WHAT'S AHEAD IN 2001

Shortages may abound in an uncertain future

Forrest A. Garb, Forrest Garb and Associates, Dallas

As I look back at the forecasts I have prepared for this series over the last 14 years, one thing becomes blatantly obvious. When preparing each article, I never believed that the petroleum industry was enjoying an average or even stable year. Industry activities were either ascending or plunging the roller coaster ride, which has become the norm rather than the exception. The unsteady nature of current events again causes any forecast to be so dependent on the outcome of pending national and international issues that, by the time this is published, opinions expressed for the forthcoming year could be in gross error.

Uncertainties. Currently, the two major uncertainties are the presidential election and Middle East peace efforts. The first of these uncertainties will be known by the time this is published. I am not sure the second will ever be resolved.

"Oil and gas will remain the dominant energy providers for decades – but at ever-higher prices."    – Forrest Garb

Other long-term uncertainties include the impact on world markets of recent major discoveries found offshore Kazakhstan and onshore in Azerbaijan, Turkmenistan and Uzbekistan. These new discoveries may be of such magnitude that they could become an alternative to the Middle East reserves on which the U.S. is so dependent. For any of these reserves to reach world markets, the long-debated route for one or more trunklines from this unsettled region must be decided. Even after a route is selected, financing, construction and operation of the transportation system will require years to organize.

If the current price trend for natural gas continues, North Slope gas-reserve volumes will warrant construction of transportation facilities for delivery to the Lower 48 States. Again, this is a long-term project.

The effect of recent industry mega-mergers is also unpredictable. Giant companies resulting from mergers such as Exxon / Mobil, BP / Amoco / Arco, Chevron / Texaco and others will be faced with efficiently developing and operating smaller reservoirs and fields. Traditionally, small companies have done a better job with such operations. The inertia of the giants may lead to spawning of a whole new group of smaller companies willing to take on the challenges of small reservoirs and fields.

Prospects for consultants. From the view of a small consulting firm, 2000 was a reasonably active year. However, until the latter part of the year, assignments were related to litigation support or property acquisition, with few exploration or field-development studies. The current surge in oil and gas prices is now beginning to awaken these activities.

From a consulting view, this is good for business, as it can result in repeat work with less marketing effort. After all, litigation support is usually a one-shot assignment. Surprisingly, it doesn’t always result in winner and loser becoming friend and enemy, respectively. If one can present the client’s case in a professional manner, the opposition may be the next client for other matters.

Efficient operation of near-depleted reservoirs and appropriate application of enhanced recovery has made it apparent in our company that, in well-test design / evaluation and in estimating optimum operation methods, good capability is fundamental to our viability. Giant mergers frequently make highly skilled technical persons available to consulting firms; however, there are always some that become independent consultants and, therefore, potential competition.

Supply, demand and prices. One prediction can be offered despite difficulty forecasting near-term activities. A review of world oil and gas reserve volumes, their producing capacities, their geographical locations, alternate energy options and the energy-demand curves leads to one conclusion: Oil and gas will remain the dominant energy providers for decades – but at ever-higher prices. There will continue to be peaks and valleys in prices, but the overall trend will undoubtedly be upward.

Gas, which is the fastest-growing component of primary world-energy consumption, is projected to capture an even greater share of the energy market. Gas remains the fuel of choice for electricity generation for the foreseeable future.

The price trend for WTI oil from about 1986 through 1998 can be interpreted as declining or, at very best, flat. The less than $10/bbl price experienced during late 1998 certainly curtailed activities. During 1999, the price more than doubled to about $25/bbl, and $30 was achieved during mid-2000. This had two impacts on our industry. First, it is not surprising that properties, which had been for sale, were withdrawn from the market to enjoy their increased cash flows. Second, prospective investors, finding acquisition properties harder to find, began to seek exploration or development projects.

