IPAA: U.S. OIL PRODUCTION TO DECLINE AGAIN NEXT YEAR

The U.S. is headed for a steeper decline in crude oil production next year.

Production will average 7.1 million b/d, a slide of 3.7% from 1991. When all returns are in, the country's 1991 oil flow will average 7.3 million b/d, off only 0.2% from 1990.

Meantime, total U.S. imports will rise to 8 million b/d, amounting to 47% of supply. That will be an increase from 1991's average of 7.7 million b/d, or 46% of supply.

That's how the Independent Petroleum Association of America views the country's deteriorating domestic oil supply picture. Those figures and others were unveiled last week at IPAA's annual meeting in Denver, where attendance of 1,100 was about flat with last year's meeting.

Other figures included a report from the National Stripper Well Association (NSWA) underscoring the grim situation among marginal oil wells: production down, abandonments up.

Oil supply is among the key components in IPAA's outline for a U.S. energy strategy. The others:

• Expansion of natural gas markets through pipeline rate reform, longer term wellhead sales contracts, and antitrust exemptions for independent producers' marketing cooperatives. Gas production will rise to 17.8 tcf in 1992, up 1.3% from this year, IPAA predicted.

• Elimination of the tax penalty on oil and gas exploration, development, and production by repeal of preference treatment of intangible drilling costs and percentage depletion under the alternative minimum tax (AMT).

• Retention of the present state based regulatory program for oil and gas production and associated wastes, as well as retention of the exemption of those wastes from designation as hazardous waste under the Resource Conservation and Recovery Act (RCRA).

Newly elected IPAA Chairman Eugene L. Ames Jr., San Antonio, blamed federal policies for devastation wrought throughout much of the U.S. petroleum sector, which he called "an industry under siege."

He said, "It's time for the country to wake up and remove government penalties on U.S. producers-penalties that have the same effect as placing embargoes on domestic oil and gas production."

OIL SUPPLY/DEMAND

The modest decline in total U.S. oil production in 1991 is due to a rebound in Alaskan production.

North Slope flow was restricted in 1990 because of pipeline and pump station maintenance projects. In addition, North Slope enhanced oil recovery and well stimulation projects helped buoy production in 1991. But Alaskan production will slip in 1992 as natural decline takes effect, IPAA's supply/demand committee said.

U.S. crude oil production has fallen at an average rate of about 4%/year or 320,000 b/d/year since 1985, when production peaked at 8.971 million b/d.

As of last Jan. 1, 463,854 stripper oil wells were producing, NSWA reported. Their production amounted to 383-197 million bbl during 1990, the sixth year in a steady decline that began after 1984's volume of 463.459 million bbl. Average production was 2.26 b/d/well, the lowest since 1971.

Stripper well abandonments because of low oil prices climbed to 17,235 in 1990 from 16,107 in 1989. Abandonments have exceeded 10,000 wells/year since 1983, NSWA said.

All stripper well figures are based on data compiled by the Interstate Oil and Gas Compact Commission.

Domestic demand for petroleum products will rise 1.7% in 1992 to 16.957 million b/d, the supply/demand committee predicted. This will follow 2 years of falling demand. Demand for 1991 is estimated at an average 16.676 million b/d, down 1.8% from 1990. Demand in 1990 was down 1.9% at 16.988 million b/d. Demand hit a recent high of 17.325 million b/d in 1989. Record high demand was 18.847 million b/d in 1978. In reaction to high prices, demand fell as low as 15.231 million b/d in 1983.

IPAA said motor gasoline demand will move up slightly in 1992-0.4% to 7.225 million b/d. This will be 3 consecutive years of decline as demand fell from 7.336 million b/d in 1988 to an estimated 7.197 million b/d in 1991.

The committee said one of the main reasons for the reversal of this downward trend is a slowdown in the improvement of fleet fuel efficiency due to low automobile sales. Average auto fuel efficiency is expected to increase in 1992, but any improvements will be more than offset by additional travel.

The gap between domestic oil supply and demand will narrow in 1991, then widen again in 1992. Imports of crude oil and petroleum products to fill that gap will fall this year due to the drop in product demand and stability in domestic production.

Increased product demand coupled with a decline in U.S. production will boost the need for imports in 1992. Total imports will advance to 8.045 million b/d, an increase of 4.4%. Crude oil imports are projected at 6.103 million b/d, up 3.5%. Product imports are forecast to move up 7.5% to 1.942 million b/d.

