TECHNOLOGY, ECONOMICS FAVOR OPERATIONS IN MATURE PRODUCING PROVINCES

Technology is raising the investment allure of mature oil and gas producing regions in relation to frontiers. Falling exploration and development costs have improved the comparative economics of established, high cost areas such as North America and the North Sea, says Ted Eck, chief economist of Amoco Corp. During an economic panel discussion at the American Petroleum Institute's annual meeting, Eck noted that oil prices of $25/bbl or less don't provide sufficient incentive for

Nov. 15, 1993

5 min read

Technology is raising the investment allure of mature oil and gas producing regions in relation to frontiers.

Falling exploration and development costs have improved the comparative economics of established, high cost areas such as North America and the North Sea, says Ted Eck, chief economist of Amoco Corp.

During an economic panel discussion at the American Petroleum Institute's annual meeting, Eck noted that oil prices of $25/bbl or less don't provide sufficient incentive for exploration and production in areas that lack infrastructure.

The combination of moderate oil prices and new technology "tends to favor established areas and not frontier areas where you need considerably higher prices to afford all the infrastructure spending that would take place," he said.

Although their outlooks for oil prices were modest, Eck and the other panelists delivered generally upbeat messages about near term prospects for the oil and gas industry and the continuing need for companies to reduce costs.

GROWTH SEEN

Eck, who is optimistic about worldwide economies next year, expects strong oil demand growth in 1994 and 1995.

The rebound from this year's market weakness will raise the call on crude from the Organization of Petroleum Exporting Countries to 26 million b/d next year and 28 million b/d in 1995. Current OPEC production is about 24.5 million b/d.

Economic performance, and therefore demand for energy and oil, in the former Soviet Union will remain an important variable in the world oil supply/demand balance.

Demand for OPEC crude will approach OPEC's total productive capacity, especially if Iraqi exports remain embargoed by the United Nations.

"This looks like pretty tight world supply and demand conditions 2 years from now," Eck said.

He nevertheless expects no significant increase in crude oil prices.

"U.S. producers are going to have to win their markets on a cost basis," Eck said. But he said the price forecast of another panelist, Philip K. Verleger Jr., may be too low.

Verleger, visiting fellow of the Institute for International Economics in Washington, D.C., said competition will keep oil prices in a range of $15-18/bbl, with real growth of only 1-2% through 2010.

Helping to moderate oil prices are loss of market power by OPEC, increasing ability of consumers to switch fuels and suppliers, and growing use by consumers and producers of hedging techniques.

Another source of price moderation is "a proliferation of designer products" required by environmental regulations at a time when storage capacity is static.

"Industry has a terrible containment problem for the various products," Verleger said. Product that can't be stored must be sold, which means depressed product prices, refining margins, and crude values.

Expectations of long term price moderation have put a damper on energy politics in the U.S.

"The energy security issue is dead," Verleger declared, adding that the U.S. should sell the Strategic Petroleum Reserve.

"Since nobody's going to believe in that free market advice, the least we should do is stop selling oil into it."

BRIGHT OUTLOOKS

Two other panelists provided bright outlooks for gas markets and the investment climate.

Kurt H. Wulff, president of McDep Associates Inc., New York, said market values imply price increases for natural gas of 6-11%/year.

The upper part of the range comes from values reflected in the stock market. Wulff derived the lower part of the range from gas and producing-property transactions by producers and traders.

The analyst cited possible development of a futures market for electricity as one reason the electric utility market is "especially interesting" as a growth market for natural gas.

Trading in futures contracts for oil and natural gas has made it easier for consumers to spot high cost suppliers and seek alternatives, Wulff said. Similarly, a futures market for electricity would help gas-fueled power generators, which combined-cycle technologies make increasingly efficient, compete against higher cost power from coal-fired or nuclear plants.

Suzanne L. Cook, a director of Wasserstein Perella & Co., Dallas, said investors' attitudes toward oil and gas companies have improved greatly since the 1970s and 1980s.

The improvement may result from a general acceptance and even expectation of intermittent OPEC crises.

"Investors are content to take a trading approach and hold the oil stocks during the lulls in order to sell into the next crisis," Cook said.

"Those oil company managements that can grow volumes economically are in the happy circumstance to expect gradual improvement in the underlying business-in contrast to the wild upward and downward swings of the 1970s and '80s-and, for the moment at least, can play out their business strategies amid a general climate of investor support."

Key concerns for the industry she said, are increased spending required to remain in business downstream, growing government involvement in industry affairs, rising costs of conducting business in the U.S., and tax hikes.

"Each of these is redirecting capital away from exploration, not to mention renewing interest in reincorporating outside the U.S."

Rising tax rates-coming at a time of operating cost declines noted by Cook, Eck, and others-are becoming a competitive issue for U.S. oil and oil service companies, Cook said.

"I would not have predicted the level of inquiry on reincorporating overseas."