Luncheon – January 19, 2001

Title: Petroleum Industry — Perspective 2001

Speaker: by Philip H. (Pete) Stark (IHS Energy Group)

Date: January 19, 2001

Publication: The Outcrop, January 2001, p. 4-5

In spite of multiple boosts in OPEC production, key oil benchmark prices continued to fluctuate above $30/bbl into 4th quarter 2000. The combination of low U.S. crude and fuel oil stocks plus Middle East political turmoil were concerns that sustained high oil prices. In response to the highest average prices since 1986, both governments and citizens clamored for lower prices and a culprit to blame. Even though buoyed by soaring income, industry’s hangover from the 1998-99 oil price collapse continued to dampen spending programs. Through September 2000 international drilling activity had increased only 6% from 1999 levels. And virtually all of the 42% increase in North American drilling was targeted to natural gas.

The petroleum industry must cope with new paradigms. OPEC has re-emerged as a force in controlling oil supplies and prices but reduced cushion in the supply chain has led to regional product shortages that boosted prices in spite of high levels of oil production. In the long term, robust oil and gas demand forecasts must be tempered by growing political pressure to reduce greenhouse gasses. A global shift toward natural gas will force other adjustments in the supply chain. These paradigms will create significant shifts in the energy business. Consequently, industry must continue restructuring and improve return on investment in order to generate capital to deal with these changes. The petroleum industry outlook is flavored with cautious optimism.

Paralleling the oil situation, low U.S. gas storage volumes signaled that supply shortfalls could occur if temperatures return to normal during the 2000-2001 winter. U.S. natural gas storage during mid-October 2000 still trailed prior year volumes by 12% or about 350 BCFG. Declines in Offshore Gulf of Mexico (GOM) gas production also were cause for concern. From peak rates in 1997, GOM shelf production declined by almost 3.6 BCFGPD through December 1999. This was only partly offset by a 0.6 BCFGPD increase in deepwater gas production. Key gas supply questions focus on Canadian deliverability and the rate of production increase from current high levels of US gas drilling. The September 1, 2000 Baker-Hughes U.S. rig count topped 1000 for the first time since December 1997 and was the highest number of active rigs since January 1991. The Gulf of Mexico rig count is the highest since February 1986 and a record 844 rigs were targeted to gas during the week ending October 20. Based on 1998 gas drilling, measured decline rates and average first year gas well production, simple models indicated that about 600 to 650 gas rigs would sustain US gas productivity. The models also indicated that current levels of gas drilling could make up the 1998-99 drilling shortfall before mid-2001. Thus, current trends indicate that US gas drilling may be adequate to increase producing capacity to meet 2001 demand. If so, prices would ease, possibly returning to the $2.50 to $3.50 range.

Trends in market forces and industry activity, including a North American gas outlook and international E&P rankings, are presented in regard to the new industry paradigms. The objective is to provide insight to likely future industry directions.