The MacNeil/Lehrer Report; 6220; Abilene Oil

[Tease]

BUDDY WILLIAMSON, Oil Rig Drilling Contractor: I think that the country is expecting too much out of the oil producers and the drilling contractors from the standpoint that they expect it to all happen overnight. We didn`t get in this trouble overnight. You can`t just snap your finger and, hocus- pocus, and it`s all over. It takes time.

[Titles]

JIM LEHRER: Good evening. Some very unusual things are happening. The service station on the corner is open at night and on Sunday, and they wash the windshield. Profits for major oil companies are down for the first time in energy-crisis memory. The inflation rate is receding, primarily because the price of gas and oil is leveling off. American oil companies are buying less foreign oil, and so on through a list of recent developments that would have seemed like a far-out dream two years and long gas lines ago. The reason is simply that there is suddenly a surplus of oil in the world, otherwise known as a glut. It has been caused by a dramatic reduction in the demand, and in the United States particularly, by a new acceleration in our own production of oil. Higher prices are behind both developments. They force conservation on us, and they`ve made it profitable for domestic producers to dig more wells, particularly since President Carter, followed by President Reagan, took all price controls off domestic crude oil. Tonight, it`s the problems and the prospects of getting even more oil out of our ground that we explore because, as one energy analyst said recently, the glut in crude oil is above the ground, not below the ground. Robert MacNeil is off; Charlayne Hunter-Gault is in New York. Charlayne?

CHARLAYNE HUNTER-GAULT: Jim, one way to look at the dimensions of the U.S. oil problem is through two questions: how much domestic oil is there, and how fast are we using it up? In the simplest terms, the answer to that so far is that our new discoveries are not keeping pace with our depletion rates. For example, in 1974, U.S. oil men responded to the previous year`s Arab oil boycott by drilling some 30,000 [31,698] potential wells. By 1980, that figure had almost doubled to over 60,000 [60,845]. But those drilling efforts did not result in more oil for while the U.S. produced some 3.2 billion barrels in 1974, by 1980 production had dropped by more than 200,000 barrels a day. Meanwhile, on the plus side, as Jim said, consumption is down. For example, back in pre-boycott 1973, the U.S. consumed about 6.3 billion barrels of crude oil, but by 1980 high prices had pushed oil usage down to 6.2 billion barrels. Imports have also dropped. Last week, the American Petroleum Institute reported about 3.8 billion barrels a day, the lowest figure in the last six years. Nonetheless, on the minus side, the gap between production and consumption is still pretty wide. Jim?

LEHRER: There are no mysteries over where the oil is here in the United States. It`s where it has always been -- primarily in the Southwest, the Rocky Mountain states, the Gulf of Mexico, California, and most recently, Alaska. The only brand new areas for virgin exploration are limited to the far northern Rockiei area, and around Alaska`s Prudhon Bay. Other than that, it`s exploration and drilling where there has always been exploration and drilling. Places like West Texas around the city of Abilene where oil has been found and produced for more than 100 years. It`s booming again in Abilene, particularly for the independent oil producers who do 90 percent of the exploration that`s done for oil in this country.

JOHN CHALMERS, Independent Operator: In 1970 we had between 700 and 800 rigs -- drilling rigs -- in the United Stales in active operation. Today we have over 3.600 rigs. The reason we have 3.600 is because the price of oil is such that it will support the drilling, and putting these rigs in operation, and we can pay for `cm.

JACK FRIZZELL, Independent Operator: The surge of activity that we`ve seen in the oil business has been building over the past two years. It was given greater emphasis when Reagan decontrolled crude oil prices. During the years past, we would drill 20 wells, maybe 25 wells in a year. Now we plan to drill 35 wells this year, and probably more if our success ratio is what we anticipate.

Mr. CHALMERS: I`ll drill deeper. I`ll drill more wells. I`ll spend more money. I`ll speculate more because I know I`ve got a chance to pay back what I owe.

