Legislature(1995 - 1996)
03/29/1995 08:20 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
JOINT MEETING
HOUSE AND SENATE FINANCE COMMITTEES
March 29, 1995
8:20 a.m.
TAPES
SFC-95, #25, Side 1 (000-end)
SFC-95, #25, Side 2 (575-135)
CALL TO ORDER
Representative Mark Hanley, Co-chairman, House Finance
Committee convened the Joint Meeting of House and Senate
Finance Committees at approximately 8:20 a.m., in the Senate
Finance Committee Room, State Capital Building, Juneau,
Alaska.
PRESENT
In addition to Representative Hanley, Senators Phillips,
Sharp, and Zharoff were present. Senator Rieger arrived
soon after the meeting began.
ALSO ATTENDING: Senator Torgerson; Senator Green; Mike
Greany, Director, Legislative Finance Division; aides to
committee members and other members of the legislature and
representatives of the press.
SUMMARY INFORMATION
Cambridge Energy Research Associates
Presentation on Oil Pricing and Production Forecasting
by Ann-Louise Hittle
Upon convening the meeting, Representative Hanley welcomed
Ann-Louise Hittle, Director, World Oil, Cambridge Energy
Research Associates, to committee. Ms. Hittle advised that,
as agency director of world oil, she heads the consulting
business on "the crude oil side," including crude oil price
forecasting.
Directing attention to her handout (copy on file in House
and Senate Finance Committee minute books), Ms. Hittle
advised that her presentation would cover:
1. The oil outlook through 1996
2. Demand/supply. (Non-OPEC supplies and OPEC
production and politics)
. 3. Oil price outlook
4. Crude quality differentials
5. Exploration and productive capacity outlook with
specific reference to Alaska
6. Longer-term price forecasting
The price outlook is "a little bit more supportive, a little
bit more positive" than outlooks in recent years. For FY
95, it appears ANS will average "about $16.50." The price
for FY 96 is expected to be $16.70. The positive news is
that the price is not going down but remaining within a
steady range. The market in recent weeks has indicated
ability to retain levels gained in the last year.
A snapshot of the market indicates more of the same. Demand
is rising at about the same rate as last year (this year's
rate is 1.3%). Non-OPEC production is up again, and OPEC
has continued the same quota (24.52) and is producing at a
level the market can tolerate. The market continues to
await a signal on oil exports from Iraq. Saudi Arabia and
OPEC are relying on the market to set the price. In effect,
they are waiting for demand to absorb production increases
that have occurred over the last few years.
Speaking to demand, Ms. Hittle advised that the driving
force is the world economy. She directed attention to page
3 of her handout and noted that the world economy is
presently in a strong economic convergence. For 1995, that
results in demand growth, on an annual calendar year basis,
of 0.9 to 1.1. Cambridge is estimating a demand growth of
0.9 mbd's (900,000 barrels a day) for calendar 1995. Next
year, the range is expected to be 1.3 to 1.4 mbd's. The
driving force in demand is the Far East where growth,
excluding China, is expected to be 6% in 1995. Demand will
grow 3% in the Middle East, Latin America, and other areas.
There will be a marginal increase in North America, but it
will not be as much as that caused by cold weather last
year. On a yearly basis, demand was down in the first
quarter.
Ms. Hittle directed attention to page 4 of her handout and
explained that steep declines in the former Soviet Union
(FSU) have hidden sharp increases in demand in other areas
of the world. The rate of decline in the FSU has started to
trail off and is now not so steep. Between 1994 and 1995, a
decline of 330,000 barrels a day is expected. As decline is
reduced, the impact of demand increases in other regions is
felt in the market.
Ms. Hittle next advised that non-OPEC supply has become a
dominant market feature. Page 4 of the handout demonstrates
the rebound in non-OPEC supply over the last few years,
driven by increases in the North Sea, the Far East, Latin
America, etc. While prices have fallen every year since
1990, output has increased since 1993. That reflects the
impact of technology reducing the cost of finding and
developing oil. As an example, Ms. Hittle remarked on
development of the West of Shetlands field in the North Sea
for less than $5.00 per barrel. Low oil prices have also
caused countries that previously were closed to foreign
exploration efforts to change their rules and "take . . .
economics over politics." It is now possible to go into
Algeria. As a result there has been a sharp increase in
Algerian reserves, and there will be increases in Algerian
production. This is also occurring in Latin America.
Further, due to low oil prices, exploration and production
companies are streamlining and using "partnering" and
alliances to overcome operating costs in a low- price
environment. Ms. Hittle cited BP as an example of a company
that has worked effectively, over the last few years, to
overcome problems in that environment. Increases in non-
OPEC supply result from a surge in exploration and
production.
