COMMENT OIL PRICE, GOVERNMENT POLICIES FUEL INDUSTRY'S SHIFT FROM U.S.

C.J. (Pete) Silas
Chairman and Chief Executive Officer
Phillips Petroleum Co.
Bartlesville, Okla.

From an address to the International Association of Geophysical Contractors annual meeting, May 15, Houston.

The world exploration outlook starts with the outlook for the price of oil.

If we've learned anything in the past decade it's that we're not very good at predicting oil prices.

We can build economic models of supply and demand but we can't build models for political events in the Middle East or the actions of someone like Saddam Hussein.

As we look to 2000 our best estimate is that oil will remain at about $20 for the near term and move upward very gradually during the rest of the decade.

Of course, rising demand eventually should cause oil prices to break out and show some strength. But not soon.

We don't see oil prices overcoming inflation until the latter part of the decade. And we aren't expecting oil prices much above $25 in inflation adjusted terms until the next century.

GLOBALIZATION TREND

Against that background one of the most significant trends in exploration and production in the next decade will be globalization.

Surveys show that this year major oil companies and independents will expand their exploration and production budgets overseas by about 20%. That contrasts with what's happening in the U.S.

This year major oil companies on average plan only a 5% increase in U.S. spending, and some majors are cutting back. Independents, which do most of the exploration, will increase U.S. spending only abut 6%.

What's driving the shift overseas and away from the U.S.?

The trend began 4 or 5 years ago as low oil prices of the 1980s encouraged consumption and as developing countries demanded more oil to grow their economies.

Major oil companies also are attracted overseas because of better odds of finding large reserves. Finding major reserves in one place means lower operating costs per barrel once production begins.

At the same time, governments of other countries seem to be more willing to allow private companies to help them develop their resources. Generally their environmental requirements are tough but reasonable.

Ironically, here at home the situation is almost reversed.

Even though the easy oil has been found there are still good prospects in the U.S. even at $20 a barrel. The problem is we don't have the same encouragement to explore.

Instead of dealing with one government agency we deal with many. And we often face complicated and even conflicting restrictions on our exploration and development plans.

Meanwhile, America becomes more and more dependent on imported oil to the detriment of our trade balance and our national security.

Let me give you an example.

EKOFISK, POINT ARGUELLO

In my career I've been directly involved in two of Phillips' largest exploration and production projects.

One was Ekofisk field in the Norwegian North Sea the first major oil discovery in western Europe. The other was Point Arguello field off California.

When Phillips discovered Ekofisk in 1969 Norway had no oil industry. We were starting from scratch.

Working with the Norwegians we installed 25 platforms, two major pipelines, and two large onshore facilities and during the next 10 years we produced about 1 billion bbl of oil.

In 1980 we shared in discovery of Point Arguello, the largest U.S. field since Prudhoe Bay. In contrast to Norway, California had a well established oil infrastructure. And we've done everything possible to work with local officials. But after 11 years we haven't produced a barrel of oil.

Point Arguello could be producing 100,000 b/d. But environmental concerns keep escalating, and the rules keep changing even though we and our partners have invested about $2 billion to get the project under way.

So the oil remains locked underground while America imports more oil.

Point Arguello eventually will come on stream. But nowhere else in the world--not even in the most hostile, remote location--has a completed production facility been so delayed.

That's why I tell people the toughest country in the world to operate in is California. Unfortunately, some other states aren't far behind.

U.S. EXPLORATION SLUMP

As you know, exploration activity in the U.S. is poor.

The seismic crew count is at its lowest point in recent memory. A big reason is that some of the best exploration options are off limits.

In recent years more restrictions have been placed on the Outer Continental Shelf. Much of the Pacific Shelf has been entirely withdrawn from exploration until 2001.

Onshore, the situation is similar. The federal government owns about one third of the land in the U.S. These lands should hold billions of barrels of oil. But more than 40% of it is off limits to exploration.

And right now, this off-limits territory includes the area that holds the greatest potential for a major oil discovery: the Coastal Plain of Alaska's Arctic National Wildlife Refuge.

