More U.S. independent producers are testing the waters of non U.S. operations while keeping an eye on opportunities and the nation's sliding oil production at home.
Those themes were prominent when producers gathered at mid month for the annual meeting of the Independent Petroleum Association of America.
Sessions in Reno, Nev., heard encouraging words about the industry's victory over the onerous alternative minimum tax (OGJ, Nov. 2, p. 30). IPAA Pres. Denise Bode reiterated the association's estimate that an end to the AMT will yield $1 billion in tax relief for producers in the next 5 years and add 6,800 wells in 1993 alone that otherwise could not have been drilled.
But independents agreed there is still much to be done to bolster the U.S. petroleum industry. And they hope to have the ear of President elect Bill Clinton particularly on matters involving natural gas as the prime, clean burning fuel after his inauguration in January.
Clinton backs maximum use of gas as part of his energy program (OGJ, Oct. 12, p. 21). That could give an added boost to gas consumption, predicted by IPAA's supply/demand committee to show a rise this year when all figures are in. Gas consumption will advance next year, too, the committee said.
U.S. exploration and development can still yield a great deal of oil and gas, an IPAA task force said in an interim report. Whether the yield can realized depends in part on government policies.
In the meantime, prospects and opportunities abound outside the U.S. Several independents recounted their success stories in operations abroad. A notable example lies in Colombia, where a Dallas independent and British and French partners have scored a world class oil discovery.
Granted, there are opportunities outside the U.S., independents said. But gaining unfettered access to tantalizing underexplored prospects and undeveloped reservoirs in other countries can sometimes test an operator's resolve. That's especially true in the Commonwealth of Independent States, where layers of well entrenched bureaucracy and lack of infrastructure slow contract talks and operations.
OPERATING ABROAD
Triton Energy Corp. Pres. Tom Finck underscored the importance of his company's outstanding success in Colombia: giant Cusiana oil field, owned in partnership with units of British Petroleum Co. plc and France's Total (OGJ, Oct. 26, p. 24; Nov. 2, p. 40).
Cusiana is the biggest payoff from Triton's exploration campaign that aims for large discoveries at low front end costs. Triton, only 10 years old, was formed specifically for non U.S. operations. Its practice is to hire bilingual expatriates.
A Triton brochure emphasizes its high risk, high reward philosophy. The first Cusiana exploratory wells, for example, cost more than $20 million each. By BP estimates, those outlays and ones that followed have yielded reserves of at least 1.5 billion bbl of crude oil and condensate and "additional large volumes" of gas. The field is undergoing delineation.
An earlier Triton success was Villeperdue, France's second largest oil field, discovered in partnership with Total.
In addition to Colombia and France, Triton lists acreage holdings in Canada, Argentina, New Zealand, Indonesia, and the Gulf of Thailand.
U.S. companies have not reported a Cusiana class discovery in the C.I.S., but only a few joint ventures with foreign partners are under way there (OGJ, Oct. 19, p. 25).
Vast untapped resources await exploration and development in prime target Russia, said Dan Rapoport, financial adviser to the White Nights joint venture operating in western Siberia. However, the trail from negotiations to production and exports is a rocky one despite a desire by C.I.S. republics to step up production and earn hard currency via oil exports.
For example, Rapoport said, logistics are a nightmare. Primitive roads and lack of pipeline capacity translate into shipments of equipment and oil by barge and railway. Thievery from rail cars is common.
Poor quality and lack of maintenance programs are rampant across the spectrum of critical drilling equipment items such as bits and mud pumps, although those can be upgraded with western components.
High taxes and fees can amount to more than the export price of oil.
The banking system of the former Soviet Union is insolvent. It's very hard to convert rubles to hard currency. Inflation has grown into hyperinflation.
Communications are difficult at best, largely because the telephone system is inadequate.
Even so, because of a few operations under way and a flurry of deals taking shape, Rapoport called Russia "the Klondike, the gold rush of the 1990s."