The precedent of economics over politics makes the world
more competitive for producers who are trying to focus
exploration and production work in their own areas. That
has relevance for Alaska. Ms. Hittle noted liberalization
of terms in Vietnam and other areas where it is now easier
to explore.
Directing attention to the graphics on page 6, Ms. Hittle
noted that the biggest increases in non-OPEC supply, over
the last few years, have come from the North Sea (Norway and
the U.K.).
The graphic on page 7 evidences that despite the sharp
decline in production in the FSU in the last few years (as
well as the sharp decline in demand), exports to the world
oil market have remained "pretty much steady." Even in
1997, when it is expected that FSU production will bottom
out at 6.4 million barrels a day (compared to the previous
level of 12 million barrels a day), Cambridge expects
exports to remain steady at the 2.2 mbd level. While one
would think that decline in FSU production would support oil
prices, it has not because of the fact that "They've kept
exports up."
Senator Phillips asked if the recent Soviet oil spill and
transportation problems within the country impacted
projections. Ms. Hittle acknowledged that it is difficult
to move oil around the FSU. That has caused the flow of
exports to be "very erratic" and has had a short-term
effect on the market. Last fall, oil coming into the
Mediterranean was erratic, and prices in that part of the
world went up, with some spill-over effect. Despite those
surges on an annual, average basis, the FSU is keeping
exports level. Responding to concerns regarding
transportation and the condition of FSU pipelines, Ms.
Hittle advised that Cambridge "is not really bullish on the
former Soviet Union."
The graphic on page 8 relates to OPEC production and
politics and attempts to present OPEC's hidden strategy.
This is important to the market because, since September of
1993, OPEC has kept its quota flat at 24.52. That quota
will have been in effect for more than two years at the end
of this year. Demand has increased (last year 1 million
barrels a day, this year 900,000) while OPEC held
production steady within a range slightly above the quota.
That has had two impacts on the market:
1. It has caused the role of swing supplier to fall
off from OPEC. "It's now much more the industry
and inventories."
2. The role of inventories is more important.
In the event of a cold winter in the first quarter and a
large draw on inventories, the surge in needed supply is not
going to come from OPEC. It will come from inventories.
That can be a supportive feature. It is one of the reasons
the market is experiencing stable prices at the present
time.
Referencing page 9, Ms. Hittle explained that OPEC has
created a "margin of tolerance." Although the quota has
remained flat at 24.52 since the fourth quarter of 1993,
because demand has increased, there is market tolerance for
OPEC's overproduction. At the present time, OPEC is
producing at 25.1. That overproduction is welcomed by the
market. It is not a price depressant. Three years ago,
OPEC would have set the quota at a level that was "probably
a little bit above demand." If OPEC overproduced, that
would have a price depressing impact. Because the present
quota is set below demand, when the cartel overproduces, the
market tolerates it. The graph on page 9 provides signposts
on "where OPEC can produce." If production in the fourth
quarter of 1995 starts to inch above 25.3, a lower price is
expected. Similarly, in the second and third quarter, if
production increases above 25.1, that will have a price
depressing effect. It could be as much as $0.25 to $0.50 a
barrel, on a quarterly average basis.
Senator Rieger suggested that the present scenario
(particularly in the case of Saudi Arabia) is different from
the past where Saudi production went up and down to match
swings in demand from season to season or to negate cheating
by other OPEC members. It now appears that instead of
varying OPEC production to meet changes in demand, holding
constant is a source of stability. In the past, holding
constant was the source of volatility in price. Ms. Hittle
said that she did not mean to imply there would be no
volatility in the price. The current OPEC approach, on an
average basis, is price supportive. There can still be
volatility because of reliance on inventories. A price
spike could occur in the event of cold weather in the first
quarter, because Saudi Arabia will not be there to surge and
meet that demand. Overall, however, the impact has been
price supportive. It has had a positive effect on market
psychology and has generally tended to help keep prices
firmer than they might have been. OPEC is no longer the
swing supplier in the market.
Senator Rieger inquired concerning Saudi Arabia's production
in terms of overall OPEC production. Ms. Hittle said that
Saudi production is at 8 million barrels a day. It has been
steady at that amount since the quota went into effect in
September of 1993. The Saudis intend to keep production
level. They are, in effect, waiting for demand and prices
to increase. Because of the surge in non-OPEC supply, even
though OPEC has adhered to its quotas and has not cheated
much, prices have not gone up much.
Directing attention to the graph on page 10, Ms. Hittle
explained that it demonstrates OPEC's change in strategy.
In the pre-1995 market, it was the high priced team (Iran,
Algeria, Nigeria) versus the volume capacity reality team
(Saudi Arabia). The post-1995 scenario shows OPEC acting as
a group in a standoff against non-OPEC production.
