Baker Hughes 2004 Annual Report Download - page 70

Download and view the complete annual report

Please find page 70 of the 2004 Baker Hughes annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

Oil฀and฀Natural฀Gas฀Prices
Generally,฀changes฀in฀the฀current฀price฀and฀expected฀future฀
prices฀of฀oil฀or฀natural฀gas฀drive฀both฀customers’฀expectations฀
about฀their฀prospects฀from฀oil฀and฀natural฀gas฀sales฀and฀their฀
expenditures฀to฀explore฀for฀or฀produce฀oil฀and฀natural฀gas.฀
Accordingly,฀changes฀in฀these฀expenditures฀will฀normally฀result฀
in฀increased฀or฀decreased฀demand฀for฀our฀products฀and฀ser-
vices.฀Oil฀(Bloomberg฀West฀Texas฀Intermediate฀(WTI)฀Cushing฀
Crude฀Oil฀Spot฀Price)฀and฀natural฀gas฀(Bloomberg฀Henry฀Hub฀
Natural฀Gas฀Spot฀Price)฀prices฀are฀summarized฀in฀the฀table฀
below฀as฀averages฀of฀the฀daily฀closing฀prices฀during฀each฀of฀
the฀periods฀indicated.
฀ 2004฀ 2003฀ 2002
Oil฀prices฀($/Bbl)฀ $฀ 41.51฀ $฀ 31.06฀ $฀ 26.17฀
Natural฀gas฀prices฀
฀ ($/mmBtu)฀ ฀ 5.90฀ ฀ 5.49฀ ฀ 3.37
Oil฀prices฀averaged฀a฀historic฀high฀of฀$41.51/Bbl฀in฀2004.฀
Prices฀increased฀from฀the฀low฀$30s/Bbl฀in฀January฀2004฀to฀a฀
high฀of฀$56.17/Bbl฀in฀late฀October฀2004,฀before฀moderating฀
and฀ending฀the฀year฀in฀the฀low฀$40s/Bbl.฀Inventories฀of฀crude฀
and฀petroleum฀products฀were฀relatively฀low฀throughout฀the฀year,฀
supporting฀high฀prices.฀Worldwide฀demand฀for฀hydrocarbons฀
was฀driven฀by฀strong฀worldwide฀economic฀growth,฀which฀was฀
particularly฀strong฀in฀China฀and฀developing฀Asia.฀Worldwide฀
excess฀productive฀capacity฀was฀at฀the฀lowest฀level฀in฀30฀years,฀
and฀disruptions,฀or฀the฀potential฀for฀disruptions,฀in฀oil฀supply฀
resulted฀in฀volatile฀oil฀prices฀throughout฀the฀year.฀Events฀in฀
2004฀which฀either฀disrupted,฀or฀had฀the฀potential฀to฀disrupt,฀
oil฀supplies฀included:฀the฀August฀recall฀elections฀in฀Venezuela;฀
sabotage฀of฀Iraqi฀oil฀production฀assets;฀actions฀taken฀by฀the฀
Russian฀government฀regarding฀Yukos฀and฀their฀tax฀obligations;฀
terrorism฀in฀the฀Middle฀East,฀including฀the฀possibility฀of฀a฀dis-
ruption฀in฀oil฀supply฀from฀Saudi฀Arabia;฀labor฀strikes฀in฀Nor-
way;฀labor฀strikes฀and฀violence฀in฀Nigeria;฀and฀weather,฀
especially฀the฀impact฀of฀hurricanes฀in฀the฀Gulf฀of฀Mexico.฀By฀
the฀end฀of฀the฀year,฀a฀number฀of฀these฀issues฀were฀resolved฀
without฀significant฀disruptions฀to฀oil฀supply,฀which฀led฀to฀oil฀
prices฀of฀just฀above฀$40/Bbl.฀In฀addition฀to฀these฀events,฀the฀
weakness฀of฀the฀U.S.฀dollar฀relative฀to฀many฀worldwide฀curren-
cies฀contributed฀to฀high฀U.S.฀dollar-denominated฀oil฀prices.
During฀2004,฀natural฀gas฀prices฀averaged฀a฀historic฀high฀of฀
$5.90/mmBtu.฀Throughout฀the฀year,฀a฀tight฀balance฀between฀
supply฀and฀demand฀supported฀prices฀between฀$5/mmBtu฀and฀
$7/mmBtu,฀with฀weather฀related฀spikes฀outside฀of฀this฀range.฀
High฀natural฀gas฀drilling฀activity฀in฀2004฀combined฀with฀
increasing฀depletion฀rates฀resulted฀in฀limited฀production฀
growth.฀We฀began฀the฀year฀with฀U.S.฀natural฀gas฀storage฀lev-
els฀slightly฀greater฀than฀the฀five-year฀average฀storage฀levels.฀
Natural฀gas฀prices฀peaked฀above฀$7/mmBtu฀in฀January฀as฀a฀
result฀of฀colder฀than฀normal฀winter฀weather.฀Prices฀fell฀to฀just฀
above฀$5/mmBtu฀in฀late฀February,฀as฀winter฀weather฀moder-
ated฀and฀storage฀remained฀just฀above฀the฀five-year฀average.฀
However,฀by฀the฀end฀of฀the฀winter฀heating฀season,฀natural฀gas฀
inventories฀fell฀below฀the฀five-year฀average.฀In฀the฀first฀half฀of฀
