Oil company executives face another murky year.

Prices look to remain stagnant as cost cutting continues

The new year's outlook for petroleum industry prices is: "flattish" for crude oil, "a little higher" for natural gas and "no improvement" for products.

This was the forecast summary of Albert Anton Jr., perhaps the nation's premier petroleum analyst, who is a partner at Carl H. Pforzheimer & Co. While that brokerage house, which specializes in petroleum, is based in New York City, executives here of Los Angeles-based oil companies nodded their heads in general agreement.

Crude price swings of only plus or minus $2 a barrel were forecast for 1993 by Dan Smith, vice president of corporate planning at Atlantic Richfield Co. That would be markedly different from the preceding two years:

The range between the high and the low prices posted for crude produced from L.A. County oil fields was $6.75 a barrel in 1992 and $10 a barrel in 1991. (A barrel contains 42 gallons.)

"Last year was brighter than 1991 because we've been working on cutting costs," declared Smith of downtown L.A.-based Arco. "I expect we'll continue to gut it out in 1993."

Arco has continued to sell properties where it was less efficient - $200 million to $300 million in 1992 representing operations that involved 20 percent of the employee count in the lower 48. "I expect more of that to take place," he said.

Indeed, each of the Big Three petroleum companies based here will continue striving to cut its operating costs this year. However, all three are opening their treasury coffers a little wider to make somewhat larger capital investments in oil-related projects.

Arco's additions to fixed assets, for example, "may be slightly higher," Smith said, than the $2.4 billion planned for 1992, which fell from 1991's $2.7 billion. Noting the company has "a lot of big projects" planned for 1993, he ticked off:

* A second gas handling facility at the Alaskan North Slope's Prudhoe Bay field is scheduled to start up either in late 1994 or early 1995.

* A gas project is scheduled to start up late this year in the Northwest Java Sea.

* Another Indonesian gas project off-shore toward Bali is slated to commence operations next year. (Production from the two Indonesian gas projects is expected to be consumed in that nation of islands, Smith said.)

* A Chinese gas project in the South China Sea near Hainan is projected to be on stream in 1996. Production is expected to be consumed in Hong Kong, Smith said.

Occidental Petroleum Corp. will hike its capital expenditures in international oil and gas by $75 million or about 30 percent above the 1992 level, Ray R. Irani reported. That would increase capital spending on international oil and gas to $350 million in 1993 from $275 million in 1992.

However, the chairman, president and chief executive officer of Westwood-based Oxy said the company already has begun to "scale back capital expenditures in all other areas."

Thus, he said, capital expenditures all told in 1993 will be slashed to $750 million, down $150 million from the $900 million of 1992. Among the capital spending reductions, Irani said, domestic oil and gas will be cut nearly a third to $150 million in 1993 from $220 million in 1992.

Total capital spending reductions will be matched by $150 million of cost reductions in 1993, Irani continued, for total cash savings of $300 million. Among the cost-saving measures Oxy is invoking, he said, are a hiring freeze and a salary freeze.

The latter went into effect last November and will remain in place throughout 1993 for all salaried employees earning more than $40,000 a year, Irani said. Annual savings from the freeze as well as reduced employee benefits and reduced fees for outside services, he projected, will total about $55 million.

(Salaried employees earning less than $40,000 a year will get a 3-percent pay hike April 1 to offset inflation, Irani added; hourly workers are not affected by this action.)

In addition, he said, savings of about $100 million are expected from targeted cost reductions. Among these are further staff reductions that will cut about another 500 positions from the company-wide work force, Irani said.

To be sure, Oxy already has effected significant cost savings since Irani began a company restructuring in 1991. However, he lamented, the recession has negated temporarily the expected benefits from the restructuring.

"A combination of lower volumes and prices, and correspondingly reduced profit margins, has lowered the results from our core businesses," Irani said.

Nonetheless, he reaffirmed his optimism about the company's longer-term future. Net production of Oxy's international oil and gas operation will increase by more than 50 percent to nearly 210,000 barrels daily over the next couple years, he predicted.

He based this on discoveries in Ecuador and Yemen coming on stream and on an enhanced oil recovery project in Russia. In addition, Irani reminded, Oxy has exploration activities under way in 16 countries encompassing 47 million acres.