Necessity has caused OPEC to take that stand. If the cartel
increases its quota and fights for market share against non-
OPEC countries, prices will fall. OPEC cannot afford that
because member countries are under extreme revenue
pressures.
The graphic on page 11, presents a picture of the impact of
production or lack of production from Iraq. If oil from
Iraq enters the market, OPEC capacity utilization would fall
to 83%. If Iraq is not in the market, the OPEC percentage
is 87.3. The message is that even if Iraq does not come
into the market this year or next, capacity utilization in
OPEC will not be that tight. The big surge in prices one
might expect will not occur if Iraq does not come into the
market. Conversely, if Iraq enters the market, utilization
will fall off but not as sharply as one might expect.
Ms. Hittle voiced her belief that entry to the market by
Iraq would have "about a $2 a barrel lowering effect, on a
quarterly basis, on price." By the second quarter after
start up, price recovery would be underway. Speaking to
sanctions against Iraq, Ms. Hittle told members that the
United States has succeeded in reinforcing a majority
security council commitment to minimum core requirements:
1. Iraq must meet requirements on weapons of mass
destruction. This is particular to biological
weapons. It includes releasing some suppliers and
ensuring that the monitoring process is working
smoothly.
2. Iraq must account for missing Kuwaities.
3. Iraq must return seized equipment taken during the
invasion of Kuwait.
Sanctions cannot be lifted until minimum requirements are
met. At an April 10 meeting of the security council, the
head of the U.N. special commission will report on Iraq's
adherence to weapons of mass destruction. Although there
may be much talk in the press regarding the sanctions, Ms.
Hittle reiterated that they cannot be lifted until the
foregoing requirements are met.
In addition to the foregoing, the United States has two
broader requirements:
1. It would like Iraq to prove its peaceful
intentions in the area.
2. It would like Iraq to observe human rights within
Iraq.
Acceptance of these broader requirements, by the security
council, is not "very extensive."
By July, Iraq will have had time to address minimal core
requirements. Hypothetically, if all goes well, and Iraq
cooperates on the above three items, extensive debate will
occur on whether or not sanctions should be lifted. Given
the right circumstances it is possible, but not assured,
that by the end of 1995 there could be some sort of
compromise measure that would take into account U.S.
concerns. The foregoing assumes that Iraq has met minimum
requirements. Oil from Iraq could reach the market by the
end of 1995. That is, however, with many "ifs, ands, and
buts." The signpost to watch is Iraqi progress in meeting
minimum requirements.
Senator Rieger asked if the threat of Iraq's reentry to the
market had already depressed oil prices. Ms. Hittle
responded affirmatively. Actual reentry would engender a
short-term reaction to inflow of 1 million barrels a day to
the market. The actual start up is factored into price.
That happened in the summer of 1993. Actual inflow will
cause a surge, but it will not be as extensive as in 1993
when prices lost $3 to $4 a barrel. Fear of Iraq production
which arose in the summer and fall of 1993 has not yet been
completely worked out of the market. It remains in the
price. Impact from actual Iraq entry to the market will be
"a lot more short term and less of a reaction than we would
have had otherwise."
Directing attention to the triangle graph on page 12 of the
handout, Ms. Hittle said it represents the triangle of
competition for market share that will occur when Iraq comes
on line. She stressed that when Iraqi oil enters the
market, two other components are going to be vying for
market share in addition to ongoing non-OPEC production:
1. OPEC oil.
2. World inventory patterns.
If, in July, it appears that sanctions might be lifted,
market participants will start to draw on inventories. They
will anticipate that once oil from Iraq starts to flow, the
price will fall, there will be much oil on the market, and
inventories purchased at a higher price will become a
detriment. Companies will thus draw on inventories even
before Iraqi oil starts to flow. That is something to watch
for. If it occurs, it will diminish the impact when oil
from Iraq actually begins to flow, since inventories will be
lower. The price effect could thus occur before export from
Iraq begins.
The graphic on page 13, provides an additional picture of
the previous dynamic. Assuming oil from Iraq starts to flow
in 1996, there will be a 1.3 to 1.4 million barrel a day
increase in demand in that year. The threat to price from
non-OPEC will be 0.4. Inventories and OPEC production are
also part of the equation.
Ms. Hittle directed attention to the graphic on page 14 and
advised that it demonstrates what non-OPEC production has
done to the market. It has pulled the rug out from under
what should be strong prices because of strong economics,
good demand growth, and steady OPEC production. The fact
that the price is not where it should be is evidence of
increases in non-OPEC production. However, in 1996, non-
OPEC supply will only increase 0.4. There will thus be
"somewhat of a tailing off of that trend." The graphic
demonstrates the quandary presently facing OPEC. The cartel
has little choice. If it increases its quota to gain market
share from non-OPEC producers, the result will be weaker
prices, and market psychology will turn negative. Ms.
