CHEVRON: ENVIRONMENT SHAPES OIL, GAS FUTURE

Concern for the environment will determine the future of oil and gas markets.

There are likely to be ample resources of both fuels-as well as coal, their chief competitor-available at a reasonable cost this decade.

How best to use these resources for efficient economic growth and still protect and improve the environment is the top energy issue for the 1990s.

That is the theme underlying Chevron Corp.'s latest world energy outlook.

Chevron noted that overall energy consumption will rise in the 1990s.

"To do less would be to condemn the developing nations to a low standard of living forever."

Further, fossil fuels will continue to dominate energy supplies as the world learns to use these fuels in environmentally benign ways, Chevron said.

"There will be a tradeoff between standard of living and environmental quality. The challenge of the 1990s is to find an acceptable balance. "

COMMUNIST WILD CARD

Chevron's supply/demand forecasts relate to the world outside Communist countries. Many of their Communist regimes are fading from view.

The company noted that major changes have occurred in eastern Europe since its outlook was prepared.

Chevron said it is too early to tell how the collapsing Soviet bloc will influence the world energy balance.

"As these countries move toward a market driven economy, energy consumption will increase with increasing living standards and industrial output," the company said. "But growth in energy consumption will be moderated as inefficient machinery and production methods are replaced with more efficient ones.

"On the oil supply side, the Soviet Union faces a serious problem. To replace its declining oil production, it must turn to high risk, high cost frontier exploration and development. This development must compete with other rapidly increasing needs for limited investment capital."

GAS PROSPECTS

Prospects for gas supply and demand in the U.S. are improving despite the wide seasonal price swings still likely in coming winters, said Chevron.

The company pointed to peak season gas deliverability falling short of demand in recent winters, a pattern it expects will be repeated in the early 1990s.

The decline in deliverability may be slower than many predict, Chevron noted. Additions to gas reserves in the U.S. averaged about 90% of production during the 1980s, resulting in only a slow decline of total reserves.

That suggests some gas development still is economic, said Chevron, citing the unprecedented situation of about half the U.S. active rig fleet seeking gas.

"This implies that the cost of replacing U.S. gas reserves may not be too much above today's price."

Chevron predicts that average U.S. gas prices will rise relative to oil prices in the next few years.

"By the mid-1990s, gas prices appear likely to reach levels that will justify continued gas exploration and development in North America."

Because gas development is more economic in Canada than in the U.S., Chevron expects Canadian gas sales to increase by 70% during the next 10 years.

Chevron also contends that the resurgence of LNG imports in the U.S. will be limited to existing facilities. That's because the high cost of new LNG facilities will render new baseload LNG supply in the U.S. too expensive to compete for many years, the company said.

OIL PRICE PATTERNS

Chevron expects oil prices to repeat patterns of recent years, continuing to be volatile within a $10/bbl range.

In the early 1990s the average price of West Texas intermediate crude will rise with inflation from its 1989 average of about $20/bbl. Thereafter, oil prices will increase faster than inflation.

To a large degree, the direction of oil prices will hinge on how well the Organization of Petroleum Exporting Countries adjusts to fluctuations in supply and demand.

Oil reserves worldwide were 920 billion bbl at yearend 1989, up 15% from the previous 2 years. Three-fourths of that total and most of the reserve additions were in OPEC countries.

As demand for OPEC oil increases it will be necessary for member countries-mostly in the Middle East-to add productive capacity to hold oil prices at a moderate level and thereby avoid the boom and bust price cycles of the 1970s and 1980s, Chevron said. However, temporary oil supply disruptions are still possible as a result of political actions.

"In the short term, political events can influence oil prices. In the longer term, economic forces are far more significant. The possibility of temporary disruptions must be recognized and dealt with but should not dominate our thinking about the longer term."

IMPORT CONCERNS

Chevron sees U.S. dependence on oil imports climbing to 60% by 2000, surpassing the levels seen in the energy crisis years of the 1970s.

It attributes that trend to an overall decline rate in U.S. production of 3-4%/year and demand growth of 1%/year.

Correspondingly, western Europe's dependence on oil imports will begin rising again in the mid-1990s, as the buildup of North Sea oil production that pared import dependence in the 1970s and 1980s begins to reverse, Chevron said. Japan will continue to depend 100% on oil imports.

