RE: How's it compare too a yr agoI ran across a couple of articles on the oil industry posted on another site. I think they are interesting, particularly the following passage, taken from the first article, which, to my dismay, doesn't seem to apply to Encana.
"Oil companies say they learned their lesson from the Asian economic crisis and are wary of overinvesting. Many producers are sitting on huge cash positions due to record sales and are buying back their shares while issuing generous dividends. "
Here is the entire article.
Rate of oil exploration slows
Companies trim budgets, raising supply concerns
By Stephen J. Glain, Globe Staff | August 21, 2004
WASHINGTON -- Despite record oil prices and strong projected demand from China and the United States, major oil firms are skimping on their exploration budgets and pocketing big profits while waiting out the storm of high prices, oil analysts say.
ADVERTISEMENT
"If ExxonMobil says it will expand its exploration budget by 50 percent, that will be a sign they think these prices will be sustained," said Edmond Chow, a Washington oil consultant. "So far, we're not seeing that."
The surge in fuel costs has been blamed largely on a shortage of production capacity rather than a dwindling of the world's crude reserves. And that, analysts say, is the result of a sharp decline in new drilling that followed the near-collapse of the Asian economy seven years ago. In 1997, much of East Asia's currencies plummeted against the US dollar and demand for crude oil dropped sharply along with energy prices, forcing petroleum producers to slash exploration budgets.
Spending on exploration among the top 10 oil companies declined to $7.5 billion in 1999 from $11.3 billion in 1998, according to Wood Mackenzie, a Scotland oil consulting firm, and has yet to return to 1998 levels.
With new drilling plans put on hold, there was little petroleum capacity left to meet the needs of China's economic expansion, which kicked into high gear in the last 18 months, and this year's recovery of the American economy.
"Growth in China and the US caught" oil companies "by surprise," said Robert Ebel, who heads the Energy and National Security Program at Washington's Center for Strategic and International Studies. "Projects that should have begun in the late 1990s didn't happen, and as a result we're missing the capacity that would have been coming online now."
The price of a barrel of crude oil fell slightly yesterday from Thursday's record price of $48.70 a barrel, closing at $47.86 on the New York Mercantile Exchange.
While exploration budgets have recovered somewhat since 1998, analysts say the increase may not be enough to match projected demand, particularly given how the next generation of oil development will take place in largely untapped but politically volatile regions like Venezuela and Nigeria, where instability in the last year has led to costly supply disruptions.
"There is nothing out there to suggest cheap oil in the long term unless you have a serious slowdown in China," Ebel said. "We might solve problems in Iraq, Russia, and Nigeria, but when you resolve one problem, something somewhere else tends to crop up."
Oil companies say they learned their lesson from the Asian economic crisis and are wary of overinvesting. Many producers are sitting on huge cash positions due to record sales and are buying back their shares while issuing generous dividends. For now, petroleum producers seem to be gambling that the chaos among petroleum-producing countries -- the insurgency in Iraq, concerns about Iran's nuclear ambitions, the near bankruptcy of Russian oil giant Yukos, and the threat of terrorism in Saudi Arabia -- coupled with continued high demand for oil in China and the United States, will gradually subside.
Rate of oil exploration slows
August 21, 2004
Page 2 of 2 -- John Felmy, chief economist at the American Petroleum Institute -- to which a spokesman for ExxonMobil referred queries -- says US companies will spend an estimated $52.9 billion in exploration and production in 2004, up 4.8 percent from last year's levels following a 23.6 percent increase in 2004. Felmy said US producers would invest more aggressively were it not for environmental regulations and corporate pressure at home and political instability in oil-rich states abroad.
ADVERTISEMENT
"You've got to produce the greatest return for shareholders, and if that means buying back shares, that's what you've got to do," he said. "On the other hand, there are promising areas we can't invest in, like Alaska. If places like Alaska open up, we could do a lot more."
For all the advances in energy exploration technology, hunting for crude oil is expensive and often frustrating work. More often than not, according to industry specialists, new drilling projects fail. Shell, the Anglo-Dutch oil giant, plans to invest $1.4 billion, up from $1 billion last year, to develop wells on 15 to 20 major new sites. It anticipates a success rate of 50 percent, "and we're quite proud of that," said Shell spokesman Simon Buerk.
Analysts acknowledge there are good reasons to think petroleum prices may taper off over the next several years. New wells in Central Asia, West Africa, and the Gulf of Mexico are expected to add an estimated daily production capacity of 5.5 million barrels of oil. The US Department of Energy forecasts total daily petroleum production capability to grow to 126 million barrels in 2025 from today's 80 million barrels, a 51 percent increase, above the agency's estimate of a 44 percent rise in consumption.
Economists and oil specialists are anticipating the current surge in petroleum prices to slip to an average of $35 a barrel for the next calendar year -- costly by recent standards but still low compared to oil prices in the 1970s when measured in real dollars. In addition, say analysts, considerable growth in refining capacity over the last few years should ease supply bottlenecks into the next decade.
"We expect the fundamentals to soften somewhat into 2008," said Jamal Qureshi, a Washington oil analyst at PFC Energy. "There's a lot of capacity that will be coming on stream."
But Qureshi said he is troubled by the way oil companies appear to be more concerned with their balance sheets than developing new oil reserves, particularly given the anemic investment levels of the late 1990s and forecasts of sustained high demand from China. While waiting for prices to ease atop a mountain of cash and tight capacity, some analysts fret, petroleum producers could actually be setting the stage for even higher oil prices a decade or so from now.
"The situation is fundamentally different" from the late 1990s, Qureshi said. "With supplies this tight and demand so strong, spare capacity could be eliminated overnight. The major companies are not doing much for the long term."
Stephen J. Glain can be reached at
Copyright 2004 Globe Newspaper Company.