When energy services giant Halliburton announced this past March it would open an office in Dubai and post the company’s CEO and president there, it caused a flurry in the media and on Capitol Hill in Washington, D.C. Opinions differed as to the meaning of Halliburton’s decision, with Democrats expressing generalized concerns, while newspaper and television stories reported on a possible tax savings. But Halliburton indicated the move is in the long-term interests of a company whose wide-eyed gaze is locked on a global marketplace.

 

When David J. Lesar, Halliburton’s chairman, CEO and president unveiled the move at a conference in Bahrain, he said, “My office will be in Dubai, and I will run our entire worldwide operations from that office. The Eastern Hemisphere is a market that is more heavily weighted toward oil exploration and production opportunities. Growing our business (in this region) will bring more balance to Halliburton’s overall portfolio.” A report in The New York Times said Halliburton plans to maintain the bulk of its operations in the U.S., where approximately 60 percent of the company’s operating income is generated. A Reuters report carried on MSNBC.com and elsewhere indicates that 38 percent of Halliburton’s revenues have come from the Eastern Hemisphere.

 

Houston has long been home to Halliburton, but Lesar’s announcement barely caused a stir in town. In other information that appeared in The New York Times, a spokesperson for Houston Mayor Bill White said, “We don’t expect it will have a big impact on employment here. Houston continues to be the center for the international oil and gas business.” Energy pundits generally agreed Halliburton’s move will better position the company in an expanding global marketplace. William Sanchez, an analyst with Howard Weil Inc., said of Halliburton’s move, “The company as a whole has continued to diversify internationally, and the Middle East is a point that they have targeted. They are being opportunistic in putting the CEO in the middle of the action.”

 

 Democratic leaders on Capitol Hill have expressed some skepticism about Halliburton’s decision, an aspect of which has to do with Halliburton subsidiary Kellogg, Brown & Root (KBR), which supplies the U.S. Army with logistical support and service in Iraq. But Halliburton announced in early April of this year that it has spun off KBR into an independent company. A press release issued by the company in announcing the completion of a stock swap, quoted Lesar as saying the move to Dubai and the spinning off of KBR would enable Halliburton to “focus on the global growth opportunities in its core energy services business.”

 

And who wouldn’t want to live in Dubai? The city is rapidly transforming itself into a hub for business and investment, facilitated by one of the most liberal tax policies in the world. But as Halliburton’s Lesar casts his eye upon a place to live, he will have to write a large check and be patient. It has been reported that an average price for a luxury dwelling befitting someone of Lesar’s stature would cost about $1.4 million and could take a year or two before you could move in.         

 

Blip, Cautionary Tale or Just a Problem With Weather?               

 

When viewed together, could a series of energy service reports appearing in late March be a foreshadowing, a forewarning or just food for thought for energy service companies who might be mulling their future prospects?

 

Quarterly financial and monthly performance reports from Nabors Industries, Halliburton, Key Energy and Basic Energy examine their respective results, along with some factors affecting those results. While all reported brisk business, financial analysts have begun to dampen their enthusiasm for the sector. Wall Street’s flagging interest may be less about overall oil and gas demand, and more about the confluence of disparate events, possibly weather conditions and the number of new and refurbished rigs coming into the marketplace. And that may be important information for any servicing company.

 

Halliburton, Key, Basic and Nabors all reported some softening in demand for well servicing business. Part of that lowered demand is due to severe ice storms that hit Texas, Oklahoma and elsewhere and disrupted work. A Halliburton news release in late March said in part, “A significant portion of these lower than anticipated results is attributable to decreased drilling and completion activity in Canada and the northern United States.” Nabors, in a press release issued at the end of March said, “Our reduced first quarter outlook is primarily attributable to lower than expected rig activity in our U.S. Lower 48 land drilling, Canadian and U.S. well servicing units….” And an article appearing in the Houston Chronicle quotes a Merrill Lynch analyst who wrote, “The ‘North American softness’ story is not over. Expect more negative news flow, more rigs to be let go, (and) more pricing pressure.”

 

The story is not quite so dour for Key and Basic, who are more focused on the well servicing business. A mid-March release from Basic talked about the increases the company is making to its well servicing fleet, and the modernization efforts already underway. Ken Huseman, Basic’s president and CEO said, “First quarter 2007 rig utilization remains below the same period in 2006 as oil and gas prices have moderated somewhat and we experience more typical seasonal first quarter activity levels.” Key Energy’s Dick Alario said in a news release in February, “Our conversations with customers indicate that 2007 spending should be in-line with or slightly higher than 2006, although we believe that some customers are rolling out their 2007 capital spending more slowly than they did in 2006.”

 

One factor sure to have an impact on equipment demand and prices is the number of new well servicing rigs coming on line. Basic and Key, among others, have been aggressive in expanding their fleet of rigs and upgrading existing equipment. Additional equipment puts pressure on price and day rate increases. The nature of the energy services industry often means reliable information about the industry is frequently more difficult to unearth for smaller, independently owned companies. Sometimes the best you can do is scope your own business prospects through the lens of what is happening to others in your industry and then make your best decision.      

