SPECIAL FOCUS

What’s ahead in 2001

Unbridled enthusiasm has replaced the cautious, skeptical approach that pervaded the upstream industry 12 months ago. Factors influencing the attitude change include consistently high oil prices, strong activity levels, improved technology economics and exploratory successes

Edited by Kurt S. Abraham, Managing/International Editor

eflecting the improved mood of E&P companies in general, there is a discernable shift in the flavor of our editorial advisors’ prognostications for 2001. Compared to a year ago, it is not an understatement to say that optimism can be found in abundance among their respective forecasts and reviews. Phrases like "bright future," "excellent year" and "substantial increases" have crept back into their assessments.

So what’s behind the enthusiasm for 2001? More than anything else, the industry is now convinced (as opposed to a year ago) that higher oil prices are here to stay. Whether prices settle out at a level near $25/bbl, $28/bbl or at $30/bbl and above is something else again, but few people entertain the thought that prices are headed back into the teens. Similarly, the outlook remains very bullish for natural gas prices, particularly in light of forecasts suggesting strong growth in gas usage worldwide through 2010. Within the U.S., a conservative range is projected at $3.50 to $4/Mcf, and most observers expect the price to be closer to the high end of that bracket through next year.

Consistently higher prices this year have stimulated sizeable increases in exploration, drilling and field development activity, particularly in the U.S. and Canada. The boost in activity took longer to materialize during 2000 than originally expected, due principally to major oil companies holding back funds during the first half of the year. Reasons cited by these firms were wariness about OPEC’s ability to manage production levels, concern that oil prices would not stay high and a perceived need to bank cash, to "build shareholder value." Nevertheless, even these firms began to open their wallets wider during second-half 2000, a trend that our advisors expect to continue next year.

Higher prices also have made it more economical to utilize advanced technologies to find and produce greater amounts of oil and gas worldwide. Numerous projects that were not possible under $10-to-$15 oil have been able to proceed. Additionally, the combination of higher prices and greater use of technology has stimulated increased exploration rates that have resulted in significant discoveries, particularly offshore West Africa and in other deepwater areas.

For 2001, our advisors see continued high levels of activity in West Africa and the Gulf of Mexico, plus further increases in Brazil. This year’s elevated drilling levels in Canada and the U.S. will be sustained in 2001, with additional incremental increases possible. A long-awaited recovery in the North Sea has finally begun, and the region should continue to improve. Ironically, the one overwhelming concern among E&P firms may be a growing shortage of rigs, materials and skills. The industry’s ability to expand activity will be impacted increasingly by how many more drilling rigs and qualified crews can be put to work. One other area of uncertainty is the political scene in the U.S. As this section went to press, the result of the U.S. presidential election was still up in the air. The outcome of that vote will have a widely differing impact over the next four years, depending on whether environmentalist Vice President Al Gore or industry-friendly Texas Gov. George W. Bush was the winner.