INTERNATIONAL FOCUS

Twenty-five years ago, the world faced a major oil shock, followed six years later by a second shock. The 1973 shock set off an oil boom that propelled the industry, especially the offshore oil industry, to new heights. We are faced once again with a boom. Service businesses are straining to meet demand, trained personnel are in short supply, and new equipment is under construction. Soon, new manufacturing capacity will by built to feed the industry and we will begin to worry about

Victor Schmidt
Houston

1973 vs 1997: A perspective on two industry booms

Twenty-five years ago, the world faced a major oil shock, followed six years later by a second shock. The 1973 shock set off an oil boom that propelled the industry, especially the offshore oil industry, to new heights. We are faced once again with a boom.

Service businesses are straining to meet demand, trained personnel are in short supply, and new equipment is under construction. Soon, new manufacturing capacity will by built to feed the industry and we will begin to worry about overbuilding. Let's compare and contrast the two booms and their importance to the marine petroleum business.

The essential difference between the two booms is the supply/demand driver that started them.

  • The 1973 oil shock was a politically driven restriction of supply by Iran designed to drive up prices. Demand was not immediately affected but did respond over time.
  • The current boom is not supply constrained, but is demand driven.

Over the intervening years, growing demand removed the production capacity overhang creating the need for new supply sources and expanded exploration. In addition, existing oil fields are depleting. Those reserves need to be replaced to sustain current and future production volumes.

In 1991, a seminal event occurred - the collapse of the Soviet Union's unsustainable communist economy. The client states lost their benefactor. The monetary and petroleum flows from the Soviet Union that under-girded their economies evaporated. This forced developing economies to seek capital and expertise from the world of market economies.

Suddenly, their territories were open for petroleum exploration. Licensing fees for exploration rights provided the bridge funding these countries needed. The offshore oil business began to recover and utilization rates for equipment began to climb. Now, we face the peril of "good times." So far, the industry is applying the lessons of the 1970's: moderate growth supported by long-term commitments and stable funding.

The industry's response to the 1970's supply constraint was to expand and develop the North Sea and seek new opportunities. The current boom will not focus on any one region because the offshore territories of most of the world are now open to the industry. In addition new technology has expanded the envelope of accessible waters from depths of 2,500 ft to over 7,500 ft. The size of the drilling fleet is rising once again as new rigs enter the fleet.

This is a real growth phase, a real boom. May we manage it well and resist excessive speculative building.

Counter-cyclic oil economy

The oil business is normally counter-cyclic with the larger economy. General economic growth occurs best when energy prices are low. The oil business does best when prices for its products rise. If they rise too far or fast, energy prices slow, stall, or collapse economic growth.

The economy is in a period where growth around the world is rising, but energy prices are reasonably stable. This is the best combination: an expanding service base and growing volumes of oil and gas sold. A hidden danger in this scenario is too rapid growth that disturbs the supply/demand balance. If the industry cannot meet the need, petroleum prices will rise creating inflation and squeezing off growth.

The recent correction/crash in the financial markets removed some pressure to supply exponentially larger quantities of petroleum to fuel economic growth off the industry. This is a short breathing spell for the world, but is an opportunity for the oil business to gain some ground in its search for new supplies. A two to three year slowing of world economic growth will give the industry the opportunity to find new plays, build new capacity and meet the challenge of the 21st Century.

A cautionary note for upstream personnel

Because petroleum companies tend to be identified with their countries of origin, regardless of multi-national interests, they remain greatly vulnerable to unrest and terroristic actions. No one is truly safe when traveling the world on behalf of a petroleum producer or service company. One may be seized as a hostage, mugged in a major city, endangered by terrorists of whatever persuasion, or killed by a fanatic's bomb or gun. Larger oil companies have always had security plans for their ex-patriots, but many smaller firms are entering the international arena in search of opportunity with limited security. To grow and succeed, they must protect all assets - especially people.

Saddam Hussein - the consummate games-man

Is it Gulf War II? In many ways the recent fit of pique by Iraq's Saddam Hussein is more of a test for the United Nations and the US president than for him. Hussein is being internally consistent, autocratic, and disdainful of his population. US President Bill Clinton has few peaceful options other than to reinvigorate the coalition assembled by former President George Bush in 1991 and pressure Iraq to mind the earlier agreement that brought the war to a close.

Saddam Hussein continues to test the UN resolve and the power of the United States to be the "enforcer of peace" over one the world's most volatile political landscapes. Hussein is a consummate games-man. So far, he has outperformed Clinton in the international political arena.

Hussein sees the need for his oil in European markets. He sees European companies cutting deals with Iran at the expense of American oil companies, who must contend with a long-standing business embargo. He sees that recent oil sales by Iraq have found a home filling growing world demand. So, from time to time, he tests the limits by attempting to wedge apart the coalition.

The UN is acting resolute, defending its position that weapons inspectors must have free access regardless the inspectors' country of birth. By forcing the inspectors out of the country, Hussein has bought time at no cost to himself or the country. The inspectors did their job in identifying and destroying vast stockpiles of chemical and biological agents. They did not get them all, of course, and new agents are easily recreated.

A major question remains: Will the coalition that stopped him before have the fortitude to hold once again? A second US aircraft carrier group is in the area and the time for flexible diplomacy is drawing to a close. Hussein and his aides would escape leaving the Iraqi people to bear the pain. Force should be used as a last resort but used fully to remove the sites useful for generating weapons of mass destruction.

Will force be used? Let us hope not. Many innocents would die unnecessarily if they continue to crowd around military sites.

The net effect on the oil markets is minimal at best. The output from Iraq is less than two million b/d. That quantity is not enough to put the world into imbalance or significantly affect the trading range for crude. Iraq does hold significant undeveloped reserves and those reserves will be needed in the future.

New international editor
Allow me to introduce myself. I am Victor Schmidt. My technical training is in geology and geophysics, with an MBA thrown in for good measure. My work experience includes the joy of exploration and development, the frustration of mergers (on both sides), the free-fall of downsizing/restructuring and the spice of consulting. I will do my best to provide you with the current developments in our industry, coupled with a forward view and perspective. I seek your comments, article ideas and participation. As we build into the new century. I look forward to working with you and for you.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.

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