The downturn of activity in early 1982 was the steepest and deepest in the United States since World War 11, and the depth of the fall varied widely, depending on the product and/or service involved. In Baker's own case, the greatest impact occurred in our tool jointing facility where revenues dropped by 95% within 270 days and for the past 30 months have remained at about 10% of their previous high. The least impacted units were those heavily involved in maintenance and workover.
Thus, publicly traded companies have been hit with different amounts of revenue retreat depending upon the mix of their products, services, and market geographics. Using a sampling of published data from segment information of annual reports, the least impacted in revenue fall was Schlumberger at 16%; next was Halliburton at 29%, followed by Hughes Tool Company at 34%, Baker International at 35%, Dresser Industries at 36%, Smith International at 41%, and NL Industries at 48%. These percentages are from that company's all time high reported sales regardless of which year the high water mark occurred. Again, referring to our own data, the pricing structure generally broke between sales fall backs of 25 and 35% and that price break has ultimately averaged a rollback of about 25 to 50% of the 1981 price levels.
Against this backdrop, companies in the manufacturing, service, and supply sector are mandated to look toward their economic survival but even more important, every company and/or every product group must earn within the customer community a feeling that that company or that product and service has a right to survive now that the cold light of dawn has revealed that oil is not going to be $100 a barrel and gas is not going to be $15 per mcf. There are some products and services which sprang up during the heyday that will die because they are not perceived by the oil and gas community to be in a proper cost benefit relationship.
Turning to what Baker has done to meet our economic challenges, we have targeted the opening paragraph from the management primer on down markets. Be the lowest cost producer of a product and service your customer wants to buy while simultaneously aiming for the highest quality product, the highest quality service people, and the best deliverability out of inventory. Although it's easy to articulate this simple platitude, it's very difficult to achieve it in practice and the level of achievement will vary from profit center to profit center.
Of the items receiving intense scrutiny in our Company at the moment, the most dominant is an attempt to accurately assess where, when, and how much of the products and services will be needed by our customers, with a confirmation of this assessment coming from an understanding of where the cash flow will come from to support those customer activity levels.
For its first ten years, OPEC was ignored by all but its own members and even by many of them. The consumers and their oil companies were dominant; no changes could be conceived. This comfortable state ended with the Mideast war of 1967. Although no immediate move was made by OPEC, it began to flex its muscles in the early 1970s. The industrialized countries began to grasp the fact that an organization of oil exporters existed. OPEC was taken very seriously after the overwhelming American assistance to Israel in the Mideast war of 1973, the inevitable oil embargo, and the consequent skyrocketing of oil prices. Immediately after the initial shock, the incredible nature of OPEC struck our economists who predicted its imminent demise.
A well-known economist, Milton Friedman, who subsequently won the Nobel Prize in Economics, said in 1974 that OPEC could not possibly sustain a price of $10 a barrel. At that price, he said, so much additional production would come on-stream that the world would be awash in oil ; the United States would again become a major exporter. This gives sterling proof (if any were needed) that economics ( at least oil economics) is not a science but an art, and an arcane one at that.
There were some disruptions in the world economy as the price of oil went up much too rapidly in 1973 and early 1974. Whether it went too far is another matter. Apparently it did not; consumption was barely affected by the price increases; in fact it continued to rise through the remainder of the '70s. Then the world was faced with the second great oil shock of 1979-80 which . sprang from western concerns over the Iranian Revolution and the Iraq-Iran war. The price of oil trebled again. Again, the rise was much too fast. There were severe repercussions in the industrialized world and in the Third World. This time, consumption was affected.
The price increases of 1979-80 resulted from a frantic bidding by the industrialized countries for the available oil . This should not have happened. Had there been consumer discipline, some rationing and some modest draw-down of stocks, the crisis could have been avoided. Instead, the main industrialized countries built up their stocks thereby exacerbating rather than alleviating the relatively small disruption in oil production. But there are limits as to how far stocks will be built up; when every storage tank and every surplus tanker is full , the realization dawns on consumers that the feared crisis has not materialized and that there will probably be no further cuts in exports. Consumers then start to draw down their stocks. They did this in 1981 and 1982 and put considerable pressure on OPEC to reduce its prices or to restrain production.
Good afternoon ladies and gentlemen.
It is a special pleasure to be back in Dallas and to have an opportunity to talk to a group of petroleum engineers. I have chosen as my subject this afternoon the somewhat ambiguous yet all embracing title of \"Changing Times\". This is altogether intentional since I want to talk today, not only about changes taking place in the oil and gas business, but about changes that are taking place in business generally in our country and in the world.
