Comments (February 2005)

Though intensely competitive, and sometimes at odds in public policy debates, the largest multinational oil and gas companies appear to be in agreement about the short-term and long-term challenges facing the industry. Recent remarks by top executives at ExxonMobil, BP, and ChevronTexaco point to an oil market that has shifted to one still dependent on hydrocarbons despite all the talk of alternative fuels and one in which sellers now have the upper hand. With oil prices above $40/bbl for much of the past year, it has been a profitable stretch for operators, but they are not dis-missive of the challenges that lie ahead. In a December speech in Canada, John Browne, Group Chief Executive of BP, explained how an oil market fearful of supply shortages evolved. Technology led to an E&P boom in the 1990s, Browne said, as advances in seismic technology reduced risk and costs, new strides in deep water opened up new areas for exploration, and reservoir-management breakthroughs enhanced recovery factors. After the oil price collapse of the late 1990s, OPEC introduced its “price band” target price of around $25/bbl and began to skillfully manage prices. That was followed by large upswings in global demand in 2003 and 2004. With the world’s surplus oil capacity rapidly shrinking, geopolitical events—in Iraq and Venezuela, for instance—and potential supply disruptions put the market on edge. Browne sees supply/demand challenges facing the industry. The world’s population continues to grow, and oil demand is rising in developing countries. And, although much public and political attention has been paid to renewable and alternative forms of energy such as wind and solar, oil and gas demand will continue to grow as hydrocarbons remain the world’s fuel of choice. The resources are there to meet that demand, Browne says, but oil trade will increase as new oil discoveries are likely to be located farther from major consuming centers. And by 2015, three regions—Russia, west Africa, and the Gulf states of the Middle East—will account for 80% of oil trade. Rex Tillerson, President of ExxonMobil Corp., also laid out his vision of the future of supply and demand issues in December at a joint meeting of the Independent Petroleum Assn. of America and the Texas Independent Producers and Royalty Owners Assn. in Houston. Energy demand will continue to increase, especially for oil and gas, which will account for about three-fifths of total energy supply. Natural gas demand will grow at a faster clip than that of oil. And, although demand for alternative forms of energy will rise over the next 2–3 decades, it will still pale in comparison to oil and gas. Oil demand in industrialized counties will grow only modestly, Tillerson said, with the real significant demand growth coming in developing countries in Asia, particularly through transportation. Energy security will remain a key concern for policymakers, but the world seems destined to become increasingly dependent on OPEC and Middle East oil supplies in the future. After 2010, the “call on OPEC crude” will require OPEC countries to add 1 million BOPD of capacity per year. Tillerson believes that enormous oil resources still exist, not only from conventional sources but from unconventional sources such as extra-heavy oil, tar sands, and shale. The industry faces huge challenges in meeting world demand growth that are highly capital intensive, he said, and governments must open their resources to development. David O’Reilly, ChevronTexaco’s Chairman and Chief Executive Officer, believes the industry is witnessing a “change in the basic energy equation.” In a recent speech, he noted the high global energy demand projections for places such as China and the difficulty and expense of bringing new supply sources on line. He contends the public must digest a few energy facts, including the realization that there will be a rise in demand for all types of energy sources over the next 20 years and that alternative fuels will still make up only a small slice of the demand pie in the short term. The scenarios laid out by these executives will cause little controversy in the oil and gas industry. But educating the public about the issues surrounding future energy supply and demand may be as difficult as bringing those supplies to market.