 

 

 

Sustained high oil prices mean more U.S. landbased marginal wells will stay in production longer, so producers are challenged to keep those wells gurgling. New techniques, advanced tools, innovative materials –– any promising introduction is being investigated.

 

For decades, the strength, durability and widespread applications of steel helped make it a first choice for sucker rods. In the case of marginal wells, the cost of recovery often becomes a major factor when deciding if a well is to live or die. A company based out of Big Spring, Texas, believes that under the right set of conditions, their fiberglass and resin sucker rods can outwork an all-steel string. Fiberod® backs up their claims with data from years of work in the field. But using fiberglass rods is far more difficult than simply trading out one sucker rod string for another. A number of major elements of the sucker rod string, including the pumpjack, require careful evaluation and planning when considering fiberglass.

 

Fiberglass rods present several characteristics not found in steel. For example, they weigh only about one-third as much as a steel rod but still can bear a tremendous hanging weight. Reduced overall string weight means less energy is needed to operate the rod string or a smaller pump can be installed at the wellhead. And a fiberglass rod stretches under load, so that when fiberglass rods are strung together, an over-travel effect similar to that experienced by a bungee jumper occurs. Case in point: several years ago, Pioneer Natural Resources re-configured 221 wells in the Driver Unit of Spraberry field in West Texas with strings combined with fiberglass and steel rods. The average string weight was reduced around 2,000 to 3,000 pounds, production of the wells jumped 209 percent and well failure, (typically due to corrosion) dropped 192 percent. Those efficiencies and energy savings helped drive down operating costs on those wells by 48 percent.

 

Fiberglass sucker rods have some limitations and drawbacks when compared to steel. Initially, they are slightly more expensive than steel rods. Each rod string must be carefully calculated and designed in order to account for the over-travel characteristic of the fiberglass, and to either exploit or neutralize that effect with the quantity and placement of steel rods in the string. And the pumpjack may need to oscillate in synch with the stretch-and-recover characteristic of fiberglass rods. Fiberglass sucker rods can be damaged by excessive radial torque and by excessive weight pressed down from above. And the rods themselves must be carefully handled and stored, so as not to be damaged, compared with the rougher handling that steel can endure.

 

Fiberod, a major manufacturer of fiberglass sucker rods, makes it clear that a number of downhole factors might compromise the benefits of their product, but for the producer or well servicing client looking to maximize production efficiencies, glass just might be better than steel.       

 

 

 

The coming of spring traditionally brings budding trees, blooming flowers, nesting birds and higher summer gasoline prices. The laws of nature are responsible for the flora and the fauna, but a spike in seasonal gas prices has more to do with the laws of supply and demand and overall refinery capacity. And industry history indicates whenever gas prices rise 20 percent or more, American consumer reaction lowers fuel demand 6 percent. That was the pattern during the latter half of the 1970s and through most of 1980. But it appears that new attitudes are being written into the equation and we could be witnessing a case of economic evolution as it alters consumer behavior.

 

Christopher Knittel, an economics professor at the University of California at Davis plots the pattern of gasoline price increases and the resulting reduction in demand. What has proved significant in his research is that during a five-year period, March 2001 through March 2006, while prices rose at least 20 percent, gasoline consumption went down a mere 1 percent. This contrarian position signifies that Americans are driving more miles than ever before. A good illustration of increased miles being driven can be found at the California Air Resources Board website (http://www.arb.ca.gov/), which says that in the past 20 years, the south coast population (the counties of Los Angeles and Orange and parts of Riverside and San Bernardino counties) has increased 34 percent, but the total highways miles driven has jumped 84 percent.

 

An article in The New York Times points out that a higher number of dual-income families might make it easier for many households to endure the burden of price increases. The report quoted a driver in Los Angeles, filling up his tank at $3.39 a gallon, who said, “I don’t think about gas prices at all. I guess maybe if it was $10 a gallon, I’d think about it.” Evidence for that notion appears to lie in another fact unearthed in Knittel’s study. While the percentage of sport utility vehicles being sold has fallen off, and the percentage of smaller, more fuel-efficient and hybrid-powered vehicles has risen, for the record, “Mr. Knittel said he found little change in the average fuel efficiencies of vehicles driven by motorists over the last five years.”

 

The link between consumer behavior and economics will continue to shift as the price of gasoline and other forms of energy continues to increase over the years. And while consumers may shake their heads as the price of filling their gas tanks goes up, the likelihood is that driving habits will not change appreciably. If you live in the suburbs and work in the city, then you have to commute. And based on some of Knittel’s findings, there may be pain at the gasoline pump, but consumers seem to have a much higher tolerance for pain than they used to..                    

