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High oil prices expected to be the norm

TORONTO -- The world of crude has flipped upside down, with high prices becoming the norm, says the president of Devon Energy Corp., the largest U.S. oil and gas independent.

John Richels, Devon's recently appointed second in command, told The Globe and Mail yesterday that the era of low prices punctuated by short-lived spikes has come to an end.

In its place, an upside-down pattern is emerging, where high prices are the rule, with periods of unusually high supply and low turmoil creating short-term downdrafts.

The cause: Industrializing economies in Asia are driving up demand for crude, just as terrorism and political conflicts threaten oil production in the Middle East and elsewhere.

"As China, [and] as the Indian subcontinent, continue to develop, you could see more pressures on the demand side, at a time where there are geopolitical tensions in a lot of the places where oil comes from," said Mr. Richels, speaking after his presentation to the Peters & Co. Ltd. energy conference in Toronto.

With natural gas, the gap between supply and demand has shrunk, he said, pointing to a period of sustained prices for that commodity as well. Mr. Richels noted that a spike in prices in 2000 generated a flurry of exploration activity, but that supply did not rise as much as it had in the past. That suggests that the cyclical temper on natural gas prices is not functioning as it has in the past, he said.

Rising tensions outside North America underscore the importance of reliable supply from areas such as the Gulf of Mexico and Alberta's oil sands -- a situation that Devon has turned to its advantage by positioning itself in the two regions, Mr. Richels said. "We're really happy to be in both."

Mr. Richels, who was the head of Devon's Canadian subsidiary until January when he was named president of the parent, which is based in Oklahoma City, had been part of the Canadian industry's efforts to educate policy makers and corporate leaders in the United States about the value of the bitumen sands of northern Alberta, helping to make the case that they are a key part of energy security for North America.

He said he believes that opinion has shifted strongly in favour of the oil sands. "There's far more understanding today than there was a few years ago regarding the size and future potential of the oil sands."

The company has yet to sign up a partner for its planned exploration efforts in the Beaufort Sea, which Mr. Richels first disclosed last year at the Peters conference. Devon inherited the Beaufort Sea leases after acquiring Calgary-based Anderson Exploration Ltd. in 2001 for $5.3-billion.

Devon is planning to drill exploratory wells there in the 2005-06 winter season, the first such activity in the area in more than 15 years. He has said that as much as 50 trillion cubic feet of natural gas could be trapped underneath the Beaufort Sea -- three times the amount of onshore gas believed to be nearby in the Mackenzie Delta. "We are quite convinced that there are some huge prospects out there."

Mr. Richels said Devon has talked with a number of companies about a possible partnership, including at least one Canadian independent. However, most of the discussions have been with major international firms, he said.

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