Off Palawan Island, Philippines, Alcorn International Inc., Houston, is producing about 16,500 b/d of oil from West Linapacan A, a 100 million bbl field (OGJ, Sept. 21, p. 36). West Linapacan A and other discoveries off Palawan Island lie on acreage in which major oil companies once held interests.
Financial backing for such operations is available from sources such as the U.S. government's Export Import Bank and Overseas Private Investment Corp., as well as private companies and government entities in host countries.
SUPPLY/DEMAND OVERVIEW
IPAA's supply/demand committee predicted a continuing slide in U.S. crude oil and condensate production in 1993, following a decline this year. By contrast, gas production will continue to rise in response to increasing demand and firmer prices.
The committee estimated U.S. crude and condensate production will fall 3.6% this year to an average 7.2 million b/d. The slide will continue in 1993 but at a slightly slower pace, with production falling another 2.5% to average about 7 million b/d. That will be the smallest volume production since 1958.
Dry gas production was estimated to be up 1.6% in 1992 at 18.223 tcf. Production will hit 18.658 tcf in 1993, up another 2.4%.
Increased gas consumption in 1993 as the U.S. economy continues to expand is the main reason for the projected production increase.
Here are other highlights from the supply/demand committee forecast for the U.S.:
- Petroleum demand will reverse its 2 year slide and increase 1.4% in 1992 and another 1.1 in 1993.
- Resumption in oil demand growth will lead to increased imports of 1% in 1992 and 5.1% in 1993. Total oil imports will reach 7.7 million b/d in 1992, or 46% of domestic demand vs. 45.6% in 1991. Total imports will rise to 8.1 million b/d in 1993, with import dependence climbing to 47%.
- Natural gas consumption will be up 3.7% in 1992 when all figures are in, assuming normal weather in the fourth quarter. Consumption at an expected 19.957 tcf will be the highest since 1979. On the strength of stepped up economic activity and assumed normal weather, gas consumption in 1993 will increase another 3.9% to 20.726 tcf.
- Natural gas imports, mostly from Canada, will reach a record high 2.023 tcf this year, or about 10% of total U.S. gas consumption. Imports in 1993 will rise another 8.3% to a record 2.19 tcf. This is mainly due to continued strong growth in consumption, which is moving up faster than domestic production. The increase in gas consumption in 1993 will be spread about evenly among major consuming sectors, with each growing 3 5%.
- Total energy demand will rise 2.1% in 1993, following a 1.4% increase in 1992. The main reasons for growth are a more rapid pace of economic recovery and a return to normal weather.
- The economy will grow at a rate of less than 3% until the spring of 1993. The growth rate will nudge past 3% for the rest of the year. Inflation as measured by the gross domestic product price inflator will average only 2.6% this year, rising to 3.1% in 1993.
PETROLEUM SUPPLY
U.S. crude oil and condensate production will average 7.151 million b/d this year, down 3.6% from 1991. The slide will continue in 1993 with production dropping to 6.974 million b/d.
The current downturn started in 1985 with only a temporary halt in 1991, when production rose 62,000 b/d. The modest increase in 1991 was due to industry response to the Persian Gulf crisis and completion of maintenance and enhanced oil recovery installations on Alaska's North Slope. North Slope oil flow was reined in 1990 by pipeline and pump station maintenance projects.
U.S. crude and condensate production will fall 177,000 b/d in 1993 following a drop of 266,000 b/d in 1992. Production has been falling since 1985 when it peaked at 8.971 million b/d. The decline rate for 1985 92 will average about 260,000 b/d/year.
A steady decline in the tally of active rotary rigs and number of wells drilled points to continued erosion of production and the reserve base, the committee pointed out.
There will be little change in NGL production in 1993. Production is forecast at 1.689 million b/d, compared with an estimated 1.69 million b/d in 1992. Production this year is expected to be up 1.9% from last year.
