'Risk aversion' blamed for slow US drilling response by E&P firms

Dallas (Platts)--11Nov2004

Robust wellhead prices have failed to prompt a surge in US natural gas
drilling because many producers have become "risk-averse" because of external
forces beyond their control, several industry officials said this week. Scott
Sheffield, chairman and CEO of Pioneer Natural Resources, said $6/MMBtu and
even $7/MMBtu gas is "not necessarily enough" for exploration-and-production
companies to invest large sums in domestic drilling. Speaking to the American
Gas Foundation's Executive Roundtable in Dallas Tuesday, Sheffield said that
regardless of gas prices, there needs to be a change in the "mindset" of CEOs,
many of whom "are becoming risk-averse on exploration" in the US and Canada
despite the existence of huge untapped reserves. He said many majors and large
independents are instead deploying cash to fund acquisitions or acquire
international prospects, which "doesn't really add to the supply" in North
America.

Sheffield said the gas industry needs "significant" financial incentives to
take on expensive, risky exploration projects, particularly in the deep-water
Gulf of Mexico, or producers will continue to shy away from potentially
prolific regions. He admitted, however, that tax breaks for an industry
thriving on record-high gas and oil prices and pulling in huge profits would
be a tough sell to the public and politicians. Mike Warren, chairman,
president and CEO of Energen, cited a number of factors that he said are
creating risk-aversion among top E&P officials. Among the most important is
the lack of a comprehensive energy policy that expands access to gas-rich
federal lands. While acknowledging that "there's simply nothing better than
$50/b oil and $7.50/MMBtu gas for an independent producer," Warren said a lack
of quick government action to open more reserves and streamline permitting
processes will keep E&P executives in a cautious mode.

Warren said Wall Street is helping to fuel producers' conservative approach to
gas exploration. Recent changes in federal accounting rules in the wake of
Enron's collapse "have had a major impact, I believe, for smaller independent
companies [hoping] to make big bets on drilling," he said. Also, the major
credit-rating agencies have become increasingly tough on E&P companies that
assume new debt to pursue risky--but potentially prolific--exploration
projects, and that is discouraging many firms from taking chances, Warren
maintained. Keith Rattie, chairman, president and CEO of Questar, said "over
time, high prices tend to change behavior" and that ultimately the
risk-aversion sweeping the industry will subside to a degree. But he added
that that the super majors "have basically punted on the US," except for the
Gulf, and that independents probably will have to pick up the slack on
domestic supply.

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