API seeks energy policy; IEA notes spending caution

Jan. 24, 2005
Red Cavaney, president and CEO of the American Petroleum Institute, called for major changes in US energy policy in a Jan. 18 address to a forum of the US Energy Association of public and private energy-related organizations, corporations, and government agencies.

Red Cavaney, president and CEO of the American Petroleum Institute, called for major changes in US energy policy in a Jan. 18 address to a forum of the US Energy Association of public and private energy-related organizations, corporations, and government agencies.

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The time has come, said Cavaney, for Congress to enact an energy bill that will ensure diversity of supply, increase access to oil and natural gas resources on nonpark federal land and offshore leases, encourage imports of LNG, increase energy efficiency and conservation, expand US refinery capacity, and reduce the growth of boutique fuels across the country.

In a separate Jan. 18 report, the International Energy Agency, Paris, said, "A trend [among oil and gas companies] away from exploration spending in the past decade has reduced company reserve replacement levels."

Problems for consumers

Cavaney claimed that rising world demand for crude and failure to pass comprehensive energy legislation have combined to create acute problems for US business and consumers.

"The sad fact is that the current policy framework does not deliver as promised," he said.

He noted that, led by developing nations like China and India, world demand for crude increased by 2.7 million b/d in 2004, up from a "typical" annual increase of 1 million b/d.

"A comprehensive US energy policy must recognize the growing impact of these major new competitors for energy supply in the world," Cavaney said. "For the US to secure energy for its economy, government policies must create a level playing field for US companies to insure international supply competitiveness."

IEA said global oil demand grew by 2.65 million b/d in 2004, "more than twice the rate anticipated at this time last year," representing "the highest rate of demand growth since 1976, when demand soared by a staggering 3.3 million b/d."

That growth rate generally is expected to slow in 2005 to 1.44 million b/d, said IEA, "still led by China" and other Asian countries outside of the Organization for Economic Cooperation and Development.

IEA said world oil supply averaged 84.4 million b/d in December, down by 45,000 b/d from November, with supplies from the Organization of Petroleum Exporting Countries level at 29.5 million b/d. However, OPEC has since moved to reduce its production by 1 million b/d effective Jan. 1, trimming back toward its current cumulative quota of 27 million b/d.

Cavaney said that current US policies have decreased US crude production while increasing reliance on imports and that Congress's failure to enact comprehensive energy legislation is harming US economic growth. He cited loss of 0.5-1% in growth of the US gross domestic product, declining production of natural gas, sharp spikes in gasoline and diesel prices nationwide, tight fuel supplies in the Midwest and New England, and electric power blackouts in the Northeast and parts of California.

"All of these energy issues and concernsUadd up to a need for action. America's energy problems are becoming acute," Cavaney said.

Companies cautious

Although world oil prices surged to a nominal record high late last year, IEA reported, "A number of recent industry surveys suggest that major oil companies are not yet banking on the sustainability of recent high prices and that, consequently, a cautious approach is being taken towards boosting capital expenditure in 2005, notably on exploration and production."

Such surveys "suggest worldwide expenditure in the [oil and natural gas] upstream [industry] will grow by less than 6% in 2005. This represents a slowdown from double-digit growth recorded in 2004. Spending growth will exceed the average, however, in North America, on offshore projects, and among the independent upstream operators," IEA reported.

"Surveys suggest that, generally, companies are now working on an assumption of [an average price] of $35/bbl [for] crude for 2005. But the major international oil companies (IOCs) still seem to be budgeting for $20-25/bbl," IEA said.

"For the majors, short-term returns to shareholders remain a priority, as do mandatory environmental spending, refinery upgrading, and gas projects. The IOCs are particularly concerned about the rise in costs in mature producing areas, and the trend towards offloading noncore assets in mature areas to independent operators will likely continue," said IEA. "Rather, the majors would prefer to concentrate longer term on accessing a limited portfolio of world-scale projects. Here, too, however, shortages of qualified project staff, raw materials, and drilling equipment are also driving up costs and setting a ceiling on overall investment plans."

IEA said, "If sustained, the trend towards higher crude prices and a growing role for independent upstream operators should boost industry investment levels, shore up reserve levels, and boost productive capacity. But for now the industry seems to be taking a wait-and-see attitude."