COMMENT

No other development could have such a monumental impact on the petroleum business as a means of converting natural gas to liquids in the field. The substantial cost-cutting progress made so far on catalysts and conversion processes has whetted the interest of oil and gas producers everywhere, with good reason:

Leonard Le Blanc

The liquid option

No other development could have such a monumental impact on the petroleum business as a means of converting natural gas to liquids in the field. The substantial cost-cutting progress made so far on catalysts and conversion processes has whetted the interest of oil and gas producers everywhere, with good reason:

  • Product flexibility: Gas liquids developed from gas wells or associated gas can be used to lighten heavy crude in the field or reacted chemically to create downstream or petrochemical products. This capability shifts some downstream functions into the upstream sector, but more importantly, expands the options for producers in the field.
  • Changing field economics: Producers will have two equally important search targets, instead of one. Where fields have both oil and gas, injection of associated gas will create a second value class that subsequently can be produced and transported as easily as oil, without the cost of LNG or pipelining.
  • LNG, pipeline option: Producers with new LNG plants in the wings have to be concerned about whether to embark on a costly process that may become less economic within a few years. Also, gas-to-liquids margins could alter the throughput mix in existing liquid lines and encourage conversion of some gas lines to liquid transport. Most importantly, the option to add value to gas production will belong to the producer, instead of being handed off to processors and distributors. Rather than meekly accepting 10-14% of the burner tip price, producers can look for better margins elsewhere.

At all costs

Despite appearances to the contrary, this is a precarious time in the petroleum business. A great deal is riding on one factor alone - petroleum product prices.

  • The only good will the industry has earned to counter an onslaught of environmental regulation resides with energy price constraints. If the industry begins raising prices, the threat of regulation-driven price hikes will no longer be effective, and that small reservoir of good will will evaporate quickly.
  • The health of the global economy depends on stable oil and gas prices. Economic growth in under-developed countries is supporting rising global energy demand. Sensitivity to energy price increases is much greater in under-developed nations, and increasing oil and gas prices could undermine not only energy demand there, but also the global economy.
For oil and gas producers, holding down prices now will be extremely difficult. Relentless price increases for equipment, supplies, and labor are cascading through the business chain. There is great pressure to pass on costs.

The industry's ability to hold down prices thus far has been a result of technological achievement. Manufacturers and suppliers have become much more efficient in putting new technology to work. This investment in new systems, components, and procedures needs to continue, if we are to have any chance of restraining prices.

The industry has to consider long-term impacts. There are reasons beyond simple supply and demand fundamentals and triggering investment in renewable energy resources for exercising caution.

The struggle for customers

The struggle for customer market share and profit margin in American and European fuel markets is producing some interesting and permanent shifts in a very traditional business:

  • Merging downstream: Integrated and national oil companies are merging downstream operations as quickly as possible to improve lackluster refining and retailing margins and enable them to dominate fuel markets geographically.
  • The Russians are coming: In search of markets elsewhere, Russian producers are buying into quick-service grocery chains and helping to convert them into much larger multi-purpose retailers.
  • Combination retailing: Refiners are negotiating with giant US and European merchandisers to locate fuel dispensing pads at the edge of parking lots. Is stand-alone fuel retailing doomed? Maybe not, but the construction of corner fueling stations has come to a halt as larger refiners try to evaluate trends.
A great deal will depend on how consumers treat the growing association with large and small food retailers and merchandisers. Fuel brand identity is still a powerful sales tool for US and European producers and refiners, however, most of the growth in market share is coming from unbranded or smaller brand retailers. And it is this latter group that is forcing the retailing changes.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.

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