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Anadarko Sees Major Oil Recovery on Horizon

Anadarko Sees Major Oil Recovery on Horizon

Anadarko CEO Robert J. Allison Jr. is not alone in predicting a sustained oil market recovery now that OPEC has decided it can live with a little less supply on the market. But unlike most of the other optimistic soothsayers attending the Howard Weil Energy Conference in New Orleans last week, Allison sees a major turnaround ahead and much greater volatility than has been present in market cycles of the past.

There's fixed supply at a time of steadily rising demand, said Allison. "Who's going to add new supply?" he asked. "Not BP Amoco-Arco-blank. They're too busy managing merger consolidation. They have bigger fish and chips to fry." And it won't be the small operators who are struggling just to stay in business right now, he said.

With oil demand growing 2 to 2.5% per year worldwide and production flat or even in decline, a major price surge is in store. Allison predicts oil prices will shoot well above $18/bbl in a much "longer and stronger" market recovery than at the end of previous cycles. The shock of the spending cutbacks and drilling decline also should put quite a jolt in the market, triggering significantly greater volatility than expected, he said.

Allison said Anadarko plans to focus on building around its core assets this year, particularly those in the sub-salt play offshore in the Gulf of Mexico. However, its acquisition options will be limited by a capital spending program that has less than half of the cash of its 1998 program, $410 million compared with $917 million last year.

"We're pleased that BP has worked its way through the A's and passed by us," he said. It leaves Anadarko to take advantage of the new opportunities created by the depressed market, in particular, the lease openings available in the sub-salt. "It's great to stay ahead of the competition. No one else is doing sub-salt like we are right now," and Anadarko would like to keep it that way.

Stone Energy, another, albeit much smaller, independent producer speaking last week at the Howard Weil conference, noted it's a perfect time to buy up lease positions around core operations while others are in need of cash. Look for a lot of "farmouts" this year because many companies paid high prices on leases but currently are struggling to find out how to make up those costs, said Stone Energy President D. Peter Canty. "A lot of our competitors are looking for cash flow to cover what's budgeted," he noted.

Other companies confirmed those observations. Several Rocky Mountain region-based producers indicated they plan on divesting non-core assets or deferring activities in the Gulf and Midcontinent regions and will come back home to focus on core Rockies' projects until the market settles and prices make a sustained turn northward.

"We're concentrating on the drillbit and [focusing] on the Rockies," said Basin Exploration CEO Michael S. Smith. "We're de-emphasizing the Midcontinent and the Gulf and curtailing international activity until oil prices recover."

William J. Barrett, CEO of Barrett Resources, noted his company showed a 310% reserve replacement rate and 19% production growth in the Rockies last year in contrast to much poorer results in other operating areas. "That's why Barrett is focusing on the Rockies" and putting other activities on the back burner.

Rocco Canonica, New Orleans

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