STEADY RISE IN OIL, GAS DEMAND AHEAD

Economic growth will steadily increase world demand for oil and natural gas during the rest of the 1990s.

After 2000, real oil prices could jump as productive capacity expansions are needed to meet steadily growing product demand.

In the very long term - 2010 to 2020 and beyond - demand will depend on the extent of political and economic liberalizations and the response of governments and consumers to those changes. If that period finds a world of increased regulation and taxation, government mandated conservation, and support for nuclear and other energy sources, it could be a difficult time for international oil and gas companies.

But only after 2020-2030 will renewable energy sources begin to be competitive with fossil fuels. Throughout this period of rising demand, oil reserves will be adequate.

Those are highlights of the picture painted by several key speakers at last week's 14th World Petroleum Conference WPC in Stavanger.

1990s OIL USE

Forces driving oil markets outside the former Soviet Union (FSU) since the mid-1980s will remain dominant through the 1990s. Oil consumption will continue to "rise sturdily," and OPEC will be the main incremental supplier.

Beyond 2000, those trends will be "critically affected" by policy responses to concerns over global warming and transportation, including the role of alternative fuels.

That's the broad brush outlook prepared for the WPC by Peter Davies, chief economist for British Petroleum Co. plc.

Davies told the WPC the weakness in oil demand in the first half of the 1980s was due to a decline in "static sector" demand. In the Organisation for Economic Cooperation and Development alone, for example, fuel oil consumption fell by 5 million b/d between 1978 and 1985.

"It is likely that the declines in world static sector oil demand have come to an end," Davies said. "Fuel oil demand in the world outside non-OECD Europe ... expanded by 0.9% in 1992 and is now at the highest level since 1983...

"Total oil demand growth is likely to be well above the 1980s but not reach the levels seen in the 1970s."

FSU OUTLOOK

Oil production in Russia has fallen 3.5 million b/d since the peak in 1987.

In the rest of the FSU, outlook has remained flat.

High production rates have reduced ultimate recovery from many fields, and in western Siberia during the mid-1980s water cut was increasing and average well production was dropping. Without adequate investment, the trend accelerated.

Average production fell from 300 b/d/well in 1985 to an estimated 100 b/d/well in 1992, Davies said. Water cut increased 4%/year and is now estimated at more than 75%.

"There is no sign of these trends turning," Davies said. "Even if substantial new funds were to become available at short notice, it is probable it would still take several years to stabilize production."

The energy picture in the FSU is too complex to draw simple conclusions about its future, largely because energy balances among republics and economic and political developments differ widely. But Davies offered these broad conclusions:

Continued declines in energy and oil consumption are likely. Energy price reform "if and when it is fully implemented" will depress energy demand even further.
The biggest energy crisis is the decline in Russian oil production, "which is showing no signs of stabilizing."
Declines in coal and gas production are less than in oil.
Oil trade in the FSU has slumped as Russia has tried to increase hard currency exports.

BEYOND 2000

Oil demand through the first decade of the next century will be influenced by economic growth, environmental legislation, and conservation. Predicting demand levels to 2010 therefore is difficult.

The incremental supply needed for demand growth will likely come from members of the Organization of Petroleum Exporting Countries because non-OPEC production will be flat at best.

OPEC's share of world oil production will continue to rise to 52.8% in 2010, said a paper prepared for WPC by S.A. Al-Fathi, head of OPEC's energy studies department in Vienna. The paper was presented by A. Gharani of the same department.

Gharani told WPC demand for OPEC oil is likely to be 35 million b/d in 2000 when world demand is 72.45 million b/d if oil prices remain constant in real terms ($17/bbl in 1993).

After 2000, Al Fathi expects an increase in real oil prices to $24/bbl in 2010. At that time, world oil demand will be 79.17 million b/d, and OPEC will be supplying 41.77 million b/d.

OPEC's share of world oil supply in 1995 is expected to be 43. 1 %.

OPEC natural gas liquids production will reach 3 million b/d in 2000 and 3.5-4 million b/d in 2010, Al-Fathi predicted.

OPEC's current crude and NGL producing capacity, including Iraq, is about 31 million b/d. Based on expansion plans, Al Fathi said, capacity could reach 41 million b/d by 2000, The required investment would be $160 billion, half of which would be spent in the Middle East to generate 80% of the incremental capacity.