Hittle stressed that market psychology is an extremely
important factor. She reiterated that in the fall of 1993,
market psychology was expecting Iraqi oil to start to flow.
That is the reason prices fell so sharply. It was not
fundamentals but market psychology. If OPEC raises its
quota, market psychology will turn negative. Concern will
be that if OPEC has increased its quota, how will it deal
with Iraq when Iraq commences production. A higher quota
when Iraqi oil begins to flow means a battle within OPEC
when it attempts to cut the quota. Fear of OPEC in disarray
will undermine psychology.
If the OPEC quota remains flat, the cartel will be in a much
better position to deal with start up in Iraq. The
Cambridge assessment is that if OPEC remains at the current
quota of 24.52 when Iraq begins production, the most the
cartel will do is pull current overproduction back toward
the actual quota. It is not anticipated that OPEC will move
to cut its quota below 24.52 to accommodate Iraq. With
increases in demand, return to the actual OPEC quota should
be enough.
Ms. Hittle explained that oil prices increased $3 to $4
dollars a barrel in the spring of 1994 (even though demand
usually falls a million barrels a day between the first and
second quarter because of reductions in winter heating
demands) as a result of the new price seasonality. In the
old world market, prices would have been weak and strong in
the fourth quarter. In the new market, growing demand and
lack of Iraqi production, have produced a feeling that there
may not be a sufficient supply of oil in the fourth quarter.
There is thus a tendency to "do a lot of anticipatory
buying" in the first and second quarter. That is supporting
prices in the latter. In the fourth quarter, when it
becomes evident that supplies are adequate, prices tend to
weaken. That is reflected in the ANS price outlook (p. 16).
In response to a question from Senator Phillips regarding
lack of a price increase during fourth-quarter winter
months, Ms. Hittle said that in the fourth quarter of 1993,
when the winter was extremely cold, prices hit a low in
January. That was because non-OPEC supply increased by
700,000 barrels a day from the North Sea. The surge in
supply caused prices to fall off, despite the weather. The
North Sea remains a factor in the market today.
Referencing the graph on page 16, Ms. Hittle highlighted the
following ANS prices:
Third quarter - An average of $16.81
Fourth quarter - Steady prices at $16.75
A Factor contributing to the foregoing prices is no repeat
in the spring price increase (new seasonality). The
greatest effect from the new seasonality, in the second
quarter of this year, will be that prices are not going to
go down. They will remain steady. While they could go up,
the picture at this time anticipates that they will remain
steady. There is no anticipated repeat of the steep price
increase of a year ago because:
1. The market is not as "oversold" as last year. It
was oversold in the futures market and had plunged to
lows by March. The market is $3 dollars a barrel
higher and thus not in an oversold status.
2. No OPEC meeting is planned for the second quarter.
There will thus be no surprise from the cartel. A
year ago, OPEC provided impetus for the
change in market psychology when it extended
its quota through the end of the year.
3. There will be a larger stock supply in the fourth
quarter consisting of "a 1.6 mbd build." That
compares to stocks of 1.4 last year.
4. There is no whiplash effect anticipated from the
Iraq factor. A year ago, there was much
expectation that Iraq would be in the market.
In the spring that expectation started to
fade. That is one of the reasons prices "ran
up." Currently there is no such expectation.
Iraq is "kind of a neutral factor in the
market."
Ms. Hittle set forth the following prices for 1996:
First quarter - $16.25, reflecting
the
cumulative build in
stocks: 1.6 in the
fourth quarter and
1.3 in the first.
Second quarter - $16.75, based on
increase
in demand in the
fall and winter. A
2.1% demand increase
is projected, and
non-OPEC supply will
be increasing at its
lowest rate.
In the second half of calendar year 1996, the assessment is
that OPEC could again roll over its quota. That will
provide a good psychological boost to price. It is further
assumed that at that point Iraqi exports have not started.
Ms. Hittle next spoke to factors and signposts that could
cause variations:
1. If OPEC produces beyond market tolerance, prices
will
be lower than expected by $0.25 to $0.50 on a
quarterly basis.
2. Conversely, if OPEC produces below market
tolerance--
production is maintained at 25.0 to 25.1 through
the end of the year--prices will be approximately
$0.50 a barrel stronger than expected. It would
not be unreasonable for OPEC to take this approach
because of problems with capacity in Nigeria and
Iran.
