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Oilfield support businesses proceed with caution.

Although oilfield activity to enhance production and maintain operations in aging Prudhoe Bay and to sustain new exploration in Cook Inlet has created near-term work for service firms, managers are wary of impending future slowdowns.

Alaska's oilfield support industry is holding its own, but some operators fear the current calm may give way to further unsettling changes. Because the sector depends heavily on the prices oil companies are able to reap from their crude oil sales, the steady price of oil during most of 1991 was a stabilizing factor.

Although a fair amount of work remains for contractors as a result of efforts to squeeze more oil from declining fields, the support industry has lost some jobs as a result of consolidation by Arco Alaska and BP Exploration (Alaska) in North Slope operations.

The service sector suffered when the price of oil dropped in 1986 and the recession followed. Oilfield contractors and suppliers shut down, moved out of state or dramatically streamlined their operations. Then, the 1989 oil spill cleanup gave the industry a new -- if somewhat uncomfortable -- lease on life. The Persian Gulf war also helped forestall any further belt-tightening.

One drilling company official explains: "The support industry is tied directly to oil company budgets. If they want to spend 50 percent of last year, the support industry suffers. It's been a good year for us, with 100 percent utilization of our equipment for 1991. What's going on today is kind of a carryover from the Kuwaiti situation, a little interim boost. It just put off some uncomfortable decisions, that's all. 1992 will be more like a year ago."

Bill Webb, general manager of the Alaska Support Industry Alliance, a trade organization representing the oilfield support industry, says some in the industry are more worried than others. For many "there will be a steady stream of contract work for years to come at Prudhoe, Kuparuk, Milne Point and the others," he explains.

The service industry should see stable demand through 1995 when the GHX-2 gas-injection system kicks in, Webb notes. But after that, he says, "there's absolutely nothing on the horizon. We were hoping for ANWR to fill that late '90s gap for us."

But like the rest of the oil industry, support contractors will have to wait for possible opening of the Coastal Plain of the Arctic National Wildlife Refuge to exploration. The U.S. Senate voted last fall to put off consideration of the issue, thereby keeping the refuge closed to oil exploration.

Waiting on ANWR's final outcome is hardest for small and mid-sized companies with operations in Alaska, especially those involved in exploration and the early phases of oil development. "The scariest thing is the lack of geophysical work, which is where it all starts," Webb explains. He recalls when 30 Caterpillar trains tracked Alaska's winter wilderness with seismic crews. In the last six seasons, there haven't been more than three trains.

Steelfab, an Alaskan-owned steel fabrication contractor and service center, had a pretty good 1991, reports its president, Richard Faulkner. The company, which draws 60 to 70 percent of its business from the oil patch, doubled its fabrication capacity through an 18,200-square-foot plant expansion in 1991.

Several of Steelfab's competitors failed or abandoned the Alaska market and presently each of the handful of survivors in Faulkner's trade is busy. But he notes, "If there was one more (company) than there is right now, then things would be pretty marginal. There's not enough room for anyone else to come in here."

Faulkner hopes to persuade oil companies to do more of their fabrication in Alaska. His tools of persuasion: demonstration of reliable performance and just plain salesmanship. "What we're looking for from them is to want to work with people here to develop a steady work flow. We're investing quite a lot of money upgrading both our capability and our capacity," Faulkner says.

Even for support companies with corporate headquarters outside Alaska, waiting for an upturn is nerve-wracking. "Unless we secure a larger market share, we're going to cut back in Alaska. In the current situation, if we gain market share in Alaska, it means one of our competitors is going to be losing share. That's how little work there is to go around," says Tom Gennings, Alaska operations manager for Teleco Oilfield Services Inc., based in Meriden, Conn.

Teleco provides measurement while drilling (MWD) services, employing sophisticated technology to evaluate geologic formations during exploration and development drilling. Before 1980, there were 40 MWD companies nationwide; now there are three or four.

Gennings explains that when major oil companies economize, contractors such as Teleco must follow suit. For example, if a major decides to drill six-inch holes instead of eight-inch holes, to save on casing and drilling mud, Teleco must reduce the size of its instruments accordingly. "That's not an overnight thing," Gennings says. He also points out the high costs associated with research and development.

One means of gaining a larger market share is cutting prices, which in turn reduces profitability. "Then you're still shooting yourself in the foot. In Alaska, there's just not the economies of scale," says Gennings.

Internationally, the firm's business is booming. "We have sent 50 percent of the U.S. fleet to the North Sea and West Africa in the last six months. Domestically, we're twiddling our thumbs. There's more competition than there is work to go around," Gennings says. Teleco is luckier than many Alaska-based firms, which lack the necessary resources to jump into the international arena.

Gennings says many companies in the domestic oil support industry based outside Alaska are twitching on the fence, hoping Alaska's oil development climate will improve. But Webb notes that a combination of stiff taxes, high operating costs and environmental bonding requirements has created a bad investment climate.

He adds, "The U.S.S.R. is essentially begging our people to go over there, and you don't have all those restrictions." Tempting as the former Soviet Union's republics may seem, markets there also are tempestuous and carry significant risks.

In the final analysis, it's impossible to escape risk and volatility in the oil business. Things can change fast, for better or worse. As one executive notes, further disintegration in the old Soviet Union and a shift in political winds could shift the focus closer to home.
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Title Annotation:petroleum services industry
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:Feb 1, 1992
Previous Article:Oil industry's troubled waters.
Next Article:Sizing up oxyfuels.

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