I don't need to tell you about the importance of the Coastal Plain. The Interior Department estimates it could provide 1 million b/d of oil for 20 years.

And if oil is discovered, only a small area would be disturbed--perhaps less than 0.1% of the total refuge area.

If the Coastal Plain is not developed where will new supplies of domestic oil come from?

The Interior Department says Alaska's giant Prudhoe Bay field, our biggest single source of oil, could be technically or economically unattractive to produce within the next 20 years. Considering America's need for energy, this is a serious situation.

The moratoriums on the Outer Continental Shelf, on ANWR, and many other prospective areas can lead to further deterioration of our energy base and more dependence on foreign sources.

WHAT'S REQUIRED

We're all faced with the question: How can we help move the nation toward a more secure energy future?

Here are three suggestions: keeping our record clean through self-regulation, continuing to develop better technology, and putting the concept of quality into all our relationships.

My first suggestion is based on the basic principle of public relations: Good performance must come before good communications. You have to have a good record before you can talk about it.

One way to make sure your performance backs up your words is through self-regulation. It means agreeing on sound operating principles, writing them down, and then calling on all your members for compliance.

Your organization is a leader in this approach.

You have set up a list of safety requirements for geophysical work. And you're working on guidelines for environmental protection in all terrains and climates around the world.

The oil industry has learned that even one incident by one isolated member can cause the public to tar us all with the same brush.

A second effort to help insure America's long term energy security is to continue to develop better technology.

Technology got the oil industry where it is today. It has always been the oil finder's best friend. It helps reduce risk in exploration.

But sometimes we don't recognize that it can also be a risk reduction tool for the environment. That's why we need to continue to explore alternatives to traditional use of dynamite, development of seismic vehicles that do less damage to the ground, and further advances in computers and 3-D seismology.

Developing and imposing your own regulations is better than waiting for regulations to be imposed on you.

Because there are people in Washington who say, "Legislation drives technology." Then they tell you the kind of technology you have to develop whether it's technically feasible or not.

We've seen that happen in our downstream operations with the Clean Air Act. Congress didn't care if the technology didn't exist. It just passed the law and said, "Find the technology to do it."

Unfortunately, that approach is not a good way for America to develop technology. It tends to get the nation in deeper trouble because it ends up driving smaller companies out of business.

Which brings me to a final suggestion. It involves our attitude about each other and the people who regulate us.

Ever since the 1970s the oil industry has put a strong emphasis on educating the public. We saw that unless we explained ourselves to regulators and the public we would find it impossible to do our job.

This emphasis on education has paid off, and it's still going strong.

I believe the entire industry is ready to move to the next step beyond education to a relationship based on the pursuit of quality.

Many of you are acquainted with the quality movement. It was the concept of American engineers. But was first adopted widely in Japan.

Boiled down to basics it means seeing every task as part of a customer-supplier relationship and continuously analyzing and improving performance to meet the customer's needs.

It also extends the definition of a customer. For example, within a company, employees should look on each other as customers and suppliers.

I think the concept of quality and customer-supplier relationships could be extended to trade groups and their relations with regulators.

The quality concept goes beyond education. It recognizes that the regulators you deal with are like your customers.

It requires that you get to know them and the pressures they live under. It requires that you continuously keep good contact with them to meet their needs for information.

Its message is: We're approachable. We're reasonable. We're aware of the pressures that are on you, and we're anxious to help.

We have found that a quality effort takes time to implement, but it's a sure way to achieve good working relations that are vitally needed.

ACTION ON ANWR

Here's a call to action on the issue that will shape our industry in the years ahead.

Congress is at a critical stage in the decision about the Coastal Plain of ANWR.

The Persian Gulf war drew America's attention to the problem of overdependence on Middle East oil. But the nation's attention span is short. Unless we get a decision this year we may not get another chance until another crisis hits America between the eyes.

Your organization is playing a key role. Your leaders and representatives in Washington have been working hard with the rest of our industry to persuade Congress to act.

Do your part by contacting your representatives about ANWR and urge them to allow the industry to find out what is there.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.