An increase in petroleum products demand coupled with the decline in U.S. crude oil and condensate production will boost oil import volumes in 1992 and 1993.
Crude and products imports will amount to a combined 7.702 million b/d this year, up 1% from 1991. Total imports will increase 5.1% in 1993 to 8.098 million b/d, the highest level since 1979.
Crude oil imports will increase 4.7% in 1993 to 6.218 million b/d. Crude oil imports for 1992 are estimated at 5.939 million b/d, up 2.7% from the year before.
Petroleum products imports next year will rise to 1.88 million b/d, an increase of 6.6%. Products imports this year are estimated at 1.763 million b/d, down 4.4% from 1991.
PRODUCTS DEMAND
U.S. petroleum products demand will average 17.133 million b/d in 1993, up 1.1% from 1992. Demand during 1992 will average 16.941 million b/d, up 1.4% from 1991.
This follows 2 years of falling demand. Demand in 1991 was down 1.6% at 16.714 million b/d, while demand in 1990 was down 1.9% at 16.988 million b/d.
Demand hit a recent high of 17.325 million b/d in 1989. The record high occurred in 1978 at 18.847 million b/d. In reaction to high prices, demand fell to 15.231 million b/d in 1983.
Motor gasoline demand will move up slightly in 1993, increasing 0.5% to 7.3 million b/d. Demand in 1992 is estimated at 7.263 million b/d, up 1% from 1991. This follows 3 years of decline as motor gasoline demand fell from 7.336 million b/d in 1988 to an estimated 7.188 million b/d in 1991.
The supply/demand committee said one of the main reasons for the reversal of this downward trend in motor gasoline consumption is a slowdown in the improvement of fleet fuel efficiency due to low automobile sales. Average auto fuel efficiency is expected to increase in 1992 and 1993. But any improvements in fleet fuel efficiency are expected to be more than offset by increased driving.
Demand for aviation fuels will resume its growth in 1993 following a 2 year decline. Consumption is projected at 1.473 million b/d in 1993, up 1.1%. Demand this year is estimated at 1.457 million b/d, down 1% from 1991. The airline industry forecasts an increase in revenue passenger miles and freight ton miles in 1993.
Distillate demand will show a 2.6% increase in 1993, rising to 3.057 million b/d after a 2% increase in 1992. Gains are expected in all end user sectors except residential and commercial. Distillate demand follows changes in the level of economic activity.
Residual fuel oil demand will fall 7.2% this year to 1.075 million b/d after declines of 5.8% in 1991 and 10.3% in 1990.
A modest rebound is in store for 1993 with resid demand increasing 2.2% to 1.099 million b/d. The expected gain will stem from an increase in economic activity and reduced competitiveness of natural gas in the energy market.
Demand for all other petroleum products is expected to move up only 0.9% in 1993 to 4.204 million b/d. This follows an increase of 4.8% in 1992. The growth next year is expected to come from higher demand for asphalt, petrochemicals, and liquefied petroleum gas.
NATURAL GAS SUPPLY
U.S. natural gas production will increase 2.4% to 18.658 tcf in 1993. Production is estimated at 18.223 tcf this year, up 1.6% from 1991.
Statistics show decreasing seasonality in gas production. Average flow during peak winter months has been relatively unchanged in recent years, while production during summer months increased 17% to 48 bcfd in 1992 from 41 bcfd in 1986.
In addition, there has been a major shift in regional production.
Natural gas flow has declined in key producing states such as Texas, Louisiana, Oklahoma, and Kansas.
But there have been sharp gains in New Mexico, Colorado, and Alabama, mainly due to coal seam gas development sparked by tax incentives. Major pipeline expansion projects in recent years also have allowed greater production outside the big Gulf Coast producing region.
Reserve data also reveal the same regional shift. With relatively higher reserve/production ratios, incremental supply likely will come from New Mexico and other states with lower production levels at present.
