Asian woes, Kyoto, OPEC top 1997 oil trends

For the first time in a decade, all major world regions experienced growth in demand for oil-a 1.86 million b/d increase worldwide-while demand patterns seesawed unpredictably from region to region in 1997.

Especially surprising was the Asian economic crisis, with its depressant effect on energy demand in that region.

That's the main conclusion of the latest annual survey of world oil trends by Cambridge Energy Research Associates (CERA) and Arthur Andersen, unveiled in Houston last month.

Joseph Stanislaw, CERA managing director, said, "The Asia/ Pacific demand growth that seem- ed invincible until mid-1997 lulled, but demand remained strong in other, previously little-noticed regions. The result is a market with no one focal center but with opportunities spread throughout Af- rica, Latin America, eastern Europe, and the Middle East, as well as North America, western Europe, and the Asia/Pacific region."

A decline in oil prices, coupled with increases in the cost of finding and developing new oil and gas reserves, means the oil and gas industry must devise methods for carefully selecting opportunities and then deciding what are the most risk-averse ways to pursue them.

Victor Burk, Arthur Andersen's managing director for energy industry services, said that companies that have developed the "right strategies, processes, people, technology, alliances, and capital" will succeed in a changing and complex world oil environment. He warned companies lacking these skill sets will "find themselves at a competitive disadvantage."

Oil companies have recognized for some time the importance of becoming "streamlined" organizations. To remain competitive, leaner companies will depend more on human resource management, project management, and knowledge management in the coming years, he added.

Trends

Although the oil industry is well-positioned for change, 1997 was a year of surprises, as documented by the CERA/Arthur Andersen energy industry survey.

As oil demand in the Asia-Pacific countries grew 5.6%/year during the past 5 years, the industry's focus on this growth left it without a clear view of the potential for an economic downturn. A key uncertainty for oil markets in 1998 will be the degree to which the lull in the affected economies of Asia has a ripple effect on the rest of the world's economies.

Continuing technological progress has enabled non-OPEC crude production to record volume gains at substantially lower costs, CERA/Andersen noted. As oil production growth continues across the globe, the number of potential obstacles in the way of a smooth production profile increases. Key concerns are technical challenges, weather sensitivity, environmental opposition, and terrorism.

Since the mid-1980s oil price collapse, the industry has minimized costs and maximized productivity, leading to significant layoffs and to fundamental changes in the way oil companies do business. This created a need for relegating tasks, from economic analysis to drilling, to vendors outside operating companies and spawned a host of joint ventures and strategic alliances. These companies now require further refinement of key managerial skills: human resources, project management, and knowledge management.

OPEC and geopolitics

Although OPEC's demise has been predicted regularly since the oil price collapse of 1986, it survives with 11 members supplying 42% of the world's oil and controlling 78% of the world's oil reserves in 1997.

But the organization no longer functions as an oil price-setting cartel, according to CERA/Andersen. Rather, the new OPEC role is that of a lobbying group, protecting the interests of its members in international forums such as the Kyoto climate change protocol and opposing unduly high taxation of oil products. Also, OPEC's biannual ministerial meetings continue to grab the market's attention as a signal of short-term price direction.

Oil and politics are inseparable, the consultants note. The use of oil as a political weapon has shifted from the hands of Middle East producers, as in early 1970s boycotts, to employment by the U.S. in unilateral sanctions against producers accused of sponsoring terrorism.

The two consultants suggested that the Kyoto protocol has signaled that the world's energy foundation-heavily based on fossil fuels-may be on the verge of a period of evolution. The protocol calls for legally binding targets to bring emissions of greenhouse gases down by 5.2% of 1990 levels by 2012. How industries and governments will respond to the new requirements will take a number of turns over the next several years.

1997 highlights

According to the CERA/Andersen survey of world oil trends last year, world oil consumption increased by 2.6% in 1997 to 73.68 million b/d.

Demand growth was most vigorous in the Asia-Pacific region, rising 4.5%, or 850,000 b/d, and in Latin America, increasing by 4.1%, or 180,000 b/d.

Oil demand in the U.S. increased 1.2%, or 220,000 b/d, from 1996. For the first time in 10 years, demand increased in the former Soviet Union, where a 160,000 b/d rise reversed a long trend of falling oil consumption.

However, demand growth in the Asia/Pacific region recently has slowed as a result of the currency and related economic crises in several Asian countries.

Total world crude oil production increased 3.6% to 65.35 million b/d in 1997, a 2.24 million b/d increase from 1996. OPEC crude oil production reached 27.45 million b/d in 1997, a 1.62 million b/d increase from 1996, and the group's highest overall total since 1979. Production increases in Iraq of 620,000 b/d and in Saudi Arabia and Venezuela of 340,000 b/d and 260,000 b/d, respectively, contributed to the increases. Non-OPEC crude production averaged 37.89 million b/d in 1997, a gain of only 610,000 b/d from 1996.

The combination of: rebuilt oil inventories in the Organization for Economic Cooperation and Development; changes in weather patterns in Asia, Europe, and North America; slowing growth in the Asia-Pacific region; and resumption of Iraqi exports brought a decrease in world oil prices in 1997 from the highs reached in 1996.

For the year, the average price of West Texas intermediate fell to $20.67/bbl, down $1.86 in real terms from 1996. Brent also declined $1.86 to $19.18/bbl while Arabian light fell $1.43 to $18.80/bbl.