Sam Fletcher
OGJ Senior Writer
HOUSTON, July 24 -- The triple threat of political tensions in the Middle East and Latin America, dwindling US exploration for natural gas, and limited access to known low-cost reserves could drive up energy prices and curtail economic growth, warned an energy analyst at Standard & Poor's, a division of McGraw-Hill Cos., New York.
"Due to political and economic unrest in regions that hold some of the world's greatest reserves of oil and natural gas, crude oil spot prices climbed over 30% in the US during the first half of 2002. Natural gas spot prices were up over 16%," said Tina Vital, oil and gas equity analyst at S&P, in a report issued last week.
Conflict between Israel and Palestine has already imposed a $4/bbl "war premium" on world oil prices. That could escalate if expansion of the US war on terrorism imperils Persian Gulf shipping and oil exports from the Middle East, the report said.
South American unrest
Political and economic unrest also is likely to deter energy-related investments in South America. During the first quarter of this year, several leading equipment and service companies "saw their sales from operations in Argentina and Venezuela drop due to reduced drilling activities," Vital noted.
Since Fernando de la Rua resigned as president of Argentina last December, that country has endured a series of interim top executives. During the last 6 months, the Argentine peso lost 70% of its value against the dollar. "Even if the political regime is stabilized, Argentina's ongoing economic crisis could further delay crucial energy reforms that have languished for years," Vital said in her report.
Meanwhile, it's still uncertain whether Venezuelan President Hugo Chavéz can unite his deeply divided country. "Economic and political instability, coupled with a hydrocarbons law that Mr. Chavéz enacted in November, are likely to keep investment in Venezuela's oil industry on the sidelines," Vital warned. "Less investment means reduced prospects for finding and developing new reserves in Venezuela's mature oil and gas industry. The result is likely to be another crisis for Venezuela."
Venezuela's new hydrocarbons law raises government royalties on most new oil and gas projects to 30% from 16.7% previously and stipulates that the state oil company, Petroleos de Venezuela SA, retain majority interest in all joint ventures with foreign energy companies.
Global activity
Standard & Poor's estimates that the six supermajor oil companies—led by ExxonMobil Corp. and BP PLC—have global capital spending budgets this year in excess of $54 billion, but down 5.8% from 2001 spending. The lion's share of the current budgets—67%—is likely to be devoted to worldwide exploration and production, said Vital.
"The major oils will continue to dispose of aging, high-cost fields in North American and to move toward lower-cost prospects abroad, mostly in deep waters," she said.
In the North Sea, the focus is shifting "from small numbers of very large projects to larger numbers of small projects," Vital reported. "As a result of government pressure and increased decline rates of major fields, investment should improve in the future, boosting drilling activity in the region."
Although down from a year ago, utilization rates among offshore rigs working European waters have remained relatively strong at 82.7% as of July 19. Continued high utilization rates for North Sea jack ups have produced high day rates, said officials at ODS-Petrodata Group in Houston.
Drilling activity has been relatively stable in the Middle East and is likely to remain so for the rest of this year, "despite growing political concerns," Vital said. "Asia is showing signs of improved drilling activity, led by Malaysia, Indonesia, and India. Continued investment in Nigeria, (elsewhere in) West Africa, and Russia should drive activity growth."
Meanwhile, exploratory drilling in the US has steadily diminished over the last 20 years. According to the American Petroleum Institute, operators drilled 9,151 new-field wildcat wells in the US at the height of the oil boom in 1981. Last year, that number was down to 1,166. Of all US wells completed during 2001, 91% were development wells.
As the US economy recovers, demand for natural gas should follow suit, boosting North American drilling activity in the process. "Because independent producers working on shorter-term projects dominate the North American energy market, it moves quickly up and down with demand," Vital observed.
"The quality of drilling prospects worries US independent exploration and production companies, which could lead to consolidation," she said.
"Government land in the natural gas-rich Rocky Mountains might be less available for drilling than many people think," said Vital. "The EIA (Energy Information Administration, the statistical arm of the US Department of Energy) estimates that about 43% of the Rockies' natural gas is unavailable for drilling due to environmental regulations, lack of pipeline capacity, or other barriers to development."
