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BusinessWeek: January 11, 1993 |
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Industry Outlook
NOW, THEY'RE COOKING WITH GAS The turnaround would be more pronounced if an over-supply of oil wasn't dampening prices worldwide. The consensus among analysts is that benchmark West Texas Intermediate crude should average about $21 per barrel this year, about the same as in 1992. That's largely because squabbling OPEC members are unlikely to rein in production enough to force prices up. In fact, many OPEC watchers expect Iraq, whose exports are now banned by U.N. sanctions, to be allowed to start selling some oil later this year to finance emergency purchases of food and medicine. The struggling nations of the former Soviet Union could offset that increase a bit. Their exports may drop slightly from last year's 2 million barrels a day. BURSTING BUBBLES. Plentiful supplies aside, "the real bad news is demand," says Pierre Terzian, head of Paris consultants Petrostrategies. Houston consulting firm Purvin & Gertz Inc. predicts that world oil demand next year will be about flat at 68.3 million barrels a day, mainly because weak economies in many countries are holding down oil sales. As the U. S. economy heats up, by contrast, domestic demand is projected to rise 2.4%, to 17.3 million barrels per day. The outlook for natural gas is brighter. The so-called gas bubble, or excess supply that has dogged the industry for a decade, may be near the bursting point. In recent years, depressed prices and better prospects for major finds over-seas have caused most producers to cut domestic drilling. As a result, only 70% of U. S. gas production was replaced in 1991, and only 60% last year, estimates analyst M. Diane Caracciolo of Kidder, Peabody & Co. Consumption should rise this year by 4%, the rate at which it has grown on av- erage since 1986, while U.S. production climbs less than 2%. As a result, "we're close to a balance of supply and demand" for the first time in nine years, says Thomas H. Cruikshank, chairman of oilfield-services giant Halli- burton Co. Gas prices shouldn't skyrocket, however--though a severe winter could lead to temporary increases. Most analysts expect U.S. spot prices to average $1.75 to $1.85 per thousand cubic feet this year, up from an average of about $1.65 in 1992 and a low last February of less than $1. "I certainly hope that $1 gas is a thing of the past," says James L. Pate, CEO of Pennzoil Co. As the year progresses, higher and less volatile prices should spur drilling, mainly by independents. Oil-field-services giant Baker Hughes Inc. estimates that the average number of U. S. drilling rigs in action will climb to 765, up 7% from 1992 but still down from 860 in 1991. George P. Mitchell, chairman of Houston's Mitchell Energy & Development Corp., says it would take sustained gas prices of over $2.50 per thousand cubic feet to really boost drilling. Still, Mitchell Energy will boost U. S. drilling by about 30% this year. In contrast, major oil companies such as Texaco, Mobil, and Chevron won't spend a lot more on domestic exploration. They're looking overseas, where drilling costs are lower, environmental rules less stringent, and chances of a big find better. Nearly 60% of the $2.8 billion that Chevron poured into exploration and production last year was spent abroad. Says Dan F. Smith, vice-president for corporate planning at Atlantic Richfield Co.: "As a big company, we tend to do better [financially] with larger fields where we can bring technological advantages to bear." In fact, the majors are unloading properties at home. Arco sold about $600 million worth mf U. S. reserves last year, resulting in deals with Anadarko Petroleum Corp., Snyder Oil Corp., and others, and it plans to sell more in 1993. All told, some analysts estimate, $15 billion worth of properties are on the bloek. But that doesn't guarantee bargain-basement deals, because higher gas prices may ease pressures to sell. "We're going to see an end to distress sales predicts Marion B. Stewart, a vice-president at National Economic Research Associates in White Plains, N.Y. Despite the money they're raising by selling reserves, the majors will keep a tight grip on their wallets. That's largely because they face a huge tab-estimated at $15 billion by 1995-for converting U.S. refineries to make federally mandated, environmentally safer reformulated gasoline. Beyond that, weak demand and overproduction of gasoline pushed many refineries into a loss last year after five years of modest profits, Purvin & Gertz estimates. With a strengthening U S. economy and continued consolidation of refining capacity, "there's a good chance that [refinery] margins in general will improve' this year, says Roger R. Hemminghaus, chairman of refiner Diamond Shamrock Inc. He estimates that 3% of U. S. refining capacity was closed last year, and an additional 2% may be shut this year. From here on out, oil producers may be able to ease tip on their furious cost-cutting. In 1992, the industry cut its head count by 72,000, or about 5%, according to the American Petroleum Institute. "I think we've got most of [the restructuring] behind us," says C. J. Silas, chairman of Phillips Petroleum Co. So, 1993 may be the year the industry starts pumping steady profits again. | |
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