Today's low oil prices could persist despite growth in demand if supplies from the FSU increase, although this is not likely until after 2000, Al-Fathi said.

REFINING INCREASES

OPEC refining capacity and complexity have increased in the past 15 years. Distillation capacity had grown to 7.4 million b/d by 1992, and conversion capacity reached 1.4 million b/d.

Capacity increases to 2000 are likely to be more dramatic with as much as 2.8 million b/d of capacity under construction or firmly planned, Al-Fathi said. "These refineries are mostly integrated high capacity plants and would at least have similar sophisticated conversion facilities..."

This expansion program is estimated to cost $29 billion.

Few plans have been announced for beyond 2000, but Al-Fathi estimates current trends of expansion and replacement of older plants could bring OPEC distillation capacity to 12 million bid in 2010.

Products exports from OPEC members could reach 4.7 million bid in 2000 and more than 6 million bid in 2010, he said. Products exports currently amount to about 2.9 million bid.

OPEC members' equity ownership in refineries in consuming countries is about 1.8 million bid at present, and supply agreements account for almost 2.5 million bid.

Expansion of these interests will depend on the availability of "good commercial opportunities and possibly a reciprocal upstream investment in OPEC countries," Al-Fathi said. This trend "is positive for its contribution to better understanding between producing and consuming countries."

TO 2020 AND BEYOND

In looking even further ahead, Royal Dutch/Shell Group uses scenario planning to describe market and political environments that might exist in the much longer term to 2020.

At the WPC, P. Kassler, group planning coordinator for Shell International Petroleum Company Ltd., London, described two such scenarios determined by responses to political liberalizations and economic reforms.

The "new frontiers" scenario is, Kassler said, "a story of growth, turbulence, and change. Economic and political liberalization are expected to work, in the sense of improving societies' ability to create wealth for their members."

In the "barricades" scenario, liberalization is held back, creating a world of divisions and barriers with limited room for maneuver. People resist liberalization because they fear they might lose jobs, power, autonomy, religious traditions, and cultural identity.

Kassler said the reforms of "new frontiers" will bring rapid economic growth and increasing demand for energy. Liberalization will spawn growth rates of 5-6% in non-OECD countries. They will account for 70% of world output by 2020, compared with less than half in 1992.

Demand for oil and natural gas liquids in this outlook will exceed 110 million bid by 2020. More than half will come from OPEC.

Some real growth in oil prices will occur, Kassler said, "but not necessarily above the $25-30/bbl or so at which unconventional liquid petroleum fuels ... (can) be profitably produced and marketed."

He said, "Given such prices, the world's liquid fuel resources are considered sufficient to fuel 'new frontiers' demand levels up to and beyond 2020."

In the "barricades" scenario, another energy supply crisis caused by political upheaval will occur after 2000. The resulting price spike will bring an attitude among consumers that energy is bad, along with a surge of regulation by governments to mandate conservation and the use of electric vehicles, support nuclear plant construction, encourage biofuel production, and increase oil and gas taxes.

Those responses will severely limit the growth of oil demand in OECD countries. Oil consumption in some markets such as transportation may even decline. And as prices fall to preshock levels, demand will not recover.

Although he did not provide demand figures for this forecast, the "barricades" scenario is not good news for international oil and gas companies, Kassler said.

At the end of this period, new renewable forms of energy will start to be competitive with fossil fuels about 2020 or 2030.

ASIA-PACIFIC GROWTH

During the past decade, world energy consumption grew at about 2%/year, but Asia-Pacific growth was 5%/year. The region now uses almost 20% of the world's primary energy. Oil demand grew at 4.3%/year in Asia-Pacific during the same period while world oil use was growing at 1.2%.

Until 2000, Asia-Pacific oil demand will grow at 3.6%/year to 16.8 million b/d, predicted Takao Tomitate, managing director of the Institute of Energy Economics, Tokyo.

In a paper prepared for WPC, Tomitate divided the region into two groups. In the high growth group, South Korea, China, Indonesia, Thailand, and Philippines are each likely to increase oil demand by 6%/year. In the low growth group - Japan, Oceania, Taiwan, Singapore, and Malaysia - oil demand will grow at only about 1.2%/year.