IPAA: U.S. oil, gas outlook positive in 1998

Bob Beck
Associate Managing Editor-Economics

The outlook for the U.S. upstream oil and gas industry in 1998 is generally positive, according to a forecast by the Independent Petroleum Association of America's supply and demand committee.

The committee released its latest short-term outlook for supply and demand for U.S. oil and gas in 1997-98-as well as its forecast for international oil supply/demand-at IPAA's annual meeting in Houston last week.

The outlook is based on the committee's assessment of the level of economic activity and energy demand over the same period and includes these highlights:

U.S. natural gas consumption in 1998 will expand by 2.2% to 22.48 tcf. This is the first time since 1973 that natural gas demand will have topped 22 tcf. Consumption in the industrial and electric utility sectors will show the most growth, up 1.4% and 5.5%, respectively.
In 1998, U.S. natural gas production will increase by 0.7% to 19.14 tcf. A 1,000-plus rig count and strong activity in the Gulf of Mexico are the main factors contributing to the increase.
U.S. natural gas imports, mainly from Canada, have been increasing at double-digit rates since 1991, but are expected to slow to 3.7% in 1998. Pipeline capacity constraints are the main reason for the slower growth.
U.S. crude oil production is forecast to arrest its slide, increasing 0.3% in 1998 to 6.43 million b/d. Higher prices coupled with technology gains and offshore activity are the main reasons for the increase.
After posting growth of 1.5% in 1997, U.S. oil demand is expected to increase another 1.3% in 1998.
U.S. oil imports are projected to reach 9.8 million b/d in 1997 and more than 10 million b/d in 1998, increases of 3.9% and 2.1 %, respectively. Oil imports are expected to account for 53% of total petroleum demand in 1998.
U.S. energy consumption is anticipated to increase by 1.7% in 1998 to 92.48 quadrillion BTU (quads), mainly due to the strong economy.
Real economic activity, as measured by inflation-adjusted gross domestic product (GDP), is projected to increase at a rate of 2.5% in 1997 and 2.6% in 1998. The inflation rate is likely to increase to 2.2% in 1997-98, up slightly from 2% in 1996.

Economic activity

According to the committee report, the U.S. economy is entering its seventh year of expansion and is in the third-longest expansion since World War II.

Since the 1990-91 recession, the U.S. economy has grown at a rate of 2.4%/year. The committee estimates that 1997 economic activity will increase at a slightly faster pace, with GDP increasing 2.5%. GDP growth is projected to increase to 2.6% in 1998.

However, the committee did caution that, although most sectors of the economy appear to be growing at present, Federal Reserve action could slow growth in the interest rate-sensitive areas. The committee projections for 1997 are based on GDP growth slowing to 2-2.2% in the last 2 quarters of 1997, down from 3.8% in fourth quarter 1996 and 3.3% in first quarter 1997. However, increased economic activity in 1997-98 could give rise to inflationary pressures.

According to the report, inflation has been 2-3%/year since 1992. In 1996, the broadest inflation gauge, the GDP price deflator, registered only a 2% gain, while the consumer price index (CPI) increased 2.8%. The committee expects these inflation trends to continue in 1997-98, with the deflator growing by 2.2% in that period and the CPI growing 2.5% in 1997 and 2.4% in 1998.

Energy consumption

U.S. energy consumption is estimated to increase 1.1% this year to 90.94 quads and a further 1.7% in 1998.

The slower energy consumption growth in 1997 was due to warm weather in the first quarter.

Relatively high natural gas prices, particularly in relation to coal and residual fuel, will serve to limit the growth in natural gas energy consumption. The committee said that the natural gas market is now near equilibrium, quite different from the period of excess supply that has been experienced since the late 1980s. Natural gas consumption is forecast to grow 0.7% in 1997 and a more robust 2.2% in 1998.

Energy from nuclear facilities is expected to decline in 1997 due to the shutdown of several New England units for maintenance and planned outages. However, the committee believes that recent high utilization rates for nuclear power plants are sustainable in the near future, as facilities are able to shorten refueling and maintenance turnaround times. As a result, nuclear power output is expected to return to pre-1997 levels in 1998. Nuclear power consumption is expected to fall 1.5% in 1997 but then gain 1.8% in 1998.

