"This is how the missing barrels that IEA has been reporting will disappear"
Oil prices could rise more still
World Oil, October Editorial
When spot prices on the New York Mercantile Exchange closed above
$24 per barrel last month, it seemed a good time to obtain a fresh view
on prices. So, we visited with Henry Groppe of the Houston consulting
firm, Groppe, Long and Littell - the first and only outfit we know of to
predict the turnaround this year. In fact, it was last October when we
heard them say oil would reach $20 per bbl by midyear 1999 and $26
by year-end. Keep in mind that at this same point in time, oil company
economists, Wall Street analysts and most other forecasters were telling
industry to get used to $12 oil since it would be around for another
three or four years.
Mr. Groppe says the firm has since taken another look at the numbers
following the OPEC meeting in March this year, but saw no reason to
change the original forecast.
Asked about comments from naysayers who think that higher prices will cause OPEC members to
cheat on their production quotas, thus weakening prices, Groppe disagrees. "We think there is a
misperception widely held by the International Energy Agency (IEA), the analysts, the press and most
of the industry that there is 8 million bpd of capacity shut in. This is based on an estimated 3 million bpd
of unused capacity in early 1998, plus an assumed 5 million bpd of production cuts during the past year
and a half.
We think most of these were "paper cuts" from exaggerated high levels of claimed production. With the
actual capacity-demand balance tighter than most believe, a total of only 1.25 million bpd of actual cuts
(by Saudi Arabia, Kuwait and Abu Dhabi) are required for our forecast of $26 by year end.
As to supply / demand numbers issued by the IEA, which have overstated supply in the past, Groppe
says, "We are seeing them forecast much higher draws from inventories during the last quarter than we
think are realistic. So, we think that this is how the extra barrels of oil in storage that IEA has been
reporting will disappear. They created them on paper, so they are going to remove them on paper by
forecasting a bigger gap between production and consumption than is actually the case."
Natural gas. Along with $26 oil by year-end, the consulting firm also expects natural gas to reach
about $3.80 per Mcf. "Looking at our estimates for 1998 - a very warm year - gas inventories grew
by an average of 1.5 Bcfd. But this year, we are estimating that inventories will be drawn by an average
of 1.5 Bcfd by the time we get to year-end," says Groppe.
If the above situation occurs, it will amount to a 3-Bcfd shift in the supply / demand balance, and will
have more and more effect as demand continues to outstrip supply. With oil prices in the $26-range,
then low sulfur fuel oil (the alternative fuel under dual-fired boilers) will correspond to gas at about
$3.80 per Mcf.
Declining gas deliverability in the U.S. will soon become a significant concern. Groppe sees only two
areas with the potential for raising production - the deepwater Gulf of Mexico and tight gas reservoirs
in the Rocky Mountains, particularly in Wyoming. However, he says, "We don't think those are
adequate to offset the declines in our biggest sources of production. In fact, the principal growing supply
for the U.S. the last 13 years has been imports from Canada. And without those we would have had a
severe gas shortage long ago."
Canada is producing gas at capacity, according to Groppe, and he doesn't think the country will be
able to continue its past growth rate, since it has already run its reserve-life index down from about 28
years to 10 years during the past 12 years. Furthermore, during the last 12 years, Canada only replaced
production with reserve additions during one year. And to keep the pipelines full, including the new
Alliance pipeline coming on next year, Groppe thinks Canada would have to double its average annual
reserve additions of the last 12 years.
In view of the above, Groppe sees the U.S. entering its first real gas deliverability shortage in the history
of the industry.
So, with oil prices double what they were at year-end 1998 and an optimistic outlook for gas too, why
are operators so slow to react? Maybe it's akin to the situation of the farmer using his horse Buddy to
help a car stuck in the mud:
He hitched Buddy to the car and yelled, "Pull, Nellie, pull!" Buddy didn't move. He hollered, "Pull,
Buster, pull!" Nothing. Then he commanded, "Pull, Coco, pull!" Still nothing.
Finally, the farmer nonchalantly said, "Pull, Buddy, pull!" When the car was pulled out of the mud, its
driver asked the farmer why he kept calling his horse by the wrong name.
The farmer said, "Oh, Buddy is blind and if he thought he was the only one pulling, he wouldn't even
try."
Maybe it's time to blindfold a few oil company CEOs and tell them to get back to work.
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