Gushing With Enthusiasm

By RICHARD WOODBURY HOUSTON

As the price of crude oil headed toward $30 per bbl. last week, the smile on Bud Champlin's face broadened into a grin. The Oklahoma wildcatter has large oil holdings in south Texas and stands to make a sturdy profit from the run-up in oil prices that was precipitated by the Iraq crisis. Higher prices also made drilling ventures in west Texas and Oklahoma that he has been considering look better. "No one's happy with the events in the Middle East, but it's going to make for some good activity here," said Champlin. "If prices stay up, deals are going to get done."

Oil drillers at first reacted cautiously to news from world petroleum markets. "Uncertainty is the problem," said Julian Martin, executive vice president of the Texas Independent Producers & Royalty Owners Association. "Too many people have got burned on the downside before." But as prices kept rising through the week, optimism began to spread across the oil patch. Drilling companies prepared to scout for workers. Supply firms hastily took inventories of equipment. Geologists pulled out maps and started searching for choice wildcatting sites. "The price jump is looking more permanent," said Houston oilman Michael Prescott. "Hopefully, good times are coming."

That sentiment was echoed in Alaska, where oil money funds 85% of state spending. Declining tax revenues last month forced Governor Steve Cowper to slice $325 million from the budget, but last week there was brief talk of restoring the cuts. Cowper pleaded with residents not to gloat over the expected revenue windfall.

Oil drilling and production have already been on the rise for several months as a result of a small hike in prices. In south Texas' Austin chalk formation near San Antonio, for example, dozens of new wells were sunk after engineers perfected a technique of drilling into rock formations horizontally. Across the U.S. last week, 992 drilling rigs were working, in contrast to 858 a year ago. Still, that number is far short of the 4,500 operating at the height of the drilling boom in 1981.

But even if prices stay in the $25-$30 per bbl. range for several months and skeptics are convinced that higher prices are here to stay for a while, the oil industry will not be able to rev up a new drilling boom. The oil business has shrunk and wasted since the glory days of the early '80s. Thousands of geologists, engineers, roughnecks and roustabouts scattered to take other jobs. Equipment was auctioned off, sold to scrap dealers or left to gather dust among the tumbleweeds. Says Houston oilman George Mitchell: "The industry has been devastated."

In west Texas' vast Permian Basin, the drilling capital of the continental U.S., barely 104 rigs were running last week, down from 600 nine years ago. U.S. Highway 80 between Midland and Odessa, which was once a thriving tent city of transient oil-rig workers, is now lined with half-empty warehouses.

The slump was felt most acutely by the small independent oilmen who discover 50% of America's oil and gas. More than 8,000 independent companies -- two- thirds of the total -- have gone out of business in the past four years. The number of drilling contractors has declined 60%, and many others are on the edge of bankruptcy. "Drillers need a co-signer now to buy a beer," says Stephen Larkin of the Petroleum Equipment Suppliers Association.

More worrisome is the shortage of young engineers and geologists to staff the drilling sites. "Everybody's looking for workers," said Bob Prock, who runs a recently reopened Texas A&M class for roughnecks in Abilene. Last spring only 205 students at Texas A&M were enrolled in the petroleum engineering program; in 1983 there were 1,600. "Companies weren't hiring, so students looked for careers elsewhere," explains department head Doug Von Gonten. At the University of Texas, a third of the graduate engineering students are foreigners who will probably return to their own countries. "Full-fledged machine operators are just not around," laments Gil Tausch, a Houston manufacturer of drilling equipment. The industry is so shorthanded that it could get only 300 or so more rigs drilling on short notice.

Oil-field equipment is also scarce. For example, the high-strength steel pipe that is used to rotate drill bits has become extremely difficult to get because only one U.S. company still makes it.

The problems of the financial industry will be another handicap. Banks and savings and loan institutions still suffering from the bad loans made to drillers in the early '80s are not going to rush to sign up new applicants. "Nobody's got any money," says Texas A&M economist Jared Hazleton. "Who's going to finance all the drilling? We won't attract neurosurgeons this time around." Ralph Carestio Jr., executive vice president of the NCNB bank in Texas, is more optimistic. Says he: "There won't be a credit crunch for deals that make sense. An awful lot of production loans will start to look good again if prices stabilize in the low 20s."

Drillers are also not rushing to start work, because they know that most of the good wellsites have already been found. With only a few interruptions, U.S. oil production has been declining since 1970, when it peaked at 9.6 million bbl. a day. Output has dropped to 7 million bbl. a day. At the same time, known reserves are going down. In 20 years they have shrunk nearly one- third, from a high of 39 billion bbl. to 27 billion bbl. The drop-offs are particularly evident in Texas, where production is barely half the level of the early '70s.

The industry is unlikely to reverse those trends unless environmental barriers are lowered. By some estimates, as much as 40% of potential energy reserves lie in environmentally sensitive areas, including vast gas deposits on the outer continental shelf. Some of the fields are tantalizingly close, like the huge Point Arguello field off Santa Barbara, Calif. Developed by 18 oil companies at a cost of $2 billion, it was set to begin pumping last year. But after the Exxon Valdez disaster, community groups got a vital permit revoked, and today the wells sit idle.

Though President Bush has banned drilling along vast sections of the coasts, the pressures to open those areas, as well as Alaska's Arctic National Wildlife Refuge, are likely to mount. The waning production from Prudhoe Bay, which accounts for 25% of U.S. output, will increase the need to open new regions for drilling.

If prices stay high, the industry could get more oil from existing fields that are underutilized. Oil in the ground that may not be worth pumping if the price is $20 per bbl. can look more attractive if the price goes to $30 per bbl. One such source lies in the thousands of old wells, known as strippers, that produce less than 10 bbl. of crude each day. By some estimates, extraction techniques like water flooding or chemical injection could be used on those wells to add as much as 50 billion bbl. to the U.S. supply. "The technology is there. It just takes a reasonable price," says Dallas energy consultant Ed Vetter.

The oil game has always been one of big risks and big rewards. The odds that a driller will hit a big oil or gas field when he starts digging are 100 to 1. "Drilling will always be one large gamble," said Michael Prescott in Houston. "Higher prices don't change the odds, but they do make the reward higher." That prospect seems likely to stir wildcatters to action across the oil patch.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

[TMFONT 1 d #666666 d {Source: Hughes Tool Co.}]CAPTION: DRILLING DOWN

With reporting by David Postman/Juneau