Towards The Next Millennium

No doubt the petroleum industry has everyone on edge. Higher oil prices have failed to materialize and layoffs have once again become a fact of life. Downturns are a trademark of this business, while eternal optimists only speculate that an upswing is just around the corner. Not that anybody can forecast our future with crystal clarity, The Recorder recently interviewed some oilpatch observers for their insights into the current state of the industry and where we can expect to be in the next Millennium.

On Downstream Activities

Dave Zelinski, Director of sales, Fluor Daniel Canada, Inc., Calgary.

Here's at least one promising spot in the Canadian oil patch and that's at the Calgary-based offices of Fluor Daniel Canada, Inc. where staff have increased from 500 to 1100 persons during the past 24 months. Not since 1982, has Fluor Daniel's staffing been so high, now driven by domestic projects, primarily in the petro-chemical industry.

Fluor Daniel Canada, Inc. is currently participating on several oilsands projects. The $800 million Syncrude Aurora project, which is an expansion to existing facilities will be operational next year and house the world's largest vacuum unit, ultimately, processing 300,000 barrels per day. This past January, Suncors board of directors approved its $2 billion Millennium project which anticipates to increase production to 220,000 barrels per day of synthetic crude products. Fluor continues to work on the project development for Shell's Athabasca Sands development, which is expected to proceed during the third quarter of 1999.

Without a doubt, the global industry is going to be slow for some time to come, concedes Zelinski. "But the bright spot is now the cost and efficiency of Canadian professionals (compare to the U.S. dollar) is well recognized internationally. Canada is the most cost effective place for engineering services, and we will see Calgary as the place to lead the international projects. "

On Equity

Warren Holmes, Managing Director, Corporate Finance for First Energy Capital

"It's a very challenging task to raise money now. People are not investing because that $12 per barrel is going to persist. With respect to mergers and acquisitions, it's equally challenging because there's not a heck of lot of buyers. Instead, there's a gridlock. Everybody knows it's a great time to buy but they're afraid of low oil prices. There's a lot of sellers, but no buyers."

Holmes anticipates that 1999 will be a particularly acute year. A turnaround in oil prices can only be anticipated when there's a decline in oil production world-wide. Energy consumption has some role, because world activity, especially in southeast Asia, does impact the decline rates world-wide.

"I'm optimistic," says Holmes, "This is the precise time for companies to buy, as there are phenomenal acquisitions, but with private money. I'm more optimistic with respect to gas especially, during this upcoming fourth quarter. We're not in a world recession and eastern Canada is doing pretty well."

Some of the greatest companies started in times in times of distress, concedes Holmes. "You' re seeing companies that are slowing down on their development plans, seeing people focusing on their core industries rather than trying new ventures. There's no money for development and realistically, companies do have to pull in the shell and try and ride it out."

From the Geophysical Contractor's Point of View

Ken Lengyel, Chairman of Canadian Association of Geophysical Contractors and Project Manager for Geco Prakla

For the short term outlook, Lengyel offered a realistic perspective as to what was happening, "My personal view is that 1999 will be a hard year for the industry. We're hoping to see some recovery next winter, our peak season. In 1998, the seismic industry was operating at 30%, to 40% of level it was in 1997. A year ago, we had 89 crews, now we have 33 crews. I don't anticipate the remainder of the yea r to be great..."

Lengyel sees the favorable gas prices as driving the industry and notes few people are looking for oil. On the upside, oil companies are in an excellent position to do geophysical work, "They can take advantage of bargain basement prices, they will never get seismic cheaper than is now, which is now 25 to 35% cheaper across the board."

In trying to keep the long-term picture in mind, Lengyel anticipates that it will get busy again. He figures this present downturn is the "worst one that our industry has ever had, that's pretty pessimistic, definitely. The difference now is that we are more prepared to weather this one out, we got foolish as an industry during the heyday, yes there'll be some companies that get in trouble this time, but there won't be a bloodbath as in previous years. The industry has learned, but with a 60% reduction in work there's going to be layoffs."

What's in Store for the Future?

Chris Fong, Vice-President of Oil and Gas, Royal Bank, Calgary

The long-term is always optimistic, says Fong. "While the emerging markets will recover, we do not believe that it will be anytime soon. There needs to be better alignment of the fiscal, monetary, political and social policies. It will take time to foster a lasting recovery.

"...If prices fall to extreme levels, say U.S. $10 per barrel, the market will respond by reducing supply and push price back up to U.S. $15 per barrel, The source of this cut back will likely be the North Sea and North America. It is likely to be several years before the current oversupply situation corrects itself and U.S. $15 per barrel will be sustained. We do not see a long-term scenario where crude oil prices will languish at the U.S., $10 level. We believe the global energy industry requires prices in excess of U.S. $10 per barrel to sustain itself, given today's technology and cost structure. However, we believe that in the longer term, crude oil price will experience a real decline, similar to the experience of most commodities.

The outlook for natural gas prices is better. There is the risk that the current warm winter and strong storage supplies will see prices soften over the next six months, however the long term fundamentals are strong with demand pushing supply. This will be exacerbated by the lack of industry cash flow to fund drilling. We expect Canadian gas prices to continue to average in the order of $2.20 per mmcf over the next four years.