the฀summer,฀the฀market฀required฀natural฀gas฀prices฀in฀excess฀
of฀$6/mmBtu฀in฀order฀to฀limit฀consumption฀of฀natural฀gas฀and฀
allow฀storage฀to฀refill.฀In฀July฀and฀August,฀below฀average฀sum-
mer฀temperatures฀allowed฀storage฀to฀fill฀more฀rapidly฀and,฀as฀
storage฀increased฀above฀the฀five-year฀average,฀prices฀fell฀to฀a฀
low฀of฀$4.40/mmBtu฀in฀early฀September.฀High฀oil฀prices,฀hurri-
cane-driven฀supply฀disruptions฀and฀the฀start฀of฀the฀winter฀
heating฀season฀resulted฀in฀a฀peak฀price฀of฀$8.14/mmBtu฀in฀late฀
October.฀Prices฀fell฀below฀$5/mmBtu฀in฀November,฀as฀the฀
beginning฀of฀the฀winter฀was฀milder฀than฀normal฀and฀storage฀
was฀above฀the฀five-year฀average.฀A฀late฀December฀cold฀snap฀
resulted฀in฀a฀natural฀gas฀price฀in฀excess฀of฀$7/mmBtu.฀Prices฀
ended฀the฀year฀at฀approximately฀$6/mmBtu.
Worldwide฀Oil฀and฀Natural฀Gas฀Industry฀Outlook
This฀section฀should฀be฀read฀in฀conjunction฀with฀the฀fac-
tors฀described฀in฀the฀“Risk฀Factors฀Related฀to฀the฀Worldwide฀
Oil฀and฀Natural฀Gas฀Industry,”฀“Risk฀Factors฀Related฀to฀Our฀
Business”฀and฀“Forward-Looking฀Statements”฀sections฀con-
tained฀herein.฀These฀factors฀could฀impact,฀either฀positively฀
or฀negatively,฀our฀expectation฀for฀oil฀and฀natural฀gas฀demand,฀
oil฀and฀natural฀gas฀prices฀and฀drilling฀activity.
Oil฀–฀Oil฀prices฀in฀2005฀are฀expected฀to฀trade฀between฀
$35/Bbl฀and฀$55/Bbl.฀Continuing฀the฀trend฀from฀2004,฀low฀
inventories฀of฀crude฀oil฀and฀products,฀combined฀with฀strong฀
worldwide฀economic฀growth,฀are฀expected฀to฀support฀prices฀
that฀could฀average฀above฀$40/Bbl.฀Growth฀in฀oil฀demand฀is฀
expected฀to฀slow฀in฀2005฀compared฀with฀2004,฀as฀worldwide฀
economic฀growth฀and,฀in฀particular,฀economic฀growth฀in฀China฀
moderates฀from฀the฀extraordinarily฀strong฀growth฀exhibited฀in฀
2004.฀The฀ongoing฀lack฀of฀excess฀productive฀capacity฀will฀leave฀
the฀energy฀markets฀susceptible฀to฀price฀volatility฀should฀there฀
be฀any฀disruptions฀or฀threat฀of฀disruptions฀in฀oil฀supplies.
Factors฀that฀could฀lead฀to฀prices฀at฀the฀lower฀end฀of฀our฀
range฀include฀but฀are฀not฀limited฀to:฀a฀more฀significant฀than฀
expected฀slowing฀of฀worldwide฀economic฀growth,฀particularly฀
economic฀growth฀in฀China;฀greater฀than฀planned฀growth฀in฀
Russian฀oil฀exports;฀Organization฀of฀Petroleum฀Exporting฀
Countries฀(“OPEC”)฀exports฀in฀excess฀of฀their฀stated฀goals;฀or฀
other฀factors฀which฀result฀in฀oil฀inventories฀increasing฀signifi-
cantly฀from฀historically฀low฀levels.
Factors฀that฀could฀lead฀to฀prices฀at฀the฀top฀of฀our฀range฀
include฀but฀are฀not฀limited฀to:฀more฀rapid฀than฀planned฀expan-
sion฀of฀the฀worldwide฀economy,฀particularly฀the฀economy฀in฀
China;฀a฀significant฀slowing฀of฀exports฀from฀Russia;฀or฀other฀
factors฀which฀result฀in฀oil฀inventories฀that฀remain฀at฀historically฀
low฀levels.
Factors฀that฀could฀lead฀to฀disruptions฀or฀the฀threat฀of฀dis-
ruptions฀in฀oil฀supply฀and฀volatility฀in฀oil฀prices฀include฀but฀are฀
not฀limited฀to:฀terrorist฀attacks฀targeting฀oil฀production฀from฀
Saudi฀Arabia฀or฀other฀key฀producers;฀labor฀strikes฀in฀key฀oil฀
producing฀areas฀such฀as฀Nigeria;฀the฀potential฀for฀other฀mili-
tary฀actions฀in฀the฀Middle฀East;฀and฀adverse฀weather฀condi-
tions,฀especially฀in฀the฀Gulf฀of฀Mexico.฀The฀potential฀for฀these฀
and฀other฀events฀to฀cause฀volatility฀will฀be฀mitigated฀by฀the฀
degree฀to฀which฀OPEC,฀and฀in฀particular฀Saudi฀Arabia,฀are฀
able฀to฀increase฀excess฀productive฀capacity.
20฀฀฀฀฀Baker฀Hughes฀Incorporated