I think it is human-nature to measure current activities against the background of one's own experiences. I can recall as a youngster thinking that Summer was forever and that the vacation days between school terms were almost without limit. At 6 years of age, I suppose 3 months was indeed a long time. At my present age of 66, however, I think about Summer as 13 weekends that pass almost as quickly as one can tear pages from the calendar.
As a child I can recall penny candy, and 5¢ for a candy bar seemed a small fortune. Today that same candy bar costs 40¢ and inflation has taken its toll in the price of everything we buy.
When I came into the oil business 45 years ago, the price of oil was about % 1.00 a barrel and the United States was producing about 3.7 million barrels a day. Natural gas sales were about 15% of current volumes, and much gas was being sold in the field at 7-10¢ per 1,000 cubic feet -- hardly enough to pay the cost of gathering, processing and compressing for market. In many areas gas had no market at any price.
During the 70's, we saw massive increases in the price of oil and gas to levels of % 35 a barrel for oil and in some instances % 8 per 1,000 cubic feet for gas. Demand seemed insatiable and worldwide concerns were primarily about whether supplies were sufficient to meet demands through the end of the century. It was widely believed that the price of oil would continue to rise steadily and reach % 80-% 100 per barrel by the year 2000.
These events, and the expectations they generated, caused a boom in the oil business that none of us had ever experienced before. New drilling rigs were built as quickly as they could be put in place. What had previously been marginal oil and gas prospects quickly became major development opportunities. Manpower demands became insatiable whether for geologists, engineers, geophysicists, drillers or oil field operators. Refineries were modernized, enlarged and even built from the ground up. New pipelines both for oil and gas crisscrossed the nation.
The most obvious immediate economic challenge for the drilling contractor is to survive the overbuilt status of the industry. Only time, additional activity, and some hardware retirements will take care of this.
The challenges we need to look at are any steps or actions we can take to survive and come out of this difficult period in an economically viable condition. If we do not emerge from this period in a viable economic condition, not only we but our clients will suffer while the drilling industry rebuilds its capabilities.
Being a drilling contractor and probably somewhat biased, I feel our clients understand it is a great time to get low cost drilling work done, which it is, but have little real concern for the ultimate and not too distant effect on them, which is the quality of service they will not get from a drilling industry in economic shambles.
For this reason, I believe it is important for both we, as drilling contractors, and the operating companies who use our services to explore possibilities for keeping the drilling industry alive, if not totally well, until a better balance of rig supply and demand gives us some help.
At current prices, our ability to provide the hardware and quality our clients have come to expect cannot last. Our present efforts to continue that quality are based on an expected--no--rather a hoped for significant improvement in the profitability of our business in the immediate future. If this doesn't happen--we as contractors, even the strong ones, begin disappearing and the service you receive will degenerate to a level you may find hard to accept.
To illustrate this point, Table I, \"Industry Financial Review,\" shows the published financial results for a cross section of our industry during the last 12 months and latest quarter. Without some improved profits, there really isn't any question where this industry is going--right down the tube.
The simple, direct way for the contractor to regain his health is to receive day rates commensurate with the service provided, assuring sufficient profitability to retain top people and attract the capital required to meet our clients' technical hardware needs. I will give some long odds our clients are not going to be so generous any sooner than they have to. On this presumption, let's take a look at how we got in this condition, and then how we might improve the situation during this period of excess equipment supply and still achieve for our client the best results for the least cost.
Table I - Industry Financial Review (Available in full paper)
As a result of our listening to what we wanted to hear about the limitless requirements for our services, some misguided optimism, and resulting poor judgments, we now have our clients in the position of having a high quality service available at very low cost--a quality developed significantly during the higher day rate period.
Good morning. It is a pleasure and a privilege to provide the overview for the annual meeting of the API Production Department.
In considering the theme of this meeting, \"Challenges in a Decade of Uncertainties,\" it occurred to me there is no uncertainty so great as that of a speaker who is -not first on the agenda. I owe thanks to Bobby Hall, Tut Ellis, and the program committee for giving me the first shot on this occasion. At least I know I shan't be left speechless. If I touch on the subjects of the 20 other speakers who will be addressing us over the next two days, let me apologize in-advance -- and say that if I do trespass in their areas of expertise, it will be only briefly.
