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Schlumberger Prepares for Next Gas Drilling Uptick

Reduced natural gas drilling in North America may be enough to sustain unconventional production in the short term, but for the oilfield services sector, research and development dollars continue to be poured into more complex drilling technologies, which will be needed once activity resumes, the CEO of Schlumberger LLC said last week.

The longer the natural gas and oil industry keeps its spending flat, the more dramatic the fall-off in production capacity will be, which will lead to a steeper recovery in commodity prices once demand recovers, Schlumberger CEO Andrew Gould told attendees last Monday at the Howard Weil Energy Conference in New Orleans.

"For natural gas, recovery depends on somewhat different factors" than oil, said Gould. "These include the large volumes of LNG [liquefied natural gas] expected to come to market over the next two years, the improvement in gas transportation infrastructure and the ability of North America to continue to unlock its unconventional gas resources."

However, Gould reminded the audience that the energy industry has always worked in cycles, "all of which are all ultimately driven by demand. Periods of intense economic growth or economic stagnation lead to periods of boom and bust in our customers' investment cycles, and we, as suppliers, feel the full effects of such changes in direction.

"The trick to managing our business is not to think that the state of the cycle either up or down has become permanent. Of course, we all prefer the up cycles but we have learned over time how to profit from the down cycles as well."

Customers are doing what they can to reduce some of their service costs, which have risen dramatically in the past five years. Schlumberger's customers, said Gould, have requested renegotiations of existing contracts and are "trying to trade volume or extended duration against price...The threat is that prices will be even lower in a new tender.

"Similarly, we are equally trying hard to reverse some of the cost increases we have incurred from our suppliers over the same period. The whole process of cost and price readjustment will take from 12 to 18 months and will depend on how activity levels evolve..."

Gould doesn't expect gas output to fall substantially before 2010, which will lead the services sector to make some difficult choices in the coming months. Schlumberger has reduced its worldwide head count by around 5% since the beginning of this year and more job cuts are expected, he said.

Likewise, services operator Smith International Inc. has reduced its workforce by around 10% in response to the downturn in drilling, said CFO Margaret Dorman. Most of the job cuts were in North America, and the Houston-based company may make further reductions in the months ahead, she said at the conference. Smith had around 25,700 full-time employees worldwide at the end of 2008. Other oilfield service operators, including Halliburton, also have reduced their workforces because of the downturn in drilling.

"The technology and process for the extraction of unconventional gas has evolved so rapidly that the huge increases in rig count seen in 2005 and 2006 have translated into large production increments," Gould said. "This has now coincided with weaker overall demand, and it is going to take time for natural decline to reach a point where any substantial increase in drilling is likely to be needed."

The current downturn, said Gould, "is not about the age of oil being over. On the contrary, oil remains in terms of its energy-to-mass ratio an unrivaled source of energy. Natural gas is not far behind. None of the other sources of energy that the world is working on are anywhere close to oil for its best usage -- transportation. Only energy conservation can have a substantial effect on the demand for oil in the medium term," and as long as worldwide economies want to "adopt the lifestyle that the West enjoys, demand for oil is not going to disappear."

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