Energy Execs Bullish on Oil, See Sluggish Natural Gas Market

NEW ORLEANS (Dow Jones), Mar. 23, 2010

Energy companies and oil service firms are becoming confident that oil prices will remain above $75 a barrel driven by demand in emerging markets, but they say that prices for natural gas could remain depressed amid a production glut.

Sustained higher oil prices, which settled at $81.25 a barrel in New York on Monday, are encouraging exploration and production companies to increase spending. The trend is evident even in capital-intensive projects such as the deepwater of the Gulf of Mexico and Canadian oil sands, which saw cuts the last two years as the economic crisis roared.

"2010 will be a year of transition from the sharp down cycle of 2009 to a slow resumption of growth," Schlumberger Ltd. (SLB) Chief Executive Andrew Gould told analysts and investors at the Howard Weil Energy Conference in New Orleans. "Oil prices above $75 will give customers confidence to increase spending, and even increase exploration budgets, though we see this more as a 2011 effect." Schlumberger is the world's largest oil service company.

This positive view for oil prices was also shared by large exploration and production companies such as Houston-based Apache Corp. (APA). The company's Chief Executive G. Steven Farris said at the Howard Weil conference the world is going to see $100 a barrel soon, driven by aggressive energy demand in developing countries, especially in Asia.

"I'm very bullish on oil prices," he said. The company is planning to invest $6 billion in 2010, or about 50% more than last year, with an emphasis in projects that have the potential to increase its oil production.

BP PLC's (BP, BP.LN) Chief Executive for Exploration and Production Andy Inglis said the company counts on a $60 a barrel to increase its production 1% to 2% a year through 2015.

But some uncertainty lingers about the short-term future of natural gas prices. Unlike oil prices, which have been trading around $80 a barrel since October after falling to less than $40 in February 2009, natural gas prices remained low as producers unlocked vast new supplies of the fuel from dense rock formations known as shale and the economic downturn undermined demand for the fuel. While cold winter weather recently spurred additional demand and gave prices a boost, prices have begun to sag as spring approaches.

Natural gas for April delivery on the New York Mercantile Exchange settled down 9 cents, or 2.16%, at $4.079 a million British thermal units.

"For natural gas, the picture is very different with short-term supply growing dramatically," Schlumberger's Gould said. "While we are encouraged by the resilience of the North American natural gas drilling rig count, and recognize that severe winter weather has reduced gas storage to a level that seemed difficult to achieve four months ago, we remain cautious on the future direction."

Apache's Farris said the company uses an estimate of about $4.50 a million British thermal units as the economic hurdle to approve its projects, and although it is an internal estimate, he doesn't believe natural gas prices will improve much more than that in the short term.

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