The world of oil and gas pricing between 2005 and 2010 will likely look a lot different than anything the industry has seen before. In fact, during the next five years, producers could witness average crude prices of $40 to $60-at least 80% of the time-and average natural gas prices of $5 to $8. This is one of the more salient hypotheses served this summer by Thomas A. Petrie, chairman and chief executive officer of the energy investment-banking firm Petrie Parkman & Co. He spoke to producers and investors at two Denver energy forums, including the 10th annual Oil & Gas Conference. Among the many factors underpinning Petrie's intrinsic thesis of continuing supply/demand tightness through the balance of this decade is the maturation of the conventional petroleum resource base, economic growth in China and India, the maturity of Russia's export inclinations, and various imponderables in the Middle East. "The dynamics at work in the Middle East don't look terribly positive in terms of [oil-price] stability; rather, they suggest a higher threshold for the base price of crude oil," says Petrie, a West Point graduate and former oil analyst for The First Boston Corp. He stresses that through the balance of this decade, there's going to be a highly intensified global competition for energy supplies and that "absent a widespread economic downturn, the challenge to meet global demand during that time could prove surprisingly chronic." Global oil output this year is estimated to be 84.7 million barrels per day, but world production is in serious decline. "If, before any new additions, that base declines at 2.5% per year, we lose around 10 million barrels per day. If current output declines 5%, we lose 19.2 million barrels per day, and with an 8% decline, we lose 28.9 million barrels per day. My inclination is to focus on the middle case." Meanwhile, with respect to new additions from oil-production sources around the globe-including the U.S., South America, West Africa, the Caspian Sea, Russia, Asia and the Middle East-the base-case expectation for 2005-10 is an achievable 13 million barrels per day; the high-end case, an aggressive estimate of 25 million barrels per day. At the very best, that's not a lot of margin for error. As for excess OPEC productive capacity in particular, "maybe the cartel can get 2.5- to 3.5 million barrels per day more online," says the macro-market seer. "But that's nothing like the huge supply overhang we saw in the past from this repository of major resource potential." Prefacing his commodity-price outlook, Petrie notes that during the second half of the 1990s and first half of this decade, there has been a $10 upward move in oil and a $2 move to the right in natural gas prices. "That's a market signal very difficult to discount, and a glimpse of the looming reality," he warns. "During most of 2005-10, we're probably going to see $40 to $60 oil for about 80% of the time-with higher prices periodically and prices below $40 rarely. In fact, before we see $30 per barrel, we're likely to see an excursion up to $80-plus per barrel." Similarly, natural gas prices should average a robust $5 to $8. "There's a pretty big sweet spot between now and the end of the decade before LNG imports have any impact on domestic gas prices," especially in view of current depletion rates in conventional gas wells. Under these scenarios, the industry will have lots of incentive to accelerate the implementation of new technologies to increase recoveries from existing fields and to develop new resource plays-and premium returns will be achievable despite the high cost of entry. Also, through 2010, Petrie sees an acceleration of M&A activity. "Companies have limited organic growth opportunities, capital is available, and the outlook for sustained higher commodity prices combined with rebuilt liquidity is supporting a robust asset-acquisition market." True, there's a significant gap between Wall Street commodity-price forecasts and futures pricing. "The pricing reality, however, is well north of Wall Street estimates and that's why hedging makes so much sense, as we've seen in many recent M&A transactions."

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