MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, FEBRUARY 18, 1998 (2)
TOP STORY
Shortage Looms in Worldwide Oil Supplies
Experts Say Production of Conventional Oil Will Decline Within 10 Years; Reported Growth in Oil Reserves Since 1980 is "Illusion"
Contrary to most oil industry forecasts, global production of conventional oil will most likely begin to decline within ten years, possibly resulting in radical increases in oil prices, according to an article published in the March issue of Scientific American.
The authors, respected geologists and oil industry consultants Colin J. Campbell and Jean H. Laherrere, explain why the flow of conventional oil -- the cheap, easily recovered crude that currently supplies about 95 percent of the world demand for oil -- will peak and then drop off permanently before 2010. Unless demand for oil falls or substitutes are found, the industrial world's dependence on Middle Eastern oil will again increase dramatically. That could lead to price shocks similar to those seen in the 1970s, the authors warn.
This provocative article leads off Scientific American's 19-page special report on oil production and technology, ''Preventing the Next Oil Crunch.'' As the report makes clear, the world is not on the verge of running out of oil altogether. By a variety of technologies detailed here, it is possible to tap unconventional sources for oil that have traditionally been ignored as too costly or difficult to reach. The challenge is whether those technologies can be developed in time to prevent a crisis from the decline of conventional oil.
According to Campbell and Laherrere's analysis, the oil industry has already discovered about 90 percent of the roughly 1.8 trillion barrels of conventional oil that the earth contained. Almost half that endowment is now gone, and geological constraints will soon force production to slow, even as the demand for oil continues to rise rapidly.
Campbell and Laherrere have each worked in the oil industry for more than 40 years. Campbell served as chief geologist for Ecuador with Amoco, while Laherrere supervised exploration techniques worldwide for the French oil company Total. Both men are currently associated with Petroconsultants in Geneva.
Their article points out numerous flaws in the statistics usually used to track oil reserves. According to most industry reports, world oil reserves have marched steadily upward over the past 20 years and will continue to do so. Even the U.S. Energy Information Administration has projected that oil production will continue to rise unhindered for decades, increasing by nearly two-thirds by 2020.
Such growth is an illusion produced by inconsistent definitions of reserves, by improper accounting of revised estimates, and by suspiciously large reserve increases reported by OPEC member nations in the late 1980s, the authors contend. Among their findings:
Countries of the former Soviet Union often report wildly optimistic estimates of ''proved'' reserves that are only ten percent likely to be met. Subsequent official accounts of world reserves often fail to correct such inconsistencies.
Revisions in oilfield estimates are commonly treated as though they were newly discovered fields, rather than as mere corrections. If revisions are properly backdated to the year in which the oil field was actually discovered, the true trend becomes visible.
Oil companies have drained more oil than they discovered during each of the past 20 years.
About 80 percent of the oil produced today flows from fields that were found before 1973, the great majority of which are declining.
Why aren't the oil industry and governments more alarmed about this situation?
Many observers pin hopes on expected technological advances. Also, economists point out that the world contains enormous caches of unconventional oil -- heavy oil in Venezuela and tar sands and shale deposits in Canada and Russia -- that can substitute for conventional oil. But the authors think that the industry will be ''hard- pressed for time and money need to ramp up production of unconventional oil quickly enough.''
However, Campbell and Laherrere say that with substantial preparation, the transition to the post-oil economy need not be traumatic. ''Safer nuclear power, cheaper renewable energy and oil conservation programs could all help postpone the inevitable decline of conventional oil,'' they write. They suggest that if advanced methods of producing liquid fuels from natural gas can be made profitable and scaled up quickly, gas could become the next source of transportation fuels -- a prospect that is also explored in the magazine's special report.
Other articles in Scientific American's special report on oil production and technology include a survey of the methods now used to extract oil trapped in Canadian oil sands, as well as innovations in underground imaging, steerable drills and deep water oil production.
Scientific American reaches more than three million globally by subscription, on newsstands, and on the Web at www.sciam.com. Published in New York City by Scientific American, Inc., the magazine won the 1997 National Magazine Award for Single Topic Issue.
FEATURE STORY
Here's an interesting article that one may want to keep abreast of.
WAITING FOR FUNDING
Proflex Pipe Corp. Plans $12 Million, 260-Job Plant
Edmonton Sun
Edmonton-based ProFlex Pipe Corp. said yesterday it's planning to build a $12-million manufacturing plant in Alberta, creating 260 jobs.
But it won't pick a location or start digging until funding is secured.
"There is a billion-dollar market for our product in North America, and we want a healthy share of it," said ProFlex president Don Wolfe, in a release.
The Edmonton-based company makes a flexible composite pipe for the oil and gas sector.
The patented pipe is in demand because, unlike steel, it is corrosion resistant and is flexible enough to be wound onto a big reel for transportation, the company said.
"This is the pressure pipe for the 21st century," said Wolfe.
"We project that within 10 years, flexible, continuous pipe made from composites and plastics will replace at least 30% of the steel pipelines used in the oil industry."
To date, ProFlex has installed its product - made at a small test facility - in over 300 locations for about 30 oil producers throughout Western Canada since 1994, "without a single failure," the release said.
The company's next step is to raise the money for the proposed plant. The six-year-old company, which has 40 shareholders, also plans to go public in the near future, the release says. Wolfe couldn't be reached for comment yesterday.
FEATURE STORY
Alberta Energy's Thrust In '98: Gas, Gas and Gas
The Financial Post
Alberta Energy Co. Ltd.'s strategy to grow by the drill bit paid off last year as the company said yesterday its earnings soared to $200 million ($1.73 a fully diluted share) from $68 million in 1996 (65›).
When non-recurring items are excluded for both years, earnings jumped 81% - to $96 million - from $53 million.
"In challenging times, relative strengths become more evident and more important," said president and chief executive Gwyn Morgan.
"Our large, concentrated land and reserve base enable us to dominate in our operating areas. AEC will continue to own a large interest in Syncrude. We also have a unique growing midstream business."
Cash flow from operations was $544.7 million for the year, up from $411.9 million.
Revenue (net of royalties) was $1.72 billion, up from $1.12 billion in 1996.
Last year's net earnings include proceeds from the spinoff through an initial public offering of AEC Pipelines LP, and adjustments to the value of pipelines and international assets. Combined, they contributed $104 million.
Net earnings for 1996 included a $15-million non-recurring gain from selling AEC's forest products business.
AEC has outlined an $800-million capital spending program for this year. Half has been earmarked for natural gas exploration, production, storage and transportation.
"We expect natural gas prices to recover more rapidly than oil prices," as additional pipeline capacity opens a continental energy market for Canadian producers, Morgan said.
"Our growth thrust for 1998 and 1999 will be gas, gas and gas."
The company estimates its cash flow increases $22 million for every 10› increase in the price of a thousand cubic feet of gas.
AEC produced 575 million cubic feet of natural gas daily in 1997, up from 515 million in 1996. Oil and liquids production was 58,940 barrels daily, up from 53,155 b/d.
Its successful exploration program resulted in conventional reserve additions of 1.2 trillion cubic feet equivalent in 1997. Reserve additions were 682 billion cubic feet equivalent in 1996.
FEATURE STORY
Rigel Energy Asset Sale Trims Output
The Financial Post
An asset sale by Rigel Energy Corp. produced a pretax writedown of $37.8 million, pulled it into the red and dragged down its 1997 oil production, the company said yesterday.
It lost $23.9 million (43› a share) on net revenue of $215.3 million after taking a hit on the sale of properties in southwestern Saskatchewan. In 1996, it earned $2.4 million (4›) on revenue of $211.9 million.
Cash flow for the year was $133 million ($2.36), down marginally from $134.7 million ($2.40) in 1996.
The writedown hurt fourth-quarter earnings, which plunged to a loss of $26.1 million (46›) on revenue of $65.9 million, compared with profit of $2.5 million (4›) from revenue of $56.1 million in the year-ago period. Cash flow improved 13.5% to $40.1 million (71›).
Finding and onstream costs were $10.48 a barrel of oil equivalent.
Aliza Fan, an analyst with John Herold Inc. in Stamford, Conn., said those costs were above expectations for the industry of $6 to $8 a BOE. She said Rigel has good properties and interesting exploration plays that might make it attractive to producers looking for an acquisition.
The potential of the firm's North Sea play north of Scotland is one reason for David Stenason's "buy" recommendation. The analyst at Gordon Capital Corp. in Montreal has a 12-month target of $14.
"If they come in with a big discovery in the North Sea, it could make their finding and development costs come way down in 1998," he said.
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