OGJ Newsletter

• U. S. industry scoreboard 4/26 [44,095 bytes]

Despite a recent sharp rebound in oil prices, the damage done from last year's slump will continue to hobble U.S. oil production through 2000.

That's the gist of the IPAA supply and demand committee's latest short-term forecast. The committee also predicts a 7.8% drop in U.S. crude oil output to 5.75 million b/d in 1999 and a further 1.7% decline in 2000-the lowest U.S. level in more than 50 years. The oil crunch is spilling over into U.S. upstream natural gas as well, as the committee predicts a decline in U.S. gas production of 1.2% to 18.75 tcf in 1999, mainly in response to capital spending cuts slicing the gas drilling rig count by a third in recent months. But U.S. gas output is expected to rebound by 1.3% in 2000.

Other IPAA supply/demand committee predictions include:

• A strong economy and normal weather are expected to hike U.S. energy consumption 2.8% to 92.9 quadrillion BTU in 1999 and a further 1.4% in 2000.
• Total U.S. demand for petroleum products will climb by 1.9% in 1999 and 1.7% in 2000.
• Gas consumption in the U.S. will increase 3.2% to 21.97 tcf in 1999, paced by residential and commercial use growth, and by a further 2.1% in 2000.
• U.S. oil imports will continue their climb, rising 3.1% in 1999 and 3.2% in 2000-when they will have reached 57% of demand.
• U.S. gas imports' growth will rise by 2.7% this year and 4.8% next year-to 3.4 tcf-after ratcheting up double-digit growth rates during 1986-95.

The dismal results emanating from the 1998 oil price trough are being manifested in other ways.

One is the phenomenon consultant John S. Herold Inc. calls "upstream planning inertia," in which oil and gas companies ramp up capital spending quicker than they can rein in capital outlays. In its latest annual reserve replacement cost analysis, Herold notes that U.S. upstream capital spending of $29.5 billion for the top 50 E&P firms in 1998 was down 6.1% from 1997, "a surprisingly modest decline in light of the dramatic plunge in energy prices.

Herold also found that, in 1998, U.S.:

• Proved oil reserves fell almost 5%, oil reserve additions from all sources plunged 65%, and additions from drilling plummeted 78%.
• Wellhead oil and gas production revenues fell by 25%, and after-tax profits of the Herold 50 collapsed by 86%.
• Overall reserve replacement costs soared by 68%, and finding and development costs almost doubled, to $12.26/boe from $6.21/boe in 1997.

Herold said, "ellipse(T)he unavoidable truth is that the numbers were just plain awful and indicate that the industry destroyed significant economic value in 1998."

Offshore drilling contractors aren't seeing any "upstream planning inertia" just yet. Global Marine's Summary of Current Offshore Rig Economics (Score) fell 15.2% in March from the prior month, when the price rebound began, with day rates falling everywhere and for all types of offshore rigs-and semis hit especially hard with a Score decline of 25.3%. Global Marine CEO Bob Rose noted, "The rising trend in worldwide oil and U.S. natural gas prices that began in February 1999 has not yet slowed the extended slide in day rates for offshore drilling rigs. Oil and gas producers' increased cash flows from rising commodity prices will likely be used to shore up balance sheets before being employed to drill new wells.

"Nevertheless, we are becoming increasingly optimistic that our business will start improving strongly in the coming months."

Meantime, while the hemorrhaging continued for much of the first quarter, the uptick in oil and gas prices that got under way in earnest in March hints at better things to come for bottom lines in 1999.

First quarter profits for petroleum operating and service/supply companies may look grim, but at least they don't suffer in comparison with prior-year results as much as they did in 1998.

Except where noted, results shown are for first quarter 1999, in millions of dollars, with 1999 shown first and losses in parentheses: Exxon 1,020 vs. 1,820, Duke Energy 967 vs. 320, Chevron 329 vs. 507, Columbia Energy 150.4 vs. 147.5, CNG 139 vs. 77.9, Coastal 134.5 vs. 124.8, Enron 122 vs. 214, CMS Energy 98 vs. 88, TECO Energy 48.6 vs. 53, Kinder Morgan Energy 41.1 vs. 0.3, Tosco 27.9 vs. 41.5, Sunoco 19 vs. 56, Vastar 19 vs. 48, Southern Union 17.6 vs. 16.2, Penn Virginia 2.9 vs. 3.2, McMoRan 1.3 vs. (7), Pioneer (6) vs. 2.8, Murphy Oil (6.7) vs. 15.5, Burlington Resources (10) vs. 48, USX-Marathon (11) vs. 76, Oxy (70) vs. 177, Dominion Resources (116.3) vs. 139.5, and Cross Timbers Oil (1.462) vs. 0.3.