Gas imports, mostly from Canada, advanced sharply, increasing 15.7% in 1991 and an estimated 14.1% in 1992.
The current estimate of Canadian pipeline export capacity is about 2.4 tcf/year. Canadian export capacity will continue to grow as many pipeline expansions go on stream.
GAS CONSUMPTION, EXPORTS
Natural gas consumption continued to increase in 1992 despite a sluggish economy and warm weather in the first quarter. The industrial sector is expected to post the strongest gain this year due to continued growth of gas fired cogeneration in industrial applications.
Gas also is gaining market share in other consuming sectors with an increasing number of customers taking advantage of new pipeline capacity, especially in the Northeast.
Growth of residential and commercial customers has been strong. Since 1987 natural gas has captured a dominant share of the new housing market. Conversions from other fuels such as oil and electricity also have increased in recent years. Cogeneration in the commercial sector is small but rising.
Gas consumption by electric utilities was higher during the first half of 1992 due to increased supply and relatively low prices.
U.S. gas exports are estimated at 179 bcf this year, up from 131 bcf in 1991. Exports are expected to advance to 211 bcf in 1993, mostly because of shipments to Mexico.
The U.S. exported 61.7 bcf to Mexico in 1991 up sharply from the 15.7 bcf in 1990. New power plants, fuel switching projects, and growing industrialization will continue pushing up gas demand in Mexico's northern tier of states.
The U.S. Department of Energy estimates total export capacity at yearend 1991 was about 500 MMcfd. As a result of pipeline expansions, export capacity has grown to about 875 MMcfd at present.
The IPAA committee foresees continued growth of gas exports to Mexico during the next decade.
TUBULAR GOODS
IPAA's cost and finance committee reported U.S. mill shipments of oil country tubular goods (OCTG) fell 33.2% in first half 1992 vs. the same period last year. Shipments dropped to 418,000 tons for the first half from 626,000 tons in first half 1991.
The volume of mill shipments of OCTG has been very volatile in recent years. Shipments jumped 23% in 1988, fell 20% in 1989, moved up 34% in 1990, then fell 12% in 1991. Shipments in 1991 were 1.077 million tons, down 142,000 tons.
Exports of OCTG also fell sharply-23.5% in first half 1992. This was a drop of 38,000 tons to 124,000 tons, compared with 162,000 tons exported in first half 1991.
Imports of tubular goods were also down during the first half, plunging 81.4% from the level of a year ago. Imports totaled only 49,000 tons, compared with 283,000 tons in first half 1991.
The result is that total U.S. supply of OCTG for first half 1992 was down 52.8% at 343,000 tons.
The main reason for the supply drop was the decline in drilling. But the drop in OCTG supply was much greater than the drop in drilling.
The average number of active rotary rigs during the first half of this year was down 28.4% at 656. The number of wells drilled fell 27.2% to 11,508, and footage drilled was down 22.6% at 60.8 million ft.
The result was that new OCTG supply fell 39.1% to 5.6 tons/1,000 ft drilled. Much of the supply came from inventories.
IPAA's index of drilling and equipping wells shows payments to drilling contractors fell 16% in 1991 from the year before. Such payments in 1991 were down 30% from 1989.
Costs for total purchased items also were down in 1991. Using the list price schedule the index showed a decline of 1.9% in 1991 from 1990. But total purchased item costs were still up 3.2% from 1989.
However, using a judgment index based on estimated discounted prices, costs fell 9.6% in 1991. And purchased item costs were down 4.9% from 1989.
PETROLEUM RESOURCES
The interim report by an IPAA task force shows the U.S. has nearly as much oil and gas left to recover at today's prices as has been produced since the industry's founding in 1859.
Future contributions of the oil and gas industry to the country's economy are nearly as great as those in the past, said IPAA's potential resources task force in a report prepared for the association's exploration and production committee.