Due to high levels of rainfall and snowmelt, hydroelectric power units are running close to maximum output. However, no new capacity is expected to be added. The committee projects hydro and geothermal energy consumption will increase 1.8% in 1997 to 3.99 quads but then fall to 3.92 quads in 1998. The committee forecasts are based on normal weather conditions. But the committee expects the El Ni?o effect will cause wetter weather across much of the U.S. However, this should have little effect on hydropower production.

Coal consumption may have been constrained in 1997 by regional transportation problems for several major railroads. These problems have caused some utility coal inventories to be depleted and forced dependence on other fuels. However, electric power deregulation is pushing utilities to use plants more efficiently, and this is expected to result in the more economical use of coal plants. The committee has forecast that coal consumption will increase 1.7% in 1997 and 1.9% in 1998.

The forecast incorporates a rather significant increase in energy efficiency in 1997 and 1998. Improvements in energy efficiency are measured by the declining amount of energy consumed per dollar of real GDP as measured in 1992 dollars. The committee expects that the level of energy intensity will drop from 13,000 BTU/GDP dollar in 1996 to 12,700 BTU/GDP dollar in 1997 and 12,600 BTU/GDP dollar in 1998. The sharp drop in 1997 is mainly attributable to warmer weather.

Natural gas demand

In 1998, U.S. gas demand is projected to return to the 2%-plus growth rate seen during 1990-96. Demand next year is projected to exceed the previous peak of 22.1 tcf in 1972.

Growth in U.S. demand for natural gas was constrained this year by warm winter weather in the first quarter, leading to an overall decline in residential and commercial gas demand for the year. The committee forecasts a decline of 4.2% in residential demand in 1997. Commercial demand, which is less sensitive to weather, is expected to post a 0.6% decline. For 1998, and assuming no unusual weather, the projection is for residential and commercial demand to both increase 2%.

Industrial demand for natural gas continues to be driven by robust economic growth. Gas used by the industrial sector is projected to increase 1.9% in 1997, reaching nearly 9 tcf. This growth rate is substantially less than the 3.8% experienced in the first half of the 1990s because of the slowing of non-utility electric generation (NUG) construction. With increased competition in the electric power industry, industrial plants are negotiating favorable electric power contracts rather than constructing NUGs and cogeneration plants. Fuel substitution and some slowing in growth of certain industrial sectors are expected to slow industrial gas demand growth to 1.4% in 1998.

Gas use by electric power utilities grew strongly in third quarter 1997. Warm weather in the southern part of the U.S. and coal transportation problems stimulated gas-fueled power generation. For 1997, the committee forecasts a 4.4% gain in electric utility consumption. The committee anticipates continued strong growth in 1998, assuming normal weather and normal precipitation in the Northeast.

Electric utility gas use is projected to reach 3 tcf, up 5.5% from 1997.

Gas exports to Mexico are expected to increase in 1997-98 due to new pipeline interconnects completed in mid-1997. However, exports to Canada are lower than in the past few years. Other gas exports involve LNG shipped from Alaska to Japan. In recent years, these exports have remained at 65-70 bcf/year. In all, exports are forecast to fall by 2% in 1997 to 150 bcf and then increase 6% in 1998 to 159 bcf.

Natural gas supply

All indicators point to tight gas supplies in 1997-98, the committee noted.

Preliminary data for first half 1997 show no growth in U.S. gas production. There has been a resurgence of gas-directed exploration and development, but at the same time there have been very rapid depletion rates in new fields.

Although several large deepwater gas fields are slated to begin production later this year, the committee expects no gain in U.S. gas production in 1997. The committee is not expecting much immediate gain from the higher rig count and new Gulf of Mexico production.

A surge in drilling activity in Canada is increasing the availability of gas imports destined for the U.S. Despite tight pipeline capacity, the committee expects a 2.9% increase in U.S. gas imports in 1997. Some of that increase is attributed to increased LNG imports from Algeria. Although there is over 1 tcf of new U.S. pipeline import capacity on the drawing board, it will be late 1998 or early 1999 before significant new capacity is completed.

