A Special Report on the Oil Outlook from World Oil

A Preview to the Forecast Review Issue

OUTLOOK '98
Strong Activity Continues

Most industry watchers are getting what they wanted from the recent activity upturn-a solid increase without the inflationary spending/building pressures of the last boom. The temptation was there a year ago when U.S. crude and gas prices reached $25 per barrel and $4 per MMBtu. But it appears that the extra cash flow from two years of $20 oil and $2 gas has, in fact, been prudently reinvested.

That disciplined approach will, hopefully, prompt operators to look at the fundamentals and beyond the vagaries of the futures markets, which have January crude at $16 levels and gas below seasonal highs. Thus, we believe, U.S. drillers will increase wells another 4.8% over 1997, following an 18% surge last year. Outside the U.S., paced by major drilling in Canada, China and Russia, which account for 77% of the total, a 2% increase is expected

Highlights of WORLD OIL's forecast indicate:

• For the U.S., 29,200 wells, up 4.8% from 1997. Total footage will be 159.9 million feet, up 6.4%.
• Texas operators will drill 9,004 wells, an increase of 5.3%, following an 8.6% jump last year.
• The U.S. Gulf of Mexico will see a 7.7% increase to 1,210 wells. Worldwide offshore drilling will be up 10.9% to 3,706 wells.
• The U.S. rig count will average 990 rigs in 1998, up from the 943 average of 1997.
• Total outside U.S. wells will be up 2% to 39,922 wells. Canada will essentially match 1997's activity with 16,014 wells, as will China, with 10,460 wells. A 5.3% increase to 3,950 wells is expected in Russia.

UNITED STATES

Operators responded positively to strong oil and gas prices at year-end 1996, and returned to developing known reserves with workovers and in-field drilling. The active rig count increased steadily, breaking 1,000 in September. Land rig utilization was reported by Reed Tool Co. at 86% in late 1997, a ten-year high.

With more than half the rigs drilling for gas, price forecasting is critical. The best guess is that gas prices will hold close to where they are, from an average $2.42 last year. Wild cards in the guessing game include futures marketing, Canadian imports, weather, storage, geographic location and demand. Overall, the perception is positive; demand will grow, all-out drilling hasn't created a surplus, Canadian import surges will be slow in coming and most areas now have pipe line access.

Crude pricing has a major effect on budget planning. The fundamentals say predicted non-OPEC supply increases did not happen, while depletion continues. Problems in Asia, and Iraqi production, are factors. But, basically, OPEC doesn't have the surplus anymore to easily raise output. Thus, the bearish perceptions coming out of NYMEX futures markets are not supported by facts, and a prolonged price drop is not in the cards.

Operator surveys. WORLD OIL's year-end survey of 20 U.S. major drillers (integrated companies and independents with large drilling programs) and 165 independents is again positive, supporting increased 1998 activity. Majors say they will drill 5,606 wells this year, a 12% increase; gas wells, 42% of the total, will be up 31%. Independents look for 1,707 total wells, a 27% jump; 52% of these will be for gas.

Spending. The annual year-end Salomon Smith Barney survey of 202 U.S. and international operators regarding expected worldwide oil/gas exploration and production expenditures indicates a spending boost of 10.9% over 1997, worldwide. While not as strong as last year's 18.7% jump, it is the third consecutive year of double-digit spending increases. The average oil price assumption for 1998 is $19.23, down slightly from late-1996's $19.67 assumption. Average 1998 gas price is $2.19 (Henry Hub), up $0.16 from assumptions for 1997.

The survey indicates the group, as a whole, will reemphasize international spending. The U.S. will see a 6.1% increase after a 20.7% surge in 1997, and 18.2% in 1996. Canada will have a 6.7% boost following 29.3% and 17.8% boosts in 1997 and 1996. Outside North America, a spending boost of 14.4% is expected.

Strong deepwater Gulf of Mexico activity is noted. There are concerns about shortages of people and equipment, but technology is holding a lid on finding and development costs. Frontier areas noted outside the U.S. include deepwater West Africa and the Former Soviet Union. Overall, 97% of the respondents are "optimistic" about the next three years.

Area highlights. With 9,004 expected wells, a 5.3% jump from last year, Texas remains the major drilling state. Three Railroad Commission Districts in West Texas account for 37% of the state's total, reflecting strong interest in established Permian basin fields with massive secondary recovery projects. Gas drilling is strong in southern, eastern and Panhandle fields. The Austin Chalk in District 3 remains a key target.

Heavy oil exploitation in California remains attractive in the second largest drilling state. Gas plays in Oklahoma and Kansas will provide moderate increases. Louisiana will post a 5.4% increase to 1,495 wells, with deeper gas and Austin Chalk plays in the South seeing action.

The U.S. Gulf of Mexico shelf area will see strong plays by independents, who can get fast returns on gas investments. And deep water has drawn strong leasing interest, with only rig and equipment availability keeping drilling down. Costs are high, but prolific oil wells with 20,000 to 30,000-bopd rates are a strong incentive for bigger company players.

OUTSIDE U.S.

Another outstanding year is on tap for international drilling, although logistical constraints (such as shortages of rigs and manpower) will limit some regions' growth. Outside U.S. activity totaled an estimated 39,127 wells in 1997, up 3.5% from 1996. For 1998, every region should increase, although North America will plateau, as Canada reaches operational capacity.

South America is forecast to gain despite a decline in Brazil, where the government is reorganizing and privatizing the E&P sector. Foreign operator activity will net Venezuela another sizeable increase. Overall drilling will exceed 3,000 wells.

For a fourth consecutive year, Western European activity will increase, picking up 5.8% to 876 wells. The tight rig market continues, evidenced by flat forecasts for the UK and the Netherlands.

Russian drilling finally may turn around this year. Eastern Europe and the FSU, therefore, should improve 6% to 4,882 wells.

African activity posted its third straight increase in 1997. Another gain to 928 wells is slated for 1998. Egypt is booming, complemented by strong drilling in Nigeria, Algeria and Libya.

Numerous development projects have pushed the Middle East beyond 1,000 wells for two consecutive years, and OPEC's recent raising of its production ceiling will be a further incentive. Oman and Saudi Arabia will guide another increase, to 1,340 wells.

Despite India, where E&P policy is under revision, the Far East is strong and should gain 2.1%, to 12,395 wells. To stabilize oil output, China and Indonesia are drilling at rapid rates.

Buoyed by exploratory success, the South Pacific is also reaching logistical capacity, hence a small increase to 333 wells.

For the WORLD OIL Forecast Committee,
Lanie Finlayson, Publisher

Forecast committee members:
T.R. Wright, Jr.
R.E. Snyder
K.S. Abraham
A.E. Hutchins
J.J. Grow

  Forecast of 1998 U.S. wells and footage to be drilled

  What 20 U.S. major drillers plan for 1998

  What 165 U.S. independent drillers plan for 1998

  Forecast of 1998 drilling outside the U.S.

  Forecast of 1998 offshore drilling worldwide

  Average number of U.S. rotary drilling rigs in operation

Copyright © 1999 World Oil
Copyright © 1999 Gulf Publishing Company