'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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