IPAA: 1991 DESTINED TO BE SIXTH YEAR OF DECLINING U,S, OIL PRODUCTION

The U.S. is headed for its sixth straight year of oil production declines.

The Independent Petroleum Association of America's supply/demand committee forecasts 1991 crude oil production of 7.043 million b/d, down 2.5% from the expected 1990 average. Natural gas liquids production will rise slightly more than 1% to stand at 1.526 million b/d in 1991, yielding a decline of a little less than 2% to 8.569 million b/d in total liquids production.

Domestic demand meantime will inch up to 16.968 million b/d, leaving an 8.474 million b/d gap in consumption and stocks to be filled by imports of crude oil and petroleum products. At that level, imports will account for slightly less than 50% of U.S. oil supply for the year, not counting volumes imported for the Strategic Petroleum Reserve.

IPAA's annual meeting last week also heard reports that U.S.:

Natural gas consumption will total 18.7 tcf in 1991, an increase of 2.5% from 1990.
The average weekly tally of active rotary rigs will show gains of 16% in 1990 and 15% in 1991. That will further bolster demand for oil country tubular goods, which showed a sharp jump in first half 1990 from the same period of 1989.
Horizontal drilling will increase dramatically, more than doubling in the next 5 years. Among other things, the technique will create a host of redevelopment opportunities in older fields.
Independent producers are reacting quickly to oil price increases. At the same time they are taking a more pragmatic approach to long term financial strategies, a survey cosponsored by IPAA and the Lehman Bros. division of Shearson Lehman Bros Inc. showed.
Stripper well production slipped to 386.916 million bbl of oil in 1989 from 442.8 million bbl in 1988. Abandonments amounted to 16,107 wells during 1989 to yield a stripper well count of 452,589 as of Jan. 1, 1990.

Sessions in Dallas drew 1,175 registrants, down from 1,264 at the 1989 annual meeting in San Antonio.

OIL SUPPLY/DEMAND

IPAA's supply/demand committee predicted a decline in 1991 crude oil production from the 1990 level of 7.225 million b/d, off 5.1% from 1989.

The relatively sharp slide for 1990 stems in part from maintenance work in Alaska that resulted in a reduction in North Slope production.

In 1991, improved economic returns from wells in the Lower 48 will encourage workovers and servicing. This will reduce abandonments and slow the production decline rate.

The committee also expects the crude oil production decline rate in Alaska to slow due to increased natural gas handling capacity and a hydraulic fracturing program.

The committee further assumes Point Arguello field off California will stay shut in because of environmental concerns.

The committee pointed out that since 1985 U.S. crude oil production has been declining at an average 4%/year, or about 340,000 b/d/year.

Domestic consumption will reverse the trend of the past 5 years and decline marginally in 1990 and 1991. Demand will be down 1.3% in 1990 at 17.093 million b/d and down another 0.7% in 1991.

Imports as a share of domestic demand will average 49.1% in 1990 and 49.9% in 1991. During second half 1991 imports will average 50.9% of domestic demand.

Demand for gasoline will continue to fall slowly in 1990 and 1991. Demand rose during 1982-88 but then slipped slightly--by 8,000 b/d--in 1989 to 7.328 million b/d. The supply/demand committee projects 1990 gasoline demand of 7.259 million b/d, down 0.9%, and 1991 demand of 7.15 million b/d, down 1.5%.

Continued improvement in fuel efficiency is expected. And personal travel by cars and light trucks will decrease in 1990-91 due to sluggish economic growth. The sharp jump in retail gasoline prices also will rein demand.

Demand for distillate fuel oil will fall 1.8% in 1990 to 3.1 million b/d, mainly due to warm weather in the first quarter and weak economic conditions for the year. The expected return to normal weather in 1991 will result in a slight increase in distillate demand--up 0.2% to 3.105 million b/d.

Residual fuel oil demand will slide 5.7% this year to 1.292 million b/d and decline another 3.2% in 1991 to 1.251 million b/d. That's because of an increase in the contribution of natural gas, hydropower, and nuclear power to electricity consumption.