As usual, buyers and sellers of oil and gas properties are using a higher price forecast than the financing sources. Banks have increased their price outlook, but not consistent with the optimistic increases of industry players. The resulting difficulty in financing a transaction is likely to remain until some world issues are more predictable.

The International Energy Agency (IEA) predicts that worldwide demand for crude and other hydrocarbon liquids will reach 77.7 million bpd in 2001, up from the current 75.8 million bpd. The IEA forecasts a supply of only 78.9 million bpd, suggesting excess capacity of only 1.5%. One must wonder if the statistics are accurate, or have we approached the dreaded crossover point?

Growth in demand is equally attributed to developed and developing countries. Indications are that the Asian economic slump is over, and energy usage there is again on the rise. China experienced dramatic energy-use reduction last year, with total energy demand dropping 10.7%. Most of this decline was in the use of coal. Oil will undoubtedly replace coal as energy demand recovers. Oil demand in the rest of Asia increased some 3.6% during the year compared to 1.6 % worldwide and 2.2% in the U.S. For the first time since 1990, oil demand in the Former Soviet Union rose by roughly 1.4%.

For 2001, WTI is forecast to range between $27 and $30/bbl. Henry-Hub gas is near $5/Mcf at the time of this writing, and published articles suggest that a range of $3.50 to $4.00/Mcf is easily supportable for the coming year. The weather folks also predict a colder winter and a hotter summer now that El Niño and La Niña have dissipated. If so, gas demand will exceed forecasts made using extrapolation of past usage.

The usual industry reaction to good prices and high market demand is to drill for new resources and to further develop known resources. This requires drilling equipment – which has dropped to critically low availability. The 48th annual Reed-Hycalog rig census shows that the 1999 rig fleet of 1,644 drilling units (of all sizes) has now dropped to 1,636. Most of the fleet has been maintained by cannibalizing stacked units, but this cannot continue. The attrition of rigs will be precipitous once cheap replacement parts are gone. There are already about four rigs drilling for gas to each one drilling for oil. If the concentration on gas and the lack of oil exploration continues, we will be even more dependent on imported oil.

Reserves and capacity. The EIA represented world proved oil reserves at 1,016 billion bbl as of January 1, 2000. Of this amount, 213.6 billion (21%) was in non-OPEC countries. In 1999, daily world oil production averaged about 65.7 million bbl, of which 38.1 million (58%) was from non-OPEC countries. The production / reserve ratio for the non-OPEC countries is only 15.4 years. Non-OPEC countries have about 90% of the world’s refinery capacity, but without imported oil have nothing to refine.

Looking back. During the 50 years since I walked the halls of Texas A&M University, I have seen many industry cycles. I have lived during the development of the digital computer, which is probably the most important scientific development for the petroleum industry – if not the world – during the 20th Century. I have seen hydraulic fracturing, enhanced displacement schemes, advanced logging methods, 3-D seismic, coalbed methane exploration, horizontal drilling, coiled tubing and a score of other advances become everyday industry applications. While at A&M, we always closed every yell practice with a traditional yell. I wonder what more I will be privileged to see before I say the traditional "fifteen for team, farmers fight, and call it a night."

Forrest A. Garb received a BS degree in petroleum engineering in 1951 and the professional degree of petroleum engineering from Texas A&M in 1963. He soon joined Socony Mobil Oil Co. and was assigned to the Magnolia Petroleum Co.’s operations in Kansas, Texas and Louisiana. Mr. Garb joined H. J. Gruy and Associates in 1957 and was elected president in 1973. He became president of Gruy Companies, Inc., with its founding in 1975. In 1988, he started Forrest A. Garb and Associates, Inc. He is a member of SPE, AAPG and the Association of Computing Machinery and is a past president of the Society of Petroleum Evaluation Engineers. He is a registered professional engineer in Texas and was the 1995 recipient of SPE’s Petroleum Engineers Economics and Evaluation Award for his contributions to petroleum engineering.