 

 

 

The $2.2 billion in minerals royalties distributed to 34 states this past November by the U.S. Department of the Interior’s Minerals Management Service, (MMS) represents not only a significant amount of money to some state budgets, it is a record-breaker over the 2005 payments of $1.7 billion. The royalties are from oil, natural gas and coal produced from federal (and offshore tracts adjacent to their shores on the Outer Continental Shelf) and American Indian lands, according to a news release from MMS. What makes the list puzzling are the criteria by which MMS calculates which states get how much money, because the winners are not always the traditionally large domestic energy producers, and 16 states get left out of this deal altogether.

 

But Wyoming does quite well under this federal program. The state got a whopping $1,072,479,293, nearly half of the $2.21 billion total. New Mexico is the runner up, collecting a hefty $573.4 million. After Utah and Colorado received their $173 million and $147.1 million respectively, the checks to the remaining states quickly started getting small. Other energyproducing states sharing revenues included California with more than $57.5 million; Montana with $38.2 million; Louisiana at $33.2 million; Alaska at $25.7 million; and Texas with $22 million for 2006. All figures are approximate, but Indiana and North Carolina’s royalty checks would hardly pay for dinner and a movie at $59.25 and $39.50 respectively.

 

According to the news release from MMS, “…states receive 50 percent of the revenues while the other 50 percent goes to various funds of the U.S. Treasury, including the Reclamation Fund for water projects. Alaska receives a 90 percent share as prescribed by the Alaska Statehood Act.” The fifty-fifty split for onshore royalties is a better deal than for those states with offshore tracts, because with that portion they receive only 27 percent of the minerals royalties. The program and the percentage of total land under federal control within a state results in a program that benefits large Western states. For example, take Wyoming, with a 2007 total state budget of approximately $3.86 billion, the minerals royalties represent more than 25 percent of the state budget. Ratio of population to geographical size is the kicker. Wyoming, geographically, is the ninth-largest state and the U.S. Census pegged the state’s population at just less than 494,000 people, which on a per capita basis makes for a nice royalty payment. New Mexico, as the fifth-biggest state in the area, with a 2000 population of approximately 1.8 million people, is a state where approximately half the land is either under federal control or American Indian reservation land. Texas, as the second biggest state in the nation, with a 2000 population of 20.8 million people, and though one of the leading energy producing states in the nation, receives a relatively small amount from the program.

 

“These revenues remain a very important source of funds to many states today,” said Johnnie Burton, Director of the MMS. “States use the money to support critical infrastructure projects, to fund local education, and to provide assistance to local counties where the energy production occurs.”       

 

 

Great change takes time to surface, become established and firmly take hold. For the energy services sector, workplace safety is a good example of a great change. Once, wearing a hard hat and steel-toed boots was good enough. Now, safety and training is a cornerstone of every company’s operation. Another great change looming and likely to affect the energy industry will be carbon disposition. All over the world, techniques and ideas are being developed and debated about how to reduce carbon emissions, but two ideas to accelerate that process appear to be attracting the most attention. One is a tax and the other contains a marketdriven component. A tax collects money and limits those with an interest in reducing emissions, while a market-driven approach lowers the barriers to participation and increases the opportunities for creative solutions. Either approach will assign a value, or cost, to carbon emissions. An article in early April in the Washington Post outlines and tags the two competing ideas making the rounds in Washington, D.C. a “cap-and-trade system” and a “carbon tax.”

 

Normally, phrases like “cap-andtrade” and “carbon tax” would send politicians, business and industry people, economists and environmental groups all running for their respective stumps and high ground so they could shout and rail on the folly or wisdom of such notions. But placing a cost on carbon and creating the opportunity to buy or sell credits levels the playing field and creates a system that is inclusive rather than exclusive. Groups of differing interests, including academics, the former chief economist for the American Petroleum Institute and former government officials appear to favor a carbon tax. They contend it is cost-effective to administer, places a specific cost on each ton of emissions, allows offenders a chance to lower their taxes by reducing emissions, and generates taxes that could be used for other government programs.

 

But any idea with the word “tax” gets a chilly reception from the Bush administration, and members of Congress remember the backlash in the early 1990s when the House of Representatives went along with President Clinton’s doomed request for a BTU tax. A cap-and-trade system measures emission levels at specific locations and establishes discharge limits and costs. Companies exceeding limits could buy credits from those with credits to spare.

 

The command and control structure of a carbon tax merely collects money. A cap-and-trade system would lower the barriers to participation for everyone interested in creating solutions. Currently there are a number of efforts underway to reduce the amount of greenhouse gases in the environment. One, like carbon sequestration, pulls carbon dioxide out of the atmosphere and pumps it underground. It is likely that some forms of both a cap-andtrade system and a carbon tax will become a reality. As various industry associations like AESC lobby their respective state and federal representatives, companies should be actively seeking out the techniques and innovations that will allow the industry to thrive years to come.