U.S. Losing Ability to Explore for Oil : Funds Slashed, Seismic Crews at 9-Year Low

Throughout the oil industry, drilling funds have dried up, seismic crews are being dismantled and geologists have been laid off as the search for more oil and gas--once a top national priority--slows to a crawl.

Industry executives now say that the real drop in exploration as a result of this winter’s collapse of oil prices could be twice as severe as is suggested by the 20% to 30% spending cuts announced by major oil companies in recent weeks.

Seismic Crews Dwindle

“There’s a hold on just about everything,” said L. Decker Dawson of Midland, Tex., whose crews and seismic equipment are hired by major oil producers to find new sources of oil. The number of such crews, which can cost $500,000 a month to support, has dropped to a nine-year low.

Firms such as Dawson Geophysical Co. are at the front lines of oil exploration, and every oil prospect they do not find is an oil well that nobody drills. Thus, apart from the immediate economic damage to such places as Bakersfield and Houston, the idle seismic crews are one of the most worrisome things about the drop in oil prices from $31 to as low as $10 a barrel since late November.

As such, they are symptomatic of the concern about oil prices that Vice President George Bush is expected to express during his current visit to Saudi Arabia.

Plain economics dictates that the less oil is worth, the less money people will spend to find more of it and get it out of the ground. Not only do the oil producers have less money to spend when prices are low, but any oil they do discover would be inherently less valuable and perhaps not worth the trouble or expense.

The retrenchments announced this year by virtually every major producer are even more severe than indicated, said Allan Martini, senior vice president for exploration and production at Chevron USA. He says that exploration budgets include routine, fixed operating expenses, such as building maintenance, that cannot be trimmed much.

“So if you’re cutting 30% overall, you might cut actual seismic work by 60%,” Martini said. “The exploration cuts are worse than they seem.”

The cutbacks in exploration and production will be sharper in this country than elsewhere because most known U.S. reserves are smaller and the oil is heavier, which makes drilling a more costly proposition on a per-barrel basis than in other oil-rich parts of the world.

Up to OPEC Nations

Because this country cannot provide all its own oil needs, a likely decline in domestic production of more than 2 million barrels per day within the next two years would have to be made up by those oil producers best able to do so--the members of the Organization of Petroleum Exporting Countries.

With the lower production and higher demand that would result from $15-a-barrel oil, the trade publication Oil & Gas Journal calculates that the United States would have to get about 52% of its oil from foreign sources by 1990. That would exceed the peak of 47% reached in 1977 before conservation measures and new domestic oil discoveries reduced U.S. reliance on imported oil. And it contrasts with today’s 29%.

‘Knock Your Socks Off’

Under this scenario, OPEC’s now-excess capacity would become strained as the cartel moved to meet the growing appetite of such oil importers as the United States. Then, says a Houston oil lawyer voicing the common wisdom: “You’ll see a spiral in prices that will knock your socks off.”

Many in the industry believe that the depth of today’s retrenchment will lengthen the time it takes to crank the huge industry back up again when a surge in prices occurs. And they say that 300,000 or more barrels of production per day could be permanently lost as small wells are plugged because they are not profitable.

Thus, even as the country enjoys the spread of lower oil prices through the economy and the Reagan Administration enjoys the deflationary fallout, the prospect of a new energy shock has touched off alarm among energy observers and oil producers.

It has also prompted criticism from within the industry of the huge cutbacks in exploration by the major oil companies, which, some complain, are putting short-term profits ahead of the national need to stem a 15-year-long decline in domestic oil reserves.

And, to some, it has turned the traditional upbeat psychology of the oil patch upside down.

“It’s doom-and-gloom,” said Dale Duley, a geologist who is looking for work because every dollar trickling into his Newport Beach exploration company is going straight to the loan department at the bank.

“I’m 53 years old and I don’t think any of us has ever seen a cycle like this,” said Duley, a longtime Atlantic Richfield employee who has spent most of his career in overseas exploration. “The thinking has changed. It’s changing the entire philosophy of the oil business. We used to figure we’d wait six months and things will turn up. Not any more.”

Running Out of Oil

The world, of course, is running out of oil, and exploration can only stretch out the timetable. Since the first oil well was drilled in Pennsylvania in 1859, man has found perhaps 2 trillion of the 3 to 5 trillion barrels of total petroleum resources thought to be recoverable. About 700 billion barrels have been used up.

Just how much commercially recoverable oil is left depends heavily on prices. At $10 a barrel, there is a lot less oil than there was at $31. With about 40% of the estimated proven and probable reserves in the Persian Gulf nations, the issue is especially acute for the United States.

But major discoveries can dramatically change the picture. The Alaskan strikes in 1969 and 1970 sharply increased the known U.S. reserves, so that the nation has slightly more proven reserves today than it had in 1950. But despite the surge in exploration in the late 1970s, the nation’s reserves have been declining steadily for 15 years.

One Company’s Problems

Dawson’s small geophysical company, and the condition of the exploration industry generally, illustrate why people are worried about the latest turn of events.

Dawson’s crews roam the Southwest and the Rockies with 25 to 30 workers each, a dozen trucks and perhaps six electronically controlled, 50,000-pound machines that vibrate and send shock waves deep into the ground. The signals that bounce back up provide clues about the presence of oil.

Last year, Dawson had five crews. Today he is down to two, the fewest since the early 1960s. The laborers who make up two-thirds of each crew have been laid off, their work performed by the remaining technicians.

“We’ve seen a pretty general freeze in exploration expenditures in the last 60 days,” said Dawson, who has been in the business since 1952. “The companies have budgets, but they’re not spending any of it. It’s been cut almost 100%.”

