SHELL'S HOLMES: CRUDE PRICES TO STAY LEVEL ANOTHER 5 YEARS

Royal Dutch/Shell Group expects a relatively flat trend in crude oil prices the next 5 years.

That's the view of Peter Holmes, chairman of Shell Transport & Trading Co. and a group managing director.

Holmes said the scenarios Shell used to form a framework for planning produced a range of possible oil trends for oil prices the next 5 years, "but all are relatively level."

"It is too much to expect oil prices always to be at a level compatible with the contrasting needs of industrialized, industrializing, and Organization of Petroleum Exporting countries.

"Similarly, it is too much to expect absolute price stability.

"But there is a broad band of $15-20/bbl in 1990 money, within which some volatility in the international price of oil need not cause undue anguish. It can also keep the world economy on course for expansion and meet the interests of most of those concerned."

Holmes reviewed Shell's outlook for world energy supply, demand, and prices, Holmes for the British Institute of Energy Economics and the Royal Institute of International Affairs.

ANOTHER SCHOOL OF THOUGHT

He acknowledged another school of thought that oil prices would rise significantly the next 5 years and there could be another oil price shock.

"This school of thought seems to be based on a combination of increasing world demand and a failure of the main producers to expand their capacity sufficiently," he said.

Shell concedes that while this outcome is possible, it considers as more likely a sustained push by the main producers to increase capacity during the 1990s.

"What we have seen in 1990-91 is an unexpectedly swift response to an increased demand on a few producers. Their performance underlines the upward flexibility of their capacity."

OPEC had been expected to make up any gap between demand and non-OPEC supply during the 1980s.

PERSIAN GULF THE KEY

Holmes said that it would be logical for the world to look to the Persian Gulf to fill a similar gap during the next 5 years.

In mid-1990, OPEC had 4-5 million b/d of spare capacity.

By 1995, OPEC could have as much as 6-7 million b/d of extra crude production capacity-the first significant increase since the late 1970s, Holmes contends.

OTHER REGIONS

Looking at other areas of the world, Holmes noted the fall in Soviet production from the 12.7 million b/d peak of 1988 had been matched by a drop in Soviet domestic demand and exports to eastern Europe.

However, this demand could recover to the 1988 level by 1995, making a return to the former level of exports to the west seem remote.

U.S. production is expected to fall by 250,000 b/d/year the next 5 years, while prospects for the U.K. North Sea now appear more promising, he said.

After a plateau of 2 million b/d in the early 1990s, U.K. North Sea production is expected to rise to 2.3-2.4 million b/d, according to Holmes.

NON-OPEC LIMITATIONS

Crude prices and government licensing policies are not as significant a short term factor in non-OPEC production as is disruption caused by severe weather or accidents, he contends.

Holmes also pointed to the technical limitations of developing new reserves as a significant factor, noting most of the advances in oil technology in the past 20 years have come through efforts to develop those new reserves in frontier areas.

But, he added, at present prices some conventional onshore fields, especially in frontier areas, were barely economic. Further, there have been sizable discoveries in arctic areas, but without higher oil and gas prices, returns from production would take a long time to repay investment.

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