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Arthur Andersen Sees Structural Change from Oil to Energy

Arthur Andersen Sees Structural Change from Oil to Energy

In case anyone hadn't noticed, profoundly depressed commodity prices have the world oil industry facing serious uncertainty over its future, according to the 1999 edition of World Oil Trends, a joint report by Arthur Andersen and Cambridge Energy Research Associates (CERA).

"The balance that began to unravel in 1997 came completely undone last year," said CERA President Joseph Stanislaw. "The suddenness of the Asian economic crisis and its impact on demand in the region created a global 'oil bubble' and a 33% decline in the average annual price of crude oil between 1997 and 1998."

"Apart from the rapid decline in price, today's oil industry is radically different from the one that faced a similar price collapse in 1986, and reactions to the low price environment by all parties - companies, countries and consumers - bear this out," said Victor A. Burk, Arthur Andersen managing director for energy industry services.

The report comes one week after the Independent Petroleum Association of America (IPAA) issued results of its own survey which found historically low oil prices have increased the number of shut-ins and the industry unemployment rate. IPAA's survey showed 16,147 crude oil producing wells were shut in in 1997 with 72 million barrels of production lost and 8,226 natural gas wells were shut in with 13.1 Bcf of production lost. Also, 3,093 jobs were lost. The IPAA membership survey turned up 720 responses from companies accounting for 11.9% of U.S. crude oil wells and 14.2% of natural gas wells. Extrapolating the response to the full universe, the producers group estimated 136,132 crude wells and 57,958 natural gas wells have been shut in since November, 1997 when crude prices tanked. It projects additional shut-ins as long as oil prices remain at an average $14 a barrel. The average price in 1998 was about $11.25 a barrel, IPAA calculated.

"America's oil and natural gas production base is eroding," IPAA said. "And if action is not taken immediately, [by Congress and the administration] the Y2K computer problem predicted in 2000 will look like a stroll in the park compared to what America will face without 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 to lack of demand rather than oversupply. The industry's resulting oil bubble dwarfs the bubble experienced by the natural gas industry in the 1980s. All this has led to an unprecedented number of mergers and acquisitions in the United States, noted Burk. He predicted the industry could see another BP Amoco-style deal before the end of 1999.

"This is a structural change taking place in this industry," Stanislaw said. "It's not an oil industry. It is an energy industry."

The report asserts the current slump differs significantly from that experienced in 1986. One difference is restructuring and cost-cutting. "The oil industry has attacked its cost structure since 1986 with everything from leading-edge technology to joint ventures with spectacular results. Now, mergers and acquisitions are strategies for large cost reductions. However, while mergers mitigate risks through greater efficiency and gains in scale, they also pose the considerable challenge of integrating people, cultures, knowledge, technology and processes."

The report also says since the 1986 price collapse, oil has lost ground, primarily to natural gas, in space heating and electric power generation. "Price, however, plays a less important role in the success of natural gas and the result is that oil price swings have less of an impact in the choice of fuel in the space heating and electric power sectors than they did in the past."

Joe Fisher, Houston

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