GOVERNMENT

HOUSTON, TX -- Volatile oil price cycles and increasing competition will make astute application of technology a key determinant of success for the oil industry, according to Global Oil Trends 2002, an in-depth study prepared by Cambridge Energy Research Associates (CERA) and Sun Microsystems. Companies will be under continuous pressure to improve their financial performance, even as the industry contends with revenue swings of a dramatic magnitude. Technology will be crucial in the drive to reduce costs and improve margins in both the upstream and the downstream markets. ``Technological progress in the upstream means prospects can be found and reservoirs produced that would otherwise be uneconomic or invisible,'' said CERA President Joseph Stanislaw. ``The rise in upstream costs since 1996 is already being reversed. Upstream costs in non-OPEC countries are expected to fall by an average of 3% per year to 2010 -- from almost $9 per barrel to little more than $7 (in inflation-adjusted terms). Cost reductions will occur fastest in the deepwater offshore, at an average of 4% per year,'' he said. ``To satisfy the world's enormous appetite for energy, power generation plants, distribution and transmission companies, exploration and production sites and shipping and transmission lines are all facing higher performance expectations,'' said Larry Rice, Manager for Energy, Sun Microsystems Houston. ``As the industry looks for ways to use technology -- and in particular, digital technology -- improving data and knowledge management are becoming important areas of focus,'' he added. Technology will also remain key to the downstream oil industry's efforts to reduce costs, increase productivity and maintain competitiveness. ``Technology has increased the flexibility of the downstream industry in responding to changing regulatory and market conditions; shorter response times and adaptable operations have contributed to significant reductions in operating costs,'' Stanislaw said. Demand, Supply and Volatility Global oil demand growth from 2000-2001 experienced a significant slowdown. In 2000, global oil demand increased 0.7 million barrels per day (mbd), but in 2001 it is expected to grow only 0.2 mbd -- the smallest year-on-year increase in over five years. World oil demand is estimated to fall in the fourth quarter by 0.5 mbd from the year-earlier level. Nevertheless, projected 2001 oil demand of 76.1 mbd represents a new record high. ``The recent collapse in world oil demand growth in the wake of September 11 will have a reverberating effect on oil price volatility -- creating additional pressures on the industry,'' said Stanislaw. ``An additional uncertainty is how OPEC will react to the situation and to what degree it will use production restraint in its attempts to support prices.'' OPEC crude oil output is expected to fall an estimated 0.4 mbd in 2001 to an average of 27.55 mbd. OPEC crude oil production (not including natural gas liquids - NGLs) accounted for 42% of global crude supply in 2001, about steady with its share in 2000. Non-OPEC oil production (crude oil and NGLs) is slated to reach an estimated daily average of 46 mbd in 2001, a 0.5 mbd gain over 2000, while OPEC worked to curtail production in an effort to maintain higher oil prices. For much of the year non-OPEC producers continued to enjoy firm oil prices, and a significant portion of the extra revenue was reinvested in growing production. Other key findings addressed by Global Oil Trends 2002 include: Supply: Global crude oil production for 2001 is estimated at 66 million bpd -- just 90,000 bd above the 2000 level. The 2001 level is the highest ever recorded, but the year-on-year gain is well below the 1.9 mbd increase registered in 2000 and is one of the smallest gains since the early 1990s. The sizeable 2000 increase was largely due to a 1.3 mbd gain in OPEC output. In 2001, however, OPEC production restraint contributed to a 0.4 mbd decline in OPEC crude oil production on an annual basis. OPEC accounted for 42% of total world crude oil output in 2001. Demand: The global economic slowdown and shocks to the U.S. economy following the September 11 terrorist attacks combined to crimp the recovery in global oil demand that had been underway following the 1998 Asia financial crisis. As a result, global oil consumption is expected to increase a mere 0.3% in 2001. Reserves: Estimates of the amount of world proven reserves of crude oil as of January 2001 grew to 1,027 billion barrels, up 11 billion barrels from 2000. The United States recorded increases in proven reserves of 0.8 billion barrels, mostly associated with ongoing development in the Gulf of Mexico deep water and on Alaska's North Slope. OPEC's estimated proven crude oil reserves in 2001 stood at 814.4 billion barrels, up nearly 12 billion barrels from the previous year. This accounted for 79.2% of world proven reserves. Refining: Growth in global refining capacity leveled off in 2000, as declines in Eurasia and Central and Eastern European crude distillation capacity offset increases in other regions. Total world refining capacity of 81.5 mbd has nearly returned to levels of the early 1980s, though the profile of this capacity has changed dramatically. The industrialized regions of North America, Europe and Japan accounted for 61% of world refining capacity in 1981, but only 49% at the beginning of 2001. Prices: The past two years recorded the strongest crude oil price environment since the first half of the 1980s. The price of U.S. Benchmark West Texas Intermediate (WTI) crude oil was between $26.69 and $31.95 per barrel on a quarterly average basis from first quarter 2000 through third quarter 2001. Prices had not averaged that high for so long since 1985. Another remarkable characteristic of the oil market in recent years is exceptional volatility. In 1998 the annual average price of Arab Light in nominal terms was $12.30, but by 2000 it had risen to an average of $26.75 -- an increase of 117%. For more information visit www.sun.com