WORLD TRENDS

Some positive signs are emerging

After a wild 18-month ride, the global E&P industry is staging a slow, steady recovery. Oil prices bottomed at $10/bbl last December and January, and have recovered rapidly since OPEC’s latest pact in March. The U.S. rotary rig count is now trending upward after shattering its record low earlier this year. Improvement also can be seen in Baker Hughes’ international rig count.

Additional positive indicators include a resumption of Far Eastern oil demand growth; upward revisions in Canadian operators’ capital budgets; and a growing confidence that OPEC’s output cuts are holding. What can’t be gauged yet is the full measure of the after-effects caused by the 1997–1998 price collapse, or how long it will take for the upstream industry to recover.

Price Gyrations

Having gone to just above $20/bbl in 1997, global oil prices fell precipitously in response to rapidly weakening Asian crude demand and OPEC’s overproduction. The price for better grades of crude fell to about only $10/bbl in late 1998, prompting OPEC to convene in March 1999 for its third output reduction pact within a year’s time.

Fortunately, the group’s oil ministers crafted an agreement to cut 1.7 million bopd from their production (beginning April 1, 1999) that so far has received 90% compliance. Single biggest factor in making this pact work versus OPEC’s two previous, ineffective output cuts has been the improved relationship between Saudi Arabia and Iran. As a concession, Saudi finally agreed to recognize the higher capacity and production levels claimed by Iran. Once this occurred, the Iranians quickly agreed to work closely to not only draft the group’s reduction but help enforce it.

In response, oil prices have improved to levels not seen since second-half 1997. In the U.S., WTI futures prices were at nearly $20.50/bbl by late July, and many contract prices had recovered to above $17/bbl.

Supply And Demand

Worldwide oil demand grew less than 1% during 1998, including Asia. At the same time, global oil production increased 1.2%, to 67.17 bpd. This year, the International Energy Agency (IEA) is predicting that the rate of demand growth will double, back to 1.5%, and result in consumption of 75.1 million bopd. In Asia, IEA now predicts a more robust 2.7% growth rate, indicating that those economies are recovering.

These figures jibe with the U.S. EIA’s outlook, which predicts world demand will grow by 1.2 million bopd in 1999 and another 1.7 million bopd in 2000. Indeed, EIA believes that the combination of reduced production and other supply changes will prevent a normal seasonal increase in world oil inventories. If anything, says EIA, 1999 will result in a net inventory draw of about 800,000 bopd for the whole year. This should keep prices relatively high.

Mega Mergers

Collapsed oil prices prompted a flood of jumbo-sized oil company mergers during last year. First of these was Arco’s $3.3-billion takeover of Union Texas Petroleum. Announced in May 1998, the acquisition was essentially completed by the end of June 1998. Two months later, BP and Amoco shook up the global industry by announcing their historic $49.2-billion merger. By January 1, the BP Amoco combination was complete, save for formal U.S. Federal Trade Commission (FTC) approval that came in April 1999.

Meanwhile, a record-breaking deal was brewing. In December 1998, Exxon and Mobil admitted that they would combine in a $73.7-billion stock transaction. This takeover disguised as a "merger" received shareholders’ approval by late May, but still lacked European Commission (EC) and FTC approval as this issue went to press.

Also last December, Total said it would acquire Petrofina in a two-stage, $13.1-billion stock swap. By April, the EC had approved the deal, and the new Total Fina shares began trading in June. Back in Britain, BP Amoco Chief Executive John Browne was approached by Arco Chairman Mike Bowlin for a possible merger. Browne could not resist the opportunity to add to his empire, revealing the proposed deal on April 1. The takeover is still in process, with shareholder meetings scheduled for August 30 and September 1.

Total threw another stone into the "merger pond," when it declared this summer that it would attempt to take over Elf Aquitaine. However, on July 23, Elf’s board of directors rejected Total Fina’s takeover bid, and Elf’s president flatly rejected any "under-the-table negotiations’’ to reach a deal. Elf defended itself by launching a $51-billion counter-bid for Total Fina.

Operating Outlook

Given the factors at hand, this year’s drilling forecast reflects the after-effects of ravaged budgets and skittishness among operators to be too optimistic about recovering oil prices. Ironically, the Far East, whose economic recession caused the oil field depression, is the only area in which we forecast any sort of drilling increase. Overall, we forecast a 13.4% decline from 1998’s figure, to a new total of 46,348 wells.

In North America, a drilling recovery is brewing in Canada, where many operators are restoring some of the funds that were cut from capital budgets at the start of 1999. In some cases, companies are adding back as much as 25% of earlier totals. Another good sign is the fact that a predicted rash of mergers has not materialized. As forecast a year ago, Mexican state firm Pemex’s drilling program continued at a higher level, despite plunging oil prices, with exploratory wells doubling. By all indications, this level will be maintained, as Pemex shores up oil reserves.

South America has been hit hard by slack Asian exports and low prices. However, by mid-1999, as these influences recover, optimism prevails in all but the troubled countries of the northwest. Brazil and Trinidad are particularly promising. Concerns about political interference in state firm PDVSA make Venezuela questionable. South American drilling will be down 20%.

Given current economics, North Sea activity is remarkably steady, which will hold Western European drilling to 558 wells, down 16%. Closely regulated development plans will keep Norway even with last year. If operator confidence returns, UK activity could exceed expectations. Reforms in Italy are not yet reflected in activity levels.

Eastern Europe and the Former Soviet Union have been hammered by low oil prices, and the effects are liable to linger for some time. Russian operators, in particular, are concentrating on maximizing oil production, to generate hard currency. The outlook is for a 17% drop in drilling regionwide.

African activity is reversing gains of recent years — drilling is headed for a 20.6% reduction, to 660 wells. In West Africa, where offshore prospects had been bright, projects have been cut back extensively. Sharp reductions from near-record levels are expected for several countries. There are some positive areas, primarily Egypt and Algeria, where development work is strong.

Middle Eastern drilling will drop about 14%, yet by historical standards, this will still be a good year. Most of the reduction will be concentrated within three large drillers, Saudi Arabia, Oman and Qatar. Saudi’s lower rate partially reflects completion of the massive development of Shaybah oil field. Growing levels of field work are pushing Iran’s rate higher, by 10.5%.

Several Far Eastern countries started a modest recovery from financial crises that cut oil prices and slowed E&P. China’s onshore drilling should rebound, and Indonesia will post a 4% increase. India and Thailand expect more development drilling. Look for a 3.7% regional gain.

South Pacific activity will be reduced 31%. Lower oil prices have cooled down Australian E&P from record levels. Exploratory interest remains good in New Zealand, but high costs plague Papua New Guinea.

The accompanying tables include global upstream statistics, together with World Oil’s revised 1999 drilling forecast, by region.

	Forecast of 1999 world drilling — comparisons with 1998 and 1997
	World crude / condensate production and wells actually producing — 1998 versus 1997
	Estimated proven world reserves, 1998 versus 1997

Copyright © 1999 World Oil
Copyright © 1999 Gulf Publishing Company