RMI forum sees good years ahead for energy in short term, warnings for long term

Oct. 6, 2003
Current high energy prices are sustainable, at least for the next few years, which will be very good for the energy industry, according to energy experts at the RMI Oilfield Breakfast Forum held Friday in Houston.

By Judy Clark
Associate Editor

HOUSTON, Oct. 6 -- Current high energy prices are sustainable, at least for the next few years, which will be very good for the energy industry, according to energy experts at the RMI Oilfield Breakfast Forum held Friday in Houston.

Profits will continue because oil and gas supplies will be low, with US demand rising faster than production and total world demand increasing by about 1 million bbl/year, and because the Organization of Petroleum Exporting Countries will continue to maintain the price of oil within its parameters of $25-28/bbl.

"We are drilling deeper and we are looking for much smaller reserves—1/20 or 1/30 the size of reserves of 50 years ago," said Marshall Adkins, managing director and head of energy research at Raymond James & Associates. Although the number of rigs has tripled, he said, the supply in the US continues to fall dramatically.

Nuevo Energy Co. Chairman, President, and CEO James Payne concurred, exhibiting physicist M. King Hubbert's bell-shaped "Hubbert's Curve" that shows US oil production, which peaked just prior to 1980, continuing to drop until reserves are totally spent in 2060. "And only technology is going to allow you to keep that curve," he added. "The US is never going to increase production; it will decline" due to the quality of remaining prospects. "[Hubbert's] prediction [made in the 1950s] has been very accurate," Payne said.

Other Forum participants included Robert Card, Under Secretary for the Office of Fossil Energy in the US Department of Energy; Marathon Oil Corp. CEO Clarence Cazalot; Noble Corp. CEO Jim Day; and Stuart Ferguson, senior vice-president and chief technology officer at Weatherford International. Steve Jacobs, president of RMI moderated the session.

Good years ahead
"Niche players will make money in the US," Payne said.

"I think the next few years (2003-06) "will be very good years for the energy business," said Adkins. He said there has been a positive step change in natural gas prices since 1999, and although "the stock market doesn't think these changes are sustainable—we think they are," for a number of reasons:
- Natural gas supply declines in the US and Canada are irreversible, and Mexico will continue to import gas from the US, further diminishing its supply.
- The easiest demand reductions have already occurred.
- By the time LNG arrives in significant quantities, global prices will be higher.

Natural gas is now a global commodity, whose price will remain $4-6/MMcf, added Cazalot, but "high prices in the near term influences demand—not ideal from the producers standpoint."

Oil prices
Oil prices also will be sustainable because "inventories are relatively low, excess capacity is small, supply interruptions are likely, and OPEC's resolve is stronger than perception [has it]," Adkins said.

"What OPEC wants, OPEC is going to get," agreed Payne, who said that OPEC could continue to control oil prices—as long as Russia doesn't counterbalance it with its exports. Payne said he expects oil prices to regress to a new mean of $23-25/bbl, with an upward bias. "Because prices have gone up, the dwindling supplies are still profitable," he said.

But there will be a "greater challenge replacing reserves," said Cazalot. Oil replacement will be more difficult and more costly—about $5-6/bbl—and the industry would have to replace 130-140%/year.

Technology's role
Utilizing available technology is necessary, Ferguson said, to deliver more barrels of oil per dollar through high-productivity wells, lower-cost wells, and production optimization.
"With fields smaller and fewer wells, you have to get it right the first time," he said. "In brownfield environments, production optimization has a key role to play."
Yet, he said that although the upstream industry is generating "a lot of technology," mostly from the service sector, "the value is in its use," and much of the available technology is not being used.
Ferguson said that people are often too busy to evaluate new technologies. "I think it's a real problem. People want increasingly complex and articulate value propositions, and yet they don't have the time to read them."
Despite risks, "surely there has to be a greater role for technology," he said, adding that he expects to see an increased focus on development. Asked about the prospects for digital oilfields, Ferguson replied, "Smart fields are always going to be 2 years late."

Exits, consolidations
The decreasing US production has led to the exit of supermajors from the US exploration scene, with majors and the larger independents following, the forum speakers said.

This in turn is leading to continued consolidations, especially of smaller independents, which can't go overseas. "Consolidation within the [exploration and production] sector will continue in an attempt to reach economies of scale," Payne said. Day agreed, saying drillers' capital requirements of $300-500 million would necessitate such consolidations. He anticipates further consolidation opportunities for both oil service companies and E&P players.

Cazalot added that with the greater focus on international exploration, consolidations are being more focused on capabilities as the scale and complexities of projects increase and as companies face the emergence of international players with competitive advantages. Access to new resources will be the most critical challenge facing these companies, he said.

A few caveats
While the promise of profitability for the oilfield service sector during the next few years sounds rosy, it comes with a few cautions from some of the speakers.

"This might be the last growth spurt in the US as project inventories continue to decline and as the majors continue to exit the US," said Payne in his conclusion.

In addition, a new gas price plateau to as much as $6-7/MMbtu would result in short-term volatility and longer-term higher prices that "will hurt consumers and may result in permanent demand destruction, hurting both consumers and the producing industry," Card said.

"Because all major new [gas] sources such as offshore, Alaska, the Rockies, and LNG will require 18-36 months or more to respond to new price signals, this could lead to significant short-term price instability," he warned.

Although storage may reach 3 tcf by this heating season, the amount is not a guarantee of adequate supplies, Card said. "Last winter we had 3.1 tcf in storage and a 3% colder-than-average winter, resulting in very large price surges and service interruptions to industrial customers," he said.

Adkins, however, said there was a less than 20% chance that weather would be that cold this year, although the market would be tight.

Analysts say the market change is structural and long term, Card said. "Government policies have encouraged gas consumption [over other fuels] while discouraging production."

"With western Canada growth-constrained and Mexico importing US gas, wellhead gas prices may be locked in at $3.50-5.00, up from $1.50-2.50," Card said.

Prices can be kept from going higher with conservation, energy efficiency, and fuel diversity, Card added.

"Meaningful fuel switching, started in November 2002, killed 2-3 Bcf/d," said Adkins.

Supply would also have to be increased from both traditional sources and the new sources such as Rocky Mountain and Alaska North Slope gas and LNG imports, Card said. Otherwise demand in 2025 could rise to more than 30 tcf—as much as 5 tcf more than it would without such gains.

He said the George W. Bush administration is supporting comprehensive energy legislation and facilitating expedited regulatory reviews, especially the Federal Energy Regulatory Commission, and the Interior Department is examining royalty incentives, particularly for Rocky Mountain states, he said.

Card said the National Petroleum Council study released Sept. 25 "urges conservation as its first recommendation" along with fuel switching and aggressive production and import actions.

"It should be taken seriously," he said.