“The U.S. has entered into an era of higher price volatility in the energy markets” as supplies tighten, Anadarko CEO John Seitz said in a keynote speech at the Howard Weil Energy Conference last Monday. “The intensity is increasing, and the cycles are getting shorter.”

And higher natural gas prices are here to stay. “The old $2 mid-cycle price for gas today is as unsustainable as the $10 gas we saw a little more than a year ago. The free market works.”

He also pointed out that “volatility creates opportunity,” Seitz said, “opportunity to manage cycles, to enhance profitability — for the industry and for consumers. Success is about finding the right individual strategies, regardless of whether prices are up or down.”

Seitz emphasized three tactics for energy companies to use to cope with volatility: (1) maintaining financial discipline; (2) managing through the cycles, and (3) balancing costs and capabilities.

“Anadarko’s financial discipline begins with a broad and deep portfolio of potential drilling projects,” Seitz explained. “We constantly high-grade this portfolio — we buy or sell properties that improve returns or enhance margins or give us more future growth — regardless of what that might do temporarily to our reserves and production growth rates.

“Managing through the cycles involves flexibility,” he continued. “At Anadarko, we work to add reserves — either through the drill bit or through acquisitions — during the down cycles. And, during the up turns, those reserves should be developed and turned into production.”

As an independent producer, Anadarko creates value by applying the right tactics to two basic types of upstream investments: “base-load,” long-term projects and “peaker” discretionary projects. “Base-load projects have long lead times and are relatively unaffected by commodity price volatility,” Seitz explained. “Our Algeria, Alaska and deepwater Gulf of Mexico projects fall into this category.

“Peaker projects are the ones that can be more readily dialed up or down to manage the cycles. The key is knowing when to build reserves and drilling inventory and when to build production. For Anadarko, this is primarily our onshore U.S. and Canada projects.”

The third strategy Seitz detailed was balancing costs and capabilities. “Anadarko has always managed the staffing level and the portfolio to keep everyone productive, actively drilling at the peaks and building opportunities in the valleys,” he said.

Looking beyond the current world economic cycle, Seitz stressed that there are factors at work that make the long-term outlook bullish for oil. “Inventories of crude oil and products have declined in the last few months, and the market’s expectation of future demand growth and supply tightness has driven this price rally,” he explained.

In 2001, the U.S. produced about 55 Bcf/d of natural gas. Because of U.S. decline rates, the industry has to find 12 Bcf/d of new gas production just to hold supply flat for 2002. “That’s about how much gas was imported from Canada last year. Think of the magnitude of that challenge. Industry has to find a whole new Canada every year, just to meet current demand.

“Unfortunately, the industry’s lack of access to under-explored areas severely limits the country’s ability to expand gas supply,” he said. “The bottom line is that if we want to grow supply as a nation, we need to elevate the public policy debate. Until there’s more access to new areas in the Lower 48 — both onshore and offshore — options are limited. And that means we are destined to see both increased volatility and higher average prices.”

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