Baker Hughes 2007 Annual Report Download - page 105

22 Baker Hughes Incorporated
The customers for our products and services include the
super-major and major integrated oil and natural gas companies,
independent oil and natural gas companies and state-owned
national oil companies (“NOCs”). Our ability to compete in the
oilfield services market is dependent on our ability to differen-
tiate our product and service offerings by technology, service
and the price paid for the value we deliver.
The primary driver of our business is our customers’ capital
and operating expenditures dedicated to exploring, and drilling
for, and developing and producing oil and natural gas. Our busi-
ness is cyclical and is dependent upon our customers’ forecasts
of future oil and natural gas prices, future economic growth
and hydrocarbon demand and estimates of future oil and nat-
ural gas production. During 2007, our customers’ spending
directed to both worldwide oil and North American natural
gas projects increased compared with 2006. The increase in
spending was driven by the multi-year requirement to find,
develop and produce more hydrocarbons to meet the growth
in demand, offset production declines, increase inventory levels
and increase spare productive capacity. Additionally, the increase
was supported by historically high oil and natural gas prices.
BUSINESS ENVIRONMENT
Our business environment and its corresponding operating
results are significantly affected by the level of energy industry
spending for the exploration, development, and production of
oil and natural gas reserves. Spending by oil and natural gas
exploration and production companies is dependent upon
their forecasts regarding the expected future supply and future
demand for oil and natural gas products and their estimates
of risk-adjusted costs to find, develop, and produce reserves.
Changes in oil and natural gas exploration and production
spending will normally result in increased or decreased demand
for our products and services, which will be reflected in the rig
count and other measures.
Oil and Natural Gas Prices
Generally, changes in the current price and expected
future price of oil or natural gas drive 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.
2007 2006 2005
Oil prices ($/Bbl) $ 72.23 $ 66.09 $ 56.59
Natural gas prices
($/mmBtu)* 6.96 6.73 8.66
* In late September 2005, Hurricane Rita damaged natural gas processing
facilities in Henry, Louisiana (“Henry Hub”) and the New York Mercantile
Exchange declared force majeure on its Henry Hub natural gas contracts.
As a result, the average natural gas prices for 2005 exclude price data for
September 22, 2005 through October 6, 2005 when there was insufficient
activity to determine a spot price.
Oil prices averaged a nominal historic high of $72.23/Bbl
for the year 2007. The year 2007 began with oil prices declin-
ing to a yearly low of $50.48/Bbl in mid-January. Throughout
the balance of the year oil prices continued to increase due to
concerns about weak inventory levels, limited worldwide excess
productive capacity and concerns that demand growth would
outpace production growth. The weakening of the U.S. Dollar
relative to other currencies also contributed to the higher
price. Oil prices reached a yearly high of $98.88/Bbl in mid-
November 2007.
Natural gas prices averaged $6.96/mmBtu for the year 2007.
The year 2007 began with record levels of natural gas in stor-
age and gas prices in the low $5/mmBtu range. However, cold
weather from mid-January to early February resulted in higher
than anticipated withdrawals of gas in storage and placed
upward pressure on gas prices, which increased to a yearly
high of $9.07/mmBtu in early February 2007. As natural gas
inventory continued to build throughout the year, gas prices
again came under pressure, hitting a low of $5.29/mmBtu in
early September. Prices recovered in late September on expec-
tations of cooler weather and ended the year over $7/mmBtu.
Rig Counts
We have been providing rig counts to the public since
1944. We gather all relevant data through our field service
personnel, who obtain the necessary data from routine visits
to the various rigs, customers, contractors or other outside
sources. This data is then compiled and distributed to various
wire services and trade associations and is published on our
website. Rig counts are compiled weekly for the U.S. and
Canada and monthly for all international and U.S. workover
rigs. Published international rig counts do not include rigs drill-
ing in certain locations, such as Russia, the Caspian and onshore
China, because this information cannot be readily obtained.
Rigs in the U.S. are counted as active if, on the day the
count is taken, the well being drilled has been started but drill-
ing has not been completed and the well is anticipated to be
of sufficient depth, which may change from time to time and
may vary from region to region, to be a potential consumer
of our drill bits. Rigs in Canada are counted as active if data
obtained by the Canadian Association of Oilwell Drillers and
Contractors indicates that drilling operations have occurred
during the week and we are able to verify this information. In
most international areas, rigs are counted as active if drilling
operations have taken place for at least 15 days during the
month. In some active international areas where better data
is available, a weekly or daily average of active rigs is taken.
In those international areas where there is poor availability of
data, the rig counts are estimated from third party data. The
rig count does not include rigs that are in transit from one
location to another, are rigging up, are being used in non-
drilling activities, including production testing, completion
and workover, or are not significant consumers of drill bits.