J. Dennis Bonney
Vice Chairman of the Board
Chevron Corp.
San Francisco
Adapted from a presentation to the Middle East Petroleum and Gas Conference Jan. 17 in Bahrain.
These are times that call for each of us in the petroleum industry to predict the unpredictable and think the unthinkable.
Every oil entity is changing rapidly in its own operation. But even as we continue to change from within, we are being strongly affected from the outside by a number of geopolitical trends.
The challenge of geopolitical change is well exemplified by the sudden end to the superpower rivalry that shaped the Cold War. There is no more dramatic manifestation of this than the fragmentation of the Soviet Union into 15 new independent states.
It was, for many of us, unimaginable.
Yet it happened, and many of us in the oil industry have tried to predict how it will affect us.
This experience has turned out to be a lesson in humility. Crude production from the former Soviet Union (F.S.U.) declined some 15% in the past 2 years. It might have seemed logical that oil exports from the F.S.U. would also fall along with its oil output. But internal demand has dropped even more, and thus exports have in fact continued steady at a little over 2 million b/d of crude and products.
The continued weakness in the local economy, together with the pressing need for convertible currency, suggest that F.S.U. exports are likely to continue at least at the present levels in the near term and perhaps moderately increase as efforts to raise production begin to yield results.
For 2060, estimates of F.S.U. exports range from 300,000 b/d at the lower end to 4 million b/d at the upper end. Further out to 2005, the export estimates tend to cluster around 2 million b/d, accounting for the expected oil industry recovery, new field developments, and a return to more favorable economic conditions.
Thus major geopolitical changes have added a new element of long term competition and uncertainty for Middle East producers. Assessing the possibilities will continue to occupy planners in producing nations for years to come.
CHINA: AN EMERGING GIANT
Meanwhile, China appears to be on the threshold of becoming an important market for Middle East oil.
While the country's burgeoning economy is just one of several in Asia, this awakening giant is particularly important because of its size and unrealized potential. China's growth is almost a geopolitical trend in itself.
We've seen the dramatic development in progress in the booming areas of Shanghai and the Shenzhen Free Economic Zone as well as in Beijing and other major cities. Entrepreneurs, investors, workers, and consumers are responding to opportunities opening up in the market. Energy demand is expanding with the economy.
China's oil production today is about 3 million b/d. This number is expected to increase only slightly over the next 5 years.
By contrast, oil demand is growing at 6-8%/year and is expected to rise to about 5 million b/d by 1999. We expect China to become a net oil importer this year.
By 2000, this emerging giant economy may be importing as much as 2 million b/d.
The Chinese government has opened some new areas for international exploration-offshore areas and onshore in the Tarim basin. Numerous companies have responded. But this won't increase output in the near term.
NEW OPPORTUNITIES
China is not the only producing nation that has turned to outside partners and privatization in the hope of revitalizing its production industry.
Geopolitical and economic changes are leading many areas that were formerly inaccessible to open up for exploration and development by international companies.
Internal and external competition for capital makes it more difficult for many countries to marshal the resources for energy development. Some are finding they must offer creative and more attractive terms not only to motivate involvement in new exploration but also to maintain the full pace of production in existing fields.
Venezuela, for example, has arranged for revitalization of several marginal fields by offering incentives to foreign companies based on their success in achieving incremental production.
Indonesia is offering attractive terms to encourage enhanced oil recovery and exploration in some of its remote areas.
India also is offering attractive and creative terms for EOR projects.
Viet Nam continues its aggressive push to bring in more investment and technology for its petroleum industry, particularly for offshore exploration.
And the dramatic moves toward oil sector privatization by Argentina and Peru may inspire others to follow.
Clearly, more and more nations believe outside technology, management skills, and capital can stimulate oil production and protect oil export income.
As the opportunities have become more numerous, however, the multinationals themselves are also stretched by the increasing cost of addressing them.
The costs and challenges of developing new reserves, often in remote locations, compete internally with capital requirements of established areas that require intensive reservoir management and massive EOR projects.
NONOIL ALTERNATIVES
The opportunities are not limited to oil.
Natural gas has become a strong performer in world energy markets. World consumption is approaching 60% of the level of world crude consumption, compared with 40% 10 years ago.
Worldwide natural gas demand could well overtake crude oil demand within 15 years.
Widely held concerns regarding environmental quality represent another geopolitical trend that is likely to have an enduring impact on Middle East oil. These concerns are showing themselves in a new campaign to try to divert society away from reliance on oil for long term energy needs.
The U.S. government and the automobile industry recently launched an ambitious program to develop a superefficient automobile - one that can deliver up to 80 mpg. This program is designed to reduce automotive emissions and moderate the growth in petroleum imports.
But perhaps a more ominous trend for the future of petroleum demand is exemplified by the U.S. Energy Policy Act of 1992.
This act sets a goal for alternatives - such as electricity, alcohol fuels, compressed natural gas, and LPG - to replace at least 10% of the projected U.S. gasoline and diesel consumption by 2000.
If that can be achieved, alternatives would displace close to I million b/d of crude in the U.S. market.
By 2010, the goal is for alternatives to replace 30% of gasoline and diesel, or more than 2 million b/d. The impact would fall primarily on Middle East exporters.
This intense interest in alterative fuels may signal worldwide trends to come. And the potential effect on oil demand should concern all producers.
AIR QUALITY CONCERNS
Certainly, there are valid concerns about air quality in the world's major cities and the potential long term effects of carbon dioxide release.
But the best scientific data indicate air quality in major cities in the U.S. and Europe has in fact been steadily improving. One reason is improved automobile design. In fact, today's new cars - burning today's cleaner gasolines - have achieved over 90% reduction in tailpipe emissions compared to cars of 30 years ago.
Recent studies indicate that only 10% of cars cause 50% of all vehicle pollution. The most effective way to improve air quality is to accelerate the replacement of older vehicles with today's lower polluting models.
And when reformulated gasoline is adopted in major cities over the next few years, automotive emissions are projected to decrease by another 1525% from today's levels.
Despite this progress and the promise of more to come, the movement that has come to be known as "Get Off Oil" continues to gain popular support. This "petrophobia" is based on the widespread misperception that air quality is getting worse, not better.
One survey last year showed 71% of Americans believe the U.S. should reduce its oil consumption. And about a third of those people want oil consumption reduced sharply.
Neither oil producing countries nor oil companies can afford to ignore this trend.
It is important that we give priority to helping consumers and governments everywhere see that oil and environmental responsibility can coexist. We must work together to demonstrate the legitimacy of petroleum as the best fuel for the long range future.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
