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Commentary, 7/8 2004

Published Aug 16, 2004
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Past Imperfect

In fifty or even a hundred year’s time, what will economic historians make of the oil and gas industry in the early years of the 21st century? We in 2004 can easily look back over our recent past and note the extremely low oil prices of 1998-99. We can track the changes in those prices up to today’s record-breaking highs. But when those historians look back at 2004, what will they make of us? Will the markets’ group-think that often leans towards panic be seen as legitimate response to today’s events or as a kind of hysteria? It seems likely that some historians may consider this year as a pivotal time, a time that marks the beginning of a new era.

The demand for oil and gas is an important aspect to consider when explaining today’s high oil prices. All projections show that demand in the industrialised nations will only increase. Add to that the demands from developing countries, whose energy needs will climb as they progress, and it’s possible to believe that prices can only go higher. Applying a recent lesson learned in the steel industry – that the demand for steel in China helped to double steel prices over a two-year period – serves to emphasise this premise. Combine declining production with these increasing demands and low-price oil and gas seem like impossibilities.

But supply and demand are not the only factors. If we begin to list the destabilising events that keep pushing prices upward – events such as the ongoing instability in Iraq, the uncertainty of the oil industry in Russia and even the attacks on foreign workers in Saudi Arabia – we could begin to wonder if there is any cause for hope at all. Fortunately, current events are just that – current. Destabilising events, often manmade, do have a way of sorting themselves out (although they often seem to be immediately replaced by other destabilising events). So we really must choose how to interpret the day’s news. We can hope for some good news – news that can make the difference between a pessimistic or optimistic market.

One bright spot is the current state of technology. Exploration and extraction technology, including means and methods still on the drawing board, gives hope for ever more efficient and effective field operation from even the most marginal fields. In the subsea arena, the percentage of field recovery is growing, as are rates from offshore platforms. Technology development here on the Norwegian Continental Shelf (NCS) is blossoming. Hardly a week goes by without an announcement of a technological success.

But technology alone can’t ensure that existing NCS production levels can be maintained. Everyone agrees that the NCS area has now reached a mature phase, and expectations, along with production rates, are declining. The Norwegian government has taken one step forward, making recommendations to help stimulate exploration. And exploration is one great hope – without new discoveries the decline will quicken.

Both the NCS 18th and the UKCS 22nd rounds can be said to be successful. All around the continental shelf, activity levels are positive, but the difference between the two areas can give pause. Although an even more mature region, UKCS activity still outstrips that of the NCS. One reason is that small and even marginal fields are under production in the UKCS. The Norwegian government itself has noticed the difference, yet small and marginal discoveries here are only noted for future reference. More has been done to encourage development of such discoveries, but perhaps more flexibility is needed. The white paper from the Norwegian Ministry of Petroleum and Energy has opened the forum for debate. The outcome of that debate is yet to be known.

Hopefully, when those future historians look back at us, they’ll mark 2004 as the beginning of a bright era, not as the time when we almost saved the oil and gas industry on the NCS.




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