The weekly average count for land and inland water rigs was 1,119 for 2003 and 1,704 for 2005. The rig count is an excellent indication of the industry’s outlook on the future. Increased prices for oil and gas have been driving more capital investments into drilling for future returns. The future looks bright but the light will not blind me.
I remember very well how crude oil prices jumped between 1978 through 1981 as a result of the growth in global demand and deregulation of domestic oil pricing. At that time analysts were predicting oil to go over $100 per barrel. Many oil and gas companies lost sight of the potential for the price of oil to fall and began to pursue what I call price-sensitive projects. Price-sensitive projects are typically considered lower risk-lower return and are feasible only as long as the price for product remains above a certain level.
The Barnett Shale Play has become a price-sensitive project area. With all the hype that has been going on regarding companies’ and investors’ belief that this Play is a “gut cinch”, the demand has escalated prices for acreage, rigs and services to levels that exceed sound investment economics. With the recent decline in gas prices, companies and investors are beginning to experience this scenario.
Due to investor demand and the diminishing availability of “in the fairway” Barnett Shale leases, oil companies are extending the Play into less proven areas. If these companies and investors are heavily leveraged in the Play, they could be facing very difficult times if gas prices remain at current levels, which are double what they were three years ago.
The key to long-term success for oil and gas companies and investors is to consistently invest in oil and/or gas projects that make economic sense, even if spot prices drop to historic averages.
