evaluation of the oil and gas industry

Suppliers to the oil & gas industry enjoying booming business; but memories of 1980s collapse still lingering

A few short years ago, some observers in the oil & gas industry were dismissing the U.S. Gulf of Mexico as "the dead sea."

More recently, the dead has come back to life - in a big way. And that's meant big times for those supplying engines and engine-powered equipment to the oil patch. But not so big that they've quite forgotten the hard times in the 1980s, when oil prices collapsed and the bottom fell out of the market. While some suppliers believe the current boom could last as long as five years, another noted that the market could be "one heart attack away from a bust." With that in mind and remembering the devastation of the last downturn, many suppliers have actively avoided putting too many of their eggs in the oil & gas basket this time around.

Still, there's no doubt that things are looking good in the oil & gas business these days. Strong economic growth in the U.S. led to increased demand for petroleum products in 1996, and deliveries rose by 2.8 percent compared to 1995, the American Petroleum Institute reported. Demand for oil & gas is also strong in the rest of the world.

Indeed, according to information published in Compressor [Tech.sup.Two], a sister publication to Diesel Progress, world demand for energy rose about 20 percent during the last decade.

This return to glory for the industry may be strongest in the U.S. Gulf of Mexico region, which a few years ago was noteworthy only for its lack of drilling and production activity. According to figures from the U.S. Dept. of Interior's Minerals Management Service, which is responsible for Gulf of Mexico resource sale and regulation, the 1995-96 MMS lease sales resulted in 2204 total operating company lease bids being accepted by the government up enormously from the 878 bids accepted in 1991-92.

And as of February 1997, the MMS said, 142 mobile drilling rigs and 56 platform rigs were working in the Gulf OCS (Outer Continental Shelf) region.

Further, according to Compressor [Tech.sup.Two], there are no surplus drilling rigs available for duty in the Gulf of Mexico. On a worldwide scale, some experts believe there will not be enough equipment available to meet the demand for oil & gas over the next few years. It is estimated that 60 percent of the oil added to world supplies between 1983 and 1996 came from tapping existing wells that were shut following the oil price collapse. Now, with Saudi Arabia being one of the few places with significant excess production capacity, the increasing demand for oil will have to be met by drilling new wells.

Other Lower 48 areas experiencing sharp upturns in development drilling activity, according to API reports, include the Permian Basin of West Texas, southeastern New Mexico and Kern County, Calif.

Elsewhere in North America, oil & gas development activity is also at high levels north of the U.S. - Canada border, particularly in the Canadian province of Alberta (see related story).

In his 1996 year-end report, Michael Baley III, president and CEO of the American Gas Association, said gas well completions exceeded oil well completions for the fourth consecutive year. The first 10 months of 1996 saw a 20.1 percent increase in well completions compared with the same period in 1995. Also since the beginning of 1996, the monthly average of gas rigs operating has increased from 406 to more than 480 through November, indicating strong growth in gas drilling.

The count of active rotary drilling rigs in the U.S. as announced by the API in 1997 was 860, with the average for 1996 being 779. While it may be a far cry from the all-time high of 4530 in 1981, it is nonetheless a massive improvement over the record low of 596 in 1992.

All this activity means that most companies in the oilfield-services business are now scrambling to meet their customers' requirements. Nevertheless, discussions with several such companies - large and small showed that while they are benefitting from the increased business and continue to pursue it, they probably will not throw all or even most of their resources into trying to meet it. Many companies that were dependent on the oil & gas business couldn't survive the '80s collapse and the managers of the survivors plan to keep their companies diversified, while still serving their oil & gas customers.

At Tulsa, Okla.-based Arrow Specialty Co., Kavas F. Mistry, marketing manager, V.R. engines, said, "The oil & gas industry is doing well for us. We have had more oilfield-related business in the last two to three months than in the past full year - we are starting 1997 with more of this business than we did in all of 1996."

Arrow Specialty provides single-cylinder, low-speed and multicylinder, medium-/high-speed diesel, gaseous fuel and gasoline engines ranging from 10 to 200 hp, as well as power units and heavy-duty generator systems (2050 kW), for applications including oil-field, industrial, construction and agricultural. Its engine lines include VR spark-ignited and diesel units (the former Waukesha VR Series), single-cylinder Climax (purchased from Waukesha in 1973), Lufkin (purchased from Lufkin Industries in 1980), and Witte (Oilwell) purchased from National-Oilwell in 1990.

The single-cylinder engines are typically natural gas fueled and used primarily in onshore pumping applications in the U.S., South America and Far East, while the multicylinder, medium-speed (VR) units are typically used in on- and offshore pumping, gas compression and power generation applications. "Both the single-cylinder and multicylinder engine lines are doing very well in general," said Mistry, "and the spare parts support for all of them is astronomical."

When asked about the potential longevity of the oil & gas industry recovery, Mistry replied carefully, "We've been wrong before, so we're not going to make any estimates we hope the recovery continues and that it continues to do well for us. We had a very good year in 1996 and intend to do even better in 1997."

Optimism tempered with caution is also the order of the day at A G Equipment, Broken Arrow, Okla., which has been designing and building engine-and electric motor-driven gas compressor packages since 1979. The company offers 5 to 5000 hp equipment for wellhead production, gathering systems, vapor recovery, CNG refueling, pipeline compression and gas storage. Equipment used in AG Equipment's packages includes Caterpillar gas engines; Lister-Petter diesels; Ariel, Howden, Le Roi and Gardner-Denver compressors; and Ingersoll-Rand and Worthington pumps.

According to Keith Miller, A G Equipment sales, "The gas industry could be one heart attack away from a bust, and that heart attack would be that the price of natural gas would collapse. But right now, every gas compressor fabricator I know of who's any good is very, very busy, and by busy I mean with a backlog up to around mid-1997."

A G Equipment supplies customers worldwide, according to Miller, and has been busy everywhere since about the end of the third quarter of 1996. Most of the company's U.S. business is in the mid-continent area. While A G Equipment's international business consists mostly of fuel boosters for gas-fired turbine-driven electric generators, the domestic side ranges from high specification vapor recovery units to standard field gas wellhead compression units rotary screw, rotary vane, recip - low pressure, high pressure, literally a smattering of everything.

"There's no doubt that our industry is very busy," said A G Equipment Engineer Charles Presley. "This is indicated not only by our backlog, but vended items are becoming difficult to get.

"Caterpillar engines, for example, are out 12 to 16 weeks. Large horsepower electric motors are becoming very hard to find - anywhere from 20 to 26 weeks delivery time. Basically, the upturn came so fast that everyone was caught without adequate stock."

Still, Presley noted that many companies were probably not going to gear up to meet the accelerated demand because of their experiences in the 1980s. For example, Miller added, in the case of rotary screw compressors - whose manufacturers typically produce air compressors that are also used in natural gas service - the natural gas compressor side of their businesses is not their core business. Consequently, they are reluctant to commit large amounts of resources to meeting the demand of a small portion of their overall business - particularly when the demand could collapse almost overnight.

With the U.S. Gulf of Mexico leading the way in oil & gas development, firms such as Reagan Equipment Co., Inc., Gretna, La., have also seen an important pickup in business in a relatively short time - within about the last six months to a year in Reagan's case.