LEHRER [voice-over): Today, it can cost over $200,000 to drill a new well. The price jumps if oil men are forced to use expensive underground techniques to boost production.

Mr. CHALMERS: We`re going to visit a completion rig where we`re undergoing a squeeze job. A squeeze job is where you actually squeeze cement through a hole to correct something that went wrong in the normal completion process. There`s no such thing as making a well, and just getting the oil out of it. They`re just like children; you have to take care of `em, and you got to -- if you don`t, they won`t do too good, [to crewman] How you all doing today?

CREWMAN: Fine.

Mr. CHALMERS: Good to see you all. You all about ready to go?

CREWMAN: Yes sir.

Mr. CHALMERS: That`s good.

LEHRER [voice-over]: In this well, underground water is mixing into tee oil s&&m. With this device, which the drilling crew lowers some 3,000 feet into the well, the oil men squeeze cement down and around the oil pipe to seal off the potential deposits from the subterranean water. Most of the producing wells in the Abilene area are known as stripper wells -- yielding under 10 barrels a day. At the current price of $38.50 a barrel, profit over the life of a well can be very rewarding. This operator has interests in over 125 wells. But for the wildcatter -- someone who looks for oil in areas not previously drilled -- finding oil underground is a risky business.

Mr. CHALMERS: Of the wildcat prospects drilled, seven out of eight end up in dry holes. You fill it full of cement, and you get out of there as fast as you can, and try not to think about it anymore. Give you a migraine headache if you drill too many of those.

LEHRER [voice-over]: While risk has always been part of the oil business, the current boom in exploration and drilling has brought with it a variety of new problems which could jeopardize expectations of increased production.

Mr. WILLIAMSON: Our major problem at this time is lack of experience with the personnel in the field. Due to the amount of rigs that are being rigged up, you know, it went from abut 35 to 40 rigs in this area up to 90 in the last couple of years -- or two-and-a-half years. Anytime you double the necessity for hands -- or the demand for hands -- then you going to have labor problems.

Mr. CHALMERS: We have a shortage of roustabout crews. They come and they go. We have some that been with us two or three years, and we have some that have been here this week. And if someone offers `em 50c an hour more, they`ll go over to another rig.

JAMES STOREY, Oil Field Worker: I`m drawing $4.75 an hour, and I brought home $728. I believe it was. cleared in the last two weeks.

GARY ROBERTSON, Oil Field Worker: Yeah, the biggest problem. I think, it`s just hard work, and somebody thinks they want to do it, and when they get there and try it. they don`t like it.

Mr. STOREY: Yeah.

Mr. ROBERTSON: It`s got to be in your blood or you can`t stay. It`s just in the blood, you know.

Mr. CHALMERS: We don`t have the trained personnel either in the drilling end. the completion end, the geological end, the reservoir petroleum engineering end for. ever since 1956 to 1972, geologists couldn`t get a job. Petroleum engineers couldn`t get a job. We didn`t need roughnecks; we didn`t need drillers; we didn`t have the rigs that go to Saudi Arabia and Iraq and Indonesia, Nigeria, Venezuela.

LEHRER [voice-over]: Even the oil-field suppliers have manpower shortages. In Abilene, one manufacturer can`t hire enough welders to keep up with the demand for oil storage tanks.

MANUFACTURER: We`ve had a running ad in papers and trade journals for over a year, now, and still are unable to employ enough people to enact a night crew. We need about 48 more people.

LEHRER [voice-over]: The increase in drilling activity has also been limited by shortages in equipment such as drilling rigs. This rig- manufacturing company has an eight-month waiting period for its rigs which cost about $2 million each.

Mr. WILLIAMSON: The supply and demand has just caught up with us. and we are not able to buy the equipment to put the rigs together as fast as we were, say, a year and a half ago. We could put a rig together in three to four months, and today it takes six to eight months. And a lot of the equipment we`re buying today is what we call black market price because of supply and demand.

