Two mountains
Two previously insurmountable industry mountains have been climbed this year. Frustrated after decades of damaging and uncontrollable oil price cycles, the international petroleum industry has taken steps that may keep prices in a reasonably profitable range.
- Late last year and recently, OPEC members, with surprising agreement, adhered to production quota change requests from the cartel secretariet. OPEC leadership was determined to head off over-pricing of crude oil by allowing production levels to drift upward, and over-production, when storage volumes began to rise and broad economic conditions weakened. Is this giving too much credit to OPEC? Maybe, but the results are hard to argue with.
- Within the last four months, success in scaling a second global supply hump was attained. Multinational and independent producers, with little notice and fanfare, began to shrink exploration efforts as inventory began rising. True, annual exploration budgets were substantially spent in the first six months of 2001, but requests for refinancing in the last half of the year have largely been ignored.
While it is difficult to take into account some unknowns, such as Iraqi production and the onstream connection of several large fields, the simple act of across-the-board activity curtailment is sending the message that individual oil producers can respond quickly.
However much dependent service companies and contractors may complain about growing curtailment of producer budgets, the fact remains that more exploration and development activity will result from a stable $25/bbl crude price than price cycles ranging up to $35/bbl one year and $10/bbl the next.
Investors, consumers, and regulators need to know that individual producers can react in a fairly coordinated manner to rising and falling storage volumes, and growing or weakening oil demand.
Budget shift
US legislators and regulators have long held an assumption that the US petroleum industry, particularly independents, would rather explore at home than elsewhere because the markets are there, the infrastructure exists, and leasing costs are right. They may need to re-assess that assumption.
Smaller majors and large independents (and more often nowdays, small independents) not involved in the deepwater Gulf of Mexico oil play or the Rockies gas play are shifting exploration budgets elsewhere - and not in developed areas of the globe.
Not only have budgets been re-adjusted this year to focus on the international environment, but attitudes are following too - for some important reasons:
- The positioning of natural gas as an international exploration target, either for export or nearby domestic consumption, has lowered geological risks in a way that oil never could.
- Mechanical and geological risks in less developed areas of the globe are benefitting as much from the use of 3D seismic and new drilling and completion technologies as developed areas.
- As operators move into deeper waters further offshore and make use of large drilling units, they become less dependent on limited shore infrastructure and risky re-supply routes that are common in many undeveloped countries.
- Licensing opportunities have opened up off West Africa, the Balkan Republics, eastern Canada, Ireland, the eastern Mediterranean, Brazil, and the Faeroes. West Africa, in particular, has become an important exploration target for a number of independent operators.
- Upgraded drilling fleets, aided by competitive rig carriers, are making it cheaper to move rigs long distances in a short span of time.
- If stability in oil and gas prices continues, another level of risk, primarily experienced by smaller producers who historically need to remain near origins, will be removed.
Major producers and large independents have long had the benefit of less competition abroad than at home, but that advantage is slipping away.
While small producers may not have the funds or skilled professionals to carry out field development, access to outside funding or getting buy-in from other producers or services and contractors for equity shares, is leveling the international playing field for smaller producers.
