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	REMARKS TO OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION SHANGRI-LA, AFTON, OKLAHOMA MAY 23, 1984

7:30 P.M.

(TIME: 8 MIN.)

THANK YOU.

(PERSONAL COMMENTS, HUMOR, HOUSEKEEPING)

[Handwritten addition: The ranchers are happy—I tried to eat my way out in ’74—impossible.]

[Handwritten addition: I’m not going to be lengthy tonite, I am usually not but I would like to leave a few minutes for questions to see what some of you are thinking about.]

I’VE BEEN ASKED TO DISCUSS THE OUTLOOK FOR THE PETROLEUM INDUSTRY THIS EVENING.

IT’S STILL TOO EARLY TO SAY PRECISELY WHAT CHANGES WILL TAKE PLACE AND WHAT THE LONG-TERM RESULTS WILL BE.

HOWEVER, THIS INDUSTRY WILL LOOK COMPLETELY DIFFERENT IN FIVE YEARS—MAYBE EVEN SOONER.

ONE THING WE KNOW FOR SURE IS THAT OUR INDUSTRY IS FACED WITH SOME CRITICAL SHORT-TERM AND LONG-TERM PROBLEMS.

THE CURRENT PRICING STRUCTURE IS KEEPING THE LID ON DRILLING ACTIVITY.

WE CAN’T AFFORD TO BE MORE AGGRESSIVE IN EXPLORATION UNTIL GAS PRICES INCREASE.

EVEN THOUGH WE’VE SEEN SOME LIFTING OF CURTAILMENTS THAT, IN ITSELF, WON’T SOLVE THE PROBLEM.

AS LONG AS OPEC HOLDS THE PRICE OF OIL STEADY AT $29 A BARREL WE WON’T SEE THE KIND OF INCREASES IN GAS PRICES THAT WILL BE NECESSARY TO SIGNIFICANTLY SPUR MORE DRILLING ACTIVITY.

OUR INTERNAL PROJECTIONS ARE THAT THE $29 A BARREL PRICE WILL HOLD THROUGH [Text stricken: 1984.] [Handwritten addition: 1985.]

AFTER THAT THE PRICE WILL ESCALATE WITH INFLATION AT ABOUT 6% ANNUALLY.

BARRING A WAR, I DON’T SEE OPEC MAKING ANY MOVES TOWARD A PRICE INCREASE.

THEY’VE FIGURED OUT HOW TO HOLD DOWN THE AMERICAN OIL INDUSTRY, AND THEY WON’T SOON FORGET.

IN FACT, SAUDI ARABIA HAS NOW DEVELOPED A PRODUCERS STRATEGIC PETROLEUM RESERVE OF ABOUT 70-80 MILLION BARRELS OF OIL.

THIS IS A “FLOATING” INVENTORY HELD IN TANKERS.

WHILE WE AREN’T QUITE SURE OF THE PURPOSE BEHIND THIS MOVE, IT’S LOGICAL TO ASSUME THAT THE SAUDIS WILL USE IT TO KEEP A BALANCE IN THE MARKET SHOULD A DISRUPTION OCCUR IN ONE OF THE PRODUCING COUNTRIES.

IN THAT WAY, IT WOULD FUNCTION SOMEWHAT LIKE AN INSURANCE POLICY.

THEN AGAIN, THEY COULD USE IT AS A “LID” ON THE MARKET BY SELLING THE INVENTORY TO PREVENT A PRICE ERUPTION OR AS A “FLOOR” TO SHOW WHO’S THE DOMINANT PLAYER IN THE PRICE-CUTTING GAME.

EITHER WAY, THE SAUDIS HAVE DEVELOPED AN INTERESTING TOOL TO MANIPULATE THE WORLD OIL MARKET.

AND IT APPEARS THAT THE DOMESTIC INDUSTRY IS GOING TO HAVE TO LEARN TO LIVE WITH STABLE PRICES FOR SOME TIME, ALTHOUGH THERE WILL BE SOME MINOR ADJUSTMENTS FOR INFLATION.