What I intend to do is provide some perspective for the specific problems that will be discussed later. I'd like to begin by stepping back from the here and now and reviewing the wide sweep of changes that have affected our industry over the past 20 years. From this perspective, our current difficulties, which loom so large from close up, may take on more manageable proportions.
One of the most significant events of the past two decades was the emergence of the environmental movement, which became a major force in American politics and -- through the political process and the courts -- a strong influence on industry as well. For many years, it seemed that the goals of the movement and the objectives of our industry were in direct and irreconcilable conflict. This led to frustrating and costly delays in exploration and development, particularly in the new frontiers offshore and in Alaska.
But we have learned to live with environmental regulations and, in many cases, we take pride in going beyond the letter of the law.
Environmental challenges will probably always be with us, but there is no doubt in my mind that today we are better-equipped to respond to those challenges than at any other time in the past 20 years. One reason for this is the expertise -- you might even call it sophistication -- we have developed in dealing with the environment and with the agencies that have environmental responsibilities. That ability has carried over to our relations with many of the organizations that spearheaded the environmental movement. We still don't see eye-to-eye with those groups on many things, of course, but at least we have substituted rational dialogue for the brick bats that were hurled regularly from both sides of the fence in the past.
A second landmark event of recent history was the rise of OPEC, the growth of national oil companies and, to a large extent, the dispossession of the private oil companies in many major oil-producing countries. During this period, the international oil companies largely lost control of production to the governments. As a result, oil production in these countries became subject to national economic priorities; it also became a political and diplomatic tool.
The title of my talk today--API's Quality Initiative-- suggests two things. First, major changes are occurring in the API standardization program and, second, these changes impact on most of you in the audience. Both are true.
Today, I will discuss the motivations for changes to the program, describe the changes, and outline the potential benefits. To set the stage, let's examine the reasons API became involved in standardization and look at the standardization program's metamorphosis over the years.
The API Division of Standardization, now known as the API Production Department, was formed in 1923. At that time, there was chaos in the marketplace for production equipment. There was little interchangeability between different manufacturer's pipe, fittings, equipment, and tools. Purchasing was a nightmare. Inventories were high; discrepancies caused delays, higher costs, and safety hazards. If the situation were the same today, you can imagine the impact it would have on operators' and manufacturers' operations.
During the first 50 years, the API standardization program focused on dimensional uniformity and interchangeability among the same products made by different manufacturers. Gradually, the standards increased in complexity. Standards began to include wider ranges of sizes, materials, chemistry, and working pressure, as well as strength and other physical requirements.
Early on, an API monogram was adopted to identify materials that conformed to API standards under the Institute's licensing system. Manufacturers certified that their products complied with API standards. With this self certification, they could then mark products with the API monogram. Today, more than 1700 manufacturers worldwide are licensed to use the mark.
The system worked well and it provided the desired benefits. However, even good things must change with the environment or perish. And the environment did change.
The change of emphasis from onshore to offshore operations created demands for improved equipment and materials. It also made national governments, here and abroad, not-so-silent partners in the petroleum industry's operations.
Prompted largely by environmental and personnel safety concerns, Federal regulatory agencies began adopting or referencing API standards in their regulations. What had been voluntary became mandatory.
Where standards did not exist, or where regulators judged existing standards to be inadequate, pressure fell on API to fill the gap with new standards or improve existing standards.
In addition, pressure was directed toward assurance that equipment would perform adequately under field conditions.
It became evident that the API standardization program had to be accelerated, broadened, and strengthened.
A beginning was made more than ten years ago. In 1973, the Committee on Standardization of Offshore Safety and Anti-pollution Equipment was formed. In ten months, the committee produced its first standard. This standard went far beyond the scope of previous standards. For the first time, the specification required quality control testing and a review of the manufacturer's qualifications to use the API monogram.
In 1980, another step was taken in the evolution. The Production Department began using third-party surveyors to assess capabilities of manufacturers of tubular goods to produce material to meet API specifications.
All over America, companies are asking, \"How can we run faster? ... cheaper? ... better? How can we operate smarter?\" The answers vary, but in many cases companies are turning to computer technology.
That's where the auto industry turned in the face of stiff overseas competition. Complex robot systems have helped improve the quantity and quality of Detroit's assembly line products. The retail industry turned to computers too, and now cashiers ring up sales more accurately with laser scanners that provide instant inventory updates.
The petroleum industry is also turning to computers. A movement is underway to use them to monitor and control equipment, and to transfer information to main-frame computers. That can mean improved use of time and money, and, in some cases, a safer place to work. With today's economic climate and regulatory pressures, these benefits are too valuable to overlook.
