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	“THE U.S. PETROLEUM INDUSTRY: RESTRUCTURING FOR EFFICIENCY AND VALUE” HOUSTON JANUARY 16, 1985

(TIME: 8 MIN.)

THANK YOU, NED (BROUN).

IT’S A PLEASURE TO BE HERE TODAY.

(PERSONAL COMMENTS; HUMOR)

TODAY, I WOULD LIKE TO DEPART FROM THE TALK I WOULD NORMALLY GIVE AND TRY TO ANSWER SOME OF THE QUESTIONS THAT HAVE SURFACED REGARDING ACTIVITIES OCCURRING IN THE PETROLEUM INDUSTRY TODAY.

THERE ARE MANY MISCONCEPTIONS ABOUT THE INDUSTRY, BOTH IN THE MEDIA, THE PUBLIC EYE AND EVEN AMONG INDUSTRY PEOPLE, THEMSELVES.

I’D LIKE TO ADDRESS SOME BASIC QUESTIONS AND PUT THE INDUSTRY PERSPECTIVE IN BETTER FOCUS FOR YOU.

FIRST, I’LL START OFF WITH A QUESTION THAT KEEPS POPPING UP BUT ACTUALLY HAS A VERY SIMPLE AND LOGICAL ANSWER.

MICHEL HALBOUTY, WHICH MANY OF YOU ARE ACQUAINTED WITH, CONTINUES TO ASK WHY WE DON’T HAVE 4,500 DRILLING RIGS OPERATING TODAY.

IN FACT, MIKE GOES FARTHER THAN THAT.

HE SAYS THAT THERE’S NO REASON 4,500 RIGS SHOULDN’T BE OPERATING.

ACTUALLY, THE ANSWER IS SIMPLE: THE ECONOMICS TODAY WON’T SUPPORT THAT KIND OF ACTIVITY.

OTHERWISE, YOU WOULD SEE IT.

TRUE, FINDING COSTS ARE LOWER FOR THE DOMESTIC INDUSTRY THAN THEY WERE IN 1981, WHEN DRILLING ACTIVITY PEAKED AT 4,531 RIGS.

ACCORDING TO AN ARTHUR ANDERSEN CO. SURVEY, SURROGATE FINDING COSTS FOR THE U.S. DECLINED FROM $15 A BARREL IN 1981 TO ALMOST $13 A BARREL IN 1983.

BUT FINDING COSTS DON’T TELL THE WHOLE STORY.

WE ALSO HAVE LOWER OIL PRICES AND POORER PROSPECTS.

THE POTENTIAL FOR FINDING SIGNIFICANT OIL AND GAS FIELDS IN THE UNITED STATES IS MUCH DIFFERENT THAN ELSEWHERE IN THE WORLD BECAUSE OVER 80% OF THE WELLS DRILLED WORLDWIDE

HAVE BEEN DRILLED IN THE LOWER 48 STATES.

IF THE ECONOMICS WERE RIGHT, THE INDUSTRY WOULD FULLY UTILIZE THE 5,000 RIGS AVAILABLE TO IT TODAY.

BUT WITH CONDITIONS AS THEY ARE, THE CURRENT LEVEL OF 2,500 RIGS IS ALL THE INDUSTRY CAN HANDLE.

A SECOND QUESTION WHICH COMES UP FREQUENTLY IS WHAT EFFECT THE CONSOLIDATION IN THE INDUSTRY—ESPECIALLY ACQUISITION AND MERGER ACTIVITY—WILL HAVE ON EXPLORATION.

SOME CRAZY VIEWPOINTS HAVE EMERGED ON THIS ONE.

DURING THE SENATE HEARINGS ON THE PROPOSED MERGER MORATORIUM LAST SPRING, GEORGE KELLER WAS ASKED WHY HE DIDN’T TAKE THE $13 BILLION HE WAS SPENDING TO BUY GULF AND SPEND IT ON EXPLORATION INSTEAD.

FIRST, GEORGE SAID THAT HE DIDN’T KNOW OF A BANKER WHO WOULD LEND HIM $13 BILLION FOR EXPLORATION.

AND SECOND, FIE SAID, “WHAT? SPEND THAT KIND OF MONEY ON A CRAPSHOOT?”

THE TOP 16 COMPANIES IN THE INDUSTRY SPENT A TOTAL OF ABOUT $7 BILLION ON EXPLORATION IN 1983.

AND WITH THAT, THE GROUP DID NOT REPLACE RESERVES.

THERE’S NO QUESTION THAT THERE IS PLENTY OF MONEY IN THE INDUSTRY TO DRILL ALL OF THE DRILLABLE PROSPECTS AVAILABLE.

IT IS THE PROSPECTS, NOT MONEY, THAT’S THE PROBLEM.

THE CHANCES ARE THAT MERGED COMPANIES WILL BECOME MORE EFFICIENT IN THEIR EXPLORATION.

DAVID HENTSCHEL, THE CHAIRMAN OF CITIES SERVICE OIL & GAS, EXPRESSED THAT IN A LETTER TO THE WALL STREET JOURNAL LAST WEEK.

