WORLD TRENDS

OPEC retains control

  modicum of stability has returned to the global oil market, compared to the chaos of 2000. Gone are the wildest price swings, although some fluctuations still occur. Oil prices are trading in a narrower range this summer and are generally $2 – 3/bbl under last year’s inflationary levels. Oil demand growth has also slowed, enough to avoid last year’s $30-plus levels, but not so much as to yank out the $22 to $23 floor currently underpinning prices.

Natural gas prices did take a noticeable drop recently. However, this was an overdue mid-course correction to the unreasonable highs reached early this year in parts of the U.S. There is every reason to believe that economic and climatic factors remain sound enough, that gas demand in the U.S. and other Western countries should stay relatively strong through 2001. Hence, gas prices are leveling off and may even gain some ground for the balance of the year.

OPEC’S Role

Credit for the slowing of oil demand, as well as eliminating some of the worst price volatility, can be given to the softening of U.S. economic activity this year. However, one should not underestimate OPEC’s role. Through manipulation of global oil supplies via quotas, the group has succeeded in pegging prices within specific ranges that, themselves, influence consumer behavior. OPEC members last year allowed prices to run too high for too long, and their multiple output increases came too late to significantly lower prices until the latter part of the fourth quarter.

However, the inflationary effects of the high prices began to catch up with consumers in the U.S., Pacific Rim and Europe, causing these populations to reduce their oil usage. The delayed effects were not felt completely until the second and third quarters of this year. This reduction in key countries lowered global demand levels and pushed prices lower. Prices slipped just enough, that they threatened to flirt with the $22/bbl minimum of OPEC’s desired range. After holding quotas steady at its July 3 meeting, the group agreed on July 25 to reduce output by 1 million bopd, effective September 1. Oil ministers obviously believe that their action will prevent prices from falling further, without pushing them back higher to a level that would discourage some recovery in demand growth.

Supply and Demand

If one can believe the accuracy of the International Energy Agency’s (IEA) figures (which have been questioned frequently by more entities than just this magazine), global oil demand grew only 700,000 bpd (0.9%), to 75.6 million bpd, or half of 1999’s 1.9% rate. While North America managed a 1.4% (330,000-bopd) increase in 2000, Europe and OECD Pacific countries fell 0.7% (120,000 bopd) and 0.4% (40,000 bopd), respectively. The great exception was China, where demand grew 300,000 bopd, or 6.6% higher.

IEA predicts that global oil demand will only grow 500,000 bpd this year, or 0.6% higher. By comparison, the U.S. Energy Information Administration (EIA) is calling for growth of 1.2 million bopd, so either the correct figure is somewhere in the middle, or one of these two agencies is going to be very wrong. On the other hand, IEA forecasts only 70,000-bopd growth in all of North America this year, while EIA sees U.S. demand, alone, growing 220,000 bopd.

World oil production (crude and condensate) increased 3.2% in 2000, to 68.64 million bpd, with every region higher. The largest gain, in actual numbers, was in the Middle East, at 1.001 million bopd. The South Pacific region posted the largest percentage increase, at 23.2%. Global oil reserves rose 1%, to just over 1 trillion bbl, while gas reserves gained 0.4%, to 5,443.5 Tcf.

Blossoming of LNG

It is no secret that natural gas is playing a more significant role in the energy plans of various nations in all regions. Reasons for greater gas usage vary from country to country. In North America, gas is seen as a cleaner-burning, environmentally friendly generator of increasing amounts of electricity. In large producers like Saudi Arabia, gas is seen as an opportunity to replace domestic oil usage, freeing even greater amounts of crude for export.

With gas demand climbing, and energy prices persisting at a higher level, LNG is expected to enjoy huge growth. The economics have improved greatly for producers / shippers, and a number of new market areas are opening to LNG. One of the primary growth areas may be the U.S., where the ability of Canadian and Mexican imports to fill a widening supply gap left by stagnating U.S. supplies is in question.

Indeed, Chevron announced earlier this year that it is "reviewing options" for importing LNG into the West Coast. One serious option would be to import supplies from Australia, where Chevron has extensive gas production and liquefaction holdings. On a worldwide basis, Cambridge Energy Research Associates has predicted that the LNG industry will triple in size during the next 20 years.

Operating Outlook

Given the emphasis on finding new gas supplies, as well as relatively stable prices and the good exploratory success rate in some regions, the industry should expect another year of significant growth in upstream activity. Global drilling should increase 23.6%, to 79,282 wells. Increases should be seen in all regions, except South America.

In North America, Canada’s record-setting pace continues to the point that it is now bumping the limits of infrastructure capacity. Nevertheless, natural gas-driven activity should break last year’s record drilling total by nearly 1,000 wells. In Mexico, gas is also responsible for pushing drilling levels two-thirds higher. Activity centers on gas development in the Burgos basin.

South America is a mixed bag of optimism, pessimism and indifference, hence, a 2% decline is predicted. Brazil is where the exploratory action will be, while development thrives in Trinidad and Argentina. The reception to Venezuela’s touting of natural gas, ahead of oil, has been less than enthusiastic.

The good news for Western Europe is that drilling, overall, will not be down, as in past years. However, the gain this year will be less than 1%, due to continued softness in the UK offshore. On the positive side, new life is being breathed into the mature basins of France and Germany.

Upstream work is staging a roaring comeback in Eastern Europe and the Former Soviet Union, where drilling should jump 24% higher. High oil prices and strong revenues have generated cash for regional operators to re-invest in E&P projects. Russia is in perhaps the best year of its post-Soviet transition.

Major discoveries abound in Africa, where a flood of new finds offshore Angola, Equatorial Guinea and Nigeria, as well as onshore North Africa, have made this region the world’s leading exploration play. Growing rig demand and higher day rates will contribute to a projected 15% drilling increase.

Investment levels are increasing in the Middle East, where a multitude of projects is underway. Gas is playing a greater role in many domestic plans, evidenced by Saudi Arabia’s recent project awards. Greater well totals in Oman, Saudi Arabia and Yemen should push regional drilling 7% higher.

In the Far East, natural gas is a growing factor, as developing countries use it to expand power generation / supply and mitigate oil import costs. Foreign investors are being actively courted to sustain greater levels of both gas and oil E&P in most countries. Overall, the region should gain about 4%.

With Australia on the rebound, South Pacific drilling should see its second consecutive gain, rising 18%. Oil field developments continue to add output in Western Australia, while Queensland and South Australia are seeing numerous gas finds. New Zealand remains an interesting, "niche" exploration play.

The accompanying tables show global E&P statistics, plus World Oil’s revised 2001 drilling forecast, by region.

	Table: Forecast of 2001 world drilling – comparisons with 2000 and 1999
	Table: World crude/condensate production and wells actually producing – 2000 versus 1999
	Table: Estimated proven world reserves, 2000 versus 1999