Baker Hughes 2004 Annual Report Download - page 71

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Natural฀Gas฀–฀Natural฀gas฀prices฀in฀2005฀are฀expected฀to฀
remain฀volatile,฀trading฀between฀$4/mmBtu฀and฀$7/mmBtu.฀
Natural฀gas฀prices฀could฀trade฀at฀the฀top฀of฀this฀range฀if฀
weather฀is฀colder฀than฀normal,฀the฀U.S.฀economy,฀particularly฀
the฀industrial฀sector,฀exhibits฀greater฀than฀expected฀growth฀
and฀continued฀levels฀of฀customer฀spending฀are฀not฀sufficient฀
to฀support฀the฀production฀growth฀required฀to฀meet฀the฀growth฀
of฀natural฀gas฀demand.฀Natural฀gas฀prices฀could฀move฀to฀the฀
bottom฀of฀this฀range฀if฀the฀U.S.฀economic฀recovery฀is฀weaker฀
than฀expected฀or฀weather฀is฀milder฀than฀expected.฀During฀the฀
summer,฀natural฀gas฀prices฀are฀expected฀to฀trade฀at฀a฀level฀
necessary฀to฀curtail฀price฀sensitive฀demand฀and฀allow฀storage฀
to฀refill.
Customer฀Spending฀–฀Based฀upon฀our฀discussions฀with฀
major฀customers,฀review฀of฀published฀industry฀reports฀and฀our฀
outlook฀for฀oil฀and฀natural฀gas฀prices฀described฀above,฀antici-
pated฀customer฀spending฀trends฀are฀as฀follows:
•฀ North฀America฀–฀Spending฀in฀North฀America,฀primarily฀
towards฀developing฀natural฀gas฀supplies,฀is฀expected฀to฀
increase฀approximately฀7%฀to฀9%฀in฀2005฀compared฀
with฀2004.
•฀ Outside฀North฀America฀–฀Customer฀spending,฀primarily฀
directed฀at฀developing฀oil฀supplies,฀is฀expected฀to฀increase฀
10%฀to฀14%฀in฀2005฀compared฀with฀2004.
•฀ Total฀spending฀is฀expected฀to฀increase฀9%฀to฀12%฀in฀2005฀
compared฀with฀2004.
Drilling฀Activity฀–฀Based฀upon฀our฀outlook฀for฀oil฀and฀
natural฀gas฀prices฀and฀customer฀spending฀described฀above,฀our฀
outlook฀for฀drilling฀activity,฀as฀measured฀by฀the฀Baker฀Hughes฀
rig฀count,฀is฀as฀follows:
•฀ The฀North฀American฀rig฀count฀is฀expected฀to฀increase฀
approximately฀4%฀to฀6%฀in฀2005฀compared฀with฀2004.
•฀ Drilling฀activity฀outside฀of฀North฀America฀is฀expected฀to฀
increase฀approximately฀9%฀to฀11%฀in฀2005฀compared฀
with฀2004.
Risk฀Factors฀Related฀to฀the฀Worldwide฀Oil฀
and฀Natural฀Gas฀Industry
Our฀business฀is฀focused฀on฀providing฀products฀and฀services฀
to฀the฀worldwide฀oil฀and฀natural฀gas฀industry;฀therefore,฀our฀
risk฀factors฀are฀centered฀on฀those฀factors฀that฀impact,฀either฀
positively฀or฀negatively,฀the฀markets฀for฀oil฀and฀natural฀gas.฀
Key฀risk฀factors฀currently฀influencing฀the฀worldwide฀oil฀and฀
natural฀gas฀markets฀are฀discussed฀below.
•฀ Excess฀productive฀capacity฀–฀the฀impact฀of฀supply฀and฀
demand฀disruptions฀on฀oil฀prices฀and฀oil฀price฀volatility฀is฀tem-
pered฀by฀the฀size฀of฀the฀disruption฀relative฀to฀the฀excess฀pro-
ductive฀capacity.฀Key฀measures฀include฀estimates฀of฀worldwide฀
productive฀capacity฀as฀compared฀with฀worldwide฀demand.
•฀ Supply฀disruptions฀–฀the฀loss฀of฀production,฀the฀inability฀to฀
export฀and/or฀delay฀of฀activity฀from฀key฀oil฀exporting฀coun-
tries,฀including฀but฀not฀limited฀to,฀Iraq,฀Saudi฀Arabia฀and฀
other฀Middle฀Eastern฀countries,฀Nigeria,฀Norway,฀Russia฀
and฀Venezuela,฀due฀to฀political฀instability,฀civil฀unrest,฀labor฀
issues฀or฀military฀activity.฀In฀addition,฀adverse฀weather฀such฀
as฀hurricanes฀could฀impact฀production฀facilities,฀causing฀
supply฀disruptions.
