February 2009

DanPedrottiHornGood bye to 2008 and thank God it is over. A year that saw unprecedented prosperity for our industry ended with the sharpest decline in value of our products since 1985. All these reserves developed at high exploration, drilling and completion costs have suddenly become marginally profitable yet we must continue producing them. Many of our high risk-high potential prospects have become uneconomic, that is until drilling costs come down to reasonable levels. Hopefully our sunk costs – overhead, leases, seismic and other exploration expenses will be recovered sooner than later as our prospects again become economic due to stabilized commodity prices, reduced exploration costs, normalized drilling rates and lower completion costs. The sharp decline in steel prices should positively affect us very soon.

Predictions for the turn around from this world wide recession vary from the fourth quarter of 2009 to who knows when. I remember in 1985 our oil and gas economists were predicting recovery in oil and gas prices at any moment and yet it was well into the 1990s before we began to see the light. This time the world demand for oil will be much stronger when the world economies start to rebuild, as we just don’t have the reserves to supply the likes of India and China. So let’s pray for a quick resurgence in economic growth world wide.

The outcome of the elections could not have been worse. Although we had few true champions of domestic production in the last congress, we now have many more who despise our industry and want to destroy our entire capital structure way of doing business. I am shocked that over half of the voters preferred big government spenders over the conservative ideals that created and have sustained the greatest country in history. Wanting the new administration to successfully launch big spending programs to bring us out of recession is like rooting for the team that beat us in the Super Bowl.

Now that I have painted such a bleak picture let’s look at the bright side. Most Companies have not yet disclosed their 2009 exploration plans or budgets. There have not been massive layoffs of our exploration and production scientists and except for the resource plays we haven’t seen a dramatic down turn in drilling activity. We are already seeing softening in drilling costs and with steel prices collapsing our tubulars are sure to get back to normal soon. If you rat holed your profits from the first eight months of 2008, now is the time to kick your prospect generation activates into high gear. You should be able to acquire seismic data and oil leases a lot cheaper, so warehouse as many deals as you can afford and keep on mapping.

Most economists are predicting that when the recovery begins there will again be a shortage of the oil and gas needed to fuel the world and our products will again increase in value maybe even skyrocket to higher levels than were seen in 2008. So keep your optimism, but be informed on what is going on in Congress, and don’t be afraid to contact your representatives when some of the detrimental legislation that has been proposed comes to the floor.

Daniel A. Pedrotti
CCGS President