Message 6054056
After reading the above, you can read a repeat of an article from last June.
June 15, 1998
Oil prices aren't going anywhere for a while, but
just wait a few years.
Cheap oil: Enjoy it while it
lasts
By Howard Banks
Not this year, nor the next, but maybe as soon as
five years hence, oil prices will start to rise, says
Franco Bernabé, chief executive of the Italian oil
company ENI SpA. Well before 2010, he
believes, the world will be vulnerable to
1970s-style oil shocks.
Speaking to FORBES in London in early May,
Bernabé says, "There is a great deal of
complacency among politicians and economists
that the oil problem is over. But despite today's
low prices, in the long term we will be back to a
high-price scenario in the oil sector."
It sounds unlikely, at a time when crude prices
have sagged below $15 a barrel. In real
inflation-adjusted terms, that's not much above the
price level just before OPEC sandbagged the world
with $30 oil in the mid-1970s. However,
Bernabé—who is a former economics professor
and in the 1970s was a senior economist at the
Paris-based Organisation for Economic
Cooperation & Development—puts forward a
well-argued case that oil will be a lot more
expensive in the 21st century.
Today's view is that prices will remain low for the
future because reserves of oil have been
increasing, especially with the discoveries of oil
outside the OPEC countries. On paper the world's
declared reserves, when related to production,
are one-fifth higher than pre-1973.
"Actually, the exact opposite has happened,"
Bernabé says. Most of the increase in world
reserves has been within OPEC and occurred in
1987 and, to a lesser extent, 1989. These were
years with low oil prices. "OPEC countries boosted
their reserve figures as a way [under their
calculation method] to increase their shares of
OPEC production through the quota system." A
negotiating ploy to boost earnings to pay for their
rising debt? "It was simply a trick," he says. Either
the newfound oil existed only on paper or it had
been there all along, but the owners hadn't
declared it. In either case, not new oil.
Another region claiming growing reserves is the
former Soviet Union. "These countries, too,
overstate their reserves, in this case because they
use the concept of geological reserves [everything
that might be in the ground] rather than the West's
concept of economically producible reserves," he
says.
What about technology? Haven't things like
horizontal drilling greatly increased the yield from
existing fields in recent years? Sure, says
Bernabé, but there's not a lot more scope to
increase recoverable reserves this way.
Bernabé's key concern is the
reserve-to-production ratio the ratio of proven
economically producible reserves to actual output
of the non-OPEC oil companies. He looks at the
world's 200 largest oil companies that are not
owned by an oil-producing country, eliminating
from his list such national companies as Saudi
Arabia's Aramco and the Iraq National Oil Co. (a
group which accounts for over 60% of the
world's oil reserves). For his list of 200, Bernabé
says, new reserves are failing to keep up with
growing output. "From 1980 to 1997, their
reserve-to-production ratio declined from 18
years to 12 years."
Bernabé thinks the figure will continue to decline.
"Even to maintain this ratio at today's 2.5% annual
increase in world production, this group would
need to replace 140% of their reserves over the
next five years," he says. This simply isn't in the
cards. "The amount of new discoveries in the
world has dropped from a peak of 41 billion
barrels a year in 1962 to 5 billion to 6 billion a
year now," he says. The peak of new discoveries
was in the 1960s, with just a half-dozen major
fields found since then.
"The only really major new basin recently has
been Africa's Gulf of Guinea, off Angola, Congo,
Gabon and Nigeria. Even the new North Slope
field in Alaska contains less oil than was once
hoped.
"For the U.S. as a whole, the industry is spending
15% more than five years ago on upstream capital
expenditure but without seeing an increase in
reserves. The North Sea has accounted for over
half of increased production in the last 15 years.
But output there will start to decline in the next 2
to 3 years."
"There is complacency that the
oil problem is over."
Bernabé points to what has been happening in the
Norwegian sector. "They have announced that
their planned increase in natural gas production to
100 billion cubic meters a year from 2000 to
2010 will now be trimmed to 80 billion cubic
meters. The reason is that they can only keep oil
production up by injecting gas into their wells,"
says Bernabé. The new field west of the Shetland
Islands is also proving to be much harder to
produce from than predicted.
"My forecast is that between 2000 and 2005 the
world will be reaching peak production from our
known fields, and after that, output will decline."
But demand will keep growing inexorably.
Will oil prices stay down well after the turn of the
millennium and then start to go up? Not
necessarily. Once the markets recognize that
production has peaked while demand grows,
prices could move up in advance of any actual
shortages.
If Bernabé is right, oil and oil shares should be
good investments for those who can take a
long-range view. But there are other, more dire
implications. "It will shift the power in the oil
market back to the Gulf region," he points out.
More than ever, the Middle East will become a
potential powder keg for war. |