APPLICATIONS OF COMPUTER-ASSISTED OPERATIONS
At Shell, we call the general use of computers in the field \"Computer Assisted Operations,\" or CAO. Typically, computers are used to monitor such oil field facilities as producing wells and injectors, field separators, dehydration units, pumps, compressors, chemical feed systems, storage tanks, pipelines, gas plants, and steam generators.
The computer systems come in a variety of packages, as Figure 1 shows. The typical Shell CAO system uses local host computers linked to electronic remote terminal units (RTUs) that are wired to individual pieces of equipment.
For example, Shell's oldest CAO systems were installed in Louisiana's Atchafalaya Basin and East Bay in the early '70s. They use minicomputers to monitor production and lift gas systems, report alarms, and status changes. They also automatically test wells and print routine reports. The Atchafalaya system also meters gas flow in the Crawfish Pipeline from Morgan City to a Shell refinery outside New Orleans. Besides substantially increasing well testing frequency in the Atchafalaya Basin, the systems are especially valuable in these marshy areas where routine travel is difficult and expensive.
During severe winter weather, travel also can be a problem in Northern Michigan. Up there, a Shell Oil Company subsidiary, Shell Western ECP Inc. (SWEPI), operates more than 400 wells from Lake Michigan to Lake Huron. In 1984, three CAO systems based on minicomputers were installed there. In addition to providing the basic services found in Louisiana, the Michigan systems also monitor tank levels and calculate daily oil and gas fluctuations for 37 central production facilities. Operators use this information as a daily audit tool for their production facilities. The logged data are also available for routine reports to state agencies.
FIGURE 1. SOME OF THE OPTIONS FOR COMPUTER ASSISTED OPERATIONS OR CAO (Available in full paper)
Several systems also operate in California's hot, dusty San Joaquin Valley. One was installed in 1980 by another Shell Oil subsidiary, Shell California Production Inc. (SCPI), for a waterflood pilot in the Belridge field. The system monitors the water treatment plant, the pilot injection system and producing wells, and provides critical alarms and reports. At one time it also monitored a steam injection pilot.
The title I was assigned for this presentation is \"When Will The Gas Bubble Break.\" Accordingly, I want first to answer that question, and then go on to give you our views on the natural gas supply/demand situation and the many areas of mutual, indeed vital, interest that API and A.G.A. share.
A.G.A. has forecast that the excess short-term production capability (\"gas bubble\") will last at least another two years and possibly for the rest of the decade. Our view is reinforced by the change in Canadian Government pricing policy for gas exports -- a policy that is making more gas available to U. S. energy consumers at price-s that the marketplace will accept.
We estimate that the domestic gas \"bubble\" will be about 2.9 Tcf in 1985, up slightly from 1984 and down from 3.9 Tcf in 1983. After the continuing surplus has ended, we expect that gas supply and demand will be in balance. That is, there will not be a gas shortage -- but rather there will be increased incentive for a dynamic new growing supply to serve a growing demand, and there will not be the upward pressure on wellhead prices that some analysts have forecast.
When examining short-term natural gas availability, it should be borne in mind that we currently have about 21 Tcf/year of gas available to U. S. markets. This includes a significant quantity of unused Canadian gas that is currently under contract but not being taken. This level of gas deliverability will not be dissipated quickly by rising demand or by the current slowdown in gas well completions. Indeed, despite all anecdotal evidence to the contrary, the figure available to us indicates that U. S. peak gas deliverability remained nearly constant between 1981-1984 -- even though gas well completions declined during this period. It should be noted that gas well completions turned around during the second half of 1984.
Our assessment of lower-48 states gas supply stability also is supported by the fact that replacement of production with new reserve additions has far exceeded the expectations of just a few years ago. In the period 1980-1983, aggregate reserve additions in the lower-48 states were 96% of production, 1983 being the third consecutive year when additions nearly equaled or exceeded production.
In 1979, A.G.A. conducted a survey of producers, pipelines and government agencies to assess the outlook for lower-48 states gas production and reserve additions. Overall, seven producers and five pipeline estimates were accumulated and these companies in aggregate forecast 11.8 Tcf/year of lower-48 states reserve additions between 1980-1985. However, between 1980 and 1983, lower-48 states reserve additions in fact average 16.8 Tcf.
In summary, the U. S. is currently in its seventh year of what was predicted to be only an 18-month delivery surplus.