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Caught Unprepared, Natural-Gas Industry Is Stymied by Labor, Equipment Shortages

By CHIP CUMMINS and ALEXEI BARRIONUEVO Staff Reporters of THE WALL STREET JOURNAL

ALICE, Texas -- Forty feet of cable and an expensive perforating gun are stuck somewhere down the hole of Wardner #223-D, a natural-gas well set in a patch of dust and scrub a dozen miles drive from this South Texas town.

Normally, it would be a simple "fishing job" for Faron Griffin and the group of engineers and rig hands gathered around the well's workover rig, a portable workshop of cranes, piping and tools. But a specially equipped truck that could do the job is booked solid. An alternative, using a long pipe to fish the obstructions out, isn't working. The effort is also tying up the rig, which Apache waited a month to lease and could be working on other wells.

"Sometimes there's plan C, D and E," says Mr. Griffin, a district production manager at Apache Corp., the oil and gas company that operates many of the wells scattered across the cotton fields of the Stratton-Agua Dulce gas field. "But sometimes you just have to shut the job down."

In an unexpected turnaround, natural-gas prices have soared to historic highs less than two years after energy prices fell through the floor. But companies are struggling to meet rising demand as they scramble for equipment and workers.

Winter's Impact

Prices doubled since the start of this year to more than $5 per million British thermal units, the futures market's standard measure. Higher prices in the futures pits are likely to translate directly into consumers' winter heating bills, with the Department of Energy estimating that an average family in the Midwest is likely to spend 44% more for natural gas this winter over last.

Meanwhile, more consumers and companies are using the cleaner-burning fossil fuel. Imports don't help much since gas is too expensive to transport great distances, and older, picked-over fields across the country and in the gas-rich Gulf of Mexico are in decline after years of exploitation. All of which means a lot of attention is now on just how the country is getting its gas out of the ground.

But the recent surge and its resilience has caught the natural-gas industry unprepared. Worried about staying solvent in the downturn of recent years, most oil and gas producers had scaled back exploration and production budgets, which forced equipment suppliers to cut back, too. They mothballed equipment and pared back their own spending on new rigs and trucks. Nearly everyone let workers go. Low prices also triggered a wave of mergers, preoccupying companies with cost-cutting and balance-sheet repair.

And so, across Texas -- still the most prodigious natural-gas state -- producers are now waiting months for gear. In the Gulf of Mexico, companies are seeing natural production declines of 30% to 40% a year as wells age, and they haven't been able to invest in finding new sources or improving the old ones fast enough. Pipeline companies and processors are scrambling to add new facilities in fields from Appalachia to New Mexico. Everyone is complaining about a dearth of experienced workers, from college-trained geologists to the relatively unskilled roughnecks who work on rigs.

'We Don't Have Anyone'

"There's no hands to relieve anybody here," says Joe Peralis, a veteran driller working Stratton's fields for Pool Co., a unit of oil-services giant Nabors Industries Inc. "Sometimes we'll work short-handed because we don't have anyone."

Baker Hughes Inc., an oil-field services company that tracks rig activity, says 1,035 rigs were drilling in the U.S. this week, up sharply from the 488 reported in April of last year. Of those rigs, 833 are looking for natural gas. After climbing steadily for more than a year, that number leveled off in the last five weeks at around 800 -- an indication that most of the rigs available were already on the fields.

At about 800 rigs, producers were "kind of stuck in the mud," says Craig Clark, Mr. Griffin's boss back in Houston and Apache's executive vice president for North American operations. "You can't just start the car up at 90 miles per hour."

Few are predicting gas shortages this year, and Mr. Clark says the labor and equipment shortages are likely to be temporary. But the situation has called into question how the U.S., which produces more than 80% of its own gas, will meet ballooning demand. About 16% of the nation's gas comes from Canada by pipeline, but the U.S. must produce most of the rest because gas is so difficult and expensive to ship from overseas.

