Black Gold Looks Golden Again

Like many U. S. oilmen, James E. Russell, president of Russell Petroleum Inc. in Abilene, Tex., is still haunted by the oil bust of 1986. But Russell thinks the darkest days are over. He tiptoed back into the oil patch last year, increasing his staff by five people, or 20%. Flush with cash from higher crude prices, he plans to drill 20 wells in 1991, a 33% increase.

A whole stateful of Jim Russells won't produce a drilling boom in the U. S., but every bit helps. Domestic crude prices averaged about $24 a barrel in 1990, up from $19.65 the year before, and production profits for 13 major domestic oil companies soared 88%, to $4.6 billion. That helped raise overall oil-company profits by 27%, according to Salomon Brothers Inc. This year, Salomon adds, production profits could rise an additional 23%, dwarfing income from both refining and marketing. In short, barring a price collapse, the U. S. oil industry will again be making money the old-fashioned way--by pumping oil.

TEMPORARY SURPLUS. The extent to which that happens, of course, depends on what happens in the Mideast. At the moment, other OPEC producers are picking up the slack for Iraq and Kuwait, so crude supplies are roughly meeting world demand. And demand is expected to fall slightly in 1991. If Iraq leaves Kuwait without a fight, those two countries could crank up 4.3 million bbl. per day of production in fairly short order. Prices could tumble.

Still, U. S. oilmen believe that any big surplus might be temporary. Saudi Arabia, which is producing about 8 million bbl. of crude per day, would likely cut production if peace breaks out. And while other countries may be slow to cut back, oil exports from the Soviet Union, the world's No. 1 producer, may fall by 40%, to 1.2 million bbl. per day, according to Soviet government reports.

Thus, most experts think domestic crude prices may be about the same as in 1990. That would be ideal for integrated U. S. oil companies, letting them make money on crude they produce without having to pay too much for extra oil they buy for their refineries. Frederich P. Leuffer, an oil analyst with C. J. Lawrence, Morgan Grenfell Inc., figures the earnings of 16 major U. S. integrated oil companies could rise 26%, to $27.8 billion, in 1991.

That will fund more drilling. A Salomon Brothers survey of 210 companies, done in December, shows that exploration and production spending may rise 17.5%, to $46.8 billion, in 1991. Conoco Inc. is boosting its E&P budget by 15%, to $2 billion; Amoco Corp. will increase its E&P budget by 11%, to $2.6 billion.

Part of this extra money will go to low-risk projects that will pay off even with cheap oil. Texaco Inc., for instance, will spend about 10% of its $2 billion E&P budget on developing 300 known prospects. That investment could pay off in two years even with $19 oil, says James L. Dunlap, president of Texaco USA. Chevron Corp. will spend $100 million on existing U. S. fields to boost its domestic production by 8%, to 520,000 bbl. per day. Much less will go to develop new fields or technology, where the stakes are much higher. There are exceptions to this trend, though. Shell Oil Co. is spending $1.3 billion for a production platform in 2,800-ft.-deep waters in the Gulf of Mexico, where it hopes to recover up to 150 million bbl. of oil.

Onshore, the vogue will still be horizontal drilling, in which bits are slanted up to 90 degrees to tap several oil formations at once. Drillers can produce four times more oil this way than with vertical drilling. Baker Hughes Inc., an oil-field service company, thinks the number of horizontal wells worldwide will climb to 1,100 this year, up from 100 in 1987 and 900 in 1990.

A big disappointment in 1990 was natural gas. Warm winter weather early in the year and ample North American supplies kept the price down. In December, things were not much better. Gas sold for about $1.80 per thousand cubic feet, only about the equivalent of $11 crude oil. Even if gas prices remain weak this year, Baker Hughes expects 1,150 U. S. drilling rigs to be in action, up 14% from 1990--most of them chasing oil.

EXPLORING OVERSEAS. Much of the exploration money will be flowing overseas, where prospects are better and the tax bite smaller. Phillips Petroleum Co., for one, will spend 55% of its $610 million budget outside the U. S., vs. 45% in 1990. It says that since environmental concerns rule out such areas as offshore California, foreign spots such as Indonesia look more promising.

Indeed, Big Oil needs big strikes to replenish its reserves and pay a rising bill to clean up its U. S. refineries. Under the revised Clean Air Act, the industry must also develop cleaner gasoline for nine major cities starting in 1995. Amoco figures new processing equipment for this will cost the industry at least $25 billion. Between 15% and 20% of Phillips' annual budget in the 1990s will be allocated for environmental concerns, compared with 8% in the 1980s, says its CEO, C. J. Silas.

Refiners will try to pass the higher costs on to consumers. But that will be hard, with gasoline demand soft. Consumers have revolted against high prices for premium gas, a big money maker: Its sales have plunged as much as 80% at some stations since last fall.

Still, if prices come down a bit and refiners can operate at the 90% of capacity they expect, margins shouldn't collapse in 1991. Consultant Purvin & Gertz predicts that a typical Gulf Coast refiner will net about 90~ a barrel on the crude it processes this year. That's down from $1.20 a barrel at the end of 1990, but still respectable by historical standards.

What would help both refiners and producers this year, of course, is greater stability in the price of crude. But with the Middle East in turmoil, that's unlikely. So independent producers such as Russell Petroleum hope for the next best thing: that when the dust settles, they'll end up with a crude price of $20 or more--something they can live with.