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	PRESS COPY OF REMARKS TO DENVER SOCIETY OF PETROLEUM ENGINEERS “RESTRUCTURING IN THE PETROLEUM INDUSTRY: THE FREE ENTERPRISE SYSTEM AT WORK” DENVER APRIL 18, 1984 12:00 P.M.

I RECALLED THIS MORNING THAT IT WAS SIX MONTHS AGO THIS WEEK WHEN WE ANNOUNCED THE PURCHASE OF GULF SHARES BY THE GULF INVESTORS GROUP. JUST A FEW DAYS BEFORE THE ANNOUNCEMENT, I MADE SEVERAL SPEECHES WHICH SOME OF YOU MAY HAVE ATTENDED. WE GOT A LOT OF QUESTIONS AT THOSE SPEECHES ON WHAT OUR NEXT MOVE WOULD BE, AND I REMEMBER SAYING THAT ALTHOUGH I COULDN’T DISCUSS IT, THERE WOULD BE NO DOUBT WITHIN A FEW DAYS. I HOPE I DIDN’T DISAPPOINT ANYONE.

A LOT HAS HAPPENED IN THE LAST SIX MONTHS. WE’VE SEEN SOME OF THE BIGGEST MERGERS IN THE HISTORY OF THE OIL INDUSTRY, NOT TO MENTION CORPORATE AMERICA. THERE’S BEEN A GREAT DEAL OF DISCUSSION AMONG INDUSTRY PEOPLE AND CONGRESSIONAL LEADERS ON WHERE THE PETROLEUM INDUSTRY IS HEADED.

I’D LIKE TO COMMENT ON THE DIRECTION RESTRUCTURING IS TAKING FOR OUR INDUSTRY BECAUSE I FEEL IT IS A DIRECT EXAMPLE OF THE FREE ENTERPRISE SYSTEM AT WORK. AND I FEEL THAT IT IS GOING TO BE GOOD FOR THE INDUSTRY—FOR THE MAJORS AND INDEPENDENTS, ALIKE.

OUR INDUSTRY HAS BEGUN AN ADJUSTMENT PERIOD LIKE NO OTHER IT HAS EVER EXPERIENCED. AND WITHIN FIVE YEARS, IT’S MY OPINION THAT THIS INDUSTRY WILL LOOK COMPLETELY DIFFERENT—MAYBE EVEN SOONER.

MOST OF YOU ARE AWARE OF HOW THINGS HAVE CHANGED FOR US. THE PRICE OF OIL HAS LEVELED OFF AT $29 A BARREL AFTER TOPPING OUT AT $40. WE CONTINUE TO SEE SOME CURTAILMENTS IN THE GAS MARKET, ALTHOUGH I HOPE THE WORST IS BEHIND US AND THAT THE BUBBLE WILL BE OUT OF THE WAY IN THE WINTER OF ’85. HOWEVER, I AM NOT OPTIMISTIC ABOUT GAS PRICES WITH $29 OIL.

DRILLING ACTIVITY HAS NOSEDIVED FROM THE RECORD HIGH OF 4,531 RIGS IN DECEMBER 1981 TO 2,107 THIS WEEK—LESS THAN HALF AS MANY RIGS. THE TIP-OFF FOR ECONOMIC PROSPECTS IS THE RIG COUNT. I’M AFRAID RECOVERY WILL BE SLOW BECAUSE FINDING COSTS ARE TOO HIGH. FINDING COSTS ARE OUR REAL PROBLEM.

EVEN THOUGH MARKETS AND PRICES HAVE SIGNIFICANTLY CHANGED IN THE LAST FEW YEARS, ONE FUNDAMENTAL PROBLEM HAS NOT CHANGED— THE PROBLEM OF ANNUALLY REPLACING RESERVES. IN FACT, IT’S BECOME A TOUGHER PROBLEM. INDEPENDENTS AND MAJORS, ALIKE, ARE HAVING AN INCREASINGLY DIFFICULT TIME REPLACING RESERVES ECONOMICALLY.

WE FOUND THE INEXPENSIVE OIL IN THE UNITED STATES YEARS AGO. WE ARE A HIGH-COST PRODUCER IN A WORLD OF OVERSUPPLY. IT’S THAT REASON THAT IS FORCING MANY COMPANIES TO REEXAMINE THEIR INVESTMENT PRIORITIES. SOCAL SAID THEY WOULD NOT ACQUIRE IN 1981, YET THEY LOOKED AT GETTY AND THEN PURCHASED GULF. WHY? BECAUSE OF RESERVE REPLACEMENT PROBLEMS PLUS FINDING COSTS, I’M SURE.

THE MUKLUK WELL IN THE ALASKAN FRONTIER MAY HAVE BEEN THE TURNING POINT FOR MANY OF THE MAJOR INTEGRATED COMPANIES. MUKLUK WAS THE MOST EXPENSIVE DRY HOLE IN INDUSTRY HISTORY—$1.6 BILLION. THAT KIND OF COSTLY FAILURE CANNOT BE OVERLOOKED. WHETHER YOU WERE A PARTICIPANT OR NOT, MUKLUK WAS CONSIDERED TO BE THE BEST PROSPECT IN NORTH AMERICA. IT’S FAILURE IS VERY SAD FOR AMERICA AND SOBERING FOR THE INDUSTRY.

