COMMENT

Leonard Le Blanc

The torch passes - for a while

No insult intended to OPEC's longstanding efforts, but as an organization devised to protect the value of the extensive resources of member countries, there is little hope of ever fulfilling that objective. OPEC's day in the sun was 20 years ago. Globalization and technology have overrun events in the petroleum industry.

Saudi Arabia, Venezuela, and non-member Mexico may be able to eat into global storage by cutting their own crude exports, but the effect will not be lasting until there is an upturn in global economic conditions. A colder winter will improve consumption somewhat, just as low oil prices will stem high-cost production, but both require time to impact prices.

Oil and gas prices should strengthen slightly in 1999, but over the long term, don't expect prices to rise much above $13-15/bbl. In fact, there are many indicators that $13-15/bbl will become the new development planning price for crude.

The torch has been passed from OPEC to financial markets, which are in firm control of oil prices and will be until a technical supply limitation occurs. Barring that event, low oil prices will continue to undermine the ability of producers to self-finance projects. Not only do financial markets possess the exploration capital needed by producers, but competition for energy users requires that they undercut premium crude price supports through supply diversification. Investment is thereby funneled to producers that demonstrate crude finding abilities, in addition to the wherewithal to beat down costs.

That ability is increasingly important in a market where each time supply exceeds demand, future crude prices mirror the marginal cost of producing the last bbl.

Low-cost OPEC producers were supposed to thrive in these low-price markets, but their internal economics have consistently sabotaged the benefits that accrue. Hence, the reason for their interest in cooperative ventures with integrated producers.

So what must the industry use as a gauge for the future? The upstream industry's future rests with what happens in under-developed countries, not developed countries where efficiency, conservation, and fuel alternatives are available to cap demand growth. Thus, producers need to chart changes in the number of bicycles in Shanghai, ox-drawn plows in Sumatra, and kerosene cooking fires in Manila and Recife, to assess long-term demand for their products. All else is driven by market perceptions of competent technology use and good cost management, neither of which is practiced widely among OPEC members.

Back to the drawing boards

In recent years, all service industry efforts were harnessed to growing capacity, putting equipment in the field, and spreading expertise and access to customers around the globe. The better part of this year, and probably more debt, will be required to collapse these expansion plans and ratchet down capability to focus on critical paths.

How can companies continue to develop new technology? The question is crucial. Technology creation was 60% of the solution to the last recovery (the remaining 40% was process revision and demand expansion). Most companies are doing process revision and layoffs now. The hard part, technological development, will come later. Even armed with new technology, we will not be able to cut E&P costs right away, and this is the frustrating part for many companies. We're simply out of practice.

During the late 1980s, everyone dreamed about oil prices recovering to $18-21/bbl or higher. Why? Because no one considered it realistic to think that profits could be obtained at the then-current $12-14/bbl price levels. Five years later, we finally threw that thinking out the window, and surprised ourselves, environmentalists, the consuming public, as well as investors.

Today's cost-price margin collapse is not a disaster. The quicker we get through process revision and on to technological innovation, the better off we are going to be. The reward for technological achievement is that no competing methods or energy forms will be as low-priced and efficient. And we haven't begun to tap other environmentally promising hydrocarbon forms, such as hydrogen extracted from oil and gas or subsea methane hydrate masses.

Even the industry's long-term difficulties with environmental protection can be resolved - given adequate time. To give us this time, our most powerful weapons have been low prices for oil and gas and ongoing technical discovery.