Analysts are dusting off their crystal balls to devise a range of oil price scenarios for the Middle East crisis as the standoff between Iraq and the rest of the world continues.
In Shearson Lehman's view, all scenarios lead to one result: There is little chance of a return to second quarter low oil prices and a greater chance of a $24/bbl floor for WTI in 1991. Prudential Bache, however, puts spot WTI at $21.10/bbl for 1990 and $22.25/bbl for 1991, reflecting gradual settlement of the crisis,. added OPEC supply, and stock draws.
Some analysts are predicting a jump in drilling as a result of expected higher prices in 1990-91. PaineWebber, expecting operators to base 1991 drilling budgets on $20/bbl vs. $16-18/bbl used in 1990, sees WTI at $28/bbl by 1995 and oil service company revenues jumping by 20% the next 5 years. It puts the U.S. rig count at 1,000 in 1990, 1,100 in 1991, and 1,450 in 1995.
Melvin Conant, editor of Geopolitics of Energy, draws up five scenarios of what could happen in the Middle East--all resulting in oil prices at the least at $25-35/bbl the next 6 months. Saddam's assassination or a continued standoff results in the low end price range, he says.
But warfare under three other scenarios means oil prices ranging $30-50/bbl the next 6 months, Conant contends.
Further, Conant thinks an end to hostilities will not change the potential for future mischief and the use of oil as a political weapon in the Persian Gulf because of lingering resentment against the wealthy Arab monarchies among the region's poor Arabs.
Because it will be "several decades at least before importing countries can walk away from their extreme dependence on the region," Conant cites:
- The need for conservation, non-Middle East E&P, EOR, and alternative fuels including gas, coal, nuclear, and solar.
- "Energy prices must be clearly defined to encourage these long term investments, not leaving them vulnerable to oil prices dictated by the OPEC cartel or by Persian Gulf states."
- Long term commitments to develop the 540 billion bbl heavy oil/tar sands resources in Alberta and Venezuela.
Meanwhile, the deteriorating political situation in the Persian Gulf has convinced oil markets that war is more likely, sending crude prices back to flirting with $30/bbl again.
Brent for October delivery jumped to $30.75/bbl at closing Sept. 6 from $26.15/bbl the week before.
Brent is leading all European prices higher despite the lack of shortage of crude or products in Europe. Very high Brent prices are a war risk premium, say market sources.
European market concerns have eased over the loss of Kuwait's refining capacity that took about 600,000 b/d of products supply off the market. Japan's decision to restart about 250,000 b/d of surplus refining capacity and a sizable jump in throughput at the Rabigh refinery on Saudi Arabia's Red Sea coast have helped ease market fears. Rabigh is a simple refinery, running at about 160,000 b/d before the invasion. Throughput is now thought to be about 300,000 b/d. Surplus distillation capacity in Italy and Spain also has restarted.
The main problem industry faces now is an imbalance of products, notably high levels of fuel oil. Conversion capacity is running flat out, although some units are still in turnaround.
European Petroleum Industry Association, representing 95% of European Community refining capacity, says there is no serious threat now of a shortfall of crude or refined products worldwide and thus no need yet to draw down compulsory stocks.
But Europia recommends a detailed preparation for an orderly stock release, in case the situation worsens, to handle a much larger and longer shortfall than usually assumed. It noted 1 month's production by Iraq and Kuwait is equal to only 4 days of OECD stocks without a demand drop.
Companies also expect to see first effects of consumer reaction to high prices. IEA expects a 500,000 b/d decline in fourth quarter OECD demand (see story, p. 24), but marketers warn that can't be certain as long as some governments block passthrough of high oil costs via higher product prices.
France has applied to join IEA, reversing a 15 year policy. Approval won't come for several months because of technical details and government approval. France's admission isn't likely to change IEA's profree market stance or OPEC relations.
Venezuela and India advance on major secondary/tertiary oil recovery projects.
Pdvsa expects planned secondary and tertiary recovery projects will add 24.6 billion bbl--15.7 billion bbl of heavy crudes and the rest light and medium--to Venezuela's current proved reserves of 59 billion bbl. Gas injection, waterfloods and thermal EOR will account for about 18.8 billion bbl, CO2, surfactants, polymers, and caustic the remainder.
Venezuela's EOR experience dates to the 1940s, and its latest experimental steam drive at Jobo in eastern Venezuela achieved 43% OOIP recovery of extra heavy Orinoco crude.
India's ONGC proposes a $1.6 billion waterflood project in Bombay High offshore field, calling for eight wellhead platforms, one oil processing platform, one water injection processing platform, and 78 wells. Target is the controversial L-III multipay reservoir, believed by some to have been damaged by delay in implementing a waterflood.
Greece will end its state monopoly on oil and gas exploration and invite participation by Greek and foreign private companies. State owned Dep-Eky hitherto has held an exclusive right to explore in Greek territory. Greece's only production is from Prinos field in the northern Aegean Sea, where output is declining sharply. The field has a foreign operator and shareholders in partnership with the state company.
Another Soviet joint venture is on tap, this one involving seismic surveys in the U.S.S.R. Seismograph Service (England) Ltd. signed a protocol toward a joint venture with the Soviet geophysical agency Neftegeofizika covering provision of 2-D and 3-D seismic crews, data processing in the U.S.S.R. and U.K., data interpretation services to oil companies working in the U.S.S.R., and possibly adapting Neftegeofizika's "novel" software for use in the West.
Lasmo Nova Scotia expects regulatory approval very soon for what could be Canada's first commercial offshore production, a $160 million (Canadian) plan to develop Panuke and Cohasset oil fields southwest of Sable Island 155 miles off Nova Scotia.
Partner in the project, to produce 30,000 b/d for 6 years beginning in 1992, is Nova Scotia Resources (Ventures) Ltd. It entails converting a jack up and tanker for use as a production/storage system. The project has completed hearings and received technical approval.
A major Canadian merger has been delayed by oil price uncertainty. Negotiators for Gulf Canada and Home Oil parent Interhome can't agree on an equity value for minority shareholders. There has been no proposal to minority shareholders because volatile oil prices make it difficult for analysts to set a price. Gulf is running several price scenarios, and both companies expect the $492 million merger with Home Oil to be complete by yearend.
Drilling will begin by yearend on a 143,000 net acre leasehold in the Niobrara trend of northern Colorado and southern Wyoming believed highly prospective for horizontal drilling.
Pennzoil agreed to buy a 37.5% stake in Snyder Oil's Pawnee Project. The deal, expected to close in 30-45 days, covers a $1.1 million seismic program, but scope of drilling isn't disclosed. Operator Snyder, having earlier sold a 25% stake in the venture to Coda Energy, retains a 37.5% interest. Snyder expects more joint ventures to explore another 100,000 acres it holds in the Niobrara trend outside the Pawnee Project.
Horizontal drilling economics in the Niobrara looked attractive even when oil was $15-20/bbl, Snyder says.
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