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	COMMENTS MADE BY T. BOONE PICKENS, JR. President and Chairman, Mesa Petroleum Co. Harvard Business School Alumni Lunch September 23, 1982

Today it is very painful to look at the oil and gas industry. In my 31 years in exploration and production, I have never seen this degree of an economic collapse in such a short period of time. The oil and gas business has never been easy, and the "boom times" occur only about 20% of the time--such as the late 1970s when all of the industry was making money. Drilling skyrocketed, and virtually everyone was invested in a drilling well and/or rig. In 1980 I knew we were in for tough times when my tennis pro said, "I'm in the same business you are--I own an interest in a drilling rig." That was the peak, and revenues, profits and rig counts recorded new highs. Too many people were ignoring the day-to-day operations; the industry was too relaxed.

In 1981-1982, our main problem has been the unreasonably high finding costs for oil and gas plus high interest rates and a worldwide oversupply of oil and natural gas. The drilling rig count reached an all-time high December 1981 at 4,530 and has gone to 2,466 currently and will probably fall 500 more.

One big problem now is that the confidence level in the industry has hit the floor. No one wants to make commitments. When you take a deal today, you had better plan on taking all of it yourself. Capital budgets are being slashed for exploration. Of all drilling last year, 75% was for gas. There is a poor market now for gas, so this drilling is being cut dramatically. There is ,a big personnel cutback underway by major producers and the drillers, as well as a push for early retirement. Syncrude and gasification projects are going into mothballs, fertilizers are out of the picture and managements cannot diversify because there are no funds. Drilling funds are "dead ducks" because of the change in tax law. There is a negative attitude in the industry. It is very sobering but realistic. More companies will end up selling or spinning off assets as Mesa did with the Trust in 1979.

The immediate outlook for 1983 is like 1982: growth and output will probably go down further or be level at best. In 1983, we will be looking for greater efficiency and productivity out of people and the economic advantages of purchasing or acquiring oil and gas reserves rather than finding them. We must be better managers of our depletable assets--since 90% of the value of an oil company is found in its reserve base. Companies must ask themselves whether to: (a) enhance their reserve base' or (b) stand the heat of letting their domestic reserve base deplete. Forty percent of companies today are liquidating by depleting the reserve base. It is Mesa's policy to enhance its reserve base. If we cannot do this, we will liquidate the Company to give the best return to the stockholders. Mesa plans to enhance reserve growth through either (a) exploration and production (finding costs are now running $15-$18 per barrel; when you receive $32 per barrel for oil, this is a losing proposition which is compounded if you cannot sell the gas you have found); (b) acquiring oil and gas reserves, as we tried to do with Cities Service for $3 per barrel.

The current attitude in the U.S. is that there are plenty of oil and gas reserves available. We import 30% of our supply from Mexico and Canada at $5 per Mcf while many of our domestic producers cannot even market all their gas. If there were to be an interruption in this cheap supply, it would cause a great crisis. It is a tragedy our administration still does not have an energy plan. This is very important and yet is little understood or appreciated. Governor Clements has a plan he is presenting to all the governors and then will take it to President Reagan. Hopefully, this will get the ball rolling.

The oil and gas industry is experiencing a revolution. It is very tough. There will be many changes in the next 24 months: mergers, liquidations, sell-outs, bankruptcies. The surviving managements will recognize that strong oil and gas companies replace their reserves annually. The recent depressed level of prices will further expose those companies which are not replacing reserves—and this will trigger those changes previously mentioned.

Determining the timing for a turnaround is tough. It will depend in great part on how many managements are in control of their assets. Managements of oil and gas companies are realizing they must change from operating companies for their own benefit to doing so for the ultimate benefit of their shareholders.