?Numerous economic and political factors are challenging oil and gas producers as they devise strategies to thrive in today’s recession. A panel of experts addressed several such issues at the Offshore Technology Conference breakfast briefing held by the British Consulate General in Houston. ?

“On one level, there is nothing really new in our industry,” said David Cochrane, planning and commercial manager for ExxonMobil Corp. “The specific issues may change, but we have always had to face uncertainty as we develop our strategies and business plans. Projects in which we decide to invest today will not start for another five years, so we have long-term planning horizons.”

Despite the current global shrinkage in demand, “we anticipate energy demand is going to grow some 35% between now and 2030,” said Cochrane. “Well over half of that will be met by oil and gas.

The EIA estimates that about $11 trillion in investments, or about $500 billion annually, will be needed to meet demand. To make that level of investment, producers need access to resources, he said.

“We have no doubt that the resources are there, but they require huge investments often beyond the scope of single parties, and require new technologies and strong and effective partnerships on many levels.”

Michael Economides, professor of chemical and biomolecular engineering for the University of Houston, voiced his opinion on the U.S. administration, saying, “Some of the pronouncements of this administration are preposterous. And I am a Democrat.”

Economides predicted that by the end of the current administration, the U.S. will use and import more oil than the current level. In his study of U.K. energy use, even as the U.K. built more wind turbines, the nation’s consumption of gas increased, he said.

“We need to move away from rhetoric to reality. The reason we use oil, gas and coal is not because of some ideological conspiracy headed by a dark knight named Dick Cheney. We use them because they are the easiest, most malleable and flexible forms of energy. I see no alternatives to replace them within the next five decades,” he said. “That’s the end of the story. Get it out of your mind.”

Bob Fryklund, vice president for upstream strategy resources for Cambridge Energy Research Associates, talked about “breaking the cycle.” The industry is once again looking for the bottom as layoffs are increasing and international fiscal terms are being renegotiated during the downturn in activity.

“What’s different from other cycles is that there is an imbalance between technical risk and above-ground risk,” he said. “In this case, the above-ground risk has much more weight on many of our decisions than technical risk. We are also seeing a shift in the type of supply, toward unconventional, and where it is coming from, as Mexico’s production falls off and Brazil’s increases.”

Amy Myers Jaffe, Wallace S. Wilson fellow for energy studies at the Baker Institute at Rice University, noted that the energy industry must adjust to “a major social and generational sea change.” After each cycle, there is fundamental change in the industry and “we don’t go backwards,” she said.

“The presumption that there is going to be no new technology and that we will go back to 4% growth is a fantasy,” she said. “Here’s what happened after the last cycle. We now have shale gas in the U.S., the biggest resource since the North Field in Qatar.”

The industry should focus on rebuilding its capacity in research and development, she said. “You are going to have unrealistic regulations pass the Congress and the only way to respond to it is through R&D.”

Kurt Abraham, vice president of professional development for the Texas Alliance of Energy Producers, said there are 10 intertwined factors that U.S. independents focus on. They are price volatility, recession, international stability, unrealistic greenhouse gas regulation, restrictions in offshore and onshore land use, fossil fuel development, water disposal, other environmental regulations, bigger government and taxes.

“Perhaps the single largest threat to our membership is the White House’s proposal to eliminate virtually every upstream tax break or incentive now on the books,” he said.

Marianne Kah, chief economist and manager of business and market analysis for ConocoPhillips, said a major concern is the effect the recession has on cash flow for investment. “We see a lot of projects that have become uneconomic because the price has dropped below long-term replacement costs. This is a big problem in the industry, and sows the seed for the next up cycle.”

Kah said the problem is that oil and gas prices have neared levels seen in 2003 and 2004, but the cost structure is twice as high. She called for the service industry to “be very aggressive in reducing their costs.”

“Also, I’m concerned about overlapping regulations, like having a low-carbon fuel standard on top of a renewable fuel standard,” she said.
Steve Macicek, partner at Ernst & Young, noted that most of his clients are in the oilfield service and equipment space, and said there have been quick cuts in head counts, mostly in the U.S., and companies reevaluating their structures.

“They are looking at where they have people and where they have assets, because going forward there is a headwind coming through taxation changes,” he said. “For those that operate internationally, there is aggressive tax regulation overseas as well. All governments are reaching for more and more tax revenue.”

Steve Robertson, head of oil and gas for Douglas-Westwood Ltd., said the industry should look at a 10-year horizon, not just the short-term recovery. “We need to plan for the next recession,” he said. “In the U.S., we’ve seen 20 recessions in the last 100 years.” Also, he sees the potential for the global economy to “become completely unstuck” due to major oil-price swings again.

About 66 countries have moved past peak oil production and are in decline, he said. “We will struggle to see oil production over 100 million barrels per day and we could see a peak in the oil supply in the next 10 years. We need to look at alternatives because we can’t rely on oil going forward. ”