THAT WON’T BE EASY BECAUSE YOU WELL KNOW THAT THE OPPORTUNITIES FOR INVESTMENT ARE LIMITED UNDER THE PRESENT PRICING STRUCTURE.

REPLACING YOUR OWN RESERVES UNDER THESE CONDITIONS IS TOUGH.

BUT LOOK AT THE UNITED STATES AS A WHOLE.

WITH 2,300 RIGS [Handwritten addition: working] IT IS IMPOSSIBLE TO REPLACE.

EVEN WHEN WE HAD 4,500 RIGS OPERATING JUST THREE YEARS AGO, WE WEREN’T REPLACING DOMESTIC PRODUCTION.

AT THE PEAK OF DRILLING ACTIVITY, THE INDUSTRY REPLACED 85% OF ITS COMBINED EQUIVALENT PRODUCTION.

WE’VE ALREADY SEEN A LOT OF ACTIVITY IN THE INDUSTRY TO ADJUST TO THE MARKET AND PRICING CONDITIONS FACING US.

AND I THINK WE’LL SEE EVEN MORE.

MERGER AND ACQUISITION ACTIVITY WILL PROBABLY CONTINUE.

AND WHILE I SEE NOTHING DETRIMENTAL ABOUT IT, WE HAVE YET TO SEE WHAT KIND OR DEGREE OF EFFICIENCIES WILL RESULT FROM COMBINATIONS LIKE TEXACO-GETTY, MOBIL-SUPERIOR AND SOCAL-GULF.

[Handwritten addition: I might digress a minute]

(COMPLIMENT DAVID BOREN, DON NICKLES FOR HELP IN SENATE.)

THESE COMBINED COMPANIES WILL OBVIOUSLY HAVE LARGER RESERVE BASES TO MANAGE.

AND IF THEY HAD DIFFICULTY REPLACING THEIR OWN RESERVES BEFORE THE MERGER—AS THEY ALL DID—IT WILL BE INTERESTING TO SEE HOW THEY DEAL WITH THIS EVEN LARGER PROBLEM.

MY BELIEF IS THAT WE WILL SEE FEWER [Text stricken: AND FEWER] OF THE POORLY MANAGED MAJOR OIL COMPANIES IN THE FUTURE.

THEIR SHAREHOLDERS WILL DEMAND BETTER PERFORMANCE FROM THEM, OR THEY WILL BE ACQUIRED BY STRONGER MANAGEMENTS.

GEORGE KELLER WAS RECENTLY INTERVIEWED FOR A CANADIAN TELEVISION PROGRAM CALLED THE FIFTH ESTATE, WHICH IS THE EQUIVALENT OF OUR 60 MINUTES PROGRAM.

KELLER TOLD THE INTERVIEWER THAT I BROKE TRADITION OR THE CULTURAL LAW THAT EXISTS IN THE OIL INDUSTRY.

I WONDERED WHAT HE WAS TALKING ABOUT.

MAYBE HE MEANT THAT I BROKE THE LAW OF THE BIG OIL FRATERNITY. . .(EXPLAIN).

[Handwritten addition: Fortune remark—Keller]

[Handwritten addition: Those managements are making a grave mistake—ignoring stockholders]

THE PRESENT STRUCTURES OF MAJOR OIL COMPANIES [Text stricken: WILL SIMPLY NOT BE ACCEPTABLE OVER TIME] [Handwritten addition: are questionable,] AND I THINK WE’LL SEE A [Text stricken: MAJOR] SHIFT TO A MORE ENTREPRENEURIAL-MINDED INDUSTRY[Handwritten addition: .] [Text stricken: MORE SUITABLE TO INDEPENDENT OIL COMPANIES.]

[Handwritten addition: In other words—our kind of game.]

