As energy companies come under continuing pressure to improve financial performance, despite volatile price swings in the oil and gas markets, technology is the crucial key in reducing costs and improving margins for both the upstream and downstream markets, according to a new study prepared by Cambridge Energy Research Associates (CERA) and Sun Microsystems.

And it won’t just be the majors that are able to take advantage of faster computer applications and the Internet. In fact, because smaller companies can actually adapt new technology faster, they may even have an advantage, said Larry Rice, the director of energy programs for Sun.

When demand for a product is down, as has been the case in recent months because of less demand for fuel (warm weather, less aviation travel since Sept. 11), Rice said technology has “always been a key to reducing costs in the past. That innovation continues.” Noting that there is a “heavier leverage” on web-based programs to reduce costs, Rice said today there are “zillions of devices” in the oil and gas fields that enable producers to better monitor and better manage their reservoirs and simulate needed work. As an example, Rice said energy companies can now use graphic simulators to “build platforms prior to actually constructing them so now you will know what they cost ahead of time.”

The key, he said, is proper implementation. “We are going to have to build and have reliable systems” to use the knowledge available.

CERA President Joseph Stanislaw said the energy markets were “more dynamic than we have seen for quite some time.” Now, however, producers aren’t “chasing demand” upwards because of low prices, but rather are chasing demand down. “The fear of recession that’s taking a grip on the market and demand has gone down further,” Stanislaw said. “It’s hard to be an oil producer…to know what direction to take.” CERA predicts that next year’s oil patch growth will, at best, be “weak every place,” and because of this, spending money to improve technological systems is important.

“Technological progress in the upstream means prospects can be found and reservoirs produced that would otherwise be uneconomic or invisible,” said Stanislaw. “The rise in upstream costs since 1996 is already being reversed. Upstream costs in non-OPEC countries are expected to fall by an average of 3% per year to 2010 — from almost $9 per barrel to little more than $7 (in inflation-adjusted terms). Cost reductions will occur fastest in the deepwater offshore, at an average of 4% per year,” he said.

Rice said that the “world’s enormous appetite for energy, power generation plants, distribution and transmission companies, exploration and production sites and shipping and transmission lines are all facing higher performance expectations. As the industry looks for ways to use technology — and in particular, digital technology — improving data and knowledge management are becoming important areas of focus.”

According to the study, which mostly focused on downstream markets, OPEC crude oil output is expected to fall an estimated 0.4 million bbl/d in 2001 to an average of 27.55 million bbl/d. OPEC crude production, not including natural gas liquids (NGLs), accounted for 42% of global crude supply in 2001, about steady with its share in 2000. Non-OPEC oil production (crude oil and NGLs) is slated to reach an estimated daily average of 46 million bbl/d in 2001, a 0.5 million bbl/d gain over 2000, when OPEC worked to curtail production in an effort to maintain higher oil prices.

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