CONOCO DETAILS WORLD ENERGY OUTLOOK

The U.S. government should adopt policies that encourage U.S. petroleum companies to diversify crude oil sources around the world, says Conoco Inc.

Conoco emphasizes diversification of crude supply sources outside the U.S. "to manage its unavoidable dependence on imported oil by reducing excessive dependence on Mideast oil."

That's the key theme underlying Conoco's latest world energy outlook through 2000.

In its 1989 outlook, Conoco called on the U.S. government to open the Arctic National Wildlife Refuge Coastal Plain to exploration and development and provide a tax credit of $5/bbl of oil equivalent (BOE) for production from U.S. frontier areas as keys to reducing U.S. oil import dependence (OGJ, July 3, 1989, p. 30). Although Conoco included opening the ANWR Coastal Plain and more of the U.S. offshore among U.S. policy recommendations in its current outlook, the company placed the greatest emphasis on incentives for worldwide exploration.

FORECAST SNAPSHOT

Among other key predictions, Conoco forecasts:

World oil demand will rise 1.5%/year to about 80 million b/d in 2000.
Demand for oil from the Organization of Petroleum Exporting Countries will jump to 33 million b/d in 2000 from 24 million b/d in 1990. Outside OPEC, oil supply growth will be flat.
U.S. oil demand will grow 1.5%/year to 19.3 million b/d by 2000.
U.S. oil production will fall to 5.6 million b/d by 2000 from about 7 million b/d today.
U.S. oil imports will jump to more than 11 million b/d by 2000 from 6 million b/d today at a cost that may approach $150 billion/year.
World natural gas supply and demand will increase about 3%/year to 2000, with the strongest demand growth in Europe, North America, the former U.S.S.R., and East and Southeast Asia.
U.S. natural gas demand will rise to about 23.4 tcf in 2000 from 18.8 tcf in 1990. U.S. gas production will meet more than 90% of that demand.

ASSUMPTIONS

Conoco's outlook is based on assumptions that:

World economic growth to 2000 will average 3%/year, about matching that of the 1980s.
There won't be "extreme" taxes on fossil fuels as a result of concerns over global warming.
Oil prices, adjusted for inflation and in 1992 dollars, will remain volatile at $16-30/bbl for several years and rise to about $24/bbl in the second half of the decade.
Natural gas prices will remain competitive with other fossil fuels with gas on gas competition limited to the U.S. and Canada.
Coal price increases won't outstrip inflation, and alternative fuels won't contribute greatly to energy supply through 2000.

Conoco's outlook covers non-Communist, Communist, and former Communist nations and lumps former and current Communist nations together as "centrally planned economies" (CPEs). Its references to "developed nations" cover countries in the Organization for Economic Cooperation and Development. All the rest are "developing nations."

ENERGY SUPPLY, DEMAND

Conoco expects growth in world energy demand to slow to 1.7%/year to 2000 from 2.3%/year in 1986-90.

It projects energy demand will climb to 192 million BOE/day in 2000 from 163 million BOE/day.

Energy demand growth in developing nations, especially in Asia, will be the strongest at 3-4%/year-in line with economic expansion. Overall energy intensity, or consumption of energy per unit of economic output, will decline 1%/year. Developed nations will continue to show minor gains in energy efficiency.

CPES, with two to three times the energy intensity of developed nations, will show increases in energy intensity as economic output falls faster than energy consumption. But pollution concerns and rising energy prices eventually will spur conservation and efficiency improvements in those nations.

Oil and gas will provide more than 70% of the growth in energy demand to 2000, Conoco predicts.

OIL DEMAND, SUPPLY

Conoco sees most of the increase in oil demand to 2000 coming from transportation fuels, mainly in developing nations, which will account for almost half the growth in oil demand.

Gasoline demand growth worldwide will average 1.8%/year to 2000, compared with 2%/year the past 2 decades. Demand is expected to increase 1.9%/year for jet fuel and kerosine, 2.1%/year for distillate, and 1%/year for residual fuel oil.

Oil production gains in the North Sea, Mexico, and elsewhere won't be enough to offset the continuing slide in the U.S. Production from the former Soviet Union remains a wild card but is likely to fall further before it recovers.

OPEC production capacity should suffice for a few years once Iraqi and Kuwaiti supply capabilities are fully restored, but investment in new capacity will be required to meet the expected call on OPEC oil in 2000. Almost all incremental OPEC production will come from the Middle East.

U.S. OIL DEMAND, SUPPLY

More than half the growth in U.S. oil demand will come from increased use of oil for transportation.

Although U.S. transportation sector demand for oil will grow only 1%/year, it will account for 60% of incremental oil demand because two thirds of total U.S. oil demand is used for transportation.

U.S. industrial and power demand for oil will increase because there will be little incentive for fuel switching under Conoco's base price scenario.

Gasoline demand growth will average less than 1%/year in the U.S. because new air quality rules will boost prices, rein demand, and spur growth of alternative motor fuels.

U.S. demand this decade will increase for jet fuel and kerosine by 1.6%/year, 2%/year for distillate, and 2.7%/year for resid.

The U.S. oil production decline rate will slow to less than 3%/year, owing to better management and recovery of reserves, from more than 4%/year the past 5 years.

GAS DEMAND, SUPPLY

Worldwide, demand for natural gas will grow because of continuing cost competitiveness and air quality concerns, Conoco predicts.

Liquefied natural gas will play a role in fuel diversification strategies of many Asian countries, where some of the demand growth will be strongest.

In the U.S., gas fired electrical power generation, including nonutility power, will account for more than two thirds of growth in natural gas demand this decade. Because the industrial market is mature, increased efficiency will offset new demand in that sector.

U.S. gas imports, mostly from Canada, will climb to 2.6 tcf in 2000 from 1.5 tcf in 1990. U.S. gas prices will rise but not to a level justifying significant LNG imports or development of arctic supplies. Given the current reserve base in the U.S., exploration and development of new gas reserves will be required.

POLICY IMPLICATIONS

Conoco contends the prospect of increasing demand for oil and gas has important policy implications for U.S. goals of sustaining economic growth while achieving environmental benefits.

"It is unlikely the U.S. will be able to reduce its dependence on imported energy supplies, let alone eliminate it," the company said. "Therefore, it is imperative to manage that dependence."

As solutions, Conoco recommends encouraging conservation and fuel diversification with an emphasis on the transportation sector.

"Since price is the best incentive for conservation, one step that would lead to lower oil dependence and improved air quality is raising gasoline taxes.

"A 500/gal increase would reduce demand and encourage purchase of more efficient automobiles."

In addition to increased reliance on natural gas and encouragement of alternative motor fuels, policymakers should make sure refiner/marketers have the flexibility they need to achieve Clean Air Act goals while responding to consumer pressures for cleaner burning, cost effective fuels, Conoco said.

Further, to encourage diversification of crude oil sources outside the Middle East in the near term, Washington should provide greater flexibility to U.S. energy- companies in crediting foreign taxes against their U.S. tax liability, Conoco said.

To encourage investment in the international arena during the long term, the U.S. government should launch an effort to expand tax and other incentive options, the company said.

Finally, Conoco points to opening promising federal lands such as the ANWR Coastal Plain and Offshore California as contributing substantially to U.S. efforts to manage its growing import dependence.