Predictions of stronger world oil products demand and an attainable-but tenuous-reformulated gasoline (RFG) supply in the U.S. punctuated the American Petroleum Institute annual meeting in Los Angeles.
Crude oil supply will be adequate to meet demand increases of 2.3%/year without bumping real prices above $15-20/bbl. And logistics of RFG supply portend precarious balances in the U.S. Northeast and West Coast, members of an economic outlook panel told API.
EPA Administrator Carol Browner declined to rule out discussions of relief if emergencies snag RFG deliveries in the Northeast. She said it is time to end the adversarial approach to enforcing environmental laws, and she thanked the oilmen for their leadership in bringing clean fuels to the public.
API Chairman Kenneth T. Derr listed the industry's accomplishments and noted that its low regard in the U.S. doesn't fit with its high international standing. He urged widespread political support for the basic requirement of economic growth.
Charles J. DiBona, API president, called for an era of environmental realism. He said it may be time to ask Congress to revisit the issue of access to federal land and offshore areas for oil and gas development.
With about 750 registrants, API's 75th anniversary meeting was the poorest attended in recent years. API distributed an evaluation questionnaire to help shape annual meetings in Houston in 1995 and Washington, D.C.,in 1996.
DEMAND, PRODUCTION SURGES
Bernard J. Picchi, managing director of Lehman Bros., New York, predicted an acceleration of world product demand through 2000, cutthroat competition among crude oil suppliers, and more equitable distribution of the industry's earnings and cash flow between the upstream and downstream parts of the business.
His 5 year 2.3%/year demand growth forecast contrasts with recent world demand growth slightly above 1.5%/year, according to the International Energy Agency.
Production from members of the Organization of Petroleum Exporting Countries, Colombia, the North Sea, Brazil, Viet Nam, West Africa, and other non-OPEC areas will be more than adequate to meet the burgeoning demand, Picchi said.
Anthony J. Finizza, ARCO chief economist, said Iraq crude oil may not reenter world markets during 1995.
Picchi said suppliers will include former Soviet areas. More than half the world's land mass and almost half the people are emerging from socialism, need investment badly, and are attempting to embrace variants of market economics.
They need to produce and export many raw materials to generate hard currency, and oil is the biggest cash generator, Picchi said. But he cautioned while exports are vital to Russia, Azerbaijan, and Kazakhstan to a much lesser extent, the other former Soviet republics are relatively backward and landlocked.
Advances in technology have led to tremendous upstream productivity increases and a "relentless decline in finding costs in 'high cost' areas." He said he has little patience with those who argue that U.S. drilling activity needs to return to record levels of the early 1980s to replace depleting reserves.
Analysis of crude oil price movements since 1861 shows it is "stretching credulity" to think that real oil prices are going to rise significantly Picchi said.
ARCO's Finizza sees economic dynamics shifting toward Asia and less developed countries, with LDC economic growth rates twice those for the rest of the world and a premium in South and East Asia, including growth in automobile use there.
NON-OPEC SUPPLY RISING
Non-OPEC production is rising almost as quickly as it did in the early 1980s at a lower level of spending, said James J. Murchie, a senior research analyst at Sanford C. Bernstein & Co.
"When you look at industry analyses done in the last 15 years, the Conventional wisdom by and large has been with no new big discoveries outside OPEC that non-OPEC production is likely to be flat from here. On average that conventional wisdom has been consistently and remarkably wrong," Murchie said.
From mid-1980s oil prices have been flat, industry's oil price expectations have come down, and vet the gap between oil prices and finding costs opened again. Spending went up, and non-OPEC production is now rising about 1 million b/d/year and is projected to rise that much again next year.
Murchie said, "It's not just a geological issue, it's an economic issue, and where there's a profit the industry will spend money and bring on capacity."
The fact that U. S. Lower 48 production is declining when production from all other non-OPEC sources is rising shows that incremental supplies are coming on from lower cost areas, This is rendering the U.S. onshore more obsolete.
RFG DELIVERIES DICEY
Lawrence J. Goldstein, president of Petroleum Industry Research Foundation Inc. (Pirinc), New York, sees U.S. RFG production capacity well in excess of demand, but there is no reason for complacency (OGJ, Oct. 17, p. 38).
Unscheduled West Coast or Northeast refinery downtime could cause shortages, but the more real fear is trouble from a delivery system that barely matches expected demand in the Northeast, Goldstein said.
Pirinc estimates PADD 1 RFG demand at 1.4 million bid. Steady manufacturing capacity of 650,000 bid results in the need for more than 700,000 bid from outside. An estimated 200,000 is available from non-U.S. sources, leaving a requirement for practically all of Colonial Pipeline Co.'s 500,000 b/d capacity north of Virginia, Goldstein said.
He noted the industry is starting the RFG season with less than 1 day's discretionary gasoline stocks nationwide.
Committing to balance a disrupted market, especially in the U.S. Northeast, will be risks, for suppliers, Goldstein warned.
One reason is that growing government mandates for specific fuels in the U.S. is shrinking, the number of world sources that can supply those fuels.
Another reason is remoteness. If a shortage of RFG develops, prices likely will rise immediately, but shipping time to the Northeast from the Gulf Coast is 19 days, probably too long to assure that higher prices will last long enough to make it worthwhile for a supplier to respond.
RFG'S PRICE EFFECTS
Goldstein urged policymakers to ignore temporary price effects as the industry meets RFG mandates.
Goldstein said RFG's debut "could have very large short term impacts" on national economic indicators, "and we believe they will as early as next month.
"It's important to remember that what's happening to gasoline markets is in mann, respects transitory in nature, and the runups in prices that we will be experiencing should not be treated as part of the core structure of inflation. "
In first quarter 1994 gasoline prices planned a positive role in the economy, down S-10% in real terms from first quarter 1993. With RFG regulations in place for 35% of the market in first quarter 1995, Pirinc expects price increases of 15/gal, including 8/gal for the increased cost of crude oil based on West Texas intermediate at $18/bbl.
Pirinc believes methanol prices that have yearly doubled in about 6 months will slowly decline as the supply system adjusts, but not to as low as they were in first quarter 1994.
The pervasive "just in time" supply philosophy portends instant price increases if anything goes wrong, Goldstein said, referring to recent 10/gal wholesale price increases with late October flood disruptions on Colonial and other Texas pipelines (OGJ, Oct. 31, p. 22).
Derr and DiBona expressed guarded optimism that Washington policymakers will become more balanced in regulating the oil industry.
Derr said industry is suffocating under a heavy blanket of regulation. "In the public and private sector alike, we're losing sight of the bedrock importance of economic growth."
Conservative implications of November elections point toward "a prospect for renewed attention to economic matters in Washington and a new era of reducing excessive regulation of both businesses and individuals" without ignoring environmental concerns, Derr said.
DiBona said, "We now have an opportunity to show that environmental policies can deliver on two goals that are both important to the American public-environmental progress and economic growth."
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
