OGJ Newsletter

June 17, 2002
There are both bullish and bearish indicators for the US natural gas market, Lehman Bros. Inc., New York, recently reported.

Market Movement

Bull and bear signs abound for natural gas

There are both bullish and bearish indicators for the US natural gas market, Lehman Bros. Inc., New York, recently reported.

Among the bullish indicators cited by the financial investment firm:

  • US natural gas production is falling, down at least 3% during the first quarter of this year and likely to drop by 5% for the year.
  • Canadian gas production is increasing more slowly, up 2% through April compared with 3.3% a year ago.
  • Oil prices remain relatively high, despite recent declines, so residual oil isn't competing with natural gas.

Bear signs

On the bearish side, Lehman Bros. analysts noted:

  • US gas storage is high, with working inventories 329 bcf above 5-year averages.
  • Gas storage injection rates have continued strong since the traditional Apr. 1 start of the storage injection season. There could be as much as 3.4 tcf in storage by winter, the analysts said.
  • Oil prices may fall further, as political uncertainties are resolved.

Nonetheless, Lehman Bros. remains bullish for natural gas over the long term, with a "go-forward" price forecast of $3.50/MMbtu.

June prices sag

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Meanwhile, Dynegy Inc., Houston, reported US spot prices for natural gas averaged $3.16/MMbtu for June delivery, down 5¢ on average from May and 45¢ from the same period in 2001 (see table).

Ronald Barone, analyst with UBS Warburg LLC in New York, noted the number of US rigs drilling for natural gas increased by 78 to an average of 690 in May, breaking a 9-month sequential string of declining rig counts.

Preliminary statistics compiled by the US Department of Energy's Energy Information Administration indicated that US dry gas production declined 5% in the first 4 months of 2002 compared with the same period a year ago, said officials at Energy Security Analysis Inc. (ESAI), Boston.

That trend should continue through the summer and early fall, tightening the market when demand for gas increases as the US economy revives.

ESAI analysts estