Oil majors set to wreck OPEC price party
Copyright 2000, Reuters
September 11, 2000
By William Maclean
Consumers bracing for a winter of high fuel costs can console themselves with the prospect of much lower oil prices in the months and years to come.
A petroleum industry cycle of boom and bust is set to kick in with a vengeance as Western energy companies bring on new production in areas not bound by OPEC rules.
Prices may also face pressure from slowing growth in global demand, some analysts say.
"Every day there is a new oil discovery — off Brazil, the Gulf of Guinea, West Africa," said former Saudi Oil Minister Sheikh Ahmed Zaki Yamani.More output from the Organization of the Petroleum Exporting Countries and elsewhere will present a financial challenge to oil-dependent OPEC members and may trim corporate profits.
Some of that new oil will come from mature regions such as the North Sea, their lives prolonged by majors awash with cash and wielding ever more formidable extraction technologies.
"The cost of oil production has come down dramatically in the last 20 years, so every producing area in the world is profitable at less than $20 a barrel," said Mehdi Varzi of Dresdner Kleinwort Benson.
"That means it is very difficult to sustain prices anywhere near the current level over the long term."
Strong oil markets may have some months yet to run, as the possibility of a cold northern hemisphere winter keeps jittery futures trading pits on guard against sudden supply shortages.
With low stocks of U.S. heating oil, the race is on to supply adequate quantities of fuel to consumers before seasonal chills hit the world's largest energy market.
OPEC fears price plunge
But OPEC's fear is that the three percent rise in crude output it agreed at the weekend to help calm nervous dealers may end up setting the stage for an oversupply of the raw material.
Matters would only be made worse by the upsurge in non-OPEC crude production due to head to markets in coming months.
Exploration drilling rates worldwide are on the up and already above levels in 1998 and 1999.
"OPEC has produced the wrong medicine for this particular disease. There is no real shortage of crude. There is a shortage of products," said Geoff Pyne of Standared Bank.
"Within three to six months a surplus of crude will emerge. And in addition there is clear evidence of an effect on demand."
The rate of so-called discretionary driving in Europe and the United States as measured by consumption of transportation fuels fell by between two to four percent between the summer of 1999 and the summer of 2000, Pyne said.
The supply squeeze powering the current price spikes is in part the result of a cutback in investment by Western companies during a price slump in 1998 when Brent crude dipped under $10.
By the time prices recovered in early 1999, newly-merged supermajors kept the leash on spending to impress equity markets with disciplined management of capital.
Majors loosen purse strings
But as the rally has gone on and mergers have been digested, capex restraints are coming off to meet demand growth.
"Prices are high now because of a confluence of factors that came together this year — among them a very strong world economy," said Varzi."However OPEC production is set to average 29.5 million barrels per day in October — a level which could cause a severe fall in oil prices possibly as early as the end of this year, barring a dramatic reduction in Iraqi exports in December."Of the supermajors, BP has been the most open its move into a new phase of production expansion.
BP last week pledged to invest $4 billion in the North Sea through 2004, with almost one-quarter of that ploughed into the extending the life of the 30-year-old UK sector.
Rival oil giant Royal Dutch/Shell RD.AS. last week committed itself to six new North Sea projects that will raise its capital expenditure there next year by 20 percent.
"It is possible to keep fit and healthy into middle age and th UK North Sea sector will be doing just that," said Malcolm Brinded, managing director of Shell UK's upstream operation.
A Reuters survey of 12 independent oil firms found average exploration and production spending was set to rise 4.6 percent this year from 1999, when E+P funding was slashed 20 percent.
Ever more sophisticated exploration and production technology means oil companies can flush out crude deposits from once inaccessible geological nooks and crannies.
As prices eventually dip, some experts say, OPEC will be forced once again to restrain its own production — and lose market share — if it wants to keep prices afloat.Then the boom and bust cycle starts all over again.