Political and economic events will play unusually strong roles in shaping worldwide oil and gas activity levels this year.
Developments in the former U.S.S.R. will be critical. As the now-independent republics adopt new economic systems, production and demand patterns will change, as will exports trom what has been the world's leading oil producer.
Changing conditions in the Middle East and among members of the Organization of Petroleum Exporting Countries also will affect the industry in the N,ear following the brief Persian Gulf war.
Oil output from Kuwait will increase throughout the year as the country recovers from devastation left behind by retreating Iraqi troops. Several OPEC countries are expanding their production capacities. And a political shift at some point will restore output trom Iraq.
Unless worldwide demand surges unexpectedly, these substantial additions to supply will tend to weaken oil prices in 1992.
WORLD DEMAND
The International Energy Agency (IEA) projects total world demand through second quarter 1992 will average 66.6 million b/d, up marginally from the same period last year. Lower demand in the former U.S.S.R. will almost totally offset demand growth in the rest of the world.
Demand in the former Soviet republics is estimated at 8 million b/d for the first half this year, down from 8.55 million b/d in the same period a year earlier. IEA estimates first-half 1992 demand for the rest of the world at 58.6 million b/d vs. 57.75 million b/d in the first half last year.
Demand of members of the Organization for Economic Cooperation and Development (OECD) will average 37.9 million b/d during the first half of 1992, compared with 37.75 million b/d during first half 1991.
North American demand is projected at 18.7 million b/d in the first half vs. 18.2 million b/d in the same period last year. Demand will slip for other OECD countries to 19.2 million b/d from 19.5 million b/d.
First-half demand in OECD Europe will decline to 13.1 million b/d from 13.3 million b/d last year and in OECD Pacific countries to 6.1 million b/d from 6.2 million b/d. IEA attributes the declines to lower levels of stocking, slower economic growth, and closer to normal weather.
Demand in developing countries, including China, is projected to average 20.7 million b/d in first half 1992, compared with 20 million b/d in first half 1991. Demand in the Asian developing countries, excluding China, is projected to be up 400,000 b/d to 6 million b/d in the first half.
Total worldwide demand for petroleum has risen very slowly the last few years. Declining demand in the former U.S.S.R. has been offsetting increases elsewhere.
Worldwide demand moved up from 66 million b/d in 1989 to 66.1 million b/d in 1990 and 66.2 million b/d in 1991. At the same time consumption in the U.S.S.R. fell from 8.8 million b/d in 1989 to 8.4 million b/d in 1990 and 8.2 million b/d in 1991. Demand in the Soviet republics is expected to fall another 400,000 b/d to 7.8 million b/d in 1992.
Recent demand among the OECD countries has been stagnant, inching up from an average of 37.8 million b/d in 1989 to 37.9 million b/d in 1990 and 1991. Increases in Europe and Pacific countries have been offset by declines in North America, where demand averaged 19.3 million b/d in 1989, 18.9 million b/d in 1990, and 18.6 million b/d in 1991.
Slowing economic growth has suppressed petroleum demand. Gross domestic product (GDP) growth for the OECD slipped from 3.3% in 1989 to 2.6% in 1990 and 1.1% in 1991. IEA expects first half 1992 GDP in the OECD to increase by a little more than 2% from the period a year earlier.
Last year worldwide demand in the fourth quarter surged to an average of 67.2 million b/d from 65.9 million b/d in 1990. Most of the increase came in the OECD countries, where the fourth quarter average of 39 million b/d was up 1.2 million b/d from fourth quarter of 1990, when demand was depressed by mild winter weather, prices elevated by Persian Gulf tensions, and slowing economic activity.
WORLDWIDE SUPPLY
OPEC members produced at close to capacity rates throughout 1991, with output unavailable from Kuwait and Iraq.
According to IEA, OPEC production averaged 23.1 million b/d in the first quarter of 1991, dropped to 22.7 million b/d in the second quarter, then moved up to 23.5 million b/d in the third quarter. OPEC flow is expected to have averaged close to 24 million b/d in the fourth quarter.
In response to the loss of Kuwaiti and Iraqi oil, Saudi Arabia boosted production to 8.2 million b/d in the first quarter of 1991 from 6.1 million in third quarter 1990. Emergency increases by other OPEC members weren't as great but in total helped replace the 4.5 million b/d lost to the conflict.
The United Arab Emirates increased output almost 500,000 b/d to 2.5 million b/d in 1991's first quarter. U.A.E. output slipped to 2.3 million b/d in the third quarter of 1991 but was back up to 2.5 million b/d in November 1991. Venezuela increased production 300,000 b/d to as much as 2.4 million b/d, sustaining output of 2.3 million b/d through the year.
World oil stocks were drawn down at a rate of about 500,000 b/d during the first quarter of 1991. There were net stock additions of 900,000 b/d in the second quarter and 1.2 million b/d in the third quarter.
