The outlook? Look out, at least through 1999.
Industry analysts have predicted another year of constrained oil and gas prices while the world works off a glut of hydrocarbons.
Beyond that cheerless forecast, there's much better news. Most projections show oil prices ending their long slide and beginning to climb before year-end.
"What we're experiencing now is an aberration. This is not something we will see over a number of years," said John Gustavson, a petroleum geologist and engineer who is principal of Gustavson Associates in Boulder, Colo.
"I think we will see a rebounding of oil prices literally within a year."
A buildup of oil inventories has depressed prices and will continue to affect the oil market, analysts say. According to estimates by the U.S. Department of Energy's Energy Information Administration (EIA), about 730 million barrels of oil were added to global inventories in 1996-98. The agency predicted a return to a more typical inventory pattern in 1999.
Experts differ on the timing of a turnaround, citing a number of uncertainties that will affect the industry in the coming 12-24 months.
Those concerns include production from OPEC, Iraq, Latin America and the Common Wealth of Independent State (CIS), and weather patterns that affect heating demand.
And mental "weather" may have as much to do with the oil market as any other factor. Market psychology plays a large part in determining price, according to Ulrich Bartsch, research fellow at the Oxford Institute for Energy Studies (OIES) in Oxford, England.
"Traders seem to have made up their minds that now is the time to buy and sell oil at $11 or less, come what may," he said. "And it has long been clear that virtually any price between $10 and $30 is more or less arbitrary, as supply and demand are inelastic in the short term.
"Market sentiment drives short-term developments."
No $19.99 in 1999
In its year-end Short-Term Energy Outlook, issued in December, the EIA predicted that world oil stock levels in 1999 will be relatively flat.
Despite that improved supply/demand picture, the EIA expects world oil prices to drop from an average of $12.16 per barrel in 1998 to $11.73 this year -- although it said prices could reach $12.50 in the fourth quarter of 1999.
"We're not overly pessimistic, I think," said Dave Costello, EIA economist in charge of the Short-Term Energy Outlook. "Economies are slowing down in the industrialized world. The only thing propping demand up is the weather, and everybody knows that's a transitory thing."
Production increases will come from the North Sea, Latin America and Africa, the EIA said, and OPEC countries will produce almost 200,000 barrels per day more in 1999 than in 1998.
Costello sees low prices limiting the growth of non-OPEC production -- and eventually curbing some development projects.
"With prices in the low range for so long, even the most efficient producers may cut back on projects to the extent that it will start to affect oil prices," he said
However, long-term projects coming onstream will continue to add to world production in 1999 because they are too far along to be affected by low prices, noted Doug MacIntyre, EIA international oil market analyst. A key example is North Sea production.
"They keep on finding oil and they keep on developing the fields. Four or five years ago, everybody was foretelling that the peak of North Sea oil (production) was going to be that year or the next," he recalled.
The outlook for both China and the CIS states remains a puzzle, MacIntyre said. He expects production to grow in the CIS region over the medium-term, but can't be sure about short-term prospects.
"In the future it's going to go up," he said, "but over the next year or two the question is, 'Will it go down before it goes up?'
"It's going to go up eventually, because of all the investment being made in the Caspian area and elsewhere."
Special Case: Iraq
Some experts believe increased production from Iraq had a significant effect on the buildup of world oil inventories.
But no one seems to agree just how much it affected oil prices, or what Iraq's future role will be.
"People don't realize that under the United Nations' program with Iraq, Iraq has been a very substantial producer," Gustavson said.
He estimated Iraq's true 1998 oil production at about 1.2 million barrels per day. MacIntyre tied that production to the level of world oil surplus.
"The increase in Iraqi production in 1998 versus 1997 is almost exactly the amount that supply has exceeded demand," he said. "In a lot of respects, that's coincidence -- but it shows that what happens in Iraq matters to the world market."
Gently Down the Stream
Low oil prices helped to change the face of the industry in 1998. Household-name companies combined with larger entities in a rush of mergers and acquisitions. Gustavson views that as a natural process.
"We have always seen that companies, once they reach a certain size, cannot get larger strictly through internally generated growth," he said. "They can only grow through agglomeration."
Even with recent announced mergers, the industry can count on a steady number of large players, he believes. Independents will grow through combination, like the Ocean Energy Inc.-Seagull Energy Corp. merger.
"We shouldn't have this doomsday look and say there will be fewer and fewer oil companies. It's a number that will be fed from below," he noted. "Whether prices go up or down, there will always be opportunities in the oil industry."
Gustavson is confident that growing demand will lift oil and gas prices in the next 12 months. Airlines and other transporters will use more fuel, individuals will consume more and international energy demands will increase, he predicted.
"It's particularly the electrification of Africa that has not slowed down, but is growing at a two-digit rate on an annual basis," he continued. "Most of that is fueled by naphtha or diesel or fuel oil.
"It is bound to have an impact."
