Commentary, 1/2, 2004

Published Feb 13, 2004
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Oil and Gas Econ 101
The oil and gas industry, like any other industry, is at the mercy of the marketplace. And markets are typically reactive. That is to say, all the people who make up the market tend to collectively react to various stimuli. We most often track these reactions with line charts, which provide the sensation of being up-to-the-minute when it comes to market trends (especially when they’re updated every 15 minutes on the Web). It’s like strapping a lie detector to the market and following the jumping, jagged line to see just how the market’s reacting to current events. Bar charts can be interesting for comparison and pie charts are great for expressing parts of a whole, but line charts, often accompanied by negative or positive percentages, are what it takes to appease investors.

Governments, companies and even brokers attempt to influence the markets, trying to heat them up or cool them down. Tax cuts or raises, earnings announcements and published opinions are all used as the reasons behind favourable or poor market performance. Add to these any number of factors such as war or peace, natural or manmade disasters, and just plain good or bad luck, and it’s no wonder the lines jump around so much.

The oil and gas industry is no different. Lately, the offshore industry has been presented as safe haven for investment funds. These favourable recommendations appear valid, as technological breakthroughs and reserve estimates suggest that even in mature areas the outlook is bright. Watch the line go up.

But is the outlook as rosy as it appears? Shell recently announced that it had previously overestimated existing worldwide oil and gas reserves by 20 percent. Even the Ormen Lange gas field’s potential is not as great as it seems according to new figures from Shell. By the time you are reading this, Statoil and Norsk Hydro will have published their numbers, so the results and projections may be different from the way things look as this is being written. Has the line edged down a bit?

For the Norwegian Continental Shelf, the authorities have been providing incentives, attempting to stimulate activity and thus the market. The latest licensing rounds have made a large number of blocks available – more so than they have in a very long time. Additionally, licensing now includes “use it or lose it” provisions so that operators and licensees must submit plans for development or relinquish their claims. And those are just the current conditions. In the coming spring, the authorities will submit a white paper to the Norwegian parliament, who will debate the merits of the paper’s recommendations, eventually making law concerning Norway’s oil industry. The authorities have been tight-lipped about coming recommendations, but once the white paper is submitted, even before the parliament debate begins, we can expect to see the market react. We’re looking forward to checking the line’s progress at that time.

And just to cover ourselves, we should close by saying:
This commentary contains forward-looking statements relating to operations that are based on fanciful expectations, estimates and projections about the oil and gas industry. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and difficult to predict …

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