NATURAL GAS

IPAA's natural gas committee bases its outlook for a 1992 increase in production on the assumption of a return of normal weather patterns. Unusually warm weather reined 1991 production slightly at 17.5 tcf.

Meantime, 1992 gas demand will rise 3.4% to 19.5 tcf as the U.S. economy emerges from recession.

Consumption in the residential and commercial sectors will be up when final figures are in for 1991, more than offsetting a drop in industrial consumption because of recession. Lower prices helped gas maintain a competitive position in the electric utility sector, where consumption is estimated to be up 0.4% this year.

Residential demand will advance 4.5% to 4.709 tcf, and commercial demand will be up 4.1% at 2.796 tcf. The forecast for growth in residential and commercial sector demand during 1992 is based on assumptions of normal weather, continued dominance of natural gas in new houses, and conversions from other heating systems. Industrial demand in 1992 is expected to be up 3.3% at 7.315 tcf. The increase is due to economic recovery and gains in nonutility power generation. The natural gas committee also pointed out that the Kern River-Mojave pipeline projects will boost gas consumption in California's heavy oil fields.

Total imports are estimated at 1.637 tcf for 1991, up 6.9% from 1990. Next year imports will increase another 8.1% to 1.769 tcf, largely from Canada. The balance will be in the form of LNG. Most growth in natural gas demand is expected to come from the power generation market later in the decade. But the near term fuel mix for power generation is being dictated by existing capacity. So the effect of the 1990 Clean Air Act amendments on natural gas consumption will not be evident until the mid-1990s.

On matters of energy policy, IPAA repeated its call for reform of gas pipeline rates with several moves, including elimination of the rate tilt toward imports from Canada.

It said low Canadian pipeline commodity charges for gas sales or transportation lock U.S. producers out of markets even if comparable domestic supplies are substantially cheaper. That's because the Federal Energy Regulatory Commission's modified fixed variable rate design forces U.S. pipelines to collect 30-40% of their fixed costs in the commodity charge. Canadian pipelines are not required to do so.

IPAA said, "Until FERC implements pipeline rate reforms that will assure a level playing field for domestic and imported gas, the Department of Energy and FERC must eliminate the Canadian rate tilt by shifting Canadian fixed costs to the commodity charge at the border, as FERC did in Opinion 256."

In general, the association's natural gas committee said, IPAA's long term goals are to restructure pipeline rates to promote fair competition among all U.S. and foreign gas suppliers, including pipelines, to assure that firm pipeline customers pay the fixed costs of facilities to match the premium service they receive, to push pipelines toward longer term contracts by means of gas inventory charges or two part producer rates, and to encourage greater reliance on natural gas.

DRILLING ACTIVITY

Baker Hughes Inc. told IPAA cost study committee U.S. 1992 drilling activity will be flat with 1991.

Baker Hughes estimated the active rotary rig count will average 874 for 1991, down 14% from 1990's 1,010. The rig count will advance by only one unit to 875 for 1992, assuming a restrained economic recovery and normal winter weather. The projection also is based on average U.S. wellhead prices in 1992 of $20.50/bbl for crude and $1.69/Mcf for gas.

Normal winter weather will result in an increase in gas prices, Baker Hughes said but the effect on drilling will not surface until second half 1992. Decreased drilling in the Gulf of Mexico in recent years is expected to be reflected in decreased productive capacity in 1992. This may possibly be reversed by Mobile Bay supply-but not before 1993.

Gary Dickinson, Triad Energy Group, reported on major changes in the cost of purchased items since the first of 1991. Cement and drilling muds are down 610%, rental tools down 715%, and directional tools and services down 22-25% as supply exceeds demand.

Costs of other purchased items have remained about the same or are up slightly due to inflation. Cost increases during 1991 probably will be about 4%.

Ken McPeters, Ziadril, told the cost study committee land drilling contractors are continuing to consolidate. Most land drilling contractors are working job to job, and that makes it difficult-if not impossible-to keep experienced crews. He called drilling contractor rates a bargain.

The cost study committee's report on supply/demand for oil country tubular goods showed that U.S. mill shipments increased 7.4% in first half 1991, compared with the same period a year ago. Shipments moved up to 626,000 tons in the first half of this year. That continued a trend started in 1990, when first half shipments were up 49% from the year before. For all of 1990, mill shipments were 1.219 million tons, up 34.1%.

