NORTH AMERICA: Oil and Gas

Analysis

For the North American oil and gas industry, 1993 has brought industry-wide restructuring and consolidation as a result of cost pressures. However, approval of NAFTA and the increasing importance of gas sales as a proportion of total revenues promise a better year in 1994 (see NORTH AMERICA: Oil and Gas - OADB, December 3, 1993, I. ).

There is a considerable level of exploration and new production both onshore and offshore. However, most of the major projects were planned on the assumption of an oil price of 20 dollars per barrel rather than the more prevalent 15 dollars.

Alaska. In October, production started in the Exxon/ARCO/British Petroleum (BP) Point McIntyre field. It may be the last new field to be opened up outside the federal wildlife reserves, which are currently off limits. Furthermore, there is almost no chance that the Clinton administration will open these areas to drilling. Instead, spending on enhanced recovery techniques is underway. This should increase recoverable reserves in existing fields by at least 8%.

Atlantic Canada. The controversial Hibernia project is back on track for a 1995 production start-up, but it is unlikely to make money at world prices of less than 24 dollars a barrel. North- east of Hibernia, the so-called Central Ridge of the Grand Banks offers the potential for major new discoveries in waters of less than 1,000 feet in depth.

However, no major exploration effort is likely at current prices unless directly subsidised by the federal government in an effort to boost the Newfoundland economy. The oil industry has been reassured by the appointment of an Albertan, Anne McLellan, as minister of natural resources. Nevertheless, the federal government's dire fiscal position means there is little scope for new spending (see CANADA: Fiscal Challenge - OADB, November 29, 1993, III. ).

Gulf of Mexico. Major sums have been committed to developing deep-water fields, such as the plans for the Mars field which were announced by Shell and BP at the beginning of October. There is also work underway in shallower water to develop gas fields.

About 30% of US gas production comes from the offshore Gulf, and the rate of drilling there is very sensitive to gas prices. An average of 100 rigs were working in 1990, but the decline in gas prices to a low of 1 dollar per million cubic feet in early 1992 drove the number of rigs down to 40.

The recovery of gas prices to around 2 dollars per million cubic feet, helped by the short-term effect on Gulf production of Hurricane Andrew in late 1992, has led to many jack-up rigs being returned to US waters. The current total of around 120 working rigs is constrained from further growth by rig availability. Rig daily rates are reported to be highly profitable for contractors for the first time since 1981.

Mexico. Mexican oil production, both onshore and offshore, is equivalent to that in the US Gulf of Mexico. Given what is known about the country's oil potential, along with the expected growth in domestic demand, both onshore and offshore Mexican fields are significantly 'under-drilled' at present.

Pemex, the state oil company, has a monopoly which is enshrined in Mexico's constitution. However, now that NAFTA has approved, ways are likely to be found around the prohibition on US investment in the Mexican industry, particularly as the ruling PRI is likely to continue to adhere to a strongly free-market philosophy after Mexico's 1994 presidential election.

One option reportedly being discussed is the Indonesian model where long-term risk and production-sharing joint ventures are established, but nominal control and ownership remain in the hands of the state enterprise. Meanwhile, offshore drilling and service contracts are already being won by the US service industry, and onshore bidding is expected to produce further contracts soon.

The Salinas government has already taken on, and defeated, the powerful oil workers' union at Pemex. Since 1989, the total Pemex workforce has been slashed from 240,000 to 120,000, and plans have been announced to cut it to 50,000 by the end of next year. Much of the reduction comes from the commitment to contract-out services, thus opening operations formerly done in- house by Pemex to US suppliers.

At current prices, Mexican oil production from known fields could increase by up to 50% over the next decade, as long as there is the political will to continue the industry's transformation.

Belize and Cuba. Both countries have offshore potential that is being examined at present. Cuba's slice of the Gulf of Mexico has been subject to Russian and French geophysical surveys, but no drilling has taken place. However, it is unlikely that any substantial foreign investment will take place until the country's political future is clearer.

Belize has more immediate potential, with geological structures similar to those in neighbouring Guatemala and Mexico. However, development plans are complicated by the existence of a fragile barrier reef system which overlies some of the best prospects. This is not only of environmental importance, but also helps support an established tourist industry.