Increased demand for oil and natural gas should push up commodity prices in 2003 or maybe even sooner, said a panel of five industry executives at a semiannual oil field service industry outlook breakfast Mar. 8 in Houston.
Mark Papa, chairman and CEO of EOG Resources Inc., Houston, told more than 700 industry representatives at that meeting to expect "another 6 months of pain," followed by a strong energy market upswing in 2003-05, especially for natural gas, as growing demand pinches diminished supplies.
Natural gas prices "could fall back to $2/Mcf for a while before the end of this year, with the storage overhang," Papa said. But he and other panel members agreed that the current falloff in US drilling activity would adversely impact new gas supplies in a period of growing demand.
That could drive up US natural gas prices to an average $3.50/Mcf in 2003, said Papa. And that rebound could begin in less than 6 months, he said.
Robert L. Parker Jr., president and CEO, of Parker Drilling Co., Houston, said he expects a recovery of US natural gas markets and gas prices this summer.
With an expected resurgence of both the US economy and energy demand in the second half of this year, "I think the oil industry is going to be in good shape," said Marianne S. Kah, chief economist at Conoco Inc., Houston.
She expects oil prices to stay at $22-23/bbl for benchmark US light, sweet crude this year-15% below 2001 levels-and natural gas prices to average $2.70/Mcf, down 40% from last year. Even so, she said, commodity prices have remained relatively robust despite weak demand in recent months.
Like other members of the panel, Kah noted that industry E&P spending is still more robust outside the US.
Oil supply outlook
Oil market fundamentals may be much tighter than many people think, said Matthew R. Simmons, chairman and president of Simmons & Co. International, Houston.
Russia and other former Soviet republics are credited for 56% of the recent increase in oil production outside the Organization of Petroleum Exporting Countries. "But there are not reliable data to confirm that supply," Simmons said.
"Some of that production gain may have been low-hanging fruit," said Simmons. If so, he asked, "Is that production surge sustainable?"
Among other non-OPEC oil producers, he said, "No single area is showing much growth." In fact, he said, North Sea oil production may have peaked and could be slipping into a decline.
Confirming actual production among OPEC members is even more difficult. "No one trusts OPEC's official numbers," Simmons said.
Although he acknowledges that Russia and other FSU producers are "the wild card for both supply and demand" in world oil markets, Simmons predicted there would be no price war between Russia and OPEC for oil market shares. "OPEC needs the [world oil] price to be high to stay solvent," he said.
"Saudi Arabia likes to be near the US as one of the largest oil producers and is concerned about [increased production from] Russia," said Kah. However, she said, "Saudi Arabia needs $25/bbl just to break even on its [national] budget."
In both Russia and OPEC, Kah said, "No one wants low oil prices." While some observers complain that OPEC members are not in strict compliance with their reduced production quotas, she said, "I'm impressed by how closely they are keeping to those quotas."
Demand outlook
Meanwhile, US oil demand hit a record 19.7 million b/d in 2000, up from the previous record of 19.5 million b/d in 1999, said Simmons, before dropping to 19.67 million b/d in 2001. But if not for mild weather last year and the huge falloff in air travel after the Sept. 11, 2001, terrorist attacks, he said, US demand for oil in 2001 could have shattered the 2000 record-"if we could have supplied it."
He said, "World demand for oil is not as depressed as some think."
Kah said she sees several indications that the general US economic recession is ending. Compared with the last five recessions since 1970, she said, the latest recession seems "extremely shallow," which may also signal a similar shallow recovery.
She sees US demand for gas increasing by 2.5 bcfd this year over last year's levels. But US gas supplies will decline by 1.7 bcfd, Kah said. Even with an increase of 500 MMcfd from other sources, she said, that will leave a shortfall of 1.2 bcfd-enough to stimulate Henry Hub natural gas spot prices to an average $2.70/MMbtu this year, rising to $3.28/MMbtu in 2003.
Simmons is "not looking for a 30 tcf" US gas market by 2010 or even 2015. "Ultimately, you'll have to price out some of that demand," he said. "We can't extract that much gas for [market prices] under $3.50/ Mcf."
Kah agreed that tight supplies would keep natural gas prices high enough to trigger some "demand destruction" among industrial consumers and to force improved efficiency among utility power plants to keep the market below 30 tcf.
Gas supply outlook
Despite 3D seismic and other new technology, US dry gas production has remained essentially flat after averaging an annual growth rate of just 1.4% in 1983-94, said Papa.
"Last year, industry [capital expenditure] was up 70%, because every company knew that if they drilled a gas well, they would get rich," he said. But that huge jump in spending resulted in just a miniscule 0.5% increase in US gas production.
In fact, production during fourth quarter 2001 was down 2% from the same period the previous year, Papa said. That's largely because decline rates for US gas fields have escalated to an estimated 26% last year from 16% in 1990 and will likely hit 29% this year, he said.
As a result, Papa predicted, "It will be extremely difficult to grow the US gas production base" before 2010, the earliest period by which a pipeline can be built to move Alaskan gas to the Lower 48.
"North American drilling will remain slow until our customers generate more cash flow," said Hank Swartout, chairman, president, and CEO of Precision Drilling Corp., Calgary.
Papa expects "modest" growth in Canadian gas imports throughout this decade. However, he expects US imports of LNG from other markets to jump to 6% of total US gas supplies by 2009 from 1.4% currently, buoyed by higher gas prices.