Crews Decline

By the end of February, the number of seismic crews active in the United States had dropped below 300 for the first time since April, 1977, according to a count maintained by the Society of Exploration Geophysicists in Tulsa. The 295 crews compare to an average of 378 last year and are less than half the 681 crews operating when oil prices peaked in 1981.

The more gradual and modest oil-price decline that occurred between mid-1981 and late 1985 had taken its toll on exploration even before the precipitous drop of recent months: 21 leading U.S. oil companies reduced their exploration and production spending by about one-third during those four years.

More recently, the industry has carved an estimated $18 billion out of its exploration spending plans for this year alone--a sudden 26% drop on top of the previous cutbacks.

“Invariably, when there’s a budget crunch, the first thing to go is exploration, which is basically the seismic crews,” said Marvin Hewitt, a research associate at Amoco who is president of the exploration society.

Better Ones Survive

“There was a real explosion in the number of seismic crews in the late 1970s when everyone was expecting $50 (a barrel) oil. Since then, the better companies have survived because they did the better work. But this latest price drop is cutting into the good, solid geophysical contractors.”

Chevron is about to dismantle one of its four company-owned seismic crews and has not had any independent crews under contract for several months, Martini said. In earlier years, it had up to a dozen independent seismic contractors in the field.

Oil producers frequently seek partners who would take over exploration projects, but, Martini said: “Right now, you can’t even find anyone willing to take farm-outs.”

Investors Seek Cover

One reason is that, in addition to the corporate cutbacks, the outside investors needed by independent oil outfits have run for cover. Public investment in funds for drilling projects, which skyrocketed a few years ago because of the tax-shelter benefits and fat oil prices, have suddenly evaporated.

Drilling investments in January and February totaled a meager $6.3 million, off 87% from the $51 million a year earlier, according to Vice President Fuhrman Nettles of the limited-partnership research firm of Robert A. Stanger & Co. in Shrewsbury, N.J.

“Drilling is going down the tubes,” Nettles said.

Such cutbacks will ease short-term financial problems--but will create severe bottlenecks when, as most observers expect, prices rebound and exploration becomes attractive again.

“Management is going to say, ‘OK, go on out there and drill,’ ” Hewitt said. “And the drilling guys will say, ‘OK, but we have no prospects because we haven’t been looking for them.’ ”

Although independent oil producers do up to 90% of all exploratory drilling, the biggest discoveries and highest success rates are made by the Exxons, Amocos and other oil giants with the resources to explore in so-called “frontier” areas where costs--and potential payoffs--are highest.

Will Buy Reserves

That is why Michel T. Halbouty, a well-known Texas wildcatter, is angry about such actions as Exxon’s announced $2.8-billion reduction in its exploration budget this year. Exxon has indicated that it will save its money to buy oil reserves, which are likely to materialize at bargain-basement prices from failing firms.

The company ought to cut its dividend instead, maintain its exploration budget and put the national interest ahead of the shareholders’ interest, according to the 76-year-old Halbouty.

“Why should Exxon, which is the biggest company in the world, and is making more money than any oil company in the world, cut back on exploration when they don’t have to?” demands Halbouty. “Buying reserves doesn’t create new reserves. Buying reserves is fine for Exxon but not for the nation.”

He was referring to what has become an increasingly common practice since 1981, known as drilling for oil on Wall Street, in which existing oil reserves are bought instead of discovered. The phenomenon is likely to accelerate in today’s oil climate.

Acting ‘Prudently’

Exxon officials declined to comment except to reiterate that the company is acting “prudently.” Another independent oilman offered a philosophical answer for the huge company, however, paraphrasing the auto executive who equated the well-being of General Motors with the well-being of the country.

“They believe the country’s interest is the shareholders’ interest,” said Rodney Nahama, president of Nahama & Weagant Energy Co., a publicly held exploration firm in Bakersfield. “The fact is, it’s cheaper to buy a barrel of oil than to look for it. As long as that’s the case, that’s what people will do.”

The groundwork is being laid for other long-term problems in exploration, notably in the availability of skilled people. The big oil companies have largely frozen hiring in addition to laying off thousands of veteran employees.

To Other Industries

Ted L. Bear, a consultant in Fillmore, Calif., and former president of the American Society of Petroleum Geologists, says there are 4,000 unemployed geologists walking the streets of Houston. A prolonged downturn would inevitably drive many into other industries.

One of the most promising sources of “new” oil in recent years has been the improved recovery from known fields that have been pumped for years but might still have 60% of their reserves. A prime example is the various enhanced-recovery projects under way in the Bakersfield area, where new techniques are bringing more and more of California’s molasses-like oil to the surface.

Those kinds of gains have resulted from technological advances as well as big capital investments in special equipment. But Unocal Chairman Fred L. Hartley contends that enhanced-recovery projects would stop altogether at a prevailing price of $13.50 per barrel, wiping out 650,000 barrels of U.S. production daily.

Now, Chevron says, general research will be cut back and a planned $1.3-billion expansion of its Kern County enhanced-recovery operations will be slowed.

Says Dawson, whose company is known for its use of the latest seismic technology: “Research is going to fall off to nothing.”

Long-Term Projects

There is disagreement over where new exploration will occur and where it will not, but oil people say long-term projects where large sums of money have already been spent will continue. That explains the discoveries announced in recent weeks by Occidental Petroleum in the North Sea and off China, for example, and development is expected to continue on offshore platforms near Santa Barbara.

But new commitments are another matter: The Interior Department said there is so little interest by the oil industry at the moment that it might cancel five of the seven sales of oil and gas leases offshore from Alaska and the East Coast it had planned for this year.

Explained a spokesman for Interior’s Minerals Management Service: “We don’t want to have a dance and nobody show up.”