LEHRER [voice-over]: The oil producers have more supply problems once they complete drilling and prepare to start the on-going pumping process. The sucker rod which runs from this pump jack into the well is in critically short supply.

Mr. CHALMERS: If I have to wait six months or three months for rods, interest goes on, I`m not making any money on my return. So that holds me up from drilling. It holds my investors up. I don`t drill these wells heads up. I don`t have that kind of money.

SUPPLIER: We have approximately a half a million feet of sucker rods on order, but we have some people on our books right now have been waiting over six months.

Mr. CHALMERS: The supply man that points out who`s going to get these sucker rods is the man that you need to be a real good friend of. If you can catch him out with somebody else`s wife or something, you can remind him that you need this string of sucker rods. Anything to get these rods.

LEHRER [voice-over]: The shortages in equipment and manpower not only have a direct delaying effect on production, they also inflate the costs of drilling.

Mr. FRIZZELL: The costs of drilling a well, in a three-year period, have increased from, oh say. $15 per foot, to over S30 per fool. They`ve doubled- And I think it could reach a point where it would cause a slow- down in activity.

LEHRER [voice-over]: Not surprising, another factor which Abilene oil men say discourages drilling activity is the government`s windfall profits tax.

Mr. FRIZZELL: If there had been no imposition of a windfall profits tax on oil production -- crude oil production -- and prices had been allowed to escalate as they have under decontrol -- or deregulation of prices -- I think we would see an even stronger or greater activity than we`re experiencing right now.

Mr. CHALMERS: We`ve drilled about 64,000 wells in our area since the first well was drilled some 100 years ago. and I think we have at least another 64.000 in our area -- I`m talking about 75 miles around Abilene -- before we have totally exhausted our oil and our gas. And it`ll take us 20 years to do this, but we have to have incentives, and the more favorable they make it to us and for us. the more wells we`ll drill, and the more we`ll find.

HUNTER-GAULT: Independents like the ones we`ve just seen are responsible for about 90 percent of domestic oil exploration, but large-scale exploration and production is usually handled by the major oil companies. The nation`s 10th largest oil company is Phillips Petroleum which produces oil in oil fields ranging from Alaska to Texas, and from the Rocky Mountain states to the Gulf of Mexico. That perspective, now, from Charles Kittrell, the Executive Vice President of Phillips. Mr. Kittrell. do the majors have the same problems as the independents we`ve just been -- the kinds of problems we`ve just been hearing about?

CHARLES KITTRELL: Sure. Sure we do. Because we`re all buying from the same people when you get right down to it, and if we have a shortage of sucker rods for them, there`s a shortage for us, also. However, let me say I`m not pessimistic about that situation. I think that`s a temporary problem that will be solved in time. That`s the way our system works, and we`ll have plenty of rigs and sucker rods if this demand continues at the level it is. Of course --

HUNTER-GAULT: And the economic -- the economic --

Mr. KITTRELL: -- while that`s going on, it`s creating a lot of jobs, too, thank heaven.

HUNTER-GAULT: Right. The economic incentives he spoke about are there, too?

Mr. KITTRELL: Oh. I think so. I think so.

HUNTER-GAULT: How much exploration is going on during this period of time?

Mr. KITTRELL: Oh, drilling is at an all-time high, and I don`t know whether all the rest of the companies are doing exactly what Phillips is doing or not, but we`ve increased our capital budget this year, for example, to $3 billion and about 60 percent of that is going into exploration and production, and half of that is going into the United States. So it`s going along at a very fast clip.

HUNTER-GAULT: What is the situation with production with Phillips, and then in general throughout the industry?