SUPPLY OUTLOOK
IEA projects declines in non-OPEC total liquids supply, including processing gain, to 41.2 million b/d in the first quarter this year and 40.7 million b/d in the second quarter from 42 million b/d in first quarter 1991 and 41.2 million b/d in the second quarter. For the first half this year, non-OPEC output will average 40.95 million b/d, compared with 41.6 million b/d in the same period of 1991.
The main reason for the decline is an expected drop in first-half production from the former U.S.S.R. to an average of 9.8 million b/d from 10.75 million b/d last year.
Non-OPEC production excluding the U.S.S.R. will climb to an average of 29.85 million b/d from 29.55 million b/d the year before.
With an increase in worldwide demand and falling non-OPEC output in 1992 there will be a greater demand for OPEC oil. According to the IEA, total OPEC production in November of 1991 reached the highest level since March 1990 at 24.1 million b/d.
As a result, total world production moved up to 67.3 million b/d, highest since February 1991, despite the 800,000 b/d decline in Soviet output.
If OPEC had sustained that level of output during the remainder of fourth quarter 1991 there would have been no need for a net reduction in stock levels to meet rising winter demand. In fact, with OPEC production above 24 million b/d, there was probably a net addition to world stocks in the fourth quarter last year.
However, during the first quarter this year stocks will have to provide about 800,000 b/d of supply to meet anticipated demand. IEA has projected first quarter world demand at 68.1 million b/d and non-OPEC supply at 41.2 million b/d. This leaves 26.9 million b/d to be met by OPEC and stocks.
OPEC's total liquids production capacity is about 26.1 million b/d, with crude output at 24.1 million b/d and NGL output 2 million b/d.
Downward pressure on prices from the excess supply may develop during the second quarter. IEA projects worldwide demand at 65.1 million b/d and non-OPEC supply of 40.7 million b/d. This leaves 24.4 million b/d to be met by OPEC and/or stocks. If OPEC continues to produce at or near its total liquids capacity of at least 26.1 million b/d there will be too much oil in the market.
Thus there could be a 1.7 million b/d surplus by the second quarter even without increases in output from Kuwait or Iraq. In order to prevent prices from falling OPEC will have to reach and enforce some new production quota agreement. Any additional supplies from Kuwait and Iraq will simply aggravate the surplus.
PRICES
Crude oil prices had started to slide at the start of 1991 but were still considerably higher than they were a year earlier. The average price of world export crude oil was $24.24/bbl the first week of 1991 vs. $19.93/bbl the first week of 1990.
Prices had been much higher a couple of months earlier because of concern about worldwide supply when the Persian Gulf conflict started. The average price of world export crude oil reached $36.11/bbl the last week of September 1990, before the output increases from Saudi Arabia and other OPEC members helped calm the market.
The average export crude price slipped to $15.34/bbl the first week of March 1991 before rebounding to a 1991 high of $20.14/bbl the last week of October, It dropped to $16.79/bbl the second week of December 1991.
Crude prices in 1992 depend on a number of variables affecting supply and demand, including economies in the U.S., Europe, and the U.S.S.R., and timing and speed of production recoveries in Kuwait and Iraq.
A major unknown affecting 1992 supply is the level of production in the former U.S.S.R. Economic chaos could sharply reduce already flagging production, although there already has been an upheaval and production hasn't collapsed.
A production decline of about 700,000 b/d seems likely for 1992. OPEC capacity will increase more than enough to offset the supply loss. Due to the expectedly modest level of economic growth in the U.S. and Western Europe the increase in worldwide demand will be only 200,000-300,000 b/d.
The result would be additional demand for OPEC oil of about 1 million b/d. With the additional capacity being developed by its members and the resumption of production from Kuwait and Iraq, OPEC should have no trouble filling the increment. In fact, a capacity surplus is likely to develop soon, which will suppress prices.
INTERNATIONAL DRILLING
One of the few bright spots for the oil industry in 1992 could be an increase in international exploration and drilling activity.
Numerous upstream opportunities have opened up for private companies in countries where they once were not welcome. Many countries with production potential need investment capital or technical assistance and thus have offered prospects to international operators or improved participation terms.
The Baker Hughes Inc. international count of active rotary rigs averaged 907 for the first 11 months of 1991. This includes active rigs outside the U.S. and Canada. The average for 1990 was 906.7 active rigs.
The trend was up at yearend. The international rig count had moved up to 945 active rigs in November 1991. This was the highest count since June 1990 and the second highest since March of 1989.
Expectations are that the major U.S. international oil companies will invest a larger portion of their exploration and production budgets outside the U.S. in 1992. The international rig count could move up close to 1,000 active rigs this year as companies worldwide take advantage of international exploration opportunities.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
