The oil industry will have to live with low crude oil prices and a high level of price volatility "for some time," says ARCO Chairman and Chief Executive Officer Lodwrick M. Cook.
Cook told ARCO's annual meeting of shareholders, "Until Iraq's production is back in the market and the Organization of Petroleum Exporting Countries cartel has adjusted with a defined target price and an effective production prorating among its members, we must be prepared for low prices."
Cook noted that since the previous stockholders' meeting in May 1993, when West Texas intermediate crude oil averaged $20.50/bbl, prices had dropped to less than $14/bbl, the lowest since 1988. WTI averages about $17/bbl today.
"Consequently we will be making substantial adjustments in the way we do business," said Cook. "These adjustments will impact the corporate units and each of the operating companies."
Cook, who will retire as chief executive officer this summer, noted that the company faced similar circumstances when he assumed his current positions in 1985 and 1986.
"We made adjustments then that included streamlining our asset portfolio, much as we have done with U.S. Lower 48 properties the past 2 years. We also lowered our cost structure and were able to improve return to our stockholders. That, along with the long term viability of ARCO, is the most important objective."
Also noting the need for change, ARCO Pres. and Chief Operating Mike R. Bowlin told stockholders, "We know further substantial changes are needed, including more cost cutting and perhaps some paring of our capital spending. We expect to finalize these decisions by midyear."
OPERATIONS
Bowlin, who will succeed Cook as chief executive July 1, outlined a number of achievements by the company.
He noted that ARCO's non-U.S. production grew more than 10% during 1991-93 and will rise another 30% this year.
"And production commitments we already have should provide for further increases in the next 5 years," he said.
Referring to ARCO's largest non-U.S. development, the gas field project in the South China Sea, Bowlin reported the pipelaying between Hong Kong and Yacheng field is well under way, with gas deliveries to Hong Kong expected to begin in 1996. Bowlin said ARCO hopes to find gas along the 500 mile pipeline route, "but the gas we've already found will be in production for at least 30 years, providing a steady cash flow."
Bowlin also noted that with the 1993 start-up of two offshore gas developments in Indonesia, ARCO for the first time should produce more gas than oil in that country. The gas is destined for Indonesia's power generation market. "We'll build on the business by looking for more gas to feed the growing local market," Bowlin said.
ARCO expects to participate in as many as 35 wildcats outside the U.S. this year. ARCO is assessing several "promising" exploration blocks in the East China Sea south of Shanghai. In the U.K., ARCO will be exploring west of the Shetland Islands and in Cardigan Bay off Wales, both new areas for the
company.
In the U.S., Bowlin said that because of Alaskan developments completed last year, "we will see results of developments to stem production declines." The biggest new factor is Point McIntyre oil field north of Prudhoe Bay which, since start-up in 1993, has produced more than 100,000 b/d gross.
In addition, gas handling capacity at Prudhoe Bay will increase late this year with installation of the second phase of the GHX-2 project (OGJ, May 9, P. 91).
"We had budgeted GHX-2 at $1.3 billion, but it will come in for $200 million less," Bowlin said.
The entire project has expanded Prudhoe Bay's recoverable reserves by more than 800 million bbl for less than $2/bbl.
In the Lower 48, where a major reorganization of ARCO's oil and gas producing operations occurred last year, "it became clear to us-even before the current oil price decline-that something radical had to be done to improve performance and cut costs," Bowlin said.
"It's been tough, but we're confident the new organization can make money in the competitive Lower 48."
Referring to Vastar Resources Inc., the cornerstone of ARCO's exploration and production program in the Lower 48, Bowlin said, "Subject to market conditions, ARCO is positioned to offer about 16% of Vastar to the public. This should bring greater recognition of Vastar's value as a gas company than if it remains wholly within ARCO."
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