Mr. KITTRELL: Well of course, when you look at the industry, the big key factor is what is Saudi Arabia doing or going to do? As far as Phillips is concerned, we`re doing quite well. Our production has increased worldwide steadily over the last five years. So we`re doing quite well. But as far as industry is concerned, the key factor in the supply situation is Saudi Arabia. There`s where the action is, and their producing at 10.5 million barrels a day is the reason why we have the so-called glut today plus decreased demand, of course.

HUNTER-GAULT: And that impacts on. say. oil companies in this country to the extent that they don`t produce as much during those periods when --

Mr. KITTRELL: Oh. I think that they`re producing all they can produce. Charlayne. I don`t know anybody that`s cut back on production. I think the swing factors as far as production worldwide are concerned will be fundamentally in the Middle East.

HUNTER-GAULT: How much of an impact on domestic production do you think that this kind of exploration that you`re involved in now will have?

Mr. KITTRELL: Well of course we`re always optimistic or we couldn`t be in the business in the first place. But trying to be as realistic as we can. we think that long-term -- if we in this country can discover enough additional oil, get additional oil out of existing reservoirs, and what have you, so that we can hold the production level in this country about where it is right now into the year 2000, we`ll be doing quite well. We do not see -- and I hope I`m wrong -- but we do not see the possibility of discovering enough oil that we`d be energy-independent of the rest of the world.

HUNTER-GAULT: Why, then are the major oil companies using oil revenues to get into other industries?

Mr. KITTRELL: Well, they`ll have to speak for themselves, I suppose. I don`t know whether they don`t have the opportunities, or what have you. In Phillips, my company, we`re shoving it right into energy development. Now it`s not all oil and gas. We`re diversifying into lignite, coal, uranium, geothermal, oil shale, and what have you. But some of the other companies may not have the opportunities we do. We`re a pretty imaginative outfit, I think.

HUNTER-GAULT: Is that kind of diversification going to hurt oil production in your view?

Mr. KITTRELL: It won`t hurt it. It`s just a question that we think we`re going to have to use all of our resources to develop all the energy sources in this country we can. We`re going to need oil and gas and coal and nuclear power, and anything else we can dream up in the future. So we`re going to have to play all of our cards, and play `em smart. It`s going to take a lot of money; it`s going to take a lot of time. But I think we can solve the energy problem in time.

HUNTER-GAULT: All right. We`ll come back. Jim?

LEHRER: Clearly the oil industry -- majors or independents -- can`t find or produce oil that isn`t there, and there is considerable disagreement over exactly what the potential is. The U.S. Geological Survey estimates there are S2V2 billion barrels of domestic oil still undiscovered, but a recent report by the Rand Corporation says that is way, way high. It puts the figure at closer to 20 billion barrels. The author of the Rand report is Richard Nehring. Two years ago he authored a much-publicized report for the CIA on world oil reserves. Mr. Nehring, how do you explain such a wide discrepancy between your findings and the government`s?

RICHARD NEHRING: Well, first of all, I would hate to characterize those findings as the findings of the government as a whole. They are the findings of one group within the Geological Survey, not of the government as a whole. What we did in making our estimates --

LEHRER: Excuse me. Excuse me one moment. They are the findings on which government policy is now being based, is it not? Energy policy ? Production?

Mr. NEHRING: Not necessarily. I mean, there are competing views on here. Most of the oil companies that have published estimates are significantly lower than that as far as the potential remaining to be discovered, and that has some impact on what policy is made. When we made our estimates, we found that our differences were concentrated primarily in the contiguous 48 states. The Geological Survey, industry, are all agreed that there is a lot of potential in Alaska. However, on the 48 slates -- particularly the on shore portions -- there is very sharp disagreement. We came up with the estimates we did primarily by looking in great detail on what has been found already, and when it was found. And we show in this report that first of all, most of the oil that has been found in this country has been found in what I call large and giant fields. These are fields that have at least 50 million barrels of oil in them or more. There are only about 800 of those that we`ve found so far, yet those 800 fields contain slightly more than 80 percent of all the oil that we`ve found in this country. If we look at when we discovered those fields, the peak in discovery of fields of those size was 40 years ago. It`s been going down at a fairly steady rate, and it`s been going down at a steady rate almost region by region. And we conclude that in effect the industry has done a very efficient, competent job in finding most of the oil that was there to be found in the first place, and we`d like to emphasize that except for Saudi Arabia, we`ve found more oil in the United States than we`ve found in any country in the world. And I think only Saudi Arabia will exceed us ultimately.