3. The demand pull from Asia which has caused much
crude
oil to move into that part of the world. A much
warmer summer than usual would help keep prices
stronger than they might otherwise be.
4. A downward pull could be exerted if discussions in
the
U.N. security council start to look favorable for
commencement of Iraqi exports.
5. Higher exports in the former Soviet Union. That
would have a downward impact on prices.
Directing attention to page 19 of the handout, Ms. Hittle
referenced the "triangle of price determination" and noted
that the graph highlights factors to look for. She advised
that three components form the price of oil:
1. Physical fundamentals--supply and demand.
2. Market psychology
3. The effect of technical indicators in the market.
Ms. Hittle next spoke to technical indicators and their
impact on price. At the present time, managed future funds
which have played an active role in forming the price of oil
futures are a neutral factor in the market. A year ago,
investors were buying crude oil futures as a hedge against
fears of inflation. These funds are now buying moderately
and not having an impact on price. If fears of inflation
recede, managed futures funds could start to pull out of the
crude oil futures market. If they all did so at the same
time, that could have a downward impact on price.
Conversely, fund managers are aware that demand is supposed
to be increasing, so they have tended to buy. They are also
anticipating there will be the typical spring run up in
price. Their effect is to strengthen the volatility in the
market. If the market is moving in a particular direction,
they strengthen movement up or down. These indicators
should be monitored. Fears of inflation or a psychology in
the market pro or con Iraq may cause technical players to
take that and "run with it and increase the move either up
or down."
Referencing the signposts graphic on page 20, Ms. Hittle
advised that in tracking oil on a month-to-month basis the
signposts would provide a guide on how prices will move. In
response to a question from Senator Rieger, Ms. Hittle
explained that although the effect on demand or supply may
force the price into the foul or out-of-bounds realm, it
tends to come back into the playing field. While the graph
cites the OPEC basket, "it's really almost virtually the
same, at this point, for ANS."
Ms. Hittle noted the importance of crude quality
differentials on the price of ANS oil. ANS has been and
will continue to increase in value relative to higher
quality crudes. She directed attention to the ANS Minus WTI
graph on page 25 of the handout. WTI is a much higher
quality crude than ANS, but the differential has narrowed
dramatically in the last year. The same trend is more
sharply evident in the next graph entitled "ANS Minus OPEC
Basket." In 1994, the differential averaged -$0.23 compared
to -$1.76 in 1991. The graph entitled "ANS Minus Kern
River" (a heavy California crude) shows that a crude of
lower quality than ANS is gaining in value.
The increase in value is long-term rather than short-term.
While differentials may not grow narrower, the trend is in
place "at least through the end of the decade." Reasons for
the narrowing include:
1. Technological evolution. Technology allows
refiners
to create a greater quantity of more valuable
products from lower quality crudes at a lower
cost.
End: SFC-95, #25, Side 1
Begin: SFC-95, #25, Side 2
2. Economies of scale. There is a tendency by
refiners to build a larger unit than needed with the
result that there is more upgrading
capacity than needed.
3. The changing product demand barrel. The tilt is
very
much toward a growing share of light products in
the total product demand barrel. That means
refiners need more upgrading capacity.
4. Environmental regulations. These require that
refiners
invest in refinery upgrading capacity even if the
differential in price between high-quality and
low-quality crude does not justify it.
The upshot of the above four factors means there is more
demand for low-quality crudes to run in upgrading capacity,
and there is less demand for high-quality crudes. The price
of high-quality crudes has thus been relatively depressed.
And, the price of lower-quality crudes, such as ANS, has
been increasing. That is one of the reasons behind the
strength in ANS, in the last year, compared to other crude
oil.
On a short-term basis, there is volatility in the
differentials. Referencing page 23 of the handout, Ms.
Hittle directed attention to equilibrium differentials. She
explained that a surge in North Sea light crude would cause
differentials to fall lower than they might normally be.
Overall, the range is expected to remain narrow, despite
volatility. Even the start of Iraq with its heavy, sour,
low-quality crude will not set the trend aside. There will
be a short-time widening in the differential between high
and low-quality crude oil, but over the medium term it will
revert back to narrow differentials. This is positive for
ANS in terms of its pricing against other quality crudes and
its use in refinery upgrading units.
Ms. Hittle directed attention to page 24 of the handout and
explained that even though the quality of the crude drives
the differential between high and low-quality oil, the world
crude oil quality is not going to change. It has not
changed over the last few years, and it is not going to
change, on average, through the end of the decade.
Refinery-related issues are driving the narrowing of
differentials. In reviewing the world average total, in
1997 the average API for crude is 32.37. In the year 2000,
it is 32.32. That means that, on average, the crude oil
supply in the world has improved. This is counter to
industry conventional wisdom. That is why Cambridge does
not believe that crude oil quality, on the longer-term
basis, will be what drives the differential. The issue will
be refining upgrading and factors that create more refinery
upgrading such as environmental rules and regulations.