Producers have been calling on the Clinton administration to release more land and offshore acreage to drilling, a topic that found its way into this year's presidential race. Pipelines from gas reserves going largely unused in Alaska are also on the drawing board. Both options, however, are still years away from affecting production rates.

Natural-gas consumption for the first eight months of 2000 is up about 2.6% over last year, according to estimates from the Department of Energy's Energy Information Administration, driven largely by new gas-burning electric power plants. The EIA expects total gas consumption to grow by an average of 1.8% a year for the next two decades, boosted by close to a trebling of power-generation demand.

At the same time, big new discoveries are harder and harder to come by, and without new reserves, "It is, a lot of times, fairly heroic to keep those production numbers flat," and not in decline, says Timothy H. Ling, executive vice president for North American operations at Unocal Corp.

Apache has managed to increase its domestic production this year by buying new properties and increasing drilling. It is trying to use technological advances to get the most out of declining fields -- taking advantage of the fact that higher prices help make well refurbishment profitable.

The company produces about 47 million cubic feet of gas a day at Stratton, but Mr. Griffin estimates he could move closer to 75 million cubic feet if the field's gas-gathering pipelines weren't already at their capacity. Apache is talking with the pipeline operator about an upgrade, but it would be an expensive undertaking that probably wouldn't be finished for months, long after this winter's demand crunch.

Meanwhile, the 46-year-old Mr. Griffin, a 24-year industry veteran, has two rigs drilling night and day for new gas deposits. He would like to have another one in order to get to work on the 70 or so promising prospects that he says Apache has identified, "but it's hard to get rigs right now."

Rigs aren't the only scarce commodity. Mr. Griffin still hasn't been able to schedule one of his wells for a fracturing job, a daylong process that is expensive but important to improving production. A "frac" job can require a team of special contractors, a trailer full of sophisticated measuring and control equipment. In the process, as many as a dozen heavy-duty pump trucks shoot water and sand down a well hole at high pressure. The water fractures the rock along the bore of the well, and the sand keeps the tiny fissures open, allowing more gas to escape out of the well.

To bring more workers back to the fields, oil and gas companies are also resorting to tactics now common in office towers. Pay for roughnecks, the relatively low-skilled field hands who typically work 12-hour shifts on oil and gas rigs, is $3 an hour more than it was a year ago. Schlumberger Ltd., a huge oil-services company, is offering bonuses of as much as $5,000 for experienced workers and referral bonuses of up to $3,000 for employees who bring in new hires.

"We never did this before," said James Chism, a field service manager in Schlumberger's Alice office. He estimates his district will need to boost its work force of 230 by 6% to 15% by year-end to meet demand.

The problems are so severe that some big players are actually seeing production declines. Burlington Resources Inc. of Houston said last month that a host of field-related problems would cuts its production to as low as 1.37 billion cubic feet a day domestically in the third quarter just ended, down from 1.47 billion cubic feet in the second quarter. The company cites natural declines in the Gulf of Mexico and its fields in the San Juan basin in New Mexico for most of that shortfall.

But it also blames pipeline and processing constraints and mechanical difficulties in the San Juan basin. "There are so many moving parts now out there in the San Juan basin ... on any given day out there you'll have something that is broken," says a Burlington spokesman.

Demand is so strong that some long-time junkyard rig dealers are finally cashing in. Because most oil drilling in the U.S. has moved offshore and natural-gas drilling has been flat, the industry has scarcely built a new land rig in nearly 20 years. The number of rigs in operation peaked in the early 1980s at more than 4,000 rigs, and after the prices crashed a few years later, some dealers bought many of them cheap. Roy Oliver bought rigs in the mid-1980s for as little as three cents on the dollar. He scraped by with an occasional foreign sale. But in recent months, he has all but unloaded his rig fleet by trading rigs for stock in oil-field services companies

John Cassidy, a 76-year-old Oklahoman who became a well-known rig buyer in the 1960s and 1980s, has sold as many rig parts in the past year as he did the preceding five. Dan Kruse, owner of Superior Auctioneers and Marketing Inc. in San Antonio, six weeks ago unloaded three circa-1960s rigs to tiny Montana drilling contractors at prices ranging from $5,000 to $26,500.

