Comment

Price management?

Natural competitors in the petroleum industry are again talking with one another about coordinating production exports to boost oil prices. It won't be easy. Competitive forces and strategic politics make it difficult to create oil price supports. There is a broader force inhibiting cooperative efforts, however. Plainly, cooperation is unnatural in free markets, and global commodity markets are becoming more transparent and competitive, not less.

Price management through export cooperation is at least partially an effort to make up for what petroleum producers do not have now - the ability to react quickly to shifts in general economic conditions or product prices without collapsing cash flow. All producers have are long-term decisions. But, there are at least two ways to reduce time and price exposure:

• Formalize time collapse: Producer efforts at reducing the time between capital investment and oil and gas production need to be formalized by latching together individual and departmental technical and process achievements, and providing incentives for those efforts. Also, the task is too important not to dedicate individuals or committees to manage it.
• Hedging price risk: Price protection for producers is not geared to large long-term swings in oil and gas price movements. But it could be, for a fee. Most producers are reluctant to pay that fee, and without it hedging sources will not develop the necessary financial instruments in counter-cyclical industries (transportation, power) to balance oil price risks. Basically, commodity markets need the same sophistication as financial markets.

Over the long-term, technology and process improvements will boost producers' ability to respond quickly to market shifts. In the meantime, despite its unsavory reputation and the cost of adding another level of protection, serious hedging will be necessary to limit oil price risks.

In undertaking both, petroleum producers should be able to level out some of the steep cycles in supply and demand, and competitors can compete on something else besides surviving oil price crashes.

But the industry isn't the only beneficiary of stable energy prices - so are energy consumers, despite the revelry in low oil and gas prices. When low oil prices deny profitability for producers over an extended period, what follows is not pretty - for producers or the economy. Sooner or later, new demands for oil stimulated by low prices will go unmet, forcing prices to rise to unreasonable levels. Then, investments dependent on low oil prices and industries with little fuel flexibility (transportation, for example) get into trouble.

So, energy consumers and user industries cannot view petroleum industry efforts to level out price cycles with technology and hedging as anti-competitive. Markets remain open and competitive, only more stable.

All-Asia pipelines

No natural gas line across Asia is too long if the market is there, and China is making a good case for markets - itself, Japan, South Korea, North Korea, and Pacific Coastal Russia. Once a gas line reaches China, it is a relatively easy matter to connect nearby countries.

China, deeply concerned about its energy future, must industrialize quickly in order to avoid a dual stranglehold - a huge consumer population to support, and an agrarian-dependent economy that needs to change. More industrialization will take more energy - more than China can import through LNG.

Once, there was only one future energy option for China: the ASEAN pipeline gathering gas production from Indonesia, Malaysia, Thailand, and Vietnam, and routing it northward into China. Now, China may actually have a choice - a solid lesson about competition for a command and control economy.

China is negotiating with Kazakhstan and Turkmenistan to build a line and bring gas eastward through a major trunkline. To the North, Eastern Siberia gas production, largely undeveloped because there is no existing market in Russia, could also be routed southeast into China. Thirdly, the virtually unexplored Sea of Okhotsk and coastal Pacific regions could contain large gas reserves, and the only gas markets lie to the south.

China is painting itself as a huge and desirable market, just as Azerbaijan and Turkmenistan are painting themselves as large and attractive suppliers. They all have something the other wants.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.