Equipment Shortage Limits Oil Exploration

ROBERT SMITH, host:

With oil prices so high, you would think that it would make a good incentive for oil companies to go out and, I don't know, look for more of it, drill deeper, search harder. And some of that has happened. Last week, a Brazilian oil company announced that it had found new oil in the deep waters of the Atlantic Ocean. Still, the pace of exploration has been relatively slow.

NPR's Jim Zarroli tells us why.

JIM ZARROLI: In the oil business, when prices go up exploration does too. Companies drill new wells. They reopen marginal ones. If everything works like it should, there is soon a lot more oil on the market. And as supplies rise, prices should fall. Energy analyst Fadel Gheit of Oppenheimer and Company says that's what happened in the 1980s, and there's some evidence this is happening again.

Mr. FADEL GHEIT (Analyst): The money is there. The incentives are there. Therefore companies are sparing no effort to go after these resource.

ZARROLI: But Gheit says this time around there are other factors that could keep the markets from running smoothly. For one thing, Gheit says, oil companies have been largely unprepared for the windfall that $130 a barrel oil has brought them, and they're finding themselves with huge amounts of money to invest in new production.

But oil industry analyst Philip Verleger says there aren't enough equipment and trained personnel to spend all that money on.

Mr. PHILIP VERLEGER (Oil industry analyst): We are short of skilled workers. We are short of steel. We are short of pumps. We're short of everything one needs to expand oil and gas development. And it takes years to build the infrastructure to build the things we need.

ZARROLI: The problem has been aggravated by a lack of investment. Richard Ranger of the American Petroleum Institute says oil prices were so low for so long that the industry didn't spend enough on training and equipment.

Mr. RICHARD RANGER (American Petroleum Institute): We spent a number of years in the lower price scenario that many folks look back on with nostalgia, not hiring and laying people off. And so we're kind of desperately competing for talent right now.

ZARROLI: With so much money chasing so few goods, prices for both labor and equipment have soared. Three years ago, it cost $180,000 a day to operate a deep-water oil rig. Today it's nearly three times that. A highly trained welder working in the Canadian oil fields can pull down $50,000 a month. So the money the oil companies are putting into production doesn't go as far as it used to.

Fadel Gheit says there's another factor slowing production. He says countries like Saudi Arabia and Russia have become more reluctant to enter into production contracts with big oil companies.

Mr. GHEIT: In the last five or six years, oil production in Russia was growing by almost a million barrels per day. And all of a sudden now Russia said we are not interested in additional drilling or additional capital.

ZARROLI: The reason, Gheit says, is that these countries see the current price spike as artificial - the result of speculation - and they worry that increasing supplies too much now will lead to a crash down the road.

Richard Ranger says even when oil exploration is permitted, the process of finding, testing and producing oil from wells is long and expensive.

Mr. RANGER: The investments made today will produce oil or natural gas ten years from now. And really, the oil and natural gas we're producing today are the result of investments we made ten to twelve years ago.

ZARROLI: Ranger says there's no way to tell whether today's investments will lead to lower prices. There are too many other factors, like the growth rate in China and India. But the higher energy prices go, the bigger the potential profits become, and the more incentive companies have to squeeze additional oil out of the ground.

Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.