Ms. Hittle next spoke to trends in exploration and
production and productive capacity. She noted a general,
strategic shift on the part of exploration and production
companies toward exploration for gas as opposed to oil.
Efforts are particularly focused on involvement in
expansions and grass-root LNG projects in order to meet the
expected surge in gas demand. Much of the focus is in Latin
America and Southeast Asia.
The next graph points to exploration and development
hotspots worldwide. The strategy of exploration and
production companies is to focus on core areas--areas they
have been in for a long time and in which they have expended
substantial dollars. Indicators are that Alaska is becoming
a core area for BP. Core areas are differentiated from
hotspots. Hotspots are areas where companies are building
up their engagements. As an example, Ms. Hittle cited the
"flexure trend" in the Gulf of Mexico, the West of Shetlands
in the North Sea, the Timor Gap in Southeast Asia, Vietnam,
Algeria, Colombia, and the East of Andes area in Latin
America. Another strategic effort for companies is to move
into "frontier, high-risk areas." These include the former
Soviet Union, China, Iraq, and offshore West Africa.
Speaking to productive capacity, Ms. Hittle advised that she
would address:
1. World liquid capacity
2. U.S. crude and condensate
3. Alaska and North Slope production
She explained that "producibility" is the capacity to
produce rather than the actual production rate. Components
of producibility are:
1. Existing production which has a built-in decline
rate by definition. The only adjustment that can be
made in that rate is the effect of new
technology.
2. Recent significant discoveries. Cambridge follows
new discoveries very closely and attempts to estimate
lead time prior to producibility or production.
3. Future discoveries. This is the largest wild
card.
Assessment of future discoveries is based on an
overall view of the pace of exploration and
production activity.
Assessment indicates that, despite low oil prices, there is
much exploration and production activity. Cambridge is thus
optimistic in its view of future discoveries and the impact
on producibility. The feeling is that there will be "a lot
of wildcats drilled . . . in Alaska."
Ms. Hittle next spoke to world liquid productive capacity
and noted that several things stand out. The first is that
from 1994 to 2010 there will be an increase of 14.1 million
barrels a day in world liquid productive capacity (from 71
mbd to 85). Most will come in the OPEC gulf--an increase of
13 million barrels a day. That demonstrates the role of
OPEC, Middle-East gulf countries. The remainder of OPEC is
not "going to do much." There will only be minor increases
from Indonesia, Nigeria, Venezuela, etc. Non-OPEC
production peaks in the year 2000 at 40.7 (an increase of
1.2 mbd from 1994). It then commences a minor decline into
the year 2010. That means a much larger role for OPEC as
time moves beyond the end of this decade. Non-OPEC capacity
outside the United States and former Soviet Union, increases
to the year 2000, but declines will begin after that time.
Most of that will come in the North Sea, Brazil, Colombia,
Australia, and Vietnam as follows:
The North Sea 1 million barrels a day
Brazil and Colombia 300,000 to 400,000
barrels a day
Australia and Vietnam 200,000 barrels a day
Speaking to production in the United States, Ms. Hittle
noted a decline from 1995 to 2010. However, decline will
moderate from 1997 to 2000 due to the "flexure trend in the
Gulf of Mexico." Approximately 300,000 barrels a day will
come on from discovered fields in the flexure trend in that
time period. Decline is flat from 2000 to 2005 because of
that production and, more importantly, a net increase of
North Slope production of 400,000 barrels a day. An
additional 100,000 barrels a day will come on line from off-
shore Southern California. After the year 2005, the decline
resumes. Throughout the period, production in Texas, the
mid continent, and the Rockies will be declining. The only
variance will come from the flexure trend, off-shore
California, and the North Slope.
Providing numbers in support of the foregoing trend, Ms.
Hittle cited the following:
1994 to 2000 - Total U.S. production will
fall
from 6.8 mbd to 5.9.
2000 to 2005 - No decline, 5.9 to 5.8.
2005 to 2010 - Decline from 5.8 to 5.1.
Looking at Alaska, including Cook Inlet (despite an increase
from 43,000 to 65,000), capacity will be as follows:
1994 to 2002 - From 1.71 to 1.21
2002 to 2005 - Increase to 1.73
2005 and beyond - Slow decline
Senator Sharp questioned the increase between 2002 and 2005.