HE WAS REPLYING TO AN EARLIER JOURNAL STORY WHICH HAD NOTED CUTS IN CITIES’ DOMESTIC EXPLORATION EXPENDITURES FROM PRE-MERGER LEVELS.

SPECIFICALLY, HENTSCHEL SAID THAT THE $430 MILLION SPENT IN 1984 PROBABLY WENT AS FAR AS THE $662 THAT CITIES SPENT IN 1981, DUE TO LOWER INTEREST RATES, LOWER INFLATION AND LOWER DRILLING COSTS.

HE ALSO SAID THAT CITIES HAS BECOME MORE SELECTIVE IN FUNDING ITS EXPLORATION PROGRAM.

IN ESSENCE, HENTSCHEL IS TELLING US THAT CITIES IS WORKING SMARTER AND MORE EFFICIENTLY TODAY THAN BEFORE THE MERGER.

AND HE SUMMED UP THE WHOLE ISSUE QUITE WELL WHEN HE SAID, “THE QUALITY OF AN EXPLORATION PROGRAM IS NOT DETERMINED BY THE AMOUNT OF MONEY SPENT BUT BY THE RESULTS.”

I TOTALLY AGREE.

THE AMOUNT OF DRILLING WE DO IS NOT BASED ON THE NUMBER OF MERGERS AND ACQUISITIONS BUT ON THE ECONOMICS OF DRILLING.

THE DAYS OF 4,500 RIGS OPERATING ARE GONE, AND WE WON’T RETURN TO THEM.

THE OTHER QUESTION THAT IS MOST FREQUENTLY RAISED IS WHETHER THE RESTRUCTURING OF THE INDUSTRY WILL AFFECT EMPLOYMENT UNFAVORABLY.

I KNOW THAT IS OF PARTICULAR INTEREST TO THE HOUSTON AREA.

A RECENT STUDY BY JOHN REES OF SYRACUSE UNIVERSITY HAS SOME ANSWERS FOR THAT QUESTION.

REES WAS COMMISSIONED BY THE JOHN GRAY INSTITUTE AT LAMAR UNIVERSITY TO STUDY THE EFFECT OF MERGER AND ACQUISITION ACTIVITY IN THE INDUSTRY ON THE GULF COAST ECONOMY.

REES GAVE A VERY DEFINITIVE ANSWER.

HE SAYS THAT RECENT LAYOFFS IN THE REFINING SECTOR ARE A FUNCTION OF THE ECONOMIES OF THE INDUSTRY MORE THAN THE MEGAMERGERS THAT HAVE TAKEN PLACE.

IN MY OPINION, SAYS REES, THE EMPLOYMENT REDUCTIONS WOULD HAVE TAKEN PLACE EVEN IN THE ABSENCE OF CHANGES IN OWNERSHIP.

REES SEES THE ENTIRE RESTRUCTURING PROCESS AS A GLOBAL ADJUSTMENT BY OIL COMPANIES FROM OVER-EXPANSION TO FIT PROJECTED MARKET DEMAND.

HE SPECIFICALLY POINTS OUT THAT FROM 1975 TO 1980, TEXAS ADDED 11 REFINERIES, GIVING IT THE LARGEST NUMBER OF REFINERIES OF ANY STATE.

SINCE 1980, [Text stricken: OF THOSE] REFINERIES HAVE BEEN CLOSED. [Handwritten addition: in Tex.]

AT THE SAME TIME, 23 TEXAS PETROCHEMICAL COMPANIES PLANTS WERE PARTIALLY OR COMPLETELY CLOSED.

BUT THE GREATER ACTIVITY, REES SAYS, INVOLVED UPGRADING FACILITIES THROUGH ON-SITE EXPANSION RATHER THAN BUILDING NEW PLANTS.

FINALLY, REES CONCLUDES THAT “THERE IS NO EVIDENCE TO SUPPORT THE POPULAR BELIEF THAT ACQUISITION LEADS DIRECTLY TO PLANT CLOSURES, ASSET STRIPPING AND JOB LOSSES EVEN UNDER CONDITIONS OF SLOW GROWTH.”

REES’ STUDY TELLS US THAT CONSOLIDATION WITHIN THE INDUSTRY WILL AFFECT EMPLOYMENT BUT THAT THIS IS A FUNCTION OF A MUCH LARGER SET OF FACTORS THAN MERGER AND ACQUISITION ACTIVITY.

I HAVE A GREAT DEAL OF COMPASSION FOR THOSE EMPLOYEES WHO MAY LOSE THEIR JOBS.

BUT WE MUST REMEMBER THAT AN EMPLOYEE’S SECURITY IS BEST INSURED BY AN EFFICIENT AND COMPETITIVE COMPANY.

AND THAT’S WHERE THE INDUSTRY IS

(PAUSE)

THOSE ARE THREE OF THE TOUGHEST QUESTIONS THAT ARE BEING ASKED TODAY.

AND NOW I’D LIKE TO OPEN UP THE FORUM TO YOU AND FIND OUT WHAT OTHER QUESTIONS ARE ON YOUR MIND.

(TAKE QUESTIONS)