Challenging dynamics and difficult choices. That was the title of a talk given by Unocal president and chief operating officer Tim Ling in Midland a couple weeks ago. But it also handily describes the energy scene for the Bush administration. Now that the military campaign is mostly over, the government must implement energy policy at home and abroad. Here, it is trying to force the stubborn Senate, which opposes drilling in ANWR, to reconcile with the House bill that supports it. This is happening at the same time Bush has started down the long road to revitalizing the Iraqi oil industry. This is ironic because it hasn't yet managed the challenges faced by the domestic oil industry, which is presiding over declining production and higher costs. It could not even prevent rogue Republican senators from joining Democrats in voting against drilling in Alaska. So, how can it guide an oil industry half a world away, one which operates in a different economic and political context? Yes, a logging tool is a logging tool. But which technician uses it, and who is authorized to pay for it, and who decides how to sell the oil-there's where it gets interesting. At least crude oil and natural gas prices remain high. U.S. and Canadian gas storage levels are at nine- or 10-year lows for this time of year, so we can expect good gas prices to last. Where do investors stand today, post-war? Most sellside analysts are fairly bullish; not so for those on the buy side-the ones with the money. I would say frustrated optimism prevailed at the annual oil conference of Howard Weil last month in New Orleans. Some of the E&P companies looked strong-lots of production growth coming-but investors still worry about the true nature of the weak U.S. economy. They prefer to hold their positions and not add new ones. Investors can no longer use the excuse "It's the war" for holding back from oil and gas equities. They have to start doing their homework and pick some stocks. Another reason for caution is that they wonder about the economics of the oil business. If a company cannot sustain good returns and create growth with $28 oil and $4 gas, should it throw in the towel? Maybe the oil industry was never meant to make money, but instead, just to recycle dollars and keep production flat forever. What is the independent producer to make of all this? In Midland at the annual Executive Oil Conference, Unocal's Ling laid it on the line in a forceful speech. "The Easter egg hunt is over. Fundamental industry performance is slipping and it is sobering. Costs are higher. Margins are eroding at a fairly breathtaking pace. We are finding less and the new, large plays are elusive. Debt has increased [for many companies] despite record commodity prices." Ling cited statistics proving basin exhaustion. For example, in the Gulf of Mexico shelf, the average discovery size has plummeted from100 billion cubic feet in 1980 to only 5 Bcf today. North American finding costs for many large companies have risen from $5.50 per barrel of oil equivalent in 1997 to $10 per BOE or more today, "a staggering increase." "Sure things" industry spoke of in 1995-deepwater Brazil, the Gulf of Mexico, the Caspian, Canada's East Coast-have led to a lot of disappointments and smaller fields than were expected, Ling said. It was enough to make you want to ride off into the sunset. But West Texans have been through this before. A panel of seven division managers from large producers vowed to increase their activity in the Permian Basin. For Anadarko Petroleum, the Permian is a secondary area that doesn't command much of its overall spending, but even so, the company is looking for more exploitation plays there. Last year, the Permian contributed the second-largest amount of cash flow to ChevronTexaco of any area in the world. "We stepped back from our resource base not to see what we have, but to see what it could be," said vice president Alan Kleier. "We believe there are more fields we can renovate here." Devon Energy's Don DeCarlo said the company will focus on capital efficiency versus production volumes, but it is looking for partners and joint ventures on its large Permian holdings-and will prioritize exploration. Tim Dunn, chief executive of CrownQuest Operating LLC, brought down the house with his witty take on what it's like to be an independent these days. "Someone asked legendary oilman J. Paul Getty what it takes to be successful. He replied, 'Some people find oil. Others don't.'" Dunn said to forget tracking return on capital, net asset value, production growth or any other success metric. He said his one goal is that a year from now, he will still be listed in the phone book. Think about it. Amoco is no longer there. Neither is Mitchell Energy or Pennzoil.

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