However, the threat to those markets from oil supply disruptions has lessened sharply with the Strategic Petroleum Reserve, emergency sharing agreements, diversification of supply sources, and OPEC's resolve to avoid supply shocks, the company contends.

"Nevertheless, if growing dependency on imported oil is viewed as politically undesirable, the U.S. can take steps to encourage domestic production ... Some, such as oil import tariffs or price floors, will distort the economy.

"Others, such as adjusting fiscal terms, allowing access to promising acreage, or streamlining the permitting process for energy projects, won't distort the economy and may even be beneficial."

REFINERS' CHALLENGES

Refiners face big challenges in the 1990s, although they currently enjoy better margins, stronger demand growth, and higher utilization than they did a few years ago.

Oil price volatility will continue to bedevil refiners, and they face ever-increasing outlays for environmental mitigation measures.

Stronger oil demand by 2000 will require about 5 million b/d in increased worldwide refinery runs, Chevron estimates.

About 4 million b/d of that increase, or about 7%, will be added by 1993.

"In the U.S., the refining industry has sufficient capacity to meet most challenges-except for the proposed reduction in diesel fuel sulfur content and the continued reduction of gasoline vapor pressure. Substantial new investments will be needed if these specifications are implemented."

Chevron sees industrialized countries with mature oil markets and strong environmental controls adding coking and middle distillate hydrocracking capacity. Other regions, such as Asia, will add conversion units to refineries.

The company also noted a general trend toward a more structurally efficient refining industry, with moves toward deregulation in Japan and a single market in Europe.

REGIONAL DEMAND PATTERNS

Here are sketches of how Chevron sees supply and demand patterns by region:

Oil will continue to command 42% of the U.S. energy mix it did in 1989 vs. 45% in 1980. In the U.S., demand will grow for gasoline 0.5%/year, jet fuel about 2%/year, and heavy fuel oil to about 500,000 b/d in 1990s. Natural gas will account for less than 20% of the U.S. energy mix in 2000 vs. 21 % today and 25% in 1980, losing market share because of rising prices. Most of the 0.2%/year growth in U.S. gas demand will occur in industrial and utility uses. Imports of Canadian gas will jump to 2.2 tcf/year by 2000 from 1.4 tcf/year today. If a national energy strategy does not seek a balance in energy and environmental concerns, the U.S. oil production decline will be worse than the 4%/year Chevron assumes in its outlook.
Canadian energy demand will rise about 1.7%/year through 2000, with strongest growth for coal in the early 1990s, then nuclear power in the late 1990s. Increases in synthetic and bitumen production will offset 34%/year decline rates in conventional Canadian oil production to keep production level through 1995. Oil flow from Hibernia field off Newfoundland likely will start after that. Mackenzie Delta/Beaufort Sea field development projects do not seem feasible until 2000. Conventional gas production in Canada will grow 4.5%/year through 1995, but frontier reserves won't be a factor before the late 1990s.
Latin American energy growth will average about 3%/year through 2000, paced by 6%/year growth in gas demand. Gas will have 24% of the energy mix in 2000 vs. 17% today. That compares with oil's market share in Latin America sliding to 46% in 2000 from 55% today. Brazil and Venezuela offer the greatest oil production growth potential, with Mexican oil production about flat through the mid-1990s.
Overall energy demand in western Europe will grow 1.5%/year through 1995, slipping to 1%/year thereafter. Oil demand will remain relatively flat, while gas demand for power generation jumps 5%/year to 2000. North Sea oil production will rise 1%/year until the mid-1990s, then decline 5%/year. Norway will sharply hike its share of Europe's gas market, and new swing supplies will come from North Africa and the U.S.S.R.
African candidates for increased oil production are OPEC members Algeria, Gabon, Libya, and Nigeria. Angola production will grow through the mid-1990s, while Egyptian flow stabilizes at about 1 million b/d until the mid-1990s, when it starts a slow slide. African gas demand growth will be strong at 6%/year, but a lack of infrastructure will rein its market share to only 19% by 2000.
Middle East gas demand will climb 7%/year and oil demand 2%/year through 2000. The region has more than 1.2 quadrillion cu ft of gas reserves, but still will face barriers to market its gas.
Japanese LNG demand growth is expected to continue at more than 5%/year as total energy demand rises 1.7%/year.
Energy demand growth in South and East Asia will average 4.7%/year, paced by spurts in developing nations. Coal will have the strongest growth, while gas demand grows 80%/year and oil demand 3%/year in the region.