LEHRER: But looping to the future, though, if you are right, the potential for producing our way out of our energy problem just isn`t there, right?

Mr. NEHRING: Well, we cannot ultimately produce our way out of the energy problem with conventional oil and gas. It is a finite resource. What we can do is by more intensive effort get more oil out of existing fields, and there are places where the prospects for finding more oil are very excellent. I might be a little more pessimistic about the production outlook than Mr. Kittrell, but I think there is a reasonable chance that if we are fortunate in finding substantial amounts of oil -- in Alaska, and like off-shore California, and deep water in the Gulf of Mexico, and if we are reasonably successful at adding more reserves to existing fields through this more intensive drilling activity that`s going on, we can keep production at current levels for the next 10 to 15 years, and begin to have a gradual decline thereafter. I mean, it`s possible that we could be beginning a fairly gradual decline just within the next few years. But either way, it still gives us sufficient time -- given the reductions in consumption that are occurring -- to make an effective transition from conventional sources of oil to other sources of energy. And that`s -- the main importance of all this activity is giving the economy time to make the adjustment to the other sources of energy which we have in substantial quantities.

LEHRER: Thank you. Charlayne?

HUNTER-GAULT: Now to a man who keeps a close eye on the economic health of the oil industry. He is Constantine Fliakos, a senior oil analyst and a vice president of the Wall Street firm of Merrill, Lynch, Fenner and Smith. Mr. Fliakos, is Wall Street bullish on oil right now?

CONSTANTINE FLIAKOS: Oh. Charlayne, not at all. The mood on Wall Street is extremely negative to say the least. The stocks -- the prices of the oil stocks -- have come down very, very sharply from the peak level that were reached back in November, and it continues to be a very negative mood toward the oil stocks.

HUNTER-GAULT: Why is that?

Mr. FLIAKOS: Well. I guess the basic reason is one that was alluded to here before -- the so-called oil glut, which by the way, I think is a misnomer; I think that the word "glut" conveys an impression of false complacency, and I think all we have really is simply a temporary imbalance between supply and demand. Inventories above the ground are quite adequate because Saudi Arabia has been over-producing oil. It`s as simple as that.

HUNTER-GAULT: How long do you expect that glut to last?

Mr. FLIAKOS: Well, it seems to me it will disappear as soon as Saudi Arabia decides it`s lime that the glut will disappear. And based on pronouncement made by Saudi officials, what they want to accomplish is a unified OPEC price structure, and once they accomplish that, I would assume they are going to drop their production so that they can bring supply and demand into better balance.

HUNTER-GAULT: Do you expect the prices to stay up?

Mr. FLIAKOS: Oh, I definitely think so in the long term. There is no doubt in my mind that the bias in the case of oil prices is up, and certainly if Mr. Nehring is right, and if he is as pessimistic as he is, then I don`t see any possibility that the price of oil will come down. Now of course, in the near term, because of very adequate inventories, you do have some downward pressure on prices both for crude oil and for prices at the pump, but I don`t think any declines are going to be major, and I think pretty soon they`re gong to start going up again.

HUNTER-GAULT: How much impact do you think the kind of exploration that`s going on now will have on our energy needs?

Mr. FLIAKOS: Well, I take the opinion -- I`m of the opinion, really, which is sort of the viewpoint expressed by Mr. Nehring -- I happen to be a pessimist in terms of our prospects for finding oil not only in the United States but around the world. Nevertheless, it`s important that we continue the effort so we can arrest the rate of the decline. I think that`s the key. But I frankly don`t think that we`re going to be finding so much oil that`s it`s going to solve away our energy problems.

