First Oil

“Life can only be understood backwards; but it must be lived forwards.”

—Søren Kierkegaard, Danish philosopher, 1813-1855.

How about that? This must be a first—quoting a philosopher in an oil industry publication. Truth be told, my understanding of philosophy is quite limited. I had to take an “Introduction to Philosophy” course as an electrical engineering student in college to “round out” my education. In the final exam, there were only two essay questions. I knew the answer to the first question, but didn’t have the foggiest idea about an answer to the second question. So, I wrote essentially the same answer to the second question. With the hope that the statute of limitations on retraction of grades has lapsed after 43 years, I can report that I got an A grade in the philosophy course.

Kierkegaard’s advice is relevant, because it is easy to understand the course of events looking backwards. The World Oil editorial team has been compiling well statistics and activity reports from around the world, to prepare for the 2013 forecast that we presented on Jan. 25 at the River Oaks Country Club in Houston and several cities in Europe. Articles based on the data and analyses are presented in the 2013 Forecast section of this issue. Executive Editor Kurt Abraham is our lead analyst, having helped prepare these annual forecasts for more than 25 cumulative years.

The well statistics from state and international agencies, and survey returns from operators, provide a good idea of what happened in the previous years. For example, it is now easy to see, how high U.S. natural gas prices in the early years of this decade led to gas-directed drilling and provided the incentive for the tremendous rise in shale gas E&P activity. With the subsequent rise of oil prices and a simultaneous drop in regional natural gas prices, E&P activity shifted rapidly from gas to liquids. That is life, as we in the oil and gas industry lived it, looking backwards.

What now? Our understanding of future trends suggests that natural gas prices will firm up during 2013, and while oil prices may come down from their recent highs, economic fundamentals are in place for sustained oil-directed drilling and a slow recovery for gas-directed drilling in the U.S., due to a rise in prices and the prospects of LNG exports to Europe and Asia. In the international arena, gas suppliers, such as Russia and Qatar, are under pressure to rework their Brent-indexed pricing.

Our optimistic forecast could be subdued by many swirling uncertainties. The Middle East is always a maelstrom of political movements: Ayatollah & Ahmedinejad in Iran, Muslim Brotherhood in Egypt and the Al-Qaeda in North Africa. With EU and U.S. sanctions against Iran, Iraq has become the second-leading OPEC producer after Saudi Arabia. Will Iraq be able to continue to strengthen its oil sector, once the U.S. involvement is phased out? Saudi Arabia’s role as a swing producer could be affected by whether the aging monarch is able to retain firm control over the political undercurrents in the royal family. A similar transition is underway in Venezuela, due to uncertainties related to Hugo Chavez’s health. E&P activity in the U.S. could be affected by hurricanes in the Gulf of Mexico, an increasingly strident anti-fracing movement, and a second Obama administration determined to enforce stricter EPA standards and phase out oil industry tax credits and allowances.

This is where the second part of Kierkegaard’s quote comes into play. There are enough wildcards for 2013 to paralyze the paranoid. It is up to the oil and gas operators, particularly the bold independents, to take a leap of faith to extract more value from mature fields and discover the next frontiers. If the past is any guide, there are creative exploration strategies evolving in the minds of petroleum geologists, and innovative technologies being developed in the skunkworks of operators and service companies.