Gustavson Associates provides technical services and management consulting for the petroleum industry. Gustavson himself teaches a short course on "Appraisal of Oil and Gas Properties" for the University of Tulsa.
In assessing properties, the industry's uncertain future may look more promising than the recent past. He said he tells his students, "What do you prefer? To look forward in a dusty crystal ball, or backward in a dirty rear-view mirror?"
With demand on the upswing, Gustavson sees a return to the average prices of the past five years, sending West Texas Intermediate crude back to the $16 range and Brent crude nicely higher, also.
Still, he cautioned that survival won't be guaranteed for any E&P organization. If the upstream sector is to survive and prosper internationally, it will have to look further downstream, Gustavson said.
Wise moves include investment in pipelines to transport gas to market in developing countries and facilities to provide fuel for IPPs (independent power producers). He cited Enron and CMS Energy as two companies moving in the right direction.
An upstream company that wants to stay in the game, he warned, "better be prepared also to invest downstream."
The Picture from Paris
In December, the International Energy Agency (IEA) in Paris forecast that world oil demand will rise from 74.3 million barrels/day in 1998 to 75.7 million barrels per day in 1999.
Non-OPEC production will also continue to grow, it said, increasing from 44.6 barrels per day to 45.4 barrels per day.
IEA, based in Paris, is an autonomous agency linked to the Organization for Economic Cooperation and Development.
Considering global oil supply/ demand realities, the industry outlook is "not a pretty picture," said AAPG member Mike Wittner, principal administrator of oil supply analysis in the IEA's Oil Industry and Markets Division.
"Iraq has been maxed out for the last three or four months in a row, producing more than we thought, more than most other people thought. Producing more than we thought possible, in fact," he said.
"Beyond that, you have growing production capacity in most of the OPEC countries."
Foreign investment in OPEC countries improves their production capabilities and builds pressure to produce for return-on-investment, Wittner observed. He said two factors that could reduce world oil production are spending cuts and field declines.
"Given the current price environment, budgets for 1999 are a key thing to look at now, whether it's private-sector companies or state companies," he said. "You have to spend money to produce oil."
While most observers focus on new fields and development projects, Wittner also looks closely at existing, older fields.
Spending levels will determine if production facilities are maintained or "you wait until something breaks down, then you fix it," he noted.
"In the short-term, with respect to the pricing environment, I think decline rates on existing fields are the biggest wild card in impact on how many barrels come into the market or don't come into the market," he continued. "Budget cuts will cause cutbacks in the routine things, like infill drilling and preventative maintenance."
IEA does not project future oil prices, in part to avoid the appearance of influencing traders or biasing the market, according to Wittner. He said current low prices may increase oil consumption somewhat, though overall demand is tied to other major variables.
"The price has some effect on demand," he said. "The factors that outweigh that are, number one, the weather, and number two, the economic growth outlook in various countries.
"When you look at most people's supply and demand balances, it'll be some time before inventories are drawn down. That's one of the big things the market is looking at."
The Outlook from Oxford
At OIES, Bartsch noted how quickly the industry's outlook and psychology changed from late 1997, when oil prices appeared to be in a stable upward trend from $18-$20 per barrel.
"In the autumn of 1998, as oil prices barely hovered between $12 and $13, as Asia was already written off, Russia crumbled and Brazil looked more and more wobbly, the industry displayed a gloominess that bordered on a death wish," he said.
"The stubborn depression is an overreaction, a panicky swing in the opposite direction, brought about by the sudden realization that people believed in the Asian bubble for far too long," he continued. "The fundamentals warrant neither the bubble mentality of the recent past, nor the bunker mentality of the last months."
Because of an industry "collective depression," OPEC's production cuts after the Riyadh pact last March and the United States' renewed military moves against Iraq had "no discernible impact on the oil market," he continued.
"Important parts of Asia are going through a recession, but so far the worst recessions have all ended in a renewed boom," he said. "Countries like Japan and South Korea have the technology and human resources to become the world's engine of growth yet again ... China and India, home to 40 percent of the world's population, look quite able to weather the storm."
Bartsch believes another strong swing in energy prices will emerge within 12-18 months. In the meantime, expectations will remain gloomy and the industry will curtail what it can, until winter weather empties storage tanks and the oil price moves up again, he said.
But the beginning of the turnaround may appear sooner than expected.
"Our feeling is that this will come with a vengeance after the next OPEC meeting in March, at which OPEC ministers will decide new production cutbacks," he said.
If it's any consolation, industry fundamentals could change to favor much higher oil prices early next century, and the next century is only 11 months away. Bartsch sees curtailed production colliding with increased demand in 2002.
"The investment slow-down from more than a year with dismal prices will hit supply growth in three years' time, when Asia is well back on track and the large additions of non-OPEC supplies seen over the last two years cannot be repeated," he predicted.
"In a reversal of the old adage loved by economists we therefore might say: 'Don't worry. What goes down has to come up again.'"