Demand for liquefied petroleum gas will decline 5.3% in 1990 due to declines in chemical industry demand and industrial consumption. LPG demand will rebound in 1991 mainly because of higher ethylene demand.

GAS SUPPLY/DEMAND

IPAA's supply/demand committee noted the expected slide in 1990 U.S. gas consumption is the first such drop since 1986, largely due to unusually warm weather and a slowdown in economic activity.

The committee said competition for sales to electrical power plants and industrial markets from oil products, mainly residual fuel oil, has slackened since the start of the Persian Gulf crisis. In general, consumers that can switch from oil to natural gas fuel have done so.

The expected jump in gas consumption next year assumes normal weather, a resumption of economic growth, and a limited amount of additional fuel switching will take place through yearend 1991.

The committee expects natural gas demand in the electric utility sector to fall 2% in 1990 to 2.7 tcf because of mild weather and expanded production from nuclear plants and hydropower. Two new nuclear plants--South Texas 2 and Comanche Peak 1--went on line in 1989 and 1990.

Electric utility consumption will increase slightly in 1991 due to added demand in Florida.

The committee pointed out that utilities and other interruptible customers in the U.S. Northeast cannot fully use their natural gas burning capabilities during the winter due to pipeline capacity limitations. Those customers routinely switch to fuel oil as natural gas is diverted to space heating. A number of new pipeline projects are expected to be completed during 1990-91, which will allow some consumption gains.

Natural gas demand in the industrial sector will increase by almost 2% to 6.9 tcf in 1991. A substantial portion of this increase will come from new cogeneration projects.

Dry natural gas production will increase to 17.3 tcf in 1990, up 0.3%. It is projected to climb further in 1991 to 17.5 tcf.

The production increase in 1990 reflects inventory buildup after the sharp stock drawdown during the cold weather in December 1989.

Imports of Canadian gas and Algerian liquefied natural gas will continue to grow at a relatively rapid pace. Total imports will be up 7.6% in 1990 at 1.486 tcf. In 1991, imports will increase another 5.3% to 1.565 tcf.

The highly seasonal nature of natural gas demand plays a major role in supply requirements. In winter, demand peaks at more than 2 tcf/month. In spring and summer, usage bottoms out at about 1.2 tcf/month.

Storage withdrawals supply more than one third of consumption during winter months. This is in contrast to summer months, when storage additions account for as much as one fourth of natural gas production.

THE ECONOMY, TOTAL ENERGY

Underlying IPAA's outlook is the committee's projection of weak economic growth and sluggish demand for energy in 1990 and 1991.

The committee found that events in the Middle East placed further pressure on a weakened U.S. economy, Real economic growth is expected to slow to 1.1% in 1990 and to only 0.5% in 1991. The latter will represent the lowest economic growth since 1982.

As a result, total U.S. energy consumption will decline 0.4% in 1990 to 80.91 quadrillion BTUS. It will move up only 0.5% in 1991 to 81.28 quads.

The level and pattern of U.S. energy consumption during the next year will depend on the duration of the Persian Gulf crisis. Demand for energy in general and oil in particular is being reduced by the combined effects of higher prices and slower economic growth. Energy consumption in 1990 was also reduced by exceptionally warm weather in the first quarter.

Energy consumption from petroleum is projected to be down 1.1% in 1990 and 1991, failing to 33-46 quads in 1991. Natural gas energy consumption will fall 2.8% in 1990 but increase 2.5% in 1991 to a level of 19.26 quads.

Energy consumption from coal will increase slowly, advancing 0.1% in 1990 and 0.3% in 1991.

The committee said the pattern of increasing natural gas use at the expense of oil and coal could intensify during the next several years as environmental concerns and legislative mandates begin to swing the fuel mix toward natural gas.

Use of nonfossil energy sources will grow as hydroelectric power generation recovers from droughts of the late 1980s. Energy from hydro and geothermal power will move up 6.4% in 1990 and 2.9% in 1991.

The growth in nuclear power will slow as the last few planned nuclear plants go on line. It will be up 6.4% in 1990 after little growth last year, but then increase only 1.9% in 1991.

