What the 1990s Have in Store for the Oil Industry : Energy: With prospects for stronger environmental laws and continuing weaker prices, the outlook is not good. But there are some bright spots.
The oil industry is entering the last decade of the century with the muck of the 1980s still stuck to its boots like oil from the Exxon Valdez.
The legacy of the Valdez will haunt oil companies in California and elsewhere that are just emerging from a period of major restructuring accelerated by the collapse of oil prices in 1986.
During that time, major oil companies pared exploration and production staffs, closed unprofitable refining operations and improved efficiencies at others, and shifted emphasis from domestic to foreign oil prospecting as home-grown sources dwindled.
Now, post-Valdez environmental concerns stand in the way of renewed domestic oil and gas exploration, and proposed clean air rules threaten to transform the industry’s gasoline refining business forever.
In California, where environmental regulations are strictest, environmental and financial obstacles to new refinery building are already making existing plants among the most desirable in the industry--and this in a place where gasoline demand is expected to grow the fastest.
The last gasps of the industry’s restructuring can be seen in recent industry developments:
California companies such as Unocal Corp. and Occidental Petroleum Corp., as well as Mobil Oil Corp. and British Petroleum, have announced reorganization of exploration and production units, including some staff cuts.
“I think the layoffs are reflecting the real end of the depression in the upstream (exploration and production) side of the industry,” said Edward Morse, executive publisher of industry newsletter Petroleum Intelligence Weekly.
Several refinery operations have gone on the block recently, many in California. Southland Corp. said last week that it would sell its remaining half-interest in Citgo Petroleum Corp., which operates a refinery in Northern California, to the Venezuelan state-owned oil company for $675 million. Santa Monica-based Tosco Corp., the West Coast’s largest independent refiner, said last week that it was entertaining offers from at least three multinational companies for its business. And Unocal is about to close its own deal with the Venezuelans, a joint venture to operate Unocal’s Chicago refinery that would bring Unocal more than $500 million.
“I think there’s a recognition that this is a good market here,” said Thomas K. Nance, Tosco’s treasurer. “The supply-demand balance appears to be very tight, and the expectation is that the market will only get better.”
The desirability of California refineries contrasts with refining in other parts of the country. Unocal said last week that it would cease all refinery production at its 65-year-old Beaumont plant in Nederland, Tex., which makes lube oil, aromatics and solvents.
“It was very out of date for the marketplace. . . . And with the margins as they are, you just can’t compete,” said Unocal spokesman Barry Lane. The Gulf Coast region’s refining profit margins rank last behind those of three other regions of the country, according to a report by Drexel Burnham Lambert. The West Coast has the strongest.
In the country as a whole, the restructuring period has resulted in a sharp drop in domestic oil and gas production.
“This is really the second round in the long trend of downsizing in the exploration and production business that started in ’84 or ‘85,” said Phillip Ellis, a vice president with Booz, Allen & Hamilton Inc. “The idea behind it was that the U.S. resource base has the highest cost in the world. . . . There’s a lot of oil and gas left here, but very few elephants,” meaning fields large enough to reward oil company development.
In 1990, crude oil production will see the sharpest decline since the 1970s, according to a forecast by the Independent Petroleum Assn. of America. Production dropped 460,000 barrels per day in 1989 over a year earlier, and is expected to fall an additional 329,000 barrels per day to 7.4 million in 1990. Natural gas production remained level in 1989 at 16.6 trillion cubic feet.
The budget for domestic exploration and production, which accounted for about 75% to 78% of total E&P; budgets, now constitutes less than half, Morse said. Amoco Corp., traditionally one of the first companies to announce its annual exploration budget, says that for the first time in its history, more than half of its budget will be spent outside the United States in 1990.
“When today’s oil executives calculate and form their strategies for the future, they confront the fact that U.S. oil production is not likely to occupy the cornerstone of their operations,” said Dillard P. Spriggs, president of Petroleum Analysis Ltd., in a speech at Johns Hopkins University this fall.
But there are some signs that interest in domestic oil and gas exploration is picking up as prices stabilize, although no one expects such activity to ever match pre-collapse levels. “From almost every perspective, there are signs that (exploration and production) operations are increasing, mostly outside the U.S., but in the U.S. as well,” Morse said.
The prime indicator of new drilling activity--the rig count--has been climbing steadily in the past few months, according to Baker Hughes Inc., the oil services firm. As of Nov. 6, the number of rotary drilling rigs in use rose to 1,042. That’s still well below the peak level of 4,530 or so in 1981, but is nevertheless the highest level since the winter of 1988. For the year, the rig count remains below 1988 levels.
Natural gas appears the most promising, especially if clean air regulations spur demand and the current oversupply diminishes as hoped. Amoco has made natural gas development a prime goal of its domestic operations. It became the largest owner of U.S. natural gas reserves with the acquisition last year of Canada’s Dome Petroleum and part of the Tenneco reserves.
On the refining side, analysts agree that most of the weaker operations have been weeded out, and improvements have raised operating rates to their highest levels ever as demand remains relatively strong and profit margins remain generally good.
Refining capacity is so tight now that prices spike sharply at any disruptions, such as Hurricane Hugo’s destruction to Caribbean refineries or last month’s explosion at a Phillips Petroleum Co. plastics refinery in Texas. And some observers fear that the high rates of utilization make such disruptions all the more likely.
All of which is placing a premium on refinery assets, particularly on the West Coast, where refining margins are highest. Environmental regulations make it hugely expensive, if not altogether impossible, to build a new plant in California.
Tight capacity has also renewed interest in other refining assets. Last month, Coastal Corp. said it would reactivate the closed Exxon plant in Aruba in the Caribbean.
A number of things keep analysts from being overly optimistic about a strong rebound in the oil industry’s fortunes:
Independent producers still await federal action to return tax benefits lost during the rewrite of federal tax laws.
Continued oversupply of natural gas could keep prices soft and discourage new domestic production.
Environmental pressures could keep drilling out of promising areas. A continuation of moratoriums on offshore drilling could put outer continental shelf areas off limits to production indefinitely, and post-Valdez concerns will probably keep exploration out of the Arctic National Wildlife Refuge.
A downturn in the economy could mean the loss of refining profits at a time when many will face upgrades to make cleaner gasolines or alternative fuels.
Looming over everything is uncertainty about where oil prices may go. Most analysts expect prices to continue at their current levels through the year. Ministers of the Organization of Petroleum Exporting Countries will meet later this month to discuss their nations’ production levels and other matters.
CUTTING BACK Arco: The firm announced a reorganization plan in 1986 designed to reduce the size of its domestic oil and gas work force by 23%--about 2,000 employees--and to divest itself of refining and petroleum marketing operations east of the Mississippi River, as well as all remaining non-coal minerals operations. Money-losing Arco Solar in Camarillo was sold earlier this year. Chevron: By 1987, the company had eliminated 27,500 jobs since the 1984 acquisition of Gulf Oil. The reductions came through the sale of assets and consolidation of operations. Unocal: The company has been selling assets to reduce the heavy debt taken on in 1985 when it fought a takeover bid by T. Boone Pickens Jr. The company sold its Los Angeles headquarters building, and recently announced it will curtail retail operations in the Pacific Northwest and close its Nederland, Tex., refinery. Occidental Petroleum: Announced in early September it will lay off 900 workers from its Oil & Gas Corp. unit based in Tulsa, Okla., to streamline domestic energy operations.
