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Schlumberger Sees Uncertainty in North American Gas Market

Schlumberger Ltd. CEO Andrew Gould said Friday it will take until the end of the winter heating season to determine whether the North American natural gas rig count will grow this year "because of the backlog of gas behind the pipe that hasn't been stimulated and the number of wells that have not been completed." Liquefied natural gas (LNG) imports, he said, are the wild card.

Gould shared his outlook for global oil and gas markets during a conference call to discuss the company's 4Q2009 and full-year earnings.

Schlumberger reported that its 4Q2009 income from continuing operations was $817 million, a 4% bump sequentially but 34% lower from 4Q2008. Revenue in the final quarter of 2009 reached $5.7 billion, which was up from 3Q2009's $5.4 billion but down from $6.87 billion in 4Q2008. Full-year 2009 revenue fell to 23 billion from $27 billion in 2008.

"Our outlook for 2010 remains largely dependent on the prospects for the general economy," Gould said. "At the end of the third quarter, we indicated that we were encouraged that signs were emerging that demand for oil and gas would begin to increase. Consensus forecasts predict that oil demand in 2010 will increase, particularly in the developing world, for the first time since 2007.

As a result, we feel that oil prices are likely to be sustained at current levels and that as our customers' confidence grows, their exploration and production budgets will increase."

However, confidence levels are lower for gas activity this year, he said.

"For natural gas activity we remain a great deal more cautious. Despite signs of some recovery in industrial demand and the impact of the recent cold weather, we consider that markets remain generally oversupplied. Increased flows of LNG -- with additional capacity being added in 2010 -- as well as the general uncertainty over the decline rates of unconventional gas production have the potential to limit the current increase in the North American gas drilling rig count."

Asked to elaborate on his outlook for North American gas, Gould said no one will be able to determine how far U.S. gas supplies will decline until the end of the year because there are many onshore gas wells that are close to completion or awaiting being turned to sales.

"If the rig count plateaus, yes, [storage] will stabilize or reverse. But it's an unusual story, and we won't see where storage is until the end of winter. When we see the production profile, then we'll have a much better idea of whether we need to drill or not" in the second half of 2010.

"The only joker in the pack, is that many thought more LNG would come to the U.S. and it didn't. But with the amount of new capacity, Qatar, Yemen are putting on, coupled with others, it has to go somewhere...So we really, really won't know how much it's going to decline in 2010...or how much LNG may balance that decline. Gas consumption in Europe is way off. LNG then becomes spot, and it has the capacity to offset the decline. Whether that happens is another story, but that's why I'm cautious."

This year will be "one of two halves," similar to activity levels in 2009, said the CEO. "Beyond this year we see an increase in exploration and production." At the end of 3Q2009, Schlumberger saw "encouraging signs emerging," which pointed to oil demand increasing this year for the first time since 2007. But for gas, "worldwide we are generally oversupplied..."

Schlumberger's U.S. onshore drilling activity rose 12% sequentially in 4Q2009, but the firm had "no pricing traction until December," said Gould. Drilling equipment also tends to break down faster because of the hydraulic fracturing (fracing) techniques used in horizontal shale plays, and "frankly, if we don't get pricing increases, and we're tearing our equipment to pieces, we lose money."

Either the gas rig count will increase, he said, "or more likely, all of these massive fracs will tear up so much equipment that the market will come into balance. Equipment is disappearing more rapidly than it usually does." If the economic recovery "stays on track...we'll see a considerable increase in exploration and production spending in 2011."

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