What does this mean for the industry? Last spring, as oil prices started to slip, it was considered temporary and prices were expected to strengthen in the fall. OPEC was expected to manage the supply side. Then we expected it to strengthen in the early winter. Many companies planned, and hoped that things would get better. One year later, we are still waiting. "

Judith Dwarkin, Vice-President, Global Energy, Canadian Energy Research Institute

Like Fang, Dwarkin is a purveyor of thought that low oil prices are here to stay. After the Valentine Day's oil price crash of 1986, it was anticipated that prices would return to pre-1986 levels and U.S. $20 per barrel was contemplated as a "low" and "low probability" case. But companies responded with new operating practices and new technologies for exploration and production. And with a scarcity of capital, countries responded by improving fiscal terms and opening their upstreams more fully to the private sector. In short, with technological advances, and even in challenging areas like deep water, finding and development costs are considerably lower than compared to fifteen years ago.

According to Dwarkin, between 1980 and 1990, non-OPEC production grew at a compound rate of just under 1 percent, but this rate of increase spurted to nearly 4 percent in the 1990's. With Iraq given permission by the United Nations to resume exports to a bloated marketplace, Dwarkin concedes that oil prices on average are likely to be lower and more volatile than they have been over the past ten years. Besides a possibly chronic supply glut, she anticipates that demand for crude oil will be facing pressure as governments and citizens become increasingly concerned about climate change and environmental quality.

How Bad Is It?

Andrew Hogg, P.Geol., Oil and Gas Analyst with First Marathon Securities Ltd.

Like those quoted before him, Hogg saw difficult times ahead for the oil and gas sector, with hope that commodity prices will shift in the year 2000. Hogg doesn't see this downturn as bad as previous ones. As compared to the 1986 downturn, he says, "Companies now have reacted faster, paying more attention to their monthly situation, instead of quarterly. We see the management teams more proactive. Companies are more financially conservatively run, balance sheets are in bad shape, but not as bad as the 1980's.

Interest rates are lower, debt is lower, and people are much smarter about how they loan and how they borrow."

"The big difference between 1980 and 1999 is that there's a very active property market," adds Hogg. Companies that get into financial trouble, have a fair and rapid process to go through to sell assets . He's surprised that with no easy money available that the buying and selling in recent months has been more active than expected. He cites the recent bankruptcy of Remington Energy where the company has not gone under, "What's happening at Remington ha s been good for investors and employees. Everybody at Remington has a job, investors will get fair value and employees will probably go on. This is a big change from the way things have been d one during the 1980's."

A Closer Look at Gas

Rick de Wolf, Senior Vice-President of Ziff Energy in Calgary.

"Gas is more focused because we're adding pipeline capacity, TCPL, Northland, Alliance... You're looking at for the first time in two decades, that the gas industry won't be impeded by lack of takeaway capacity and gas drilling will be much more focused," says de Wolf.

The low oil prices have put a cap on how high the price levels for natural gas will be. Considering the overall world economy and the fact that in some areas of the American mid-west, coal utilization for electrical generation is actually up, one thing is certain, that the economic well-being comes first, postponing new facilities for electrical generation and forgoing environmental issues.

Similar to the mining industry, another resource-based business, de Wolf concedes that everyone is looking for the best opportunities available, "When things become less of an economic challenge, you are able to look at less marginal ventures. We're going to continue to see consolidation. There will always be room for small niche players, but the economies of scale dictate these small companies have to grow."

For the long-term, de Wolf anticipates that natural gas, which is primarily a North American product, will keep its competitive edge. For 1999, natural gas price is anticipated to stay in the U.S. $2 per mmcf.

The Contrarians Point of View – Low Oil Prices are Good

John Driscoll, President of NCE Resources Group in Toronto

"The best thing for low oil prices is low oil prices," claims Driscoll. "What will inevitably will happen is that the oversupply will be used up and then we can see ourselves being set up for price hike."

He attributes the complete collapse of oil prices due to four recent extraordinary events occurring rather concurrently. There was the Asian economy meltdown, which used to account for 60% of the new oil demand. Secondly, in October 1997, OPEC - raised its quota from 25 to 27.5 million barrels per day. North Americans have experienced the warmest winters for two consecutive years and the United Nations lifted sanctions on Iraq to export their oil at the rate of 700,000 barrels per day. It's no surprise that oil prices are down 60%.

While currently there's two to three million barrels per day of production surplus, Driscoll notes, "What people have to remember in 1986, was that there was a 20 million per day surplus from OPEC countries alone." World oil production is now running around 75 million barrels per day while the demand is around 73 million barrels per day. And with the current lack of drilling, exploration and development, Driscoll anticipates by the fall 1999/winter 2000, world oil production will fall to 72 million barrels per day and eliminate the surplus, which will then correct the imbalance caused by low oil prices in the first place.

"The very reasons why the price of oil declined so rapidly starting in January 1997 are reversing themselves," observes Driscoll. "The Asian countries are starting to recover from their lows - Japan. Korea. They're going to replace and rebuild their inventories. They still have to heat their homes. EI Nino is becoming La Nina where other parts of the world are experiencing extreme cold temperature. And OPEC, is lowering its output."

A perennial optimist, Driscoll forecasts oil prices of up to U.S. $15 and U.S.$16 per barrel towards the end of 1999, but averaging U.5.$14 per barrel for 1999. Still, he would not be surprised if oil prices dropped below $10 barrel this spring momentarily

Over the long-term, Driscoll notes that world-wide oil demand has been growing by two to four percent annually. "In 1986, we consumed 58 million barrels per day. By the time we reach 2005, we're going to need about 85 million barrels per day and where is this oil going to come from? There are no alternatives for transportation, outside of natural gas. How long is it going to take to get the technology to use hydrogen and then convert existing vehicles? That's at least 25 years away!"

In a nutshell, Driscoll concedes, "When a quart of oil costs less than a quart of Perrier water, somethings got to be wrong. We're treating oil as a renewable resource, but the day of reckoning is going to come..."