OTC: High crude prices seen for 3-5 years in industry poll

May 3, 2006
Oil prices will stay high for 3-5 years, say 40% of respondents in a real-time survey at OTC.

Sam Fletcher
Senior Writer

HOUSTON, May 3 -- Using a new electronic system for instantly polling attendees at technical sessions of the 2006 Offshore Technology Conference in Houston, 42% of the respondents at a May 2 panel discussion said they expect crude prices to remain high for 3-5 years.

Another 26% of those attending the panel session on the role of independents in the offshore industry said they expect high crude prices to last for 1-2 years, while 30% said prices would drop back to $40-60/bbl "soon." The rest of the 69 respondents said crude prices would fall back to $30-40/bbl in the near future.

Representatives of the six independent oil companies appearing on the panel generally were more bullish in their outlook for crude prices. Earl Reynolds, vice-president and general manager of the international division of Devon Energy Corp., Oklahoma City, said he expects high crude prices to be sustained "for quite some time." But when it comes to budgeting long-term exploration and development projects, he said, "We don't invest that way."

Another panelist, Brian Reinsborough, vice-president of exploration for Nexen Inc., Calgary, said crude prices in excess of $70/bbl are likely too high to sustain and will probably fall back closer to $50/bbl in 4 years. However, the development of huge oil sands deposits in Canada—in which Nexen is involved—eventually could make North America "independent" of crude supplies from other countries, he said.

Development of oil sands and other energy sources that "used to be considered nonconventional" will increase crude supplies and bring down prices, said John Simon, vice- president of development at Amerada Hess Corp., New York.

But a proposed "windfall profit tax" on oil company earnings in reaction to high crude prices would likely reduce industry investment in the development of unconventional resources, said Cory Loegering, vice-president of deepwater operations for Mariner Energy Inc., Houston.

In a later survey question on global supply and demand, 55% of the respondents said high energy prices eventually will increase production and encourage conservation. Another 14% said alternative energy sources will emerge to reduce demand for petroleum. However, 12% said crude production has already peaked, while another 12% said production not only will increase but will outpace demand. The remaining 8% said conservation will reduce demand below production.

Workers wanted
One of the chief concerns repeated at many of the OTC technical sessions this year was the lack of new workers to replace the industry's aging workforce. At the independent panel session, 86% of 74 respondents predicted the industry will remain chronically understaffed for many years.

When asked to name the offshore industry's greatest challenge in 3-5 years, 49% of the 64 respondents picked access to workers, compared with 34% who said access to resources, 9% who picked volatility of commodity prices, and 8% who pointed to access to equipment and supplies. "All of these are creating a perfect storm" that is "pushing companies toward nonconventional resources and riskier areas of the world," said Reinsborough.

US colleges are not graduating enough petroleum engineers and geologists to replace the personnel losses from the industry's aging workforce, said Simon.

In a separate general session panel discussion, however, Fisoye Delano, group general manager for the Nigerian National Petroleum Corp. (NNPC), suggested that US oil companies that had difficulty attracting US recruits to the offshore industry would find "trained but inexpensive workers from other countries could be used in the Gulf of Mexico." Dalton Boutte, president of the WesternGeco division of Schlumberger Ltd. and also a member of that later panel, said international oil companies "must commit to training on a global level" both for new employees and on new technology.

Offshore operators also are concerned about the short supply of marine rigs and other equipment that is pushing up day rates and encouraging oil companies to obtain long-term commitments from drilling contractors whenever possible. Independents must be prepared to take on short notice the "surplus slot" for a drilling rig, should one develop, said Gene Van Dyke, chairman and chief executive of privately held Vanco Energy Co., Houston.

In a poll of the audience, 45% said they expected the shortage of drilling equipment and supplies to continue for 3 years. Another 28% predicted a 5-year shortage, while 26% said the shortage should ease in 2 years.

Simon said rigs now under construction will be coming into the market in 2 years and will help moderate day rates. "But the other challenge is who is going to man these rigs?" said Loegering. With the industry's continued shortage of both white-collar and blue-collar employees, he said, "The challenge will remain."

Independents push offshore
In the last 10 years, offshore independent producers have replaced production at a record ratio of 135% vs. an industry norm of 80%, said Sandeep Khurana, subsea systems project manager for JP Kenny Inc., moderator of the independent panel discussion. Independents have capitalized on their smaller size and greater flexibility to compete internationally in deep and ultradeep waters, including marginal developments. Half of the deepwater fields brought on stream around the globe in 2005 were owned and operated by independents. If that trend continues through this year, independents will likely develop more deepwater fields than the major integrated companies.

With easy access to capital as a result of high oil prices, the differentials between independents, majors and national oil companies (NOCs) are "minimal" now, said Reynolds of Devon Energy. As a result, he said, privatized NOCs are now competing strongly with majors and independents for opportunities internationally, with NOCs sometimes working together to their mutual advantage. So it's to the independents' advantage to build networks with NOCs.

Meanwhile, government-to-government deals have locked out international oil companies from access to some resources. Devon has chosen not to participate in the Middle East because of "potential access problems," Reynolds said.

Van Dyke described his Vanco Energy as "probably the only privately owned independent that is active internationally," with offshore operations in such unusual areas as Madagascar and the Black Sea, as well as Ivory Coast, Equatorial Guinea, Gabon, Ghana, and Morocco. In 2001, it identified a previously unknown salt basin, now known as the Majunga basin, off the northwest coast of Madagascar. It plans to begin exploratory drilling this year if it can get a rig.

Meanwhile, the Houston independent in late April won a competitive tender for the right to conclude a production sharing agreement with Ukraine for "the highly prospective Prykerchenska tender area in the Black Sea, which Van Dyke describes as a virgin area comparable to the Caspian. "This will be Ukraine's first deepwater license award and Ukraine's first production sharing," he said. JNR Eastern Investments Ltd., London, an investment company representing the interests of the Rothschild family, is an equal partner in Vanco's application.

Contact Sam Fletcher at [email protected].