Challenges creating opportunities for global energy industry.

Changing supply and demand patterns that began last year and are continuing in 1998 signal the start of an era of increasing complexity that will challenge conventional thinking and present many opportunities in the global oil and gas industry, according to the 1998 edition of World Oil Trends,

One result is that many companies are already planning to reduce their planned exploration and production spending. Oil prices have been at 10-year lows for the past month and natural gas prices, which have been comparatively strong, are likely to be pressured as spring approaches. Gas prices could fall as low as $1.50 per Mcf until this summer when air conditioners start running, said Victor A. Burk, managing director of energy industry services at Arthur Andersen in Houston.

For the first time since 1987, all major regions of the world - including the Former Soviet Union - saw positive demand growth. However, demand patterns fluctuated from region to region throughout the year.

"1997 was a year of surprises, a year in which the market was challenged by supply and demand outcomes quite different than what conventional wisdom had predicted," said Joseph Stanislaw, managing director for CERA. The Asian/Pacific demand growth that had seemed invincible until mid-1997 lulled, but demand remained strong in other, previously little noticed regions, he told reporters.

"The result is a market with no focal center, but with opportunities spread throughout Africa, Latin America, Eastern Europe and the Middle East as well as North America, Western Europe and the Asia/Pacific region. Which opportunities to pursue and how to pursue them is one of the key strategic initiatives in the industry," he said.

Burk said the decline in energy prices together with recent increases in the cost of finding and developing new oil and gas reserves are creating new challenges for exploration and production companies.

"Many companies are prepared to face these challenges because they already have in place the right strategies, processes, people, technology, alliances and capital," he said.

The two energy experts agreed that it is highly unlikely producers will decide to shut in wells as they did in the '80s. "Companies rarely stop a development program that is under way and if they have production they won't do anything to change that. If you stop production, you still have costs; some cash flow is better than no cash flow," Stanislaw said.

The study identified the following trends to watch for:

* The degree to which the lull in the affected economies of Asia has a ripple effect on the rest of the world's economies.

* Key potential impediments to production increases in non-OPEC supplies relating to technical challenges, weather sensitivity, environmental opposition and terrorism.

* A lack of key managerial skills in new energy companies that have evolved since the mid-'80s price collapse.

* Environmental regulations resulting from the Kyoto Protocol that anticipates a shift from high carbon content energy sources.