Unlike 1996, the U.S. is heading into the 1997-98 heating season with ample storage. Assuming normal winter weather, the natural gas industry should not feel excess pressure to increase production or inventory withdrawal rates.

Oil demand

Total U.S. demand for petroleum products showed strong growth in 1997, increasing 1.5% to 18.592 million b/d. The committee sees demand rising a more modest 1.3% in 1998.

A strong driving season is expected to propel 1997 motor gasoline demand to over 8 million b/d, an increase of 1.5%. Gasoline demand is expected to grow another 1% in 1998. Although a continuation of fuel efficiency gains is expected, these will be more than offset by an increase in the size of the total fleet of vehicles and an increase in the total miles driven per vehicle. The changing characteristics of the fleet also boosts consumption, as more sport utility vehicles and minivans are bought.

The air traffic industry is forecasting an increase in both revenue passenger miles and freight ton-miles. That trend should translate into growth in aviation fuel demand. The committee estimates demand for aviation fuel to increase 2.1% in 1997 and 1.2% in 1998, to more than 1.6 million b/d.

Demand for distillate fuel oil is estimated to increase 1.5% in 1997, following a 6.8% jump in 1996 due to extremely cold weather. The committee forecasts continued growth in 1998, with demand up 1.2%. The greatest growth in demand is expected for on-highway diesel, off-highway diesel, and residential heating oil.

Residual fuel oil is expected to be more competitive with natural gas in 1997, but demand is still expected to slip 3% to 823,000 b/d. Demand fell 18.4% in 1996 to 840,000 b/d. The committee is expecting a small gain in 1998, with demand rising 37,000 b/d in 1998, to 860,000 b/d.

Demand for all other petroleum products is estimated to be up 2.3% in 1997 and another 1.4% in 1998.

Oil supply

The long, steady decline in U.S. crude and condensate production is projected to come to a halt in 1998.

U.S. output has been falling steadily since the recent peak in 1985 at an average rate of 3%/year during 1985-1996. Output fell from 8.971 million b/d in 1985 to 6.465 million b/d in 1996.

Improvements in exploration, completion, and recovery technology are boosting output from new wells and slowing the decline rate of existing wells. In addition, improved realizations from production are stimulating increased exploration and production activity. This has brought the decline rate in the Lower 48 to a halt.

U.S. oil production is expected to increase as stepped-up activity in the Gulf of Mexico boosts output of both crude oil and condensate from increased wet gas production. The decline in Alaska is expected to slow due to increased investment in secondary recovery and some new development activity.

The committee has projected 1997 U.S. crude and condensate output at 6.4 million b/d, down only 59,000 b/d from 1996. Production for 1998 is expected to rise slightly to 6.43 million b/d. Despite the increase, the level of production still will be one of the lowest in over 42 years.

Of total U.S. oil imports this year, crude oil imports are expected to be up 5.1% and product imports down 0.6%. The growth in demand in 1997-98, combined with level crude oil production, will result in continued reliance on imports.

For 1998, growth in petroleum product imports is expected to accelerate, while crude import growth slows. U.S. refining capacity creep is expected to slow, creating greater demand for imported products.

Global supply, demand

The IPAA committee expects global oil demand to increase by almost 1.5 million b/d in 1997, up 2% from 1996.

The projection is for even faster growth in 1998, with demand increasing 1.8 million b/d, or 2.5%. Demand growth will continue to be led by developing countries, particularly in Asia and Latin America.

Oil supply from outside the Organization of Petroleum Exporting Countries is estimated at 1.1 million b/d higher in 1997 from a year ago and projected to increase another 1.6 million b/d in 1998. OPEC supply increased an estimated 1.3 million b/d in 1997. This included an estimated increase of 700,000 b/d of "humanitarian aid" oil from Iraq. At the time this forecast was compiled, the committee was projecting increased "humanitarian" oil from Iraq in 1998. The situation now appears to be rather uncertain.

But, given the expected increase in non-OPEC supply and the increase in exports from Iraq, additional oil output from other OPEC producers is not expected next year. Any increase in output by OPEC members would unbalance the world oil market.

The committee concluded that OPEC supplies will likely need to be somewhat constrained in 1998 if international markets are to be reasonably balanced.