Ms. Hittle explained that the increase relates to the North
Slope. She cautioned that the above numbers reflect
"capacity numbers" rather than production rate. Output can
vary extensively from capacity due to many things. As an
example, she cited the impact of weather which, if too cold,
may halt tanker loading at Valdez. If the weather is too
warm, the efficiency of the pipeline is lowered. There
could be hookups of new fields, repairs, etc. The foregoing
can produce a variance of up to 100,000 barrels a day
between production and capacity. The outlook for productive
capacity assumes no production from ANWR. Cambridge
includes 70,000 barrels of NGLs a day, spiked into the
pipeline feed.
Ms. Hittle next noted four components of North-Slope Alaska
liquid productive capacity (p. 35 of the handout):
1. The Prudhoe Bay field which is in continuous
decline.
2. Fields producing or under development (Kuparuk,
Lisburne, Milne Point, etc.).
3. Fields not currently under development. This is
the area
where growth is likely to occur. Assessment of
this number is based on BP's recent, aggressive
exploration and production policy. As an example,
Ms. Hittle cited moves to acquire from other
parties on the North Slope. That will provide the
foundation for BP to move forward to develop the
"string of pearls" fields east of Prudhoe Bay. If
development is not forthcoming, numbers shown for
fields not under development would be pushed back.
Attention should be paid to what BP does with
Badami, and the North Star complex. Other players
in the area are also becoming more aggressive. If
BP develops Badami, that will enable linking of
the string of pearls fields and cause fields not
now under development to start to contribute to
productive capacity.
4. Future discoveries. These discovers are not based
on ANWR but on the overall level of exploration and
development in the world today and, in Alaska, the
number of wildcats being drilled, appraisal
drilling, the Colville Delta, and Sourdough/Yukon
Gold. It is viable to assume there will be future
discoveries.
Senator Rieger asked if one field dominates in the "not
under development" category. Ms. Hittle responded
affirmatively, advising that members should watch Badami.
Senator Rieger then asked if Badami would be the key to
development or the largest producer. Ms. Hittle advised
that Badami is the key to "it all happening," but she said
she did not know if it would be the biggest production
field.
Senator Rieger inquired concerning West Sak, asking if it is
also linked to Badami. Ms. Hittle voiced her understanding
that development of the string of pearls fields is
contingent upon "bringing up Badami and then enabling the
start up." If BP does not develop Badami, development could
still occur "through other measures." Badami is the key to
watch.
MIKE GREANY, Director, Legislative Finance Division,
interjected that state agencies tracking production are
monitoring the tie-in between Kuparuk and West Sak with the
idea that, at some point, it would be economical to use the
Kuparuk facility to produce West Sak. Ms. Hittle advised
that she did not have sufficient details regarding West Sak.
She said she would inquire and return information to
committee. Senator Rieger asked how much of the approximate
production of 700,000 barrels a day relates to West Sak and
other development fields. Ms. Hittle said she would provide
a breakdown.
Directing attention to the final page of the handout, Ms.
Hittle spoke to the long-term outlook for ANS under three
different price scenarios. Cambridge is currently
reassessing the scenarios. The real price increase
evidenced by the Global Dawn scenario might be lowered
somewhat after the year 2000, but the basic trend remains in
tact. Current signposts indicate that the Global Dawn
scenario is now in effect. However, changes in signposts
could indicate that the trend is slipping into one of the
other scenarios. As an example, Ms. Hittle explained that a
signpost indicating "much less world economic growth" could
signal the Pax Faustian scenario. A signpost for the Gilded
Cage scenario would be a decision by OPEC to take a more
aggressive stance to immediately increase the price of oil.
The eventual effect of that scenario would cause prices to
move down because of the impact on demand.
The Global Dawn scenario reflects what is happening today--
cooperation, almost, between producers and consumers, the
rule of the market over politics, economics, a wait and see
attitude within OPEC, and good economic growth. Beyond the
year 2000, there is increasing reliance on OPEC productive
capacity and less reliance on increases in non-OPEC
production. An assessment of demand and supply indicates
there will be enough oil, but prices will start to "tighten
up" a bit.
Ms. Hittle pointed to page 38, referenced the assessment of
world oil demand through the year 2010, and specifically
noted demand of 78 million barrels a day. Of relevance to
the United States is the fact that 65.7% of future demand
growth through the year 2005 will be concentrated in Asia
(handout, page 39).
Directing attention to the page 42 graphic entitled "PADD V
Crude Productive Capacity and Demand," Ms. Hittle explained
that PADD V incorporates Alaska and the West Coast. Between
1996 and 1997, productive capacity will be less than demand,
and imports into PADD V will increase in order to meet
refinery demand. If the ban on export of ANS is lifted,
that action should have a positive impact on price.