Many of the bigger companies had to stack excess equipment in yards when prices fell in 1998 and early 1999. Now they're having trouble getting their equipment overhauled quickly enough for producers. Despite the steady rise in activity, prices haven't climbed enough to justify rig construction. The daily leasing rates charged by contractors are now $6,000 to $10,000 -- up as much as 50% from last year. That's still only about half what they need to be to spur new construction, executives say. So when orders come in, companies refurbish older rigs or assemble new ones out of spare parts.

Nabors, the nation's largest land-rig contractor, is doing better than most service companies in keeping up with the sudden rush for hardware. It and a handful of firms spent the last few years buying up scores of rigs for pennies on the dollar. Nabors has acquired nearly 600 rigs in the continental U.S. since 1987.

Eugene Isenberg, Nabors chairman and chief executive, began buying rigs out of bankruptcy in 1987 and then started aggressively buying smaller rig firms in 1993. Houston-based Nabors now controls 22% of the continental U.S. land rig market, Mr. Isenberg says, including more than half the diesel-electric rigs still stacked across the country. Mr. Isenberg says he has secured long-term contracts for mud pumps and drill pipe, items that have become scarce in previous booms.

Though business is much better than it was, shortages of people and parts have strained the company's efforts. "Life is not easy right now," says Mr. Isenberg.

A Nabors "boneyard" in Houston was totally shut down for nearly three years, with old rigs, parts and drill pipe stacked in rows across the lot. "We drove by occasionally, kept the weeds down," says Carlton Campbell, Nabors' refurbishment manager. But with demand soaring, "we resurrected this whole facility six weeks ago," says Mr. Campbell, a burly 34-year-old who grew up in the oil-drilling business in rural Louisiana.

Now, with recently arrived desks in the spare offices, the yard has sprung to life, with about 30 people working off and on at the site seven days a week. Recently, workers were toiling well after 6 p.m. on a Friday to finish an overdue rig , freshly painted in blue, white and yellow, for Shell Oil Co. The $4 million refurbishment fell three weeks behind schedule because of problems getting bearings, mud pumps, engines and generators for the 19-year-old rig.

Nabors has two similar yards in Texas and Oklahoma working feverishly to meet the need for rigs, and "if things pick up more we could open five or six more," says Mr. Campbell.

Mr. Campbell points to one well-used rig engine, a mustard-colored Caterpillar model that has already been rebuilt four or five times. It would take two or three similar engines to build one useable engine for a refurbished rig. "But if things get heavy we will rebuild this one, too," he says.

The yard's next project is to fix up a barely used 19-year-old rig, even though Nabors doesn't have a contract for it. Earlier he sparred on the phone with a vendor trying to get a $15,000 transformer for the rig, which lies untouched in a pile of partially rusted yellow metal. "That transformer could put that rig back three or four weeks," he explains.

Trucks to move the rigs and equipment are also running scarce. Don Fields, transportation manager for Nabors' trucking subsidiary, Peak USA Transportation, rolls by the Houston yard at day's end. "I would have liked to get 11 trucks today to haul drill pipe to other rigs," Mr. Fields says. "I could get but five."

http://interactive.wsj.com/articles/SB971223550446318480.htm

-- Martin Thompson (mthom1927@aol.com), October 11, 2000

Answers

This figured all along. The big jump in new rigs over the past year means nothing. It takes at least 2 years to shake all the water out of this particular kind of retrieval operation, and get enough gas out of the well to make it even econimically feasible to run.

There's no quick relief for this nat gas crisis.

-- JackW (jpayne@webtv.net), October 11, 2000.

What I don't get is, when the price in the futures pits has jumped over 180% in the past year, how come all these utility executives are talklig about only a 44% rise in consumer rate increases?

-- Uncle Fred (dogboy45@bigfoot.com), October 11, 2000.