Analysts warn more oil production not a quick fix for high prices Filed: 09/22/2000

By MARK BABINECK Associated Press Writer

HOUSTON (AP)  Declining resources, lingering wounds and fear of another downturn are holding back oil production despite sky-high prices, according to a number of industry watchers.

"(Production) is increasing, but I think companies are being a little bit restrained in their approach," said Nicholas D. Cacchione, research director for energy information firm John S. Herold Inc.

"In the past when prices have recovered, companies have plowed tons of money into the ground only to have prices turn around on them."

According to Herold, second-quarter exploration and production spending by the 75 largest oil companies increased 36 percent over the same period last year, when capital expenditures were lagging because of the 1998 price collapse.

Total production for 2000 is forecast to be a "historically reasonable" 2.4 percent higher than in 1999, Banc of America Securities analyst Tyler Dann said.

Dann said the major producers appear to be doing all they can to get as much oil as possible to market to take advantage of high prices, despite accusations to the contrary by Vice President Al Gore and other politicians.

"These companies are not idiots  they would be producing as much as they can," Dann said. "Perhaps (critics) can point the finger of blame at companies who are effectively producing all they can. They're an easy target, but they're probably the wrong target."

Dann said the 13 largest oil companies are responsible for about 13 percent of world production. By comparison, the Organization of Petroleum Exporting Countries produces roughly 40 percent of the world's oil.

The companies' fiduciary duty under U.S. law is to act in ways that benefit shareholders, Dann said.

"That interest is tugging at some point against the interest of general consumers that don't happen to be shareholders as well," he said.

Fadel Gheit, an energy analyst for Fahenstock & Co., also cited the decline of existing fields and long periods of time it takes to get new reserves to market.

"Oil companies, large and small, cannot just turn on and off their production every time the price goes down or up," Gheit said. "It takes a while to mobilize and demobilize."

Industry watchers say private oil companies appear to be producing at full capacity, with exploration and production expenditures rising as the year wears on.

In a statement released Thursday, Houston-based Shell Exploration and Production Co. said it was pumping out as much oil as it could.

"For new projects, depending on the complexity of the project, the time it takes to complete field development and initiate production can range from a few weeks to several years," the statement read.

A variety of other factors could keep prices in the stratosphere even if output grows:

 Demand continues to soak up every available barrel. Record low prices two years ago resulted from the Asian economic crisis, but worldwide economic health has created a thirst for oil.

 Some companies have been busy consolidating after megamergers during the oil patch slump, then weren't able to react quickly to rapidly rising prices.

 Tanker ships, the mode of transportation for most foreign oil to the United States, are in short supply. Requirements for double-hulled tankers and a mandated 25-year lifespan have taken many ships out of service.

"Even if OPEC increases production, there are not enough tankers to get that production to the end user," said Steve Brase, a portfolio manager for mutual fund giant AIM Management Group Inc.

 Refinery capacity hasn't increased in more than a decade because of weakness on that side of the business. The existing refining infrastructure is unable to convert incoming crude into enough gasoline, heating oil and other products to meet demand, said Bill Gilmer, oil analyst with the Federal Reserve Bank of Dallas.

http://www.bakersfield.com/oil/i--1242494178.asp

-- Martin Thompson (mthom1927@aol.com), September 23, 2000