Technology Trends in Oil Lower Prices, Lift Firms' Prospects

By JAMES FLANIGAN

Jan. 9, 2000 12 AM PT

A huge oil discovery off the coast of Nigeria and oil production from a new field in Angola last week highlighted trends in world energy and boosted the stock prices of Texaco Inc. and Chevron Corp.

The fact that the action was in Africa reflects success of oil company investments in that continent. Exxon Mobil Corp. also has announced recent discoveries in Angola.

Asia, too, is seeing new oil. In Bohai Bay, offshore China’s populous and industrial northeast, Phillips Petroleum Co. is drilling one successful well after another, delineating a giant oil field.

Such oil finds, and the technology that will allow them to be brought to production rapidly, reinforce the trend to moderate oil prices--between $15 and $20 a barrel--that is likely to prevail for the foreseeable future.

The oil industry’s new success has implications for investors, geopolitical strategists and all businesspeople.

Oil companies can do what they do today because they are great adapters of computer and communications technologies--not to mention masters of geology, chemistry, physics and half a dozen other disciplines. Their skills at developing essential resources will be in demand everywhere in the world in the next decade. That’s one reason most major oil and oil service company shares rose smartly last week amid wild gyrations in shares of companies conventionally labeled “technology.”

There will be strategic implications as production in Africa, Asia and the Western Hemisphere diversifies oil sources in a world that for years has focused hopes, fears and military policies on the Middle East.

Petroleum economist Amy Myers Jaffe, of Rice University’s James Baker Institute for Public Policy, notes that U.S. oil imports now come predominantly from “the Atlantic basin”--Latin America, Canada, West Africa. Indeed, Venezuela and Canada are the No. 1 and 2 suppliers of U.S. imported oil.

Yet the U.S. military has prime responsibility for protecting the oil of Saudi Arabia and the sea lanes of the Persian Gulf.

That military arrangement could change, Jaffe argues, as giant economies of Asia--India, Pakistan, China--increase their reliance on Persian Gulf suppliers and launch long-range navies of their own.

Such prospects are interesting, but definable ultimately in the misty realms of history and diplomatic affairs.

Meanwhile, the fortunes of the oil business directly affect us every day. Last year the price of oil more than doubled, driving up prices of gasoline, jet fuel and heating oil, as the Organization of Petroleum Exporting Countries imposed production restrictions on its members.

This year, forecasts of rising economic growth and energy demand in Asia and Europe as well as the United States have sparked fears of even higher prices. But that probably won’t be the case.

Prices are slipping at present because inventories of oil built up late last year to guard against a Y2K crisis are now being drawn down.

In the spring, OPEC will probably raise production, analysts predict. Many OPEC member countries, Venezuela, Iran and others, want to produce more oil to earn more revenues for their straitened economies.

And longer term, technology and oil discoveries will keep oil available and moderately priced.

Oil exploration and production has become far more efficient in recent years. Seismic graphing of the earth’s subsurface is more detailed these days. And graphs can be beamed by Internet from remote sites to company tech centers where supercomputers speed analysis of prospects.

Drilling is done with more confidence and success. And thanks to the skills of oil service companies, such as Halliburton Co. and Schlumberger Ltd., production wells are built faster, oil flows sooner.

The big Nigerian field that Texaco has just confirmed, for example, will be in production by 2003--a relatively short time for a project 70 miles out in the ocean from Lagos.

Fields in Angola and other African countries--or in deep waters of the Gulf of Mexico--can be brought to production in 18 months, a process that used to take five years.

Technology also lowers costs. The average cost for finding and bringing a deposit of oil to production is now $3 to $4 a barrel, compared with $7 to $10 a barrel in the 1980s. And that holds for remote seas off Africa as well as the Gulf of Mexico.

The payoff is that affordable costs make many more places in the world candidates for oil development. There is new excitement, for example, over oil development in Indonesia and in China, says Joseph Tovey of Tovey & Co., a New York investment bank specializing in oil issues.

Also, processes to convert natural gas to oil are now economical, Tovey reports.

That’s why prospects are good that future oil production will be sufficient to supply moderately priced energy to a world of growing economies.

Such optimism is a change from years of gloom in the mid-’90s. There had been great excitement at one time about the outlook for oil in the Central Asia region of the former Soviet Union, but most of the major companies that made big investments have been disappointed. So far, only Chevron, which over six years has developed the Tengiz field in Kazakhstan, has known some success.

The difficulties have been partly geological and mostly political--arguments among Russia, Iran, the new Central Asian states over rights of way for pipelines. Either way, development in the Caspian Sea area--which potentially could boost supplies to Europe--has been slow.

Also, oil industry returns on investment in production and distribution were declining in the mid-’90s, recalls Doug Terreson, a Morgan Stanley & Co. analyst in Houston.

So the industry had a shakeout. Mergers were one part of it, such as British Petroleum Co.’s acquisition of Amoco Corp. and its attempt to acquire Arco (a deal currently under federal antitrust objections) and Exxon Corp.’s acquisition of Mobil Corp.

Other companies have decided to trim back some operations and concentrate on those with big potential. Phillips, a relatively small company with $12 billion in revenues based in Bartlesville, Okla., sold most of a gas processing operation to raise capital for investment in exploration in China.

The result of such reorganization is the emergence of companies with the technical skills and capital to operate anywhere in the world. That’s why the stock market has been raising valuations for such companies as Exxon Mobil, Royal Dutch Shell Group, Chevron and Texaco--and BP Amoco until it ran into antitrust objections, analyst Terreson says. “Investors believe they promise long-term returns.”

Sometimes, the market is rational.

James Flanigan can be reached at jim.flanigan@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

In the Neighborhood

The top 10 suppliers of U.S. oil imports--crude oil and refined products--include more countries in the Western Hemisphere and Africa than in the Persian Gulf. Venezuela is the U.S. top supplier followed by Canada.

U.S crude oil imports in 1998,in millions of barrels:

*--*

Country Million barrels

Venezuela 627.4

Canada 583.4

Saudi Arabia 544.3

Mexico 493.2

Nigeria 254.1

Colombia 129.2

Iraq 122.5

Kuwait 109.8

Virgin Islands 106.9