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Oil & Gas Journal

Sam Fletcher
Senior Writer

The "simplistic assumption" that crude prices eventually will fall back "to where they used to be," around $25/bbl, is likely "invalid" in today's market situation, said J. Larry Nichols, chairman and CEO of Devon Energy Corp., Oklahoma City.

"The [price] model that I think a lot of people have, which is certainly a valid one if you look [only] at the last 5-10 years, is that we're going to have very moderate prices that on occasion will spike up for a very brief period of time when we have a difficulty like the Iraqi invasion of Kuwait, and then after a few months will come back down to a more reasonable level," he said.

However, Nichols said, "Now so much of the surplus [world production] capacity in oil has been eliminated." That makes crude prices more vulnerable to various political factors that threaten to disrupt supplies, "whether it's problems in Venezuela with [President Hugo] Chávez, whether it's tribal warfare that exists in Nigeria and occasionally in other parts of Africa, the uncertainties of the political environment in Russia, and of course the largest one of all is the huge uncertainties in the Middle East and other places where Islamic revolutionists are active, which includes places like Indonesia in the Far East."

As a result, he said in an interview with OGJ, "The [price] model we [at Devon] have, that I think is more likely going forward, is that we will have sustained high prices with an occasional spike down when all those troubled areas are peaceful. It won't last very long because not all of those areas are likely to remain peaceful for very long. The normalized price is a high price that will occasionally drop when we have temporary peaceful conditions before it goes back to its normalized high."

Sticking to strategy
As one of the largest and most consistently successful US independents, Devon is sticking to the same strategies that have built the company over the last 33 years, growing through both the drillbit and through mergers and acquisitions, and heavily weighted to North American and natural gas operations.

"We are, if not the largest, [then] one of the largest [companies] in terms of owning acreage in both the deepwater Gulf of Mexico and in Nigeria," said Nichols in an executive briefing of financial analysts Sept. 28.
"We've been building Devon for a long time." In a change from recent years, he said, "We have not done a major acquisition this year, really because we had done about seven in a row, and it was time to catch our breath for a little bit and study the assets. We're having a [nonstrategic] asset sale in a couple of months."

He said, "Three years ago, we made two acquisitions simultaneously [Anderson Exporation Ltd. of Canada and Mitchell Energy & Development Corp. of Houston] and incurred some debt in the process. We wanted to get that debt paid down, and we've done that. So it's been a year to digest what we had and make a few personnel changes. We hired a new senior vice-president of exploration and production [Stephen J. Hadden] and got him on board. We got the decks cleared for the future."