Service companies also took it on the chin: Transocean Offshore 85.2 vs. 77.6, Santa Fe International 58.5 vs. 67.8, Diamond Offshore 51.8 vs. 80.7, Ensco 20 vs. 87.2, Noble Drilling 15.5 vs. 46.2, Smith International 6.6 vs. 33.6, National-Oilwell 3.7 vs. 21.1, and RPC Inc. 1.2 vs. 5.7.

On the brighter side is North America's natural gas outlook.

Duke Energy thinks the post-2000 gas price outlook is "quite robust."

Brad Karp, president of Duke Energy Trading & Marketing, told a recent IPAA meeting, "The 5-year strip price coming out of year 2000 is $2.40, plus or minus, which is at the high end of the range for where annual strip prices for natural gas have been trading.

"It's clear that the marketplace is concerned about the ability of the producing community to keep up with the demand growth. The counterbalance to that here for the rest of 1999 is inventory levels. We have some 300 bcf more in inventory than we did at this time a year ago. Over the course of the injection season, that adds up (to) 1.5 bcfd, and last year was quite high relative to inventory levels for the prior 4 years. And those are the two forces that are kind of competing in the marketplace right now."

Karp expects a price inflection point in third quarter, and that is when "the marketplace decides that year 2000-forward is the right place for prices to be; or (that) the ingenuity and motivation of the producing community is going to keep enough supply available that $2 is a more realistic price going forward for natural gas than $2.40. I think, either way, it looks a whole lot better than $1.70."

With regard to U.S. and Canadian gas supply, industry has a double-sided view of what to expect this year, judging from an industry survey released last week by Calgary's Ziff Energy Group. Survey respondents think that, while Canadian production is likely to increase by more than 5% in 1999 at current price levels, they doubt that Western Canadian production will be able to fill new pipeline export capacity to the U.S. Less than 10% of respondents think gas prices will decline in 1999 vs. over 50% that think they will rise.

Is a Mexican gas export pipeline grid into Central America in the offing? Mexico's government says unnamed private companies want to build a 65 MMcfd gas pipeline from Mexico to Guatemala. Energy Secretariat official Dionisio P?rez J come says his government hopes the pipeline will be built with 100% private funds and be completed by 2004. Both governments are eager to build the pipeline, signing a formal pact in January to promote it.

Guatemala hopes to convert much of its private industry and electric power plants to gas soon, while Mexico seeks another export market-outside the U.S.-for its rising gas output. Government and industry officials see the Mexico-Guatemala link as a first step to extending gas pipelines from Mexico throughout Central America-later to San Pedro Sula, Honduras, and then into El Salvador and Nicaragua.

The petroleum merger and acquisition frenzy shows no sign of letting up.

Latest target is Australian independent Cultus Petroleum, sought by Austria's OMV in its aim to expand its international exploration portfolio.

Cultus's operations are mainly in Australia, which attracts OMV as an E&P play because of its "high degree of political and fiscal stability." OMV said Cultus' assets would "serve as a platform for further growth in this country." Cultus was valued at $102.4 million (Australian) the day before OMV launched its bid.

The Aussie firm produces roughly 6,000 boed net and operates mainly in the onshore Cooper basin and on the North West Shelf.

Columbia Energy Group last week launched an unsolicited bid of about $9 billion-comprising stock, cash, and $2 million in assumed debt-for Consolidated Natural Gas, citing potential for $250-300 million in pre-tax savings from the merger. The proposal came in direct opposition to the $8.07 billion bid from Dominion Resources Inc.

Domininion Resources' Chairman, Pres., and CEO Thomas E. Capps responded: "This hostile offer is an intentional distraction to the creation of America's premier and first fully integrated electric power and natural gas company. Even minimal review shows Columbia's offer is not as attractive to CNG's shareholders as Dominion's."

PaineWebber disagrees with Capps, saying, "Weellipsebelieve Columbia Energy Group'sellipseoffer for CNG is more attractive than the Dominion Resources offer-both in terms of immediate financial return as well as the longer-term interests of shareholders."

Copyright 1999 Oil & Gas Journal. All Rights Reserved.