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Small drillers rush to tap oil while crude prices are high

Jerry Dewbre, who runs a 12-person oil-exploration company in Corpus Christi, Texas, is drilling twice as many wells this year as in 2003 because crude prices have doubled in the past 18 months.

Dewbre Petroleum will reach its goal of 24 new wells by revisiting old fields south of San Antonio and opening sites shut by bigger oil companies. Dewbre started this month on a $750,000 well in Live Oak County that was abandoned in the 1980s by Atlantic Richfield, now part of BP.

"You're normally going after something somebody didn't think was worthwhile when it was open, and might not have been when oil was $18," said Dewbre, 57, who founded the company in 1988. His company's daily production is just 2.6 percent of the Texas output of ConocoPhillips, the state's largest producer.

Oil prices are above $51 a barrel in New York and are averaging about $39 year-to-date, spurring Texas companies to drill 16 percent more oil wells and 18 percent more natural-gas wells this year, according to the Texas Railroad Commission, the state's oil and gas regulator. The number of new oil and gas wells is double the amount in 1999, when oil got as low as $11.25 a barrel and averaged $19.30.

The high prices have boosted returns in the stocks of oil producers and drillers and spurred investor interest in small firms such as Dewbre Petroleum. Both crude and natural gas, which is near $7 per million British thermal units (Btu) on the New York Mercantile Exchange, are triple the 1990s average prices, and Dewbre is betting the high prices will last.

Shares of energy companies in the Standard & Poor's 500 Index, including Exxon Mobil and ChevronTexaco, are up more than 20 percent this year, while the index as a whole is little changed. The Philadelphia Oil Service Sector Index, composed of oil-service companies such as Baker Hughes and Schlumberger, is up 25 percent.

Dewbre Petroleum operates 300 wells across the South Texas plains that stretch from El Campo, about 70 miles southwest of Houston, west toward the Mexican border. The firm produces gas and oil that is equivalent to 20 million cubic feet of gas per day. About 70 percent is gas and the rest oil.

Dewbre said he also has received investments from private oil and gas investors and from other companies like his. He also has revenue of about $100,000 a day from his oil and gas output, based on regional prices, to help fund new projects such as the Live Oak well that Atlantic Richfield abandoned 20 years ago.

Most old wells are plugged with concrete to prevent leaking. The plug has to be drilled out, a process few producers are willing to undertake, given the uncertainties that surround a well left untouched for decades.

Of the 11,906 oil and gas wells completed in Texas this year through August, 113 were classified as re-entries in Railroad Commission data. Sixty-six of the re-entries were oil wells, a 4.8 percent increase over last year.

The average number of active U.S. drilling rigs this year was 1,172, according to Baker Hughes. The rate is the second highest of the past 10 years, exceeded only by drilling in 2001, which began with gas prices near $10 per million Btu and oil trading as high as $32 a barrel.

Houston-based Anderson Oil, a second-generation, family-run business, is drilling 50 percent more wells than it did last year, which itself was a record year, Vice President Scott Anderson said.

"It amazes me how active we are at this point," said Anderson, 46, who runs the company with his three brothers. "I never thought a family business like ours would be able to participate the way we have."

Increased drilling in Texas has failed to stop a decline in oil production. Output from existing wells is dropping faster than it can be replaced by supplies from new wells as the biggest oil and gas producers seek better returns overseas.

The state's production was 28.3 million barrels in July, down 6.1 percent from a year earlier, according to the Railroad Commission. Texas oil production, including supplies from offshore tracts, accounts for 20 percent of U.S. output.

"We've had $30 crude prices or above for a long time now, and yet oil production is still declining," said David Pursell, a principal with Pickering Energy Partners, a Houston research firm. "Can you, as a small producer, make a lot of money? Absolutely. But it's hard to see onshore U.S. production fighting that decline trend."

High prices may be encouraging operators to take more chances than they normally would, as cash flow from existing wells can cushion the risks associated with new projects. In addition, Texas is giving a tax break to companies that decide to drill abandoned wells.

"We may find things going on here that people never thought about before," said Ed Porter, an analyst with the American Petroleum Institute in Washington. "It wouldn't be surprising at all" to see new techniques or risks taken because of the high prices.

"There's a lot of capital available for the industry right now" from private-equity and institutional investors and from bank lenders, said Paul Cornell, a commercial banker with Wells Fargo in Houston.

Dewbre said his biggest problem is finding the drilling rigs to do the work. What used to be a three-to-four-week wait can be three to four months now, he said. Shares of Nabors Industries, the biggest provider of land-based oil and gas drilling rigs, have climbed 28 percent in the past year.

"Up until the past several months, we've been able to get the rig when we needed it," he said. "It's getting tighter, and rates are going up." A rig that used to cost $8,000 a day now goes for $10,500. Also, a booming steel market has doubled the price of well casing, pipe that is inserted into a hole to stabilize the well, Dewbre said.

At the well in Live Oak County, rig crews were erecting equipment and preparing to drill earlier this month. The process can take 10 to 12 days, followed by a week's lag before crews arrive to handle the final preparations.

Dewbre said he hopes to recoup his investment in the Live Oak well within six months. High prices or not, a losing well is a losing well, he said, and there's no telling what an old property will yield.

"They're not proven reserves, and I really can't say that we'll for sure make it back in six months, and I don't know if it will produce for a long time," he said. "But going in, we're hoping it will produce for eight or 10 years."

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