FLEXIBILITY AND EFFICIENCY ARE GOING TO BE WATCHWORDS FOR THIS INDUSTRY, AND THE COMPANIES WHICH DON’T FIT THAT MOLD WILL NOT [Text stricken: THRIVE.] [Handwritten addition: make it.]

FOR THAT REASON, I BELIEVE WE’LL BEGIN TO SEE A MORE CLEARLY DEFINED DIVISION OF EXPLORATION ACTIVITIES, WITH THE MAJOR OIL COMPANIES WORKING PRIMARILY IN OFFSHORE AREAS AND THE INDEPENDENTS DOMINATING THE ONSHORE ACTIVITY.

(EXPLAIN)

[Handwritten addition: Bureaucratic in design 1950-1970]

IT’S ALSO UNLIKELY THAT WE’LL SEE THE KIND OF DISASTROUS DIVESTITURES INTO NON-ENERGY VENTURES BY MAJOR OIL COMPANIES THAT WE’VE WITNESSED IN THE PAST.

FOR THE MAJORS, THOSE INVESTMENTS HAVE BEEN NOTHING BUT FAILURES.

[Handwritten addition: Apr 30]

SOME OF YOU MAY HAVE SEEN THE RECENT FORTUNE MAGAZINE ARTICLE WHICH NAMED THE SEVEN WORST MERGERS OF THE LAST DECADE.

FOUR OF THE SEVEN INVOLVED MAJOR OIL COMPANIES.

—MOBIL’S PURCHASE OF MARCOR. . .

—EXXON’S PURCHASE OF RELIANCE ELECTRIC. . .

—SCHIO’S PURCHASE OF KENNECOTT. . .

—AND ARCO’S PURCHASE OF ANACONDA.

IT’S INTERESTING TO NOTE THAT WHEN FORTUNE CALCULATED WHAT THE ACQUIRING COMPANY’S 1983 EARNINGS PER SHARE WOULD HAVE BEEN IF THEY HADN’T MADE THE PURCHASE, MOBIL’S EARNINGS PER SHARE WOULD HAVE BEEN ALMOST TWICE WHAT THEY ACTUALLY WERE IN 1983, ($6.12 VS. $3.70 ACTUAL)

FORTUNE CONCLUDED THAT ALL FOUR ACQUISITIONS VIOLATED ONE BASIC RULE:

THINK TWICE BEFORE INVESTING HARD-EARNED CASH IN UNFAMILIAR BUSINESSES.

I AGREE.

THE MAJORS HAVE TO LEARN TO STICK TO THE BUSINESS THEY KNOW BEST AND TAKE ON A MORE PRUDENT EFFICIENT AND ENTREPRENEURIAL ATTITUDE.

BUT THEN THAT IS NOT AN ATTITUDE NEW TO THE INDEPENDENT SEGMENT.

THE INDEPENDENTS HAVE ALWAYS FOLLOWED THAT COURSE AND WILL CONTINUE TO DO SO.

WE’RE FLEXIBLE, QUICK ON OUR FEET AND ABLE TO GET THE JOB DONE.

THE INDEPENDENTS, AS A GROUP, DO A MUCH BETTER JOB OF REPLACING THEIR RESERVES.

AND WE DRILL ABOUT 85% OF THE WELLS IN THIS COUNTRY.

WE KNOW HOW TO COMPETE AND COME OUT A WINNER.

AND I HAVE NO DOUBT THAT THE INDEPENDENTS WILL EMERGE FROM THIS RESTRUCTURING EVEN STRONGER THAN BEFORE.

[Text stricken: BECAUSE. . .AS] [Handwritten addition: As my friend &] ARCO’S CHAIRMAN ROBERT O. ANDERSON SAID. . .YOU CAN DO ANYTHING TO AN INDEPENDENT BUT ELIMINATE HIM.

[Handwritten addition: Mention infill Guymon—Hugoton]