New life in U.S. oil

Oil & Gas Journal's annual Forecast and Review special report contains subtle statistical movements that reflect deep changes in how oil and gas companies approach their business (see p. 51).

The significant change is in the rate of decline for U.S. production of crude oil and lease condensate. The rate is diminishing. And it is doing so even though the decline rate in production from Alaska's North Slope is increasing.

OGJ estimates average crude and condensate flow in the U.S. last year at 6.53 million b/d. That's down 132,000 b/d from the 1994 average. But the 2% drop compares with an average decline of 3%/year for 1985-94, a period that included a 1991 gain related to the Persian Gulf war. In that period, annual production drops exceeding 300,000 b/d were common. OGJ projects next year's U.S. production decline at 130,000 b/d.

Lower 48 flow

Alaska's production drop last year, 74,000 b/d, accounted for more than half of the U.S. change. Lower 48 production slipped by just 58,000 b/d, or 1%. That's not much for an oil and gas resource base that some observers dismiss as drilled up and nearly spent. OGJ expects a larger reduction in Lower 48 oil flow this year-115,000 b/d, to an average of 4.93 million b/d. But something is obviously going on.

In particular, the Gulf of Mexico has come back to life. Last week, OGJ's A.D. Koen reported an industry estimate that gulf oil production increased by 100,000 b/d in 1995-more than enough to offset the Alaskan drop. Most of the gain results from development projects in deep water.

Of course, a year does not represent a trend. But there's money behind these U.S. numbers. According to an annual survey of petroleum industry spending plans by Salomon Bros. Inc., U.S. outlays will jump by 12% this year after a 5% rise in 1995 (OGJ, Jan. 15, p. 28). Much of the $1.9 billion increase will come from major companies, which also plan big spending increases elsewhere in the world. The majors will devote large portions of their U.S. outlays to the gulf.

It is significant that these developments seem little related to the price of crude oil. Yes, the average wellhead crude price jumped 11% last year. But that followed 4 straight years of decline and took the average to only $14.66/bbl. The decisions that affected 1995 production were made before the year's price bounce.

Not very long ago, no one would have expected companies to announce development plans in 5,400 ft of water, such as Shell Offshore's Mensa project, in a year when the crude price averaged below $20/bbl, let alone $15/bbl. Not very long ago, no one would have expected companies surveyed by Salomon Bros. to project major spending increases for a year during which they expect crude prices to fall.

Technology and innovative business practice have liberated the industry from bondage to the price of crude. Financially, volume more than compensates for stagnant unit prices when aggressive efficiency reduces unit costs. The principle works as well on land as it does at sea. Mature onshore provinces such as the Williston basin, the Midcontinent region, and U.S. Southeast are yielding new flows of oil and gas as operators apply increasingly sophisticated seismic, drilling, completion, and production technologies. The resulting onshore volumes don't affect U.S. production totals in the obvious way that big offshore gains do. But they make money for the companies that produce them, whatever the price of crude, or they wouldn't have occurred.

The future

The worldwide future for the oil and gas business thus begins to look much like 1995 in the U.S.: incremental but profitable production where oil companies strike economic balance among considerations of geology, technology, political risk, infrastructure, terms of access to the resource, and reasonable expectations about price. In a world where decisions are made within such a framework, the U.S. can be as good a place to work as any.