Exports of tubular goods made a sharp turnaround in first half 1991, increasing to 121,000 tons from only 23,000 tons during first half 1990. By contrast, imports were down sharply, falling 70.8% to 38,000 tons in first half 1991.

The net result is that total domestic supply of oil country tubular goods for first half 1991 was down 21.3% at 543,000 tons. During the first half last year supply was increasing rapidly.

TAX ISSUES

Current federal tax policies are counterproductive and anticompetitive. They inhibit capital formation and increase drilling costs, IPAA's tax committee charged.

The single biggest culprit is the AMT statute that imposes "severe penalties" on drilling investments and penalizes independent producers' oil and gas income. The second biggest culprit are provisions of the 1986 Tax Reform Act that make new capital for U.S. exploration and production virtually nonexistent, the committee said.

It called relief from AMT "of paramount importance." IPAA's "clear first priority" is to remove intangible drilling costs and percentage depletion as preference items under AMT, which taxes investment rather than income.

IPAA charged that the 1986 tax law virtually repeals traditional drilling cost recovery in the form of IDC expensing and reverses many other historical tax policies that were intended to bolster U.S. oil and gas production.

Craig G. Goodman, a tax specialist speaking for IPAA and several other petroleum associations, told a House hearing last month, "Today, significantly less than 30% of U.S. petroleum production qualifies for less than one half of the traditional allowance for capital depletion-if and only if multiple limitations are met."

IPAA's tax committee said, "The bottom line is that current federal tax policies contribute to the decline in U.S. crude oil production.

"Since passage of the Tax Reform Act, domestic crude oil production has declined by more than 1.7 million b/d despite interim price increases of nearly 100%. All measures of U.S. oil and exploration and development activity remain near record lows."

OIL FIELD WASTES

Among the environmental issues IPAA is watching is congressional reauthorization of RCRA and its treatment of disposal of oil field wastes such as drilling mud and produced brine.

Present rules exempt from Environmental Protection Agency regulations oil field wastes in states that adequately control their disposal. IPAA wants to retain that exemption and prevent needless imposition of more rules governing disposal of such wastes, particularly those that might classify drilling mud, produced brine, and associated material as hazardous waste.

IPAA's outline for a national energy strategy makes these points:

• Oil and gas wastes are safely managed under current state and federal laws such as the Safe Drinking Water and Clean Water acts.

• Another layer of federal regulation is not needed.

• Additional federal RCRA requirements would weaken the U.S. oil and gas industry with little if any environmental benefit.

• The most severe economic consequences of a federal based RCRA regime would fall on independent producers.

Elaborating on the last point, a federal RCRA based regulatory program would shut down almost all stripper wells and a large number of additional low volume wells, IPAA's environment and safety committee warned. That would force many U.S. independent producers and almost all smaller independents out of business.

IPAA Pres. Denise A. Bode last month told a House committee, "Additional RCRA regulation of the oil and natural gas industry raises a level of alarm among independents that is unquestionably greater than that of many large, multinational companies.

"For them it is a question of where they will drill and produce oil and gas. For us it is a question of whether we can drill and produce at all."

CHAIRMAN'S VIEW

The 1990s could prove to be a period of "historic opportunity" for U.S. independent producers, IPAA's new chairman said.

But that will require lifting of what Ames termed a U.S. government embargo on domestic oil and gas production, including removal of the AMT penalty on IDCs to encourage a return of investment capital, resolution of environmentalist threats, and timely issuance of drilling permits on federal land.

Ames blamed the tattered condition of the U.S. industry on federal government policies.

He pointed out that an era of industry stability ended in 1973 with the Arab oil embargo. Control of domestic energy supply moved from the U.S. to the Persian Gulf.

Ames said, "For almost 2 decades, in a futile effort to regain control of markets, those in control of the federal government used every conceivable type of political meddling to control, regulate, penalize, and tax the domestic producer of energy. Whatever the motive was, the result of this disastrous philosophy has been the collapse of our great industry and the economy of our nation."

Ames cited this as a gauge of the times:

"Major oil companies are withdrawing from domestic operations in wholesale fashion. There is an estimated $10 billion worth of producing properties for sale today by majors.

"Why should independents purchase these properties when we know that a principal reason the major companies are abandoning American oil and gas fields is that America has the most hostile government in the world today in which to operate oil and gas properties?"

Copyright 1991 Oil & Gas Journal. All Rights Reserved.