WORLD TRENDS

Price does matter

ompared to a year ago, global oil prices have skyrocketed. Some reasons include much better quota discipline within OPEC; a rebound in oil demand; and a slowing of new non-OPEC oil output going onstream. Another factor may be unusually warm weather, particularly in North America. This has caused natural gas usage and prices to soar, further supporting oil prices.

Normally, when oil prices in the past rose to higher levels over sustained periods, global E&P activity would respond with an increase proportional to the price hike. This time, however, that pattern has taken longer to materialize – delayed E&P recovery is particularly evident outside North America.

Among factors that shaped this situation were deliberate, short-term efforts by major oil companies to build profits rather than spend on E&P. In tandem, some majors’ CEOs stubbornly refused to believe that OPEC could maintain discipline. Another factor was rising political instability in key countries of some regions. Also, the large number of independents in Canada and the U.S., and their ability to react quickly to economic changes, has allowed these countries to recover faster.

As year 2000 passed the mid-point, the recovery progressed and became more uniform. Outside North America, activity plunged during the first quarter, only to follow with a strong recovery that lifted the Baker Hughes rig average 14% higher than where it started the year. A growing number of operators also revised E&P budgets upward for the remainder of 2000.

Wild, Shifting Prices

Global oil prices have risen to, and remained in, a decidedly higher "band" during the last year. However, they have been periodically erratic. In June 1999, the spot price for West Texas Intermediate (WTI) crude was an average $17.90/bbl, according to the International Energy Agency (IEA). By September 1999, the WTI spot price had jumped 33%, to $23.85/bbl. It then rose to $26.06/bbl in December, $27.40/bbl in January and $29.78/bbl in March.

Fearing that they had pushed prices too high, too fast, and hearing complaints from the U.S., OPEC members in late March hiked their output by 1.7 million bopd, to 24.69 million bopd (excluding Iraq). In addition, non-OPEC producers, such as Mexico and Norway, boosted their output by 400,000 bopd. In the short run, prices came down. IEA’s spot price average for April 2000 was $25.69/bbl, down 14% from March.

Yet, the reduction was short-lived; growing global oil demand, coupled with seasonal U.S. increases, strained supplies. By May, the WTI spot average was up to $28.92/bbl, and it breached the $30/bbl mark in June. In response, OPEC members added a 710,000-bopd output hike, to raise collective output to 25.4 million bopd (excluding Iraq). However, because some members were already exceeding previous quotas; output was, in reality, 25.3 million bopd.

Concerned that the latest hike would not alter prices enough, Saudi Arabia on June 30 said that it was ready to pump another 500,000 bopd, if the OPEC basket price stayed above $28/bbl for 20 consecutive days. That mark was not reached, but speculation that Saudi was "leaking" 250,000 bopd, anyway, sent WTI spot prices lower, to $27-to-$28/bbl at press time.

Supply And Demand

After growing only 0.5% in 1998, global oil demand grew 1.4% last year, nearly three times the previous year’s pace. At the same time, world oil output, exclusive of NGLs, decreased 2.9%, to 65.8 million bpd. IEA estimates that total supply, including NGLs, fell 1.9%, to 74.1 million bpd.

IEA predicts that global oil demand will grow 1.7% this year, to 76.2 million bpd. The agency expects growth of 1.3% (to 24.1 million bopd) in North America, 6.8% (to 4.7 million bopd) in China and 4.2% (to 7.1 million bopd) in other Asian countries.

Merger Mania

Even as oil prices improved, significant mergers continued, as oil companies strove for economies-of-scale that would make them competitive at $10/bbl crude prices, just in case the market falls apart. As expected, Exxon and Mobil last year began completing their previously announced merger. Meanwhile, Elf Aquitaine last September gave in and agreed to merge with TotalFina. Regulatory approval for the TotalFinaElf deal came this spring.

BP Amoco won approval this spring of its ARCO acquisition after divesting some Alaskan assets. Two other significant oil company mergers were announced this year. In April, Anadarko Petroleum and Union Pacific Resources announced a multi-billion-dollar merger. The deal was completed on July 14, 2000. In Canada, Husky Oil in June said that it would acquire Renaissance Energy in a deal that ultimately will be worth more than C$8.3 billion.

Operating Outlook

Given elevated oil prices and the expectation that they will remain relatively high, plus the fact that major oil companies are finally opening up their underspent budgets, we expect significant increases in upstream activity worldwide. This will be particularly true for North America and South America. Overall, we expect global drilling to jump 35.3% higher, to 66,395 wells.

In North America, Canada’s cautious rebuilding has turned into a blizzard of activity. Soaring prices are boosting results, drilling levels and spending plans, hence the 32.5% increase expected. In Mexico, there is an even greater push toward gas development, while the big oil project remains expansion of Cantarell field offshore. Look for a 6.4% gain in Mexican wells.

South America is competing with other regions for foreign investment, which the region’s good discoveries and gas development plans will require. Following Brazil’s successful E&P sector opening, most countries are making contract terms sweeter. Strong rebounds in Venezuela, Argentina and Brazil will boost drilling nearly 50%.

Western Europe has a split personality. Countries dependent on North Sea activity have not seen their E&P sectors benefit from high oil and gas prices. Conversely, countries with higher levels of onshore E&P (Italy, Germany and France) are recovering. Overall, the region will be down 6.2%.

Signs of recovery are also beginning to appear in Eastern Europe and the Former Soviet Union, where drilling is expected to gain 11.2%. Soaring oil prices have breathed new life into many of the former Soviet republics, providing cash to boost drilling.

Last year was particularly rough for Africa, where hydrocarbon wealth is tempered by political turmoil. Nonetheless, hope is emerging; West Africa continues to have one of the highest exploration success rates globally. In the north, Egypt and Libya are looking at a massive gas development project. Thus, a 4.2% increase is expected.

Disciplined crude output has paid off handsomely for the Middle East. Windfall oil revenues and conservative spending are cleaning up countries’ balance sheets. However, greater domestic energy demand in these nations may affect oil exports – another reason for state oil companies to emphasize natural gas development projects. The outlook is for moderate (8.2%) growth in drilling.

In the Far East, China is drilling at full capacity, hoping to keep crude output steady. The result is about 10,000 wells annually, but no growth above that level. Throughout the rest of the region, economic recovery continues, and good activity gains are expected in Indonesia, India and Thailand. Overall, the region should be up about 5%.

South Pacific E&P cooled off from 1998’s healthy level. Despite better production revenues from higher prices, operators remain tentative. There is a question of what to do with the bountiful amounts of gas found in Australia in recent years, and that may be part of the reason that survey data indicate that the region will slip another 3.6%.

The accompanying tables show global E&P statistics, plus World Oil’s revised 2000 drilling forecast, by region.

	Forecast of 2000 world drilling outside U.S. – comparisons with 1999 and 1998
	World crude/condensate production and wells actually producing – 1999 versus 1998
	Estimated proven world reserves – 1999 versus 1998