PERSPECTIVES OF OIL AND GAS: THE ROAD TO INTERDEPENDENCE

PERSPECTIVES OF OIL AND GAS: THE ROAD TO INTERDEPENDENCE

Perspectives of Oil and Gas: The Road to Interdependence by Marcello Colitti with Claudio Simeoni Fondazione Eni Enrico Mattei, Milan, Italy... " KLUWER ACADEMIC PUBLISHERS DORDRECHT/BOSTON/LONDON

A C.I.P. Catalogue record for this book is available from the Library of Congress. ISBN-13: 978-94-010-7262-5 DOl: 10.1007/978-94-009-1702-6 e-isbn-13: 978-94-009-1702-6 Published by Kluwer Academic Publishers, PO Box 17, 3300 AA Dordrecht, The Netherlands. Kluwer Academic Publishers BV incorporates the publishing programmes of D. Reidel, Martinus Nijhoff, Dr W. Junk and MTP Press. Sold and distributed in the United States and Canada by Kluwer Academic Publishers, PO Box 358, Accord Station, Hingham, MA 02018-0358, USA In all other countries, sold and distributed by Kluwer Academic Publishers Group, Distribution Center, PO Box 322,3300 AH Dordrecht, The Netherlands Printed on acid-free paper. All rights reserved. 1996 Kluwer Academic Publishers Softcover reprint of the hardcover 1 st edition 1996 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission from the publishers, Kluwer Academic Publishers BV, PO Box 17, 3300 AA Dordrecht, The Netherlands.

CONTENTS Foreword Daniel Yergin vii PART ONE: THE RESOURCES CHAPTER 1: The size of present and future hydrocarbon reserves 3 Introduction 3 Oil and gas reserves, proven and to be found 4 Estimate of reserves to be discovered 7 Exploration needed to discover the potential oil reserves 12 The petroleum provinces 12 The new field wildcat (NFW) as an indicator 15 The number of NFW to be drilled in future 20 Conclusion 25 CHAPTER 2: Hydrocarbon production capacity 29 Introduction 29 Reserves to production ratio 29 Production at maximum efficient rate (MER) 30 The level of crude oil (and of natural gas) production according to a demand trend 38 Conclusion 40 Methodology 42 PART TWO: THE DEVELOPMENT OF THE OIL INDUSTRY CHAPTER 3: A picture of the oil business to-day 47 The oil market as a "spaghetti junction" 47 The actors and the figures 48 CHAPTER 4: The "good old days" 65 The need to "manage" the oil industry 65 Management by integration and interlocking concessions 67 Why the system came to be terminated 71 CHAPTER 5: The oil revolution 73 Introduction 73 The oil consumers and the developed oil-consuming countries 74 The oil-exporting countries 83 v

~1 vi CONTENTS The oil companies An assessment CHAPTER 6: The objectives and instruments of the exporters Management by volume, or the short-term approach The oil rent The composition of supply The energy market and the consumer countries' economies The time-horizon of the producers Summing up CHAPTER 7: The countershock CHAPTER 8: Summing up the great change Introduction An economist's interpretation Some graphs A cyclical model The political angle The birthmarks of the industry The reaction A summing up The experience up to the present time 87 89 91 91 93 96 99 100 101 103 118 119 119 120 122 122 CHAPTER 9: A modest proposal: a policy of interdependence. The need for consumer consensus 125 Introduction 125 The first Interdependence study 125 How the situation has changed 128 A structural element of the oil industry: the role of the State 131 A modest proposal 132 Appendix: The advantages of interdependence 133 Annex 1: Definitions and Classifications 137 Annex 2: Chronology of the 97 Meetings of the OPEC Conferences 141 Annex 3: A model to explain the connection between crude oil prices and daily world production of crude oil Giorgio Spallanzani 159 Bibliography 161 vi

FOREWORD Marcello Colitti and Claudio Simeoni present a thoughtful and incisive analysis of the development and dynamics of the global oil business in their new book, Perspective of Oil and Gas: the Road to Interdependence. The book captures the themes of the business and the interests and needs of both producers and consumers - and the companies that provide the essential services to both. I have known Marcello Colitti for more than two decades, and have great respect for his knowledge, wisdom and judgement - a respect that is shared throughout the industry. He brings the unique perspective of participant and expert through the many decades. His unique experience in ENI, as it has achieved and sustained its great role, adds to his authority. Marcello Colitti is a man of rigorous analysis. But he also has, as members of the industry throughout the world know, more than a touch of the artist about him - a special 'sensibility for oil'. We are fortunate that he and his knowledgeable and expert colleague Claudio Simeoni can now apply their knowledge - and their distinctive perspective - in this contribution to the global thinking on the oil industry as it is today - and will become tomorrow. Daniel Yergin President, Cambridge Energy Research Associates Author, The Prize: the Epic Quest for Oil, Money, and Power (Pulitzer Prize Winner) M. Colitti and C. Simeoni. Perspectives of Oil and Gas: The Road to Interdependence. vii. 1996 Kluwer Academic Publishers. vii