Luncheon – January 18, 2002

Title: Petroleum Industry Perspective 2002: Outlook on O&G Supplies, Demand and Prices
Speaker: Pete Stark , Vice President Industry Relations, IHS Energy Group
Date: January 18, 2002
Publication: The Outcrop, January 2002, p. 4-5

The events of September 11 impacted already weak economies, resulting in immediate reductions to global oil demand and elevating concerns about business and political risks. In response to reduced demand, the OPEC crude basket price dropped below $20/bbl during October, 2001. OPEC focused on rallying support to reduce production in order to sustain prices above its minimum $22/bbl target. Possible implications from an extended war on terrorism, though, generate greater concerns. Will OPEC maintain cohesion and will Middle East producers be able to implement their open investment policies in the face of possible attempts to disrupt production and political stability? Is globalization at risk? In this environment, managing business risks is industry’s greatest challenge. Opportunities will emerge from the execution of industry strategies to deal with these risks.

Oil demand will depend on the duration of the global economic slump and curtailed air travel. Both the International Energy Agency (IEA) and U.S. Energy Information Agency (EIA) forecast that the worst should be over by mid-year 2002 and that global oil demand should register modest growth of about 600,000 bbl. Reduction of terrorist risks and economic recovery, though, will be required to ease pressures on oil prices. Surplus OPEC production capacity has grown to almost 4 MM bopd and it will be difficult for some producers to maintain quotas. Barring disruption of Middle East oil supplies, a downward bias an oil prices is likely ta prevail throughout 2002.

Reduced demand and increased production delivered at least a temporary reprieve from high natural gas prices in North America. As a result, gas storage rebounded from record low levels during March 2001 to exceed the targeted 3 Tcf level during mid-October. Adequate storage eases concerns about deliverability problems and spiking prices during the 2001-2002 winter heating season. This does not dispel concerns, though, about North American gas productivity. In spite of record levels of gas drilling, extrapolations indicate that 2001 U.S. gas production capacity may only increase by about 500 Bcf. This is less than the average growth rate needed to achieve long-term demand forecasts. A decline in gas drilling activity during the last half of 2001 increases the likelihood for tightening supplies in the event of economic recovery or abnormal weather. High gas production decline rates require high levels of drilling just to stay even. Tapping arctic gas resources and expanding LNG imports likely will be required to assure adequate long-term gas supplies and to stabilize price volatility.

This presentation also addresses the petroleum industry’s growing business and political risk challenges and outlines E&P trends and opportunities that may result. The objective is to provide insight to likely future energy trends and industry directions.

Long-term oil and gas demand forecasts, though, present challenging scenarios. Both the IEA and EIA forecast 55% global oil demand growth to about 117 MM bopd by 2020. Several notable analysts believe this is impossible to achieve and predict that global oil production will peak and begin to decline within 5 years. A recent IHS Energy Group assessment of global oil supplies does not support this thesis. Models indicate that world oil production will not peak in less than 10 years even with constant $20 oil prices. Moreover, development of vast Canadian and Venezuelan heavy oil resources conceivably could extend oil supplies and mitigate the likelihood of a potential energy crisis. Global gas demand forecasts are even more robust, calling for the addition of 70 Tcf per year to 161 TCF by 2020.