In case anyone hadn’t noticed, profoundly depressed commodityprices have the world oil industry facing serious uncertainty overits future, according to the 1999 edition of World Oil Trends, ajoint report by Arthur Andersen and Cambridge Energy ResearchAssociates (CERA).

“The balance that began to unravel in 1997 came completelyundone last year,” said CERA President Joseph Stanislaw. “Thesuddenness of the Asian economic crisis and its impact on demand inthe region created a global ‘oil bubble’ and a 33% decline in theaverage annual price of crude oil between 1997 and 1998.”

“Apart from the rapid decline in price, today’s oil industry isradically different from the one that faced a similar pricecollapse in 1986, and reactions to the low price environment by allparties – companies, countries and consumers – bear this out,” saidVictor A. Burk, Arthur Andersen managing director for energyindustry services.

The report comes one week after the Independent PetroleumAssociation of America (IPAA) issued results of its own surveywhich found historically low oil prices have increased the numberof shut-ins and the industry unemployment rate. IPAA’s surveyshowed 16,147 crude oil producing wells were shut in in 1997 with72 million barrels of production lost and 8,226 natural gas wellswere shut in with 13.1 Bcf of production lost. Also, 3,093 jobswere lost. The IPAA membership survey turned up 720 responses fromcompanies accounting for 11.9% of U.S. crude oil wells and 14.2% ofnatural gas wells. Extrapolating the response to the full universe,the producers group estimated 136,132 crude wells and 57,958natural gas wells have been shut in since November, 1997 when crudeprices tanked. It projects additional shut-ins as long as oilprices remain at an average $14 a barrel. The average price in 1998was about $11.25 a barrel, IPAA calculated.

“America’s oil and natural gas production base is eroding,” IPAAsaid. “And if action is not taken immediately, [by Congress and theadministration] the Y2K computer problem predicted in 2000 willlook like a stroll in the park compared to what America will facewithout a functioning domestic oil and gas industry.”

During an Andersen-CERA press briefing in Houston Monday,Stanislaw and Burk said the current oil price environment is due tolack of demand rather than oversupply. The industry’s resulting oilbubble dwarfs the bubble experienced by the natural gas industry inthe 1980s. All this has led to an unprecedented number of mergersand acquisitions in the United States, noted Burk. He predicted theindustry could see another BP Amoco-style deal before the end of1999.

“This is a structural change taking place in this industry,”Stanislaw said. “It’s not an oil industry. It is an energyindustry.”

The report asserts the current slump differs significantly fromthat experienced in 1986. One difference is restructuring andcost-cutting. “The oil industry has attacked its cost structuresince 1986 with everything from leading-edge technology to jointventures with spectacular results. Now, mergers and acquisitionsare strategies for large cost reductions. However, while mergersmitigate risks through greater efficiency and gains in scale, theyalso pose the considerable challenge of integrating people,cultures, knowledge, technology and processes.”

The report also says since the 1986 price collapse, oil has lostground, primarily to natural gas, in space heating and electricpower generation. “Price, however, plays a less important role inthe success of natural gas and the result is that oil price swingshave less of an impact in the choice of fuel in the space heatingand electric power sectors than they did in the past.”

Joe Fisher, Houston

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