Mega-mergers only start of oil shake-up

By Greg Ansley

CANBERRA - As prices hover at 25-year lows the world's oil majors will push technology to the limits in a bid to drive down costs and make some of the planet's most remote reserves viable, industry analysts predict.

While oil prices are expected to gradually creep upwards, the pressure remains on companies which have already been forced into a rash of mergers and alliances to shut down marginal fields and slash exploration budgets.

In the past two years the West Texas intermediate crude oil price has crashed from $US26 a barrel to as low as $US11 - a 60 per cent dive that has taken world prices in real terms to below the levels of the 1973 oil shock.

BP and Amoco, Exxon and Mobil, Total and Petrofina merged in the hope of pruning the equivalent of $US2 a barrel from operating costs.

But according to analysts at the Australian agricultural and resource Outlook conference in Canberra, the scope for savings through mega-mergers has dramatically narrowed.

Instead, said BHP Petroleum's chief reservoir engineer, Peter Behrenbuch, oil companies will need to step up both their technological and commercial innovation, and the speed of their response to change.

A central key will be improving well productivity through such innovations as horizontal and multilateral wells, floating production systems and compact offshore liquified natural gas processes.

The greatest revolution at present under way is deep-water drilling: in the Gulf of Mexico. About 30 projects have exceeded a water depth of more than 300 metres.

Other major deep-water potential lies off the west coast of Africa, off Brazil, and Australia, where the first deepwater subsea development will push down as far as 600m in Western Australia's Blackback field.

But Mr Behrenbruch said it was not enough to come up with better ways of doing new greenfields developments.

"We have to be able to cut operating costs and increase reserves in existing fields as well," he said.

As it is, world oil production is expected to grow at about 1 per cent a year for the next two years, rising to 2-3 per cent a year over the following four years - most of it coming from Opec, as OECD production slips slightly.

According to Kim Donaldson, principal research analyst for the Australian Bureau of Agricultural and Resource Economics (ABARE), the main sources of new production will be mainland Asia, the disputed waters around China and Vietnam, Colombia, Ecuador, Brazil and Venezuala.

Growth of 4 per cent a year in crude oil production from developing countries is expected to limit Opec's market share, although industry analysts expect Iraqi exports to resume later this year with a predicted lifting of the United Nations embargo.

However, Mr Donaldson said Iraq would need time to regain its full production capacity of 2.6 million barrels a day, and Baghdad would be unlikely to add more than 500,000 barrels a day to global supplies this year.

Nor will expected growth in world demand of an average 2.1 per cent a year to 2004 rapidly drive up prices, which are forecast to remain significantly below the average $US19 a barrel (in 1999 dollars) reached between 1994 and 1997.

ABARE expects oil prices to average about $US12 a barrel this year - the same as in 1998 - climbing above $US14 a barrel in 2000 as growth in production eases and stocks fall.

The average word trade weighted crude oil price is projected to remain at about $US12 to $US16 a barrel in 1999 dollars until 2004.

* Meanwhile, oil traders and analysts said they expected prices to stay roughly at current levels for a while but to climb later in the year as surplus oil begins to be mopped up.

Opec is hoping to lift Brent to around $US18 but analysts are tending to err on the side of caution.

Last month a Reuters poll of oil industry experts forecast an average of just $US12.61 for Brent this year. Many are now revising their forecasts upwards and predicting levels nearer $US15 or $US16 by the end of the year.

Oil analysts believe the Vienna deal to cut exports will lift prices even if Opec does not stick rigidly to the agreement.

The Centre for Global Energy Studies in London said: "There could be some short-term profit taking but there is little doubt that prices will trend upwards from now onwards."