Top executives of oil and gas companies face a new challenge. Compared with managing for survival, their principal responsibility for the decade just past, the new task should be pleasant. But it will not be easy or free of risk.
The challenge is managing prosperity.
Prices of crude oil and natural gas have been higher this year than anyone expected. Profits are rising.
Signs of capacity strain have appeared. Refinery utilization rates are very high in the U.S. and other key markets. Inventories of heating oil are alarmingly low for this point in the heating season. Supplies of drilling equipment and trained crews have fallen behind demand in the Gulf of Mexico and other busy areas. Analysts projecting current trends into the future see deficiencies in supply of many key operating inputs and of oil in general.
This process need not be disruptive. Markets adjust, often in surprising ways. Recent trends imply further price strength. If the future follows precedent, capacities in short supply now will develop faster than anyone now thinks possible. Growing profitability will attract the needed capital.
Contrast to surplus
What a contrast to the recent past, when nearly everything, including oil and the capacity to produce it, was in surplus and price projections were mostly horizontal.
The industry has responded slowly to the reversal. In part, this reflects caution befitting a business scarred by the wild and unwarranted optimism of the late 1970s and early 1980s. It also results from chronic underestimation of oil demand. In comparisons of final, adjusted figures with original estimates, initial assessments of worldwide oil demand turn out to run about 700,000 b/d low. This didn't matter when production and refining capacities exceeded actual demand levels. But it enabled the end of surplus to arrive without much warning.
So cold weather looms in the Northern Hemisphere. The industry faces a seasonal leap in consumption of heating fuels from a preseason demand base that is higher than most observers thought it to be. And in the U.S., an administration suspicious of the oil business just coasted back into office and will be watching product supplies and prices very closely.
The oil industry has work to do. To meet winter demand, refineries must work at maximum levels of capacity utilization, even though margins often do not reward the effort. To meet forecast demand, the industry, upstream and downstream, must expand. It must increase capacities to produce and refine crude oil. It must enlarge the drilling fleet. And, of course, it must continue to pursue the highest environmental and safety standards.
Expansion has begun. Ending a long period of dormancy for speculative offshore rig construction, Rowan Cos. recently announced plans for three new Gorilla class jack-ups for which contracts are not yet in hand. An alliance of Conoco Inc. and Reading & Bates Co. plans to build a drillship able to work in ultradeep waters of the Gulf of Mexico. And Texaco Inc. is restructuring, not in order to cut staff but to accommodate growth.
More steps like these need to be taken, swiftly but carefully. The oil demand growth that necessitates expansion won't meet projections if prices rise much. And producers and their investors should expect the unit-cost declines central to recent profitability to become elusive; contractor fees climb in an expanding market.
Management challenges
Matching investment to market growth and adapting profitably to changing cost structures, of course, are standard challenges of management. Oil company leaders who discovered ways to make money producing $15/bbl crude will find solutions to these problems.
A more important question is how quickly companies abandon management by perpetual cutback. A shrinking market compelled organizations to slash and burn. The current market demands a different way of thinking.
Copyright 1996 Oil & Gas Journal. All Rights Reserved.
