Anadarko CEO Robert J. Allison Jr. is not alone in predicting asustained oil market recovery now that OPEC has decided it can livewith a little less supply on the market. But unlike most of theother optimistic soothsayers attending the Howard Weil EnergyConference in New Orleans last week, Allison sees a majorturnaround ahead and much greater volatility than has been presentin market cycles of the past.

There’s fixed supply at a time of steadily rising demand, saidAllison. “Who’s going to add new supply?” he asked. “Not BPAmoco-Arco-blank. They’re too busy managing merger consolidation.They have bigger fish and chips to fry.” And it won’t be the smalloperators who are struggling just to stay in business right now, hesaid.

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

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

“We’re pleased that BP has worked its way through the A’s andpassed by us,” he said. It leaves Anadarko to take advantage of thenew opportunities created by the depressed market, in particular,the lease openings available in the sub-salt. “It’s great to stayahead of the competition. No one else is doing sub-salt like we areright now,” and Anadarko would like to keep it that way.

Stone Energy, another, albeit much smaller, independent producerspeaking last week at the Howard Weil conference, noted it’s aperfect time to buy up lease positions around core operations whileothers are in need of cash. Look for a lot of “farmouts” this yearbecause many companies paid high prices on leases but currently arestruggling to find out how to make up those costs, said StoneEnergy President D. Peter Canty. “A lot of our competitors arelooking for cash flow to cover what’s budgeted,” he noted.

Other companies confirmed those observations. Several RockyMountain region-based producers indicated they plan on divestingnon-core assets or deferring activities in the Gulf andMidcontinent regions and will come back home to focus on coreRockies’ projects until the market settles and prices make asustained turn northward.

“We’re concentrating on the drillbit and [focusing] on theRockies,” said Basin Exploration CEO Michael S. Smith. “We’rede-emphasizing the Midcontinent and the Gulf and curtailinginternational activity until oil prices recover.”

William J. Barrett, CEO of Barrett Resources, noted his companyshowed a 310% reserve replacement rate and 19% production growth inthe Rockies last year in contrast to much poorer results in otheroperating 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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