IT’S TRUE THAT THE BADLY NEEDED BIG OIL FINDS WILL PROBABLY BE MADE IN THE FRONTIER. BUT MANAGEMENTS MUST ASK THEMSELVES IF THEY CAN JUSTIFY TAKING SUCH HIGH RISKS WITH THE STOCKHOLDERS’ MONEY UNDER CURRENT CONDITIONS. REMEMBER, THE RESERVES AREN’T GOING ANYWHERE. THERE MAY BE A BETTER TIME TO DEVELOP THEM.

WE RECENTLY CONDUCTED AN INTERNAL STUDY AT MESA THAT COMPARED THE WORLDWIDE CAPITAL EXPENDITURE OF 300 PUBLICLY-OWNED OIL AND GAS COMPANIES AND THE RESERVES FOUND. THE TIME-FRAME FOR THIS STUDY WAS FROM 1980 TO 1982. OVER THE THREE-YEAR PERIOD, THESE 300 COMPANIES SPENT $166 BILLION FOR OIL AND GAS ACTIVITIES AND FOUND RESERVES WORTH $109 BILLION. IN OTHER WORDS, THEY RECEIVED 66 CENTS IN VALUE FOR EACH DOLLAR SPENT. THAT ILLUSTRATES THE PROBLEM OF LIMITED INVESTMENT OPPORTUNITY FOR EXPLORATION—AND WHY IT MAKES BETTER SENSE FOR SOME MANAGEMENTS TO ACQUIRE RESERVES.

CHARLIE MAXWELL OF C. J. LAWRENCE MADE THE SAME POINT IN A RECENT ARTICLE ENTITLED, “WHO GAINS AND WHO LOSES FROM BIG OIL MERGERS.” WHAT HE SAID WAS THIS:
“DIFFERENT COMPANIES HAVE DIFFERENT FINDING COSTS. WE ARE CONTENT TO LET THOSE MANAGEMENTS THAT CAN BRING NEW OIL SUPPLIES ONSTREAM AT THE LOW END OF THE RANGE OF COSTS DO THEIR SUPERIOR THING. FOR THOSE WHICH CANNOT, IT MAY BE IN THE PUBLIC INTEREST THAT THEY BUY RESERVES FROM THOSE WHO CAN, AND STOP WASTING THEIR SHAREHOLDERS’ AND THE PUBLIC’S MONEY ON A FRUITLESS, HIGH-COST PURSUIT.”

MAXWELL ALSO POINTS OUT THAT THIS LINE OF REASONING ISN’T ANYTHING NEW. IT COMES DIRECTLY FROM ADAM SMITH’S WEALTH OF NATIONS, PUBLISHED IN THE LATE 1700s.

I HAVE TO AGREE WITH MAXWELL. WHY NOT LET THOSE COMPANIES WHICH DO A BETTER JOB OF FINDING RESERVES DO JUST THAT—FIND RESERVES. OF COURSE, WE’RE PRIMARILY TALKING ABOUT THE INDEPENDENT OIL PRODUCER BECAUSE INDEPENDENTS DRILL ABOUT 80% OF THE WELLS AND DO A MUCH BETTER JOB OF REPLACING THEIR RESERVES.

PUTTING THE SHAREHOLDERS’ MONEY TO THE BEST USE IS MORE THAN ECONOMIC THEORY AT MESA—IT’S OUR PRIMARY PURPOSE.

WE’VE MADE SIGNIFICANT CHANGES IN RESPONSE TO CURRENT CONDITIONS. DUE TO THE POOR NATURAL GAS MARKET, WE’VE FOCUSED OUR EXPLORATION EMPHASIS PRIMARILY ON OIL PROSPECTS. WE INCREASED OIL PRODUCTION BY 26% IN 1983 COMPARED TO 1982. AND WE’VE ADDED A NEW DIMENSION TO OUR BUSINESS. WE HAVE THE IN-HOUSE SKILL TO ASSESS UNDERVALUED ASSETS IN THE OIL INDUSTRY.

OUR PHILOSOPHY IS THAT THE SHAREHOLDER COMES FIRST, AND IT IS MANAGEMENT’S RESPONSIBILITY TO EXPLORE ALL POSSIBILITIES FOR ENHANCING THE SHAREHOLDERS’ INVESTMENT. THE SHAREHOLDERS DID VERY WELL AT CITIES SERVICE, MAKING ABOUT $1.7 BILLION, AT GENERAL AMERICAN, MAKING $500 MILLION, AND AT GULF, MAKING $6.5 BILLION, FOR A TOTAL OF $8.7 BILLION. ALSO, THE FEDERAL GOVERNMENT CAME IN FOR A NICE OVERRIDE—A COOL $3 BILLION.

MANAGEMENTS MUST PUT THEIR SHAREHOLDERS’ INTERESTS FIRST. AND THAT MAY MEAN UNDERTAKING SOME RADICAL ALTERNATIVES.

THIS SEARCH FOR ALTERNATIVES IS THE BASIS OF THE RESTRUCTURING PROCESS. IT IS THE FREE ENTERPRISE SYSTEM’S WAY OF IMPROVING EFFICIENCY IN THE PETROLEUM INDUSTRY. AND I SEE NO HARM COMING FROM IT.

THIS IS AN EXCITING TIME FOR THE INDUSTRY. THERE WILL BE MANY OPPORTUNITIES FOR THOSE WHO ARE INNOVATIVE AND NOT AFRAID TO MAKE THE ADJUSTMENTS THAT WILL BE NECESSARY.