MANAGEMENT & ECONOMICS

Although still mired in economic and political problems, Southeast Asia has turned an important corner. Businesses' psychological sentiment is positive for 1999, even though the present is economically rough, as shown in an Angus Reid/Economist poll. Thailand registered +33%, a significant positive indicator from the epicenter of the collapse. Malaysia has a +59% poll even though its industrial production was off over 11% from last year. Indonesia polled at +42%. Guarded optimism in the +21

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Victor Schmidt
Houston

Asian recovery underway

Although still mired in economic and political problems, Southeast Asia has turned an important corner. Businesses' psychological sentiment is positive for 1999, even though the present is economically rough, as shown in an Angus Reid/Economist poll.

Thailand registered +33%, a significant positive indicator from the epicenter of the collapse. Malaysia has a +59% poll even though its industrial production was off over 11% from last year. Indonesia polled at +42%. Guarded optimism in the +21 to +25% range exists in the region regarding the world economy.

East Asia sentiment continues very negative. Russia, China, Japan and Taiwan all have significant work this year to re-establish public confidence. Asia is slowly moving into recovery.

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In contrast to the overall climate there, Indonesia's government has assumed zero growth for 1999. The current draft budget also expects oil prices to average US$10.50/bbl, with exchange rates at 7,500 rupiah per US dollar and 17% inflation.

Asian impacts on gas markets

A just-released report examining the affects of Asia's economic collapse on the region's natural gas markets has developed three key findings:

  • LNG markets will suffer most
  • Gas markets in Indonesia, Thailand, South Korea and Japan will be hardest hit
  • China, India and Pakistan could revive gas demand growth.
Power generation is the major demand driver for natural gas use in the region. The Philippines and Bangladesh are also expecting growing gas demand for power generation.

The report, Natural Gas in Asia, can be ordered from Reuters at Tel: 44-171-675-0990 or Fax: 44-171-675-0991.

Bigger not always better

Major companies are the commodity providers; but the highest value is in the targeted technologies that feed different parts of the value chain. We are moving toward an era when transportation fuels will not be the best use of petroleum. The transportation market will probably be ceded (seeded?) to agriculturally generated "evergreen fuels" at some future time. These will still produce carbon dioxide and nitrogen oxide, but will be more politically palatable.

As a manufacturing process "evergreen fuels" can be reproduced anywhere there is both sufficient biomass to support the manufacture and sufficient market to use the product.

So where does petroleum's product value lie? How can oil and natural gas create an added value position that will command a premium price? How can oil companies enhance the consumer's life? This is the conundrum that oil companies should be pondering.

The forerunner in this process is the coal industry. Higher value products include plastics, pharmaceuticals, and other consumer goods that came from exploration of coal's complex chemistry. Oil is a similar organic stew of possibilities. Perhaps a 3M approach to new products needs to be applied to the petroleum business.

Eleven merge, forming giant

A major consolidation of the oil sector? No, it is the merger of eleven European currencies. Called the euro it is intended to propel European fiscal power into the next century. The new currency will not affect the oil markets in the short term. Dollar denominated oil contracts will continue until the new currency proves itself and the relative power balance of the euro against the dollar is well established.

Competition between the currencies for the oil market is probably 10 years away. The euro would have to offer an advantage to oil traders before they will switch. When it comes, it likely will be used first as a hedging vehicle for crude futures contracts.

Punished for good work

According to data from DRI/McGraw-Hill productivity in the oil sector increased to US$49,289 per employee (1999 estimate) from US$39,702 per employee in 1994. Output also increased from US$237.13 billion (1994) to US$250.73 billion (1999 est) while employment decreased from 600,000 to 510,000 workers over the same period. The reward for such improvements includes an earnings drop in 1999. First Call Corp expects a 24% drop for drilling companies and an 8% drop for equipment companies. More mergers and acquisitions will follow. When the industry is at its best, it works itself out of jobs.

YPF wins stock premium

Argentina's government sold 14.9% of YPF stock to Spain's Repsol. Purchase price was around US$ 2 billion. The government will still control 5.3% of YPF stock.

Depletion countering new field discoveries

Consumers are the reason the petroleum business exists. Fortunately, they have a constant appetite for energy. Until recently, they were burning all we could produce. However, produced reserves do not self-replicate. Replacing the consumed barrel is getting harder for many reasons: smaller fields, operations in new regions, conflicts between business needs and government demands, technology limits, and economic limits.

Mature offshore provinces continue to see the size of fields in established trends decline. Field extensions and satellite tie-ins figure strongly in this as companies preserve the value of their older production structures. The good news is that new trends are being opened in traditional production theaters.

New regions offer the hope of major new reserves. But, they are high cost plays requiring long lead times, new technology (to development discoveries) and persistence. Opening new areas often involves teaching government officials about the business of petroleum. The desire for high royalties from oil-field activity frequently conflicts with the economics of the exploration and production process.

Technology permits us to identify and extract petroleum but it cannot yet economically generate liquid hydrocarbons. It can transform gas to liquid or solid to liquid, but no process can yet create new reserves at an acceptable price.

Soft consumer demand has shifted petroleum economics to the low cost side. Even with high productivity, the industry must improve efficiency. Mergers help in the process but do not find or create new reserves.

We are seeing a feeding frenzy as oil companies gobble one another. The low oil price environment prevents companies from gaining adequate cash flow through normal means to stay ahead of the depletion rate. Buying reserves buys time for prices to recover to levels where investment in prospects will produce an adequate return. Depletion's natural forces will not be deterred. The only way to overcome depletion is to locate and drill for new reserves.

Copyright 1999 Oil & Gas Journal. All Rights Reserved.

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