•฀ Energy฀prices฀and฀price฀volatility฀–฀the฀impact฀of฀widely฀
fluctuating฀commodity฀prices฀on฀the฀stability฀of฀the฀market฀
and฀subsequent฀impact฀on฀customer฀spending.฀While฀cur-
rent฀energy฀prices฀are฀important฀contributors฀to฀positive฀
cash฀flow฀at฀E&P฀companies,฀expectations฀for฀future฀prices฀
and฀price฀volatility฀are฀generally฀more฀important฀for฀deter-
mining฀future฀E&P฀spending.฀While฀higher฀commodity฀
prices฀generally฀lead฀to฀higher฀levels฀of฀E&P฀spending,฀sus-
tained฀high฀energy฀prices฀can฀be฀an฀impediment฀to฀eco-
nomic฀growth.
•฀ Global฀economic฀growth฀–฀particularly฀the฀impact฀of฀the฀
U.S.฀and฀Western฀European฀economies฀and฀the฀economic฀
activity฀in฀Japan,฀China,฀South฀Korea฀and฀the฀developing฀
areas฀of฀Asia฀where฀the฀correlation฀between฀economic฀
growth฀and฀energy฀demand฀is฀strong.฀The฀strength฀of฀the฀
U.S.฀economy฀and฀economic฀growth฀in฀developing฀Asia,฀
particularly฀China,฀will฀continue฀to฀be฀important฀in฀2005.฀
Key฀measures฀include฀U.S.฀and฀international฀economic฀
output,฀global฀energy฀demand฀and฀forecasts฀of฀future฀
demand฀by฀governments฀and฀private฀organizations.
•฀ Oil฀and฀natural฀gas฀storage฀inventory฀levels฀–฀an฀indicator฀
of฀the฀balance฀between฀supply฀and฀demand.฀A฀key฀measure฀
of฀U.S.฀natural฀gas฀inventories฀is฀the฀storage฀level฀reported฀
weekly฀by฀the฀U.S.฀Department฀of฀Energy฀compared฀with฀
historic฀levels.฀Key฀measures฀for฀oil฀inventories฀include฀U.S.฀
inventory฀levels฀reported฀by฀the฀U.S.฀Department฀of฀Energy฀
and฀the฀American฀Petroleum฀Institute฀and฀worldwide฀esti-
mates฀reported฀by฀the฀International฀Energy฀Agency.
•฀ Production฀control฀–฀the฀degree฀to฀which฀individual฀฀
OPEC฀nations฀and฀other฀large฀oil฀and฀natural฀gas฀produc-
ing฀countries,฀including,฀but฀not฀limited฀to,฀Mexico,฀Nor-
way฀and฀Russia,฀are฀willing฀and฀able฀to฀control฀production฀
and฀exports฀of฀oil,฀to฀decrease฀or฀increase฀supply฀and฀to฀
support฀their฀targeted฀oil฀price฀while฀meeting฀their฀market฀
share฀objectives.฀Key฀measures฀of฀production฀control฀
include฀actual฀production฀levels฀compared฀with฀target฀or฀
quota฀production฀levels,฀oil฀prices฀compared฀with฀targeted฀
oil฀prices฀and฀changes฀in฀each฀country’s฀market฀share.
•฀ Ability฀to฀produce฀natural฀gas฀–฀the฀amount฀of฀natural฀gas฀
that฀can฀be฀produced฀is฀a฀function฀of฀the฀number฀and฀pro-
ductivity฀of฀new฀wells฀drilled,฀completed฀and฀connected฀to฀
pipelines฀as฀well฀as฀the฀rate฀of฀production฀and฀resulting฀
depletion฀of฀existing฀wells.฀Advanced฀technologies,฀such฀
as฀horizontal฀drilling,฀improve฀total฀recovery฀but฀also฀result฀
in฀a฀more฀rapid฀production฀decline.฀Key฀measures฀include฀
government฀and฀private฀surveys฀of฀natural฀gas฀production,฀
company฀reported฀production,฀estimates฀of฀reservoir฀deple-
tion฀rates฀and฀drilling฀and฀completion฀activity.
•฀ Impact฀of฀energy฀prices฀and฀price฀volatility฀on฀demand฀for฀
hydrocarbons฀–฀short-term฀price฀changes฀can฀result฀in฀
companies฀switching฀to฀the฀most฀economic฀sources฀of฀
fuel,฀prompting฀a฀temporary฀curtailment฀of฀demand,฀while฀
long-term฀price฀changes฀can฀lead฀to฀permanent฀changes฀
in฀demand.฀These฀changes฀in฀demand฀result฀in฀the฀oilfield฀
services฀industry฀being฀cyclical฀in฀nature.฀Key฀indicators฀฀
include฀hydrocarbon฀prices฀on฀a฀Btu฀equivalent฀basis฀and฀฀
฀
2004฀Form฀10-K฀฀฀฀฀21