Baker Hughes 2010 Annual Report Download - page 89

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Demand for oil and natural gas is subject to factors
beyond our control, which may adversely affect our
operating results. Changes in the global economy or
changes in the ability of our customers to access equity
or credit markets could impact our customers’ spending
levels and our revenues and operating results.
Demand for oil and natural gas, as well as the demand for
our services, is highly correlated with global economic growth,
and in particular by the economic growth of countries such as
the U.S., India, and China, as well as developing countries in
Asia and the Middle East who are either significant users of
oil and natural gas or whose economies are experiencing the
most rapid economic growth compared to the global average.
The past slowdown in global economic growth and recession
in the developed economies resulted in reduced demand for
oil and natural gas, increased spare productive capacity and
lower energy prices. Weakness or deterioration of the global
economy or credit market could reduce our customers’ spend-
ing levels and reduce our revenues and operating results.
Incremental weakness in global economic activity, particularly
in China, India, the Middle East and developing countries in
Asia will reduce demand for oil and natural gas and result in
lower oil and natural gas prices. Incremental strength in global
economic activity in such areas will create more demand for oil
and natural gas and support higher oil and natural gas prices.
In addition, demand for oil and natural gas could be impacted
by environmental regulation, including “cap and trade” legis-
lation, carbon taxes and the cost for carbon capture and
sequestration related regulations.
Volatility of oil and natural gas prices can adversely
affect demand for our products and services.
Volatility in oil and natural gas prices can also impact our
customers’ activity levels and spending for our products and
services. Current energy prices are important contributors to
cash flow for our customers and their ability to fund explor-
ation and development activities. Expectations about future
prices and price volatility are important for determining
future spending levels.
Lower oil and gas prices generally lead to decreased
spending by our customers. While higher oil and natural gas
prices generally lead to increased spending by our customers,
sustained high energy prices can be an impediment to eco-
nomic growth, and can therefore negatively impact spending
by our customers. Our customers also take into account the
volatility of energy prices and other risk factors by requiring
higher returns for individual projects if there is higher per-
ceived risk. Any of these factors could affect the demand for
oil and natural gas and could have a material adverse effect
on our results of operations.
Our customers’ activity levels and spending for our
products and services and ability to pay amounts
owed us could be impacted by economic conditions.
Access to capital is dependent on our customers’ ability to
access the funds necessary to develop economically attractive
projects based upon their expectations of future energy prices,
required investments and resulting returns. Limited access to
external sources of funding has and may continue to cause
customers to reduce their capital spending plans to levels sup-
ported by internally-generated cash flow. In addition, a reduc-
tion of cash flow resulting from declines in commodity prices,
a reduction in borrowing bases under reserve-based credit
facilities or the lack of availability of debt or equity financing
may impact the ability of our customers to pay amounts
owed to us.
Supply of oil and natural gas is subject to factors
beyond our control, which may adversely affect
our operating results.
Productive capacity for oil and natural gas is dependent on
our customers’ decisions to develop and produce oil and natu-
ral gas reserves. The ability to produce oil and natural gas can
be affected by the number and productivity of new wells drilled
and completed, as well as the rate of production and resulting
depletion of existing wells. Advanced technologies, such as
horizontal drilling and hydraulic fracturing, improve total
recovery but also result in a more rapid production decline.
Access to prospects is also important to our customers.
Access to prospects may be limited because host governments
do not allow access to the reserves or because another oil and
natural gas exploration company owns the rights to develop
the prospect. Government regulations and the costs incurred by
oil and natural gas exploration companies to conform to and
comply with government regulations, may also limit the quan-
tity of oil and natural gas that may be economically produced.
Supply can also be impacted by the degree to which indi-
vidual Organization of Petroleum Exporting Countries (“OPEC”)
nations and other large oil and natural gas producing coun-
tries, including, but not limited to, Norway 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. Any of these
factors could affect the supply of oil and natural gas and could
have a material adverse effect on our results of operations.
Changes in spare productive capacity or inventory
levels can be indicative of future customer spending to
explore for and develop oil and natural gas which in turn
influences the demand for our products and services.
Spare productive capacity and oil and natural gas storage
inventory levels are an indicator of the relative balance
between supply and demand. High or increasing storage or
inventories generally indicate that supply is exceeding demand
and that energy prices are likely to soften. Low or decreasing
storage or inventories are an indicator that demand is growing
faster than supply and that energy prices are likely to rise.
Measures of maximum productive capacity compared to
demand (“spare productive capacity”) are also an important
factor influencing energy prices and spending by oil and natu-
ral gas exploration companies. When spare productive capacity
is low compared to demand, energy prices tend to be higher
and more volatile reflecting the increased vulnerability of the
entire system to disruption.