Meanwhile, higher oil prices, declining production of US dry gas, and expectations of strong economic growth should buoy natural gas prices going forward. "These factors should also bring forth the development of a new slate of higher-cost natural gas reserves and help to open certain restricted areas to exploration, boosting North American land drilling in a mature province," said Vital.
US proven natural gas reserves are estimated at 167 tcf, or 3.2% of the world's total.
"Increased production from the Lower 48 states ought to provide the most immediate source of new supply, but production levels appear to be stagnant," Vital said. "About 85% of US gas comes from the Lower 48 states, down from 97% in 1986."
The top gas-producing states are Texas, Louisiana, Oklahoma, New Mexico, Wyoming, Colorado, Kansas, Alaska, California, and Alabama.
Gas production decline
During the last decade, most US drilling activity and new supplies of natural gas have centered on development of known resources. "Wildcat drilling in the US has pretty much disappeared," Vital said.
Moreover, production decline rates for US natural gas fields last year exceeded 20% in the Midcontinent region, while climbing to 40% onshore along the US Gulf Coast and 50% in the shallow-water Gulf of Mexico, according to EIA.
Officials at EOG Resources Inc., a Houston-based independent that tracks US gas production, estimates that decline rates for 94% of all US gas production sites will hit 29% this year, vs. 26% in 2001 and 16% in 1990.
Meanwhile, DRI-WEFA Inc., an economic research firm based in Waltham, Mass., reported that US dry gas production inched up only 2.5% to a little more than 19 tcf in 2000, despite a 21% hike in US upstream spending and more than 80% of all US working rigs drilling for gas.
US demand for gas exceeded dry gas production by 3.7 tcf in 2000, triggering a price spike that exceeded $10/Mcf that December. However, that situation reversed in 2001 as high gas prices forced some users to substitute residual oil and coal, and others simply shut down.
US dry gas production remained almost flat at 19.35 tcf in 2001, despite a peak of more than 1,000 US rigs drilling for gas in the third quarter of that year. DRI-WEFA projects US dry gas production will drop to 18.42 tcf this year and total 18.66 tcf in 2003. "The trend indicates that base gas production is declining rapidly along with the size of new wells being drilled," Vital said.
Oil demand
DRI-WEFA predicts that world oil demand during the last half of this year will be about 1.5 million b/d more than it was in the first half. That should equate to an average price of $25.02/bbl for West Texas Intermediate crude during 2002 as a whole, rising to an average $23.52/bbl in 2003.
But much depends on whether the Organization of Petroleum Exporting Countries can maintain discipline in sticking to production quotas as it has done this year. "If WTI prices remain over $26/bbl, the cartel will likely raise production—either officially or unofficially (by cheating)," said Vital. "However, with world oil demand rising, we could end up with a tight oil market by the end of the year unless OPEC begins to unwind its quotas."
Russian alternative
"With the world nervous about the security of oil supplies in the Middle East, the countries of the former Soviet Union are emerging as an alternative source of oil and investment," said Vital. With 76% of the FSU land mass, Russia joins Saudi Arabia as the two biggest producers of crude oil "by a large margin, as they are the only two countries capable of producing more than 7 million b/d," she said.
EIA reports Russia has the world's largest proven reserves of natural gas, 1,700 tcf, or eight times that of Saudi Arabia. In 2001, it was eighth largest in terms of proven oil reserves at 48.6 billion bbl, 19% of Saudi Arabia's reserves.
Russia's oil industry is booming at present, with production up 8% to 7.02 million b/d in 2001 and expected to hit 7.51 million b/d this year.
"Russian oil companies have streamlined their operations and are aggressively developing their reserves," Vital said. However, Russia is handicapped by aging equipment and poorly developed fields. It also faces rising depletion rates and a deteriorating transportation infrastructure.
"Huge sums of money are needed to fix Russia's problems, and investors are reluctant to lend it due to concerns about business corruption," said Vital.
Contact Sam Fletcher at [email protected]
