Yergin's outlook

Patrick Crow
Washington, D.C.
[email protected]

Daniel Yergin, chairman of Cambridge Energy Research Associates, doesn't see a strong rebound for oil prices this year.

He said that, even if the Organization of Petroleum Exporting Countries' agreement holds, the price for West Texas intermediate will hover at $14.50-15.00/bbl.

"Everybody is justifiably cautious and skeptical," he told a meeting of the National Ocean Industries Association in Washington, D.C., late last month.

Yergin said that, among OPEC nations, "The resolve is sufficient, and the fear factor is strong enough, that there may not be 100% compliance-it will only be in the 50-60-70% range-but at least they are going to try to do that and maintain it out of dire self-interest."

But, he said, global market conditions can shift: "If the demand picture changes, it gets harder. If the Iraqis increase production, it gets harder. So it's not a static situation. It's going to be something that evolves, perhaps with a good deal of volatility, over the next few months."

Yergin doesn't expect demand to rebound in response to lower prices. After a flat 1998, he said it may increase by 200,000 b/d this year and by 1 million b/d next year.

Changing market

Yergin said that, due to lower prices, industry is cutting investments in oil projects more rapidly than anticipated.

"You are getting an adjustment on the supply side. New projects are not going ahead, and slowdowns are occurring in existing projects."

He said global productive capacity in 1999 will be 79.3 million b/d, about 4.5 million b/d less than expected 2 years ago.

Yergin said, "The oil exporters have learned a lot of lessons from all this. They have learned that markets count. They have learned that customers count, and access to them is very important.

"Over the last several years, they've come to the conclusion that there is a great deal of value to them in reopening their doors to investment by companies that can bring capital, bring management, bring skills, and bring access to markets.

"Over the next couple of years, the four key countries in the Middle East are, to one degree or another, looking to opening their doors, and that will affect the allocation of capital around the world" for oil projects.

U.S. outlook

Yergin said that, despite the downturn, the outlook is good for the U.S. Gulf of Mexico, particularly the deepwater areas.

He said deepwater developments will proceed, although exploration may be cut, both depending on expectations of oil prices.

"By 2010, even taking into account the downturn in the industry, we would be looking at 2 million b/d of production out of the deepwater, compared with about 700,000 today."

Yergin said cuts in exploration and an accelerated decline in the shallow Gulf of Mexico output "will force a significant decline in gas productive capacity this year and next."

He said that will force an upswing in natural gas prices "sooner rather than later" and higher price volatility.

"This kind of decline is taking place at a time when this country is making a greater bet (for gas) as a source for the electric power industry," Yergin said.