The company plans to drill 45 to 50 exploratory wells in 1993 in a dozen foreign countries, he said and cited them: Albania, Algeria, Angola, Argentina, Colombia, Indonesia, Oman, Pakistan, the Philippines, Syria, Russia and Tunisia.

"Many of these countries have opportunities that could increase Occidental's oil and gas reserves significantly in the future," he stressed. Oxy also is discussing enhanced oil recovery projects with Algeria and several other parties, Irani disclosed.

Unocal Corp. will increase its capital spending by "at least $100 million" in 1993 over 1992's $1.1 billion, revealed Gary W. Sproule. The senior vice president of administration and planning indicated the restructuring downtown L.A.-based Unocal already has effected helped make possible hiked capital spending.

Sproule cited as examples the sale of the company's polymer and chemicals distribution in the Midwest and East and the sale of terminals in the Southeast. The sales helped generate cash to slash Unocal's debt from the $6.1 billion high in 1985-86, much of it incurred to fight off raider T. Boone Pickens, Sproule said.

By the end of 1991, he indicated, Unocal's debt had been whittled down to about $4.6 billion. Last year, he said, the company launched a new five-year plan to cut the debt by another $1.5 billion, and $900 million of that goal was achieved in 1992 to knock the debt down to $3.7 billion.

Given that achievement and the plan to work at debt reduction again this year, Sproule predicted Unocal would report a "fairly dramatic reduction" in 1993 interest expense. The company has arranged to sell its Imperial Valley geothermal operations and Unocal's truck stops in the first quarter this year to raise additional cash that can be deployed more effectively, he said.

Unocal also will be benefiting this year from another voluntary early retirement program that was accepted by 1,100 employees last September, Sproule said. "We now are pretty much where we want to be and anticipate no further change," he said.

Unocal's domestic petroleum production will be flat this year, he projected, but will be up worldwide. Sproule ascribed the international increase primarily to gas production in Thailand and both oil and gas production in Indonesia.

He affirmed Unocal's purchase of half of Shell Oil Co.'s refinery in December 1991 in L.A. County has worked out well. It was a "very good acquisition," Sproule asserted.

The purchase provided Unocal with operating equipment that otherwise would have taken the company three years to get operational had it been bought new. The purchase also has helped Unocal toward achieving compliance with environmental rules for cleaner fuels and air mandated to go into effect by the middle of the decade.

Given the consolidation of the acquisition with Unocal's existing refinery here and improved West Coast oil product market conditions, Sproule allowed the company's marketing margins were "pretty good" the last couple months. However, he doubted marketing margins will be maintained because of expected volatility.

Pforzheimer's Anton points to new American refinery capacity to produce more gasoline this year: 80,000 barrels daily by Amerada Hess, 50,000 to 60,000 barrels daily by Shell and 20,000 barrels daily by Mobil Corp.

Those additions will add 2 percent to United States gasoline supply, Anton remarked, yet the U.S. market is not growing that rapidly.

Amplifying his remarks about the outlook for crude prices, Arco's Smith first referred to the world economy, which generally is in a recession that is dampening demand.

The Organization of Petroleum Exporting Countries is unlikely to squeeze back production enough to reduce the supply side of the world-wide supply-demand equation, he said. This is because of persistent cheating on crude production quotas by OPEC members, Smith suggested.

On top of this is the Iraqi wild card.

The United Nations instituted an embargo on Iraqi oil in August 1990, when Iraq attacked and annexed neighboring Kuwait. Although Operation Desert Storm in 1991 pushed Iraqi forces out of Kuwait, the embargo still is in force.

But at some point it is likely Iraq's crude production, with a potential of 3 million barrels daily, will begin flowing into world markets, most oil observers believe.

Another wild card is represented by the former Soviet Union. It exported 3 million to 3.5 million barrels daily in 1989-90, Smith said, but exports now are less than 2 million barrels daily because production is falling faster than consumption there.

Summing up these factors, he forecast crude prices will fluctuate up or down $2 a barrel this year. Look for "some real price growth in maybe four years," Smith concluded.