The committee projects a continued decline in the ratio of energy use per unit of real gross national product. This will fall to 19,400 BTU/GNP dollar in 1990 from 19,700 BTU in 1989 as energy efficiency continues to improve. The ratio is expected to remain at about 19,400 BTU/GNP dollar in 1991 if there is a return to normal weather.

DRILLING ACTIVITY

Baker Hughes Inc. told IPAA's cost study committee the U.S. tally of active rotary rigs will show a gain to 1,01 1 in 1990 and 1,160 in 1991.

The company predicts 35,800 well completions in 1991, an increase of 17.5% from an estimated 30,470 wells in 1990. Footage drilled in 1991 will be up 12% at 165.9 million ft from 148.125 million ft in 1990.

Average well depth will be 4,862 ft in 1990, falling to 4,635 ft in 1991.

Current higher prices for oil will trigger a shift toward oil well drilling. However, for the longer term, gas drilling will dominate, Baker Hughes spokesman Ike Kerridge said.

IPAA's cost study committee said increased drilling activity has resulted in rate increases by drilling contractors. Contractors' operating costs also have risen, but contractors are experiencing positive cash flows and minor net profits.

The lack of trained personnel continues to be a problem. Wages are being increased as a means to attract quality drilling crews. However, workmen's compensation costs are a major problem for contractors in most states.

Rig supplies and equipment are considered ample for the present level of drilling activity.

The committee reported across the board price increases by virtually all suppliers of goods and services. Most of the price rise is due to increased fuel costs.

There has been a dramatic turnaround in the oil country tubular goods market.

In first half 1990 U.S. mill shipments of tubulars increased by 49%, compared with first half 1989. Last year the reverse was true. There was a decline of 49% in the first half.

Exports of U.S. tubular goods for the first half were down 57% from the same period of 1989. Imports of tubular goods have not begun to increase with the pickup in drilling activity. They were down 1.1% for the first half.

Total supply of tubular goods in the U.S. for first half 1990 was up 74% from first half 1989.

Paul Leibman, a principal in Petrie Parkman & Co., Denver, cited a Baker Hughes forecast that horizontal drilling will more than double from the current level to 1,321 wells during 1995. What's more, such drilling will gain even more strength during the subsequent 5 years, accounting for 4,065 wells in 2000.

The surge flows from technological advances in things such as steerable drilling systems, reservoir modeling, 3D seismic and borehole geophysics, coalbed methane development, and advanced computerized fracturing.

Leibman said if horizontal drilling yields good results in a given reservoir, the economics are attractive at oil prices of $15-20/bbl.

INDEPENDENTS REACT

The IPAA-Lehman Bros. survey of 203 senior executives, conducted last September by Roper Organization, revealed an ability to react quickly to global forces that are dictating change and "a refreshing nimbleness" regarding economic factors that govern financing options, said Grant A. Porter.

Porter, managing director of Lehman Bros.' natural resources investment banking group, said 27% of those polled had increased production since the Aug. 2 invasion of Kuwait by Iraq. "We can assume that even more producers have adjusted their output higher since the survey was completed," Porter told IPAA's economic policy and crude oil committees.

Among respondents, 45% had started to review potential new areas for oil exploration, and 26% had increased capital spending since the Middle East crisis began.

Longer term, 73% of those polled believed developments in the Middle East will lead to a permanent increase in oil price. Most--68%--said a new price plateau of $21 25/bbl will be achieved when the crisis abates.

This has independents thinking about how to use new-found capital in financing growth, Porter said. What's more, flexibility is required as traditional sources of money--bank debt and drilling funds, for example--become less viable.

In the survey, 43% said they will consider increased participation in equity markets, while nearly 66% will consider an acquisition of some sort after the price of oil stabilizes. Straight mergers are an option for growth among 64% of respondents.

"In the late 1970s, bank debt and partnerships accounted for 80% of the capital raised for this industry," Porter said. "Today, our survey indicates that only 8% are contemplating using these forms of financing... quite a dramatic change."

Among respondents whose companies are considering new areas of exploration, 97% are focusing on the continental U.S. No other region is being considered by even half the survey group.

"Reports of the demise of the Lower 48 as an exploration frontier appear to be greatly exaggerated," Porter said.