U.S. industry skeptical about an increase in crude oil price

Oil industry representatives are treating a recent rise in the price of crude oil with caution. At the ninth Oilfield Breakfast Forum in Houston on Mar. 12, talk was more of fundamental change in the industry than of a quick return to the prosperity of 1996-97. The day before the forum, the New York Mercantile Exchange futures price for light, sweet crude closed at $14.31/ bbl, nearly $2/bbl more than its low of mid-February.

March 22, 1999

4 min read

Bob Tippee
Editor

The day before the forum, the New York Mercantile Exchange futures price for light, sweet crude closed at $14.31/ bbl, nearly $2/bbl more than its low of mid-February.

Allen Brooks, CIBC Oppenheimer & Co. Inc. executive director of oilfield service industry research, warned of conflicting expectations for production cuts by members of the Organization of Petroleum Exporting Countries.

In the weeks before OPEC's meeting in Vienna Mar. 23, ministers and traders have discussed "substantial cuts" in output quotas, Brooks noted (see story, p. 34).

"We may get something that the OPEC ministers think are substantial but that Wall Street and oil traders think are less than substantial," he said.

Caution warranted

A price slump more than a year long has operators playing defense.

"The major issue for independents today is survival," noted George Yates, president and CEO of Harvey E. Yates Co. and chairman of the Independent Petroleum Association of America.

He said the U.S. upstream industry has contracted by 15% in the past 12 months. And he contrasted the 50,000 upstream oil and gas workers estimated to have lost jobs in this slump with about 10,000 job losses by the steel industry, which has received help from the federal government.

"We don't want anybody to cry over us," Yates said. "But a little attention would be welcome. We are losing our infrastructure."

Walter van de Vijver, president and CEO of Shell Exploration & Production, offered a warning: "Don't get any false complacency from the last couple of days of oil prices."

He said Shell has based a "robust" business plan on the assumption that the price of crude averages $14/bbl, with "defensive options" for $10/bbl oil.

In a review of deepwater operations, Robert Rose, president and CEO of Global Marine Inc., Houston, said oil company expenditures increase when oil trades within a range of $17-21/bbl.

"Most deepwater projects are viable around $15/bbl oil," he added.

What's ahead

Most of the speakers saw the oil industry at a turning point-although they didn't agree on what that means.

Brooks of Oppenheimer declared, "The heady days of 1997 for this (oil service) industry are over," and said he expects "volatility, dislocation, and a roller-coaster of emotions."

When growth resumes, it will be slower than before.

"We are in a transition to a new market era," Brooks said. A growing share of oil supply will come from low-cost production at the expense of high-cost production, which he said recently has occupied "a privileged place in the oil market."

Van de Vijver also expects basic change in business conditions.

"A harsher environment is here to stay," he said, necessitating "cost leadership in all areas. We must do more with less."

Yates also foresees change but thinks depletion will drive up prices of oil and natural gas.

A general collapse in prices of all commodities signals a "classic deflation," he said. But oil values have fallen more than the 25% that commodity prices overall have declined.

"How long can we maintain supply with low prices?" the IPAA chairman asked. "If we quit drilling wells, we will go into (production) decline, and there will be a reckoning when demand exceeds supply."

He added: "Trends are very bad today for oil supply."

For independent producers, however, natural gas presents hope. Because of infrastructure damage, Yates said, supply won't meet demand at projected levels, so prices will have to rise.