Slump's varied effects present mixed opportunities

Nov. 12, 2008
The varying effects of economic troubles on exporting countries and national oil companies present a mixed slate of opportunities to international oil companies with cash to invest.

By OGJ editors
HOUSTON, Nov. 12 -- The varying effects of economic troubles on exporting countries and national oil companies present a mixed slate of opportunities to international oil companies with cash to invest.

Lew Watts, chief executive officer of PFC Energy, told the RMI Oilfield Breakfast Forum in Houston Nov. 12 that most Persian Gulf members of the Organization of Petroleum Exporting Countries can weather the slump in the price of crude oil.

National "break-even" West Texas Intermediate crude prices in 2010 are $54.26/bbl in Saudi Arabia, $52.07/bbl in Kuwait, and $45.59/bbl in the United Arab Emirates, Watts estimated.

By contrast, in Venezuela, where the government has spent heavily on social and international projects and subsidizes domestic oil products, the break-even crude price in 2010 is $102.68/bbl. In Iran, another high-subsidy country, it's $83.31/bbl.

The financial crisis contributing to the oil price slump has mixed effects. Watts assessed a group of national oil companies on the basis of how likely they are to offer increased opportunities to international oil companies as a function of their likelihood to encounter project delays because of financial stress.

Lowest in his ranking of NOCs likely to encounter project delays and therefore to present opportunities to outsiders were those from Saudi Arabia, Abu Dhabi, and China. Highest in the ranking were NOCs from Nigeria, Angola, Malaysia, Thailand, India (Oil & Natural Gas Corp.), Iran, and Kazakhstan.

Eventually, he said, economies will regain health, energy markets will resume normal rates of growth, and oil and gas will again encounter physical limits.

For reasons unrelated to the resource pessimism of "peak-oil" adherents, he said, "The world cannot generate the capacity to produce more than 100 million b/d."

He predicted, "The big breakthrough in energy is going to come from outside of energy."

Focus on technology
Janet Clark, executive vice-president and chief financial officer of Marathon Oil Corp., said IOCs have to concentrate on technology to gain access to unconventional resources and other technically challenging projects.

Companies, she said, compete for those opportunities on the basis of their skill in areas such as seismic imaging, reservoir characterization, enhanced oil recovery and carbon dioxide injection, drilling and completion, stimulation, heavy oil in situ recovery, and gas conversion.

She cited a proprietary "gas-to-fuels" technology Marathon has in the pilot-plant phase that can be applied to small gas fields and that yields high-octane gasoline and diesel fuel.

With national companies controlling most conventional oil and gas resources, Clark said, international oil companies must emphasize technology and address the question, "How do we make ourselves the preferred partner?"

John Gibson, chief executive officer of software supplier Paradigm, called for a collaborative approach to technical problem-solving and described how his company is using the internet to solicit solutions to complex business and technical problems.

"We still have an innovation shortage in this industry," he said.

Gibson agreed with Watts that major energy innovations will come from outside the energy industry and cited imaging algorithms developed in the medical, satellite, and defense businesses.

Douglas L. Becker, Banc of America Securities vice-president and research analyst, said the stock market, which he called "a leading indicator of oil patch fundamentals," is indicating a WTI oil price of $50/bbl and a Henry Hub gas price of $5.50/MMbtu.

Although he said there's a 30% chance that demand for crude oil will be suppressed for "multiple years," Becker noted signs of an end to the current slump in OPEC's production cut, a downturn in the US rig count (which will limit gas supply and restore prices), reduced expectations by analysts for oil service company earnings, and the seasonality of service-firm stock performance.