INTERNATIONAL OUTLOOK: WORLD TRENDS

Operators ride the crest of the global wave 

These are plentiful times for the worldwide upstream industry. Last year, for the first time in more than two decades, the global drilling effort exceeded 100,000 wells. Although this year will be up only slightly, it will be another superlative, 100,000-plus performance in the total wells column. Furthermore, worldwide oil and condensate output squeezed out a minor gain, while global oil and gas reserves eased higher.

For most of the summer of 2007, futures crude prices have traded relatively high, in a range of $65/bbl to $74/bbl, spurred by a consistently strong world economy, particularly outside the US. Oil prices remain overly sensitive to weather and military/security issues, demonstrating significant volatility on an increasingly daily basis.

Healthy prices coupled with high production rates are yielding nice profits for most operators, who have plowed much of that money back into new drilling. Yet, there may be some storm clouds on the horizon. Throughout the global industry, operators’ costs are skyrocketing for everything from drill pipe to production chemicals to employees. And, in an issue particularly specific to the US, operators’ future economics are threatened by a noticeably more hostile Congress. The new Democratic majority thrives on the idea of grabbing more money from the industry to pay for all purposes under the Sun, including research and development of alternative fuels.

Worldwide oil and gas reserves last year were able to post some minor gains, despite a strong drawdown in Western Europe. This is somewhat impressive, considering that global crude and condensate production rose for a fourth consecutive year, to 73.33 million bpd. Although operators continue to emphasize development work, there is evidence of a minor resurgence of exploration in some areas. Last year, wells drilled increased 6.5% worldwide, and they rose 6.1% outside the US. For 2006, the world as a whole should drill less than 1% more wells, but most of that decline is due to a significant drop in Canada. Without Canada, the world will be up 7.5%.

Estimatedated proven world reserves, 2006 versus 2005 (Data compiled by World Oil, with aid of governmental agencies, industry associations, oil companies and private sources.) Click table to enlarge.

After several years of gains and record highs, the drilling market in Canada is going through some retrenchment, due primarily to operators scaling back plans to drill natural gas wells in response to soft prices and flattening demand. By the same token, oil activity will be stronger, as operators take advantage of continued strength for that commodity. The turbulence in Canadian activity is reflected in an upswing in M&A transactions. Accordingly, we forecast a 22.5% plunge in Canadian drilling to 20,000 wells. Other indicators were mixed. Despite minor gains in oil reserves and producing oil wells, Canada’s conventional crude and condensate output was down again. However, oil sands production made up for the shortfall.

Although Mexican state firm Pemex earned its first profit in the last nine years, the company is going to have to plow much of that money, plus additional funds, into fixing some nagging problems in the upstream sector. While last year’s total of 656 wells drilled is good by Mexico’s standards, it was 11.5% lower than in 2005. Furthermore, the success rate for exploration wells dropped noticeably. All of this comes at a time when the country is enduring a seven-year slide in proved reserves. On the bright side, light oil output is up, even while production of all crudes combined continues to fall. To get everything back on track, Mexican officials will have to make some hard decisions about financial priorities.

In South America, drilling improved yet again during 2006, with most countries posting gains. A renewed emphasis on exploration in some nations helped to bolster production, which achieved a small gain of less than 1%. Reserves also stabilized, thanks to gains in Brazil and Argentina. This year, despite political distractions, Venezuela should drill more wells, as will Argentina. Colombia will be the star performer, racking up a nearly 40% increase, thanks to improved policies and improved exploration results.

Forecast of 2006 world drilling-comparisons with 2006 and 2005 (Data compiled by World Oil, with assistance from governmental agencies, industry associations, oil companies and private sources.) Click table to enlarge.

World crude/condensateondensate production and wells actualltually producing - 2006 versus 2005 (Data complied by World Oil, with aid of governmental agencies, industry associations, oil companies and private sources.) Click table to enlarge.

Last year’s mild decline has paved the way for a larger drop in drilling for Western Europe during 2007. However, more than half of the decline will occur in the UK, where there is increased uncertainty about the political climate and potential tinkering with the financial regime. The march downward in oil production continued throughout the region, with only the Netherlands posting a mild increase among the North Sea producing countries. Operators continue to work hard to stem output declines. Indeed, the one bright spot in the UK is that exploration and appraisal drilling were up during first-half 2007.

Within Eastern Europe and the Former Soviet Union, Russia chalked up yet another production increase, gaining 2.4% to 9.62 million bopd. This figure ensured that Russia was the undisputed leader among the world’s oil producers, ahead of Saudi Arabia. Cash-flush producers increased their spending on drilling, and another gain is expected in 2007. In the rest of the FSU, drilling continues to rise, as do production and reserves. These factors are curing a long period of economic ill health in some of the republics.

Africa had another excellent year, registering increases across the board in drilling, oil production and reserves. This occurred despite an underperformance by Nigeria. Angola’s robust offshore sector continues to propel the country higher among the region’s leading producers. Egypt once again leads in drilling, followed by Algeria and Sudan. In the latter country, Chinese exports of oil now exceed 300,000 bpd.

Buoyed by development work in Saudi Arabia, Yemen and Oman, the Middle East had one of its finest year-to-year improvements ever, gaining 23% in wells drilled. Increases in output by Abu Dhabi, Iraq and Qatar helped the region avoid a net decline in oil output during 2006.

Far Eastern activity is simply remarkable, as China, and the region as a whole, achieved what is thought to be yet another record drilling total. Last year’s record is already in doubt, as China is set to exceed that performance. Drilling gains are also expected for most of the other countries, except Thailand and Vietnam. Responding to the drilling effort, Chinese production carved out a 1.6% increase to 3.406 million bopd.

It was a banner year for the South Pacific, where increases were chalked up in drilling, production and reserves. Australia led the way with a 38% drilling gain. All sectors of the country are doing well, whether onshore or offshore. The 2.1% improvement in oil output was particularly encouraging. This year, the gains are likely to be smaller, but who cares, when you’re already at the top of the region’s capability and capacities?