Senator Sharp voiced his understanding that a comparison of
comments by Cambridge several years ago with those of today
indicates that elements impacting price and supply have
narrowed. Comments concerning production from Russia appear
more pessimistic for the next ten to fifteen years. He
then inquired concerning the impact of recent events in
Libya and internal strife in Algeria. Ms. Hittle advised
that Algeria is producing approximately 800,000 barrels a
day, including condensates. She concurred that Algeria
raises potential for price instability. ARCO has had four
major finds in the area in the last year. Algeria has now
stabilized its productive capacity. Increases should be
evident next year.
Senator Sharp next voiced his understanding that new
discoveries in the North Sea are expected to taper off, and
older fields will be reduced in capacity. He then suggested
that world recovery and maintenance of OPEC quotas appear to
indicate price stability. The Senator advised of his belief
that Iraq would reenter the market in the next year or two
and voiced his recollection of earlier comments indicating
that market reentry would be tempered. Ms. Hittle explained
that Cambridge anticipates FSU production, as well as
demand, to decline to 4.3 million barrels a day by 1997.
There will then be a slow recovery of productive capacity to
the year 2000. Most of the increase will occur after that
time. Between 2000 and 2010, FSU productive capacity will
increase 3.5 million barrels a day. That reflects eventual
progress in the Caspian Sea. One of the most significant
changes in the productive capacity outlook is "pushing the
FSU back."
At the same time, there have been sharp increases from the
North Sea. However, non-OPEC production will peak in the
year 2000. Non-OPEC productive net gain will only be 0.4
million barrels a day next year. That is in contrast to 0.8
million this year.
Speaking to price stability and reentry of Iraq, Ms. Hittle
stressed that even though the outlook is stable on an annual
average basis, within the year there is "lots of room for
price instability, uncertainty, and volatility." Much of it
will be driven by the Iraq factor, but it will not be to the
extent previously seen. The effect in demand increases over
time will be less.
Referencing Libya and Algeria, Ms. Hittle said that the
United States has raised the ante by requesting an oil
embargo from its allies. It will not succeed. There will
be no acceptance of that request since it would have too
much impact in Europe. Reality says it will not succeed.
While this could have had an impact on market psychology two
years ago, there have been so many threats of a Libyan oil
embargo that the psychology of the market is not reacting to
it as much as it otherwise might. Ms. Hittle acknowledged
that if the "rhetoric really ratchets up," there could be
impact. It is something to watch. She reiterated her prior
statement that, in reality, the embargo is not expected to
be imposed.
The situation in Algeria has worsened and is unstable.
However, to date, there have been no problems for operators.
Islamic guerrillas have avoided oil facilities which are
located in out-of-the-way places. While there is potential
for instability, production and exports have not been
impacted.
Ms. Hittle further advised of movement by a group in
Washington to press for an embargo against Nigerian exports.
That would be difficult to impose. This is also a situation
to monitor due to problems within the political regime in
Nigeria. Ms. Hittle referenced the strike last year, and
the fact that, this year, joint venture partners are not
spending moneys needed to maintain productive capacity. For
that reason, Nigerian production is not "increasing much,
this year. . . ."
Senator Sharp asked if Iran is "totally back in the market
now." Ms. Hittle responded negatively, indicating that Iran
is having problems maintaining productive capacity. In one
month there is a surge up to quota, and the next month it
falls back. This difficulty in keeping production at quota
comes at a time when Iran would prefer to cheat because of
revenue problems. The country needs western investment for
needed work on its fields. The regime is paralyzed over the
issue of whether or not to undertake and how to structure
deals with western firms. There was not full agreement
within the regime on the CONOCO agreement. While the
agreement was made, it was a contentious issue. There is no
green light for these types of agreements.
Senator Rieger pointed to the long-term outlook whereby OPEC
continues to add production capacity to the year 2010 and
asked if OPEC would be meaningfully into reserves or could
continue to increase production. Ms. Hittle explained that
projections are based on the assumption that investment
occurs. There is no foregone conclusion that OPEC will be
at projected rates by 2010. After that time, the increase
OPEC might be able to achieve becomes much more nebulous.
Cambridge knows OPEC could reach projections to 2010,
"pretty much on the basis of what we have." It is much more
unknown whether or not there could be increases after the
year 2010. Assuming that demand will increase, the question
is "Will there be enough oil?" Senator Rieger again
inquired concerning the portion of reserves that would have
been produced by that time. Ms. Hittle said that
projections assume an increase in reserves. She further
advised that she could not presently say where those
reserves would be. Speaking to the extent to which reserves
may have been drawn down, Ms. Hittle advised she would have
to calculate "what the reserve level will be as opposed to
the productive capacity." She said she would undertake that
calculation.
ADJOURNMENT
The meeting was adjourned at approximately 9:45 a.m.
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