IADC: Analysts expect increases in energy prices, US drilling

Sam Fletcher
Senior Writer

HOUSTON, Sept. 26 -- Oil and natural gas prices are likely to go up, and US drilling activity will increase in 2004 as producers spend a greater percentage of their cash flow, analysts said Friday at the annual meeting of the International Association of Drilling Contractors in Houston.
"Our outlook for world oil prices is that they will go up pretty substantially," said George S. Littell, partner at Groppe, Long & Littell, a Houston-based market analysis and forecasting firm with a reputation for predicting major price changes.

Even without an increase in commodity prices, US drilling activity will increase by 15% next year as producers spend a greater percentage of their cash flow on drilling programs, predicted James K. Wicklund, managing director of oil field services research in the Houston office of Banc of America Securities LLC, New York.
"Historically, [exploration and production] companies spend 85-90% of their cash flow [on field operations]," he said. "This year, they will spend 60-65%" as they concentrate on paying down corporate debt. In 2004, he predicted, E&P companies will switch their focus to increased drilling.

OPEC moves, demand shifts
Addressing the final session of the IADC meeting, Littell and Wicklund both expressed confidence that the Organization of Petroleum Exporting Countries will continue to manage its oil production so as to keep oil prices in the upper level of its targeted price band of $22-28/bbl.
"It is not difficult for OPEC to manage 2.9 million b/d of excess production capacity [down from 10.9 million b/d in 1985]," he said. "They just did it this week."
At their meeting Wednesday in Vienna, OPEC ministers agreed to reduce their production quotas by 900,000 b/d to a total of 24.5 million b/d, effective Nov. 1, to provide an opening for more Iraqi crude to return to world markets (OGJ Online, Sept. 24, 2003).

"What's curious is the conviction in the financial [investment] community, and to some extent in the [oil] industry itself, that oil will fall to $20/bbl and that gas will fall to $3/Mcf," Littell said.
Those predicting such drops in energy commodity prices are "the sons of those people" who in 1980 expected oil prices would continue to climb to $100/bbl, he said. "Some people never get tired of being wrong," Littell said.
The "general rule of thumb" is that each $1/bbl change in world oil prices equates to a difference of 100,000 b/d in world consumption. "That is not very much," said Littell. As a result, he said, "Looking at demand for oil doesn't tell you anything about what's going to happen to prices. Just because demand goes down doesn't mean prices will go down. It depends on what happens to supply."
With prices for benchmark US light, sweet crudes averaging $29.36/bbl in 2000, $25.37/bbl in 2001, and $26.05/bbl in 2002, Littell said, total world consumption of oil, excluding Eastern Europe, remained "right at 69.7 million b/d. Total world consumption has not increased in the last 3 years."

Natural gas outlook
As for natural gas operations in the US, Wicklund said, "The long-term outlook is positive; the short-term outlook is always problematic. The fits and starts [of price volatility] will continue around that [upward] trend line, whether gas prices are $2, $4, $6, or $8[/Mcf]."
However, he said, the fundamentals of natural gas supply and demand "point to just one ending: a shortage of gas." More drilling will be necessary just to maintain US gas production at its current levels, so rig activity should see higher highs in the futures, Wicklund said.

Contact Sam Fletcher at samf@ogjonline.com

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