The Middle East's opening to Western oil companies is no head fake. It's for real, says Tom Petrie, chairman of Petrie Parkman & Co. OPEC is changing, which is the first driver of major change, he told an industry audience in Houston recently. In the OPEC of the 1970s, most if not all of the member countries had excess production capacity, and thus, each country had real power during deliberations. Today, only three (or maybe four) members enjoy excess capacity and they are the ones that hold the real power within OPEC. The others are "just noisy talk," Petrie said. By 2010, worldwide demand will rise to about 90 million barrels a day, yet known global production capacity, counting reserve decline estimates between now and then, will be just 68 million. Between 10- and 14 million barrels a day of additional supply must be found by non-OPEC sources, but most of the incremental supply will have to come from OPEC, whose market share will rise significantly, he says. "Depending on how conservative you want your estimates to be, OPEC could gain from 1% to 20% more market share during the next decade. What will make this scenario different than in the 1970s, '80s or '90s? The opening of the Middle East's upstream." If 60% to 70% of future world supply comes from the Middle East, then that region will begin to see the rapid reserve-to-production drawdown that has been seen in the U.S. and Canada in the last decade, he adds. (Twelve Western companies recently concluded opening talks with Saudi Arabia on upstream gas ventures.) On the domestic front, the disparity between high commodity prices and low stock valuations is a remarkable phenomenon that is therefore probably unsustainable, he adds. However, many investors still do not believe exploration and production companies can properly handle the gift of high oil and gas prices without "blowing the benefits," although past is not necessarily prologue. Consolidation among independents is likely to accelerate and sow the seeds of a healthier industry in three to five years. "We're in the fourth year of a major contraction. From a peak in 1996 of 74 public companies with market caps of at least $150 million, there are now 57. For the universe of opportunities, there are too many companies. They end up competing for capital and driving the cost of capital up." Consolidation creates larger companies that enjoy better valuations in the stock market, better access to capital and realizable cost savings. They also tend to have more flexibility in the way they allocate their capital across a spectrum of opportunities, from deepwater to coalbed methane to international projects. An often-overlooked benefit is that after a merger, the new company tends to have better, more seasoned management. Trends to watch now? Petrie says Occidental Petroleum is still viewed with a great deal of skepticism, yet it has made several "great strategic moves as part of a repositioning that I couldn't have imagined a few years ago-the purchase of Elk Hills and Altura Energy. Phillips Petroleum has truly captured a company-transforming event [with its $7-billion purchase of Arco Alaska], the likes of which we rarely see. We see Phillips as a major player in North America now." Petrie Parkman expects to see one or more new and significant consolidations on the Gulf of Mexico Shelf, which is ripe for a handful of companies to consolidate. Petrie says he is worried about the looming severity of U.S. natural gas supply constraints and thinks this will be another major driver of key events in the next decade. -Leslie Haines