The task force was formed last May. Its goal is to examine and combat the myth that "there is nothing left to find and develop in America," Thomas E. Ewing told the committee. Ewing is an exploration consultant to Venus Oil Co., San Antonio, whose president and owner is Eugene L. Ames Jr., chairman of IPAA.
Ewing cited a Department of Energy study that found the U.S. has remaining resources of 99 142 billion bbl of oil that can be recovered at a $20/bbl price and 130 204 billion bbl at $27/bbl (OGJ, Oct. 26, p. 33).
The low volumes assume only current practice, the high numbers advanced but known technology.
With current U.S. oil production of 2.68 billion bbl/year, use of advanced technology will place the resource/production ratio at 53 76 years. This, combined with current trends, suggests that U.S. oil production can be held at nearly today's rates for possibly 20 25 years, declining slowly thereafter through the 21st century, Ewing said.
More than half of this oil 79 118 billion bbl with advanced technology will come from onshore Lower 48. About 60% of that will be enhanced recovery from existing fields. New discoveries are estimated to amount to 34 billion bbl at $20/bbl to 48 billion bbl at $27, with wide application of advanced concepts and technology.
Ewing said a draft report soon to be released by the National Petroleum Council shows the U.S. industry can recover, with use of advanced technology, 1.295 quadrillion cu ft of natural gas, all from the Lower 48. Of that, 203 tcf will be from increased recovery in existing fields, 413 tcf will be from new discoveries, and 519 tcf will be from unconventional sources: coalbeds, shales, and tight sands.
Current U.S. gas production of about 17.7 tcf/year indicates a resource/production ratio of 74 years. Detailed modeling shows the country can maintain current production through 2010 with only a modest increase in drilling at prices of less than $2.50/Mcf. Or production could increase to meet growing demand with an approximate doubling of drilling activity and prices below $3/Mcf.
"Abundant supplies also exist in Canada and in the Arctic," Ewing said. "These contribute to the assurance of adequate supplies in North America to support long term gas use."
Because most of the new resource will be added in small increments, independents are ideally placed to find and develop the remaining resource during the next century, Ewing said.
The task force surveyed IPAA members to find out what significant discoveries independents have made and what contributed to their success. More than 35 responses have been received so far.
Major contributors to exploration and development success have been improved seismic, drilling, and logging technologies and new concepts, particularly overcoming old prejudices or finding overlooked reservoirs.
OPPORTUNITIES, REQUIREMENTS
Despite the loss of several hundred thousand jobs in the last decade, the U.S. industry still has people who can find and develop the country's oil and gas resources, Ewing said.
"We can steady the fall of oil production and save many billions of dollars a year in oil imports. We can produce the clean burning gas America needs for the next half century and beyond."
But Ewing said that requires:
- Fair and assumable energy prices. Volatile prices disrupt industry activity, discouraging exploration and investment. Too low a price, although good for consumers in the short term, will depress discoveries and lead to too high prices and too short a supply a decade down the road.
- Conditions favorable to attracting capital. The impression has been made that overseas investments are far more economic than domestic ones. This is not the case. An Arthur Andersen survey of what public companies spent to find and develop reserves shows that the costs in the U.S. and overseas are very similar. The only difference is one of scale. There are bigger fields left overseas, but they cost more to find and develop. Major companies need very large reserves potential. Independents can best find and develop smaller but equally profitable increments left in the U.S.
- Downsized, optimized government regulation. Too much regulation and bans on access to prospective land stymies exploration and development. An intelligent balance needs to be found between environmental protection and orderly development of energy resources.
- Technology transfer. The more new concepts and technologies are used by everybody, the more oil and gas can be found at a reasonable price.
"The oil and gas industries, particularly independent explorers and producers, can create wealth for America, depress our oil imports, and give us more clean natural gas," Ewing said.
"They can provide as much economic stimulus as they have over the last century. But we all need to work together on the issues of pricing, capital, regulation, and technology to assure this part of our energy future."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
