A Rosy Outlook for Oil and Gas… But with Pitfalls

Title: A Rosy Outlook for Oil and Gas…But with Pitfalls

Author: Terri Olson

Publication: The Outcrop, March 2001, p. 1, 7

Predicting the future has seldom been easy in the oil and gas industry, but two brave souls were willing to make the attempt at recent RMAG luncheon meetings. Paul Liebman (Petrie Parkman) spoke on “Oil and Gas Outlook: Is Another Energy Crisis Brewing for the U.S.?” and Pete Stark (I.H.S. Energy Group) addressed “Anatomy of an Energy Crunch” during January. Both meetings were popular, with more than 100 attendees each.

Liebman focused on financial aspects of industry status and trends, while Stark addressed the outlook for natural gas. They agreed on many issues, especially the gas market. Both predicted that gas prices will stabilize around $5/MCF, and that the winter energy supply is a problem but not a crisis, except in California. They warned that short-term supply may not meet demand, and that prices may spike to $15/MCF later this winter due to low levels of gas storage and a colder-than-average winter. Both speakers mentioned the long lead times needed to develop new resources, and the fact that North American gas production is declining faster than ever before. Neither new fields in the deep Gulf of Mexico nor excess Canadian capacity are expected to cover the increased demand for natural gas—the former turns out to be more oil-prone than anticipated, and the latter has shrunk significantly from previous years. Growth in demand for natural gas will be largely driven by new gas-fired power plants already planned or under construction.

Liebman had predicted gas to hit $4/MCF a year ago, at a time when prices had been stable around $2.25 for 5 years. He pointed out that he is not the only one who predicted strong prices, remarking “You’ve got to give Alberta Energy Company credit for their vision in predicting the strength of gas prices to outbid Shell and BP for Jonah Field.”

Liebman is encouraged by evidence that oil fundamentals (supply and demand) are gaining dominance over speculation in determining price levels. He expressed another expectation that already has been met: OPEC cut production quotas by 1.5 million barrels per day in mid-January, which Leibman had said would be necessary to forestall inventory buildups and associated price drops. He expects that the price of a barrel of oil will stabilize around $25-27/bbl. He is hopeful that the Bush Administration will develop an energy policy, noting, “Energy is finally going to have to be addressed.”

Liebman noted that the number of independent public oil companies continues to decline, and predicted that consolidation would continue. He expects E&P spending to increase by up to 25% this year over last year.

Contrary to an article in the Denver Post late last year, Liebman sees little possibility for a crash in energy prices. “The Achilles heel of an otherwise positive energy outlook is continued demand growth, which could be placed in jeopardy by a U.S. and global downturn brought on, in part, by extremely high oil and gas prices,” he stated in his concluding remarks. He said in a follow-up interview, “[A crash] could occur if there is an extended, deep, world-wide economic downturn, but I see only a 20-25% chance of that.” Liebman advocated limiting demand (e.g., through conservation) to manage the existing imbalance between supply and demand for natural gas, noting that supply cannot be increased quickly. He contended that oil prices would be more susceptible to a slowdown in global economic growth than gas: “Natural gas is almost recession-resistant.” Liebman offered some final advice based on his industry outlook: “Anybody in the producing business ought to be hedging.”

Pete Stark spoke mostly about factors contributing to the North American gas-supply crunch. He elaborated on the issue of natural gas storage, pointing out that stored gas has not built up to previous autumn levels after four successive warmer-than-average winters. He projects storage levels to drop to record lows by April, possibly as low at 300 BCF. Other factors he commented on that affect U.S. gas supply include: steepening decline in North American gas production, decreased average gas production per well in Canada, drilling rig and crew shortages, high risks in locating new resources, limited capital, and curtailment of power deliveries to some industrial customers. He noted the importance of Rocky Mountain gas reserves to meeting future supply needs, and mentioned the growing significance of coalbed methane (CBM); 19% of permits in the U.S. was for CBM wells. He also expects a shift to development of “stranded gas” worldwide, with projects to bring to market gas that has been economically unexploitable in the past. These would include big Liquefied Natural Gas (LNG) projects, and the development of Arctic gas.

In response to the question of why high gas prices haven’t impacted the economy more than they have, Stark pointed to two causes: the ratio of overall energy costs to the total gross national product (GNP) is much lower than previously, and there has been some cushion to consumers in the difference between city-gate gas prices and wellhead prices; the differential has shrunk, bringing city gate prices closer to wellhead.

While high prices generate optimism among energy-industry employees, both speakers cautioned about potential backlash from the public, with the resulting threat of regulation of energy prices. Stark advocated increased collaboration between industry, government, and the environmental sector to solve the energy crunch.