HUNTER-GAULT: In one word, are there going to be investors around to continue to finance the boom that`s going on now?

Mr. FLIAKOS: There`s no doubt in my mind that there will be investors because. I think even Wall Street -- which tends to be very fickle -- will realize that the oil industry represents great value, the opportunities in the oil business are very good, and the money is going to flow into the oil business.

HUNTER-GAULT: All right Jim?

LEHRER: Mr. Kittrell, back to you first. Somewhere along the line did we get sold a bill of goods here? We were told that if you decontrol the price, and you all were set free, then we would all be set free -- that we could produce our way out of this. Now we`re being told that is really not the case.

Mr. KITTRELL: I don`t know who made the statements that we could produce our way out, decontrol and hosannah. we are energy-independent. But I have read no. or heard no one that I had respect for in the industry make a statement like that. Most of the statements have been along the lines that I described earlier. If we have decontrol, we`ll do better.

LEHRER: There are a lot of people who believe that: they`re just wrong?

Mr. KITTRELL: Well, here`s the thing that I think they`re probably overlooking. You have to look at it in a broader context than just oil and gas. If you decontrol and the prices rise, that brings on two other things: first, conservation, and second, it brings on alternate energy resources that are not feasible at lower prices. So I think the statement is right as long as you put it in a broader context. Now. I don`t want to give the impression that I think we can or necessarily should be energy-independent of the rest of the world. If we diversify the imports that come into the country -- say. from Canada. Venezuela. Mexico -- and don`t concentrate so much of our needs into the Middle East, it doesn`t bother me to have substantial imports Bu! not to the extent we have today.

LEHRER: Mr. Nehring. do you agree with Mr. Fliakos that the price -- this temporary settling of the price -- is in fact temporary, and it`s going to continue to go up?

Mr. NEHRING: I think in the short term, there is a reasonable chance that the price may even decline in real terms over the next one or two years. He spoke of Saudi Arabia as the key, that the Saudis may cut their production very soon. Well, what we forget is that Iran and Iraq are almost totally out of the world oil market right now because of the war that`s been going on between those two countries. When those two countries come in, that`s at least another four million barrels being added to world oil exports. The Saudis can cut back very substantially, and we may still have a glut -- or "a soft market" is probably a more accurate terminology -- over the next two or three years, and you`re likely to see some erosion in the real price.

LEHRER: You agree? What`s your view on the price, Mr. Kittrell?

Mr. KITTRELL: Oh, gosh. I`ve stopped predicting prices. I remember we had an ambassador to Saudi Arabia a few years ago who predicted the price of oil might be $9 a barrel, and we all laughed and thought that guy was completely insane, and here we are now in the thirties [of dollars per barrel]. I don`t predict prices any more. And I think it fakes us out of position, really, to try to analyze what`s going to happen in the next six months. I don`t think that`s as important as taking that long-term view -- that there is a problem: we have not solved it yet, and we ought not to be complacent that we have solved the energy problem because maybe prices come down a tad.

LEHRER: Mr. Fliakos, are investors willing to invest in the long-term energy future, or are they taking short-term risks or none at all?

Mr. FLIAKOS: Well --

LEHRER: A quick answer, sir, I`m sorry. We just have a few seconds left.

Mr. FLIAKOS: Well, I think that the investors right now are taking a very, very short-term view of their investments, and are very concerned about the short-term glut. And some make the case that maybe the glut -- as Mr. Nehring implied -- may last for the next five years or so, but I don`t think the investors are willing to look way beyond the next five years into the next century.

LEHRER: Mr. Fliakos and Charlayne in New York, thank you. Gentlemen here, thank you. And we`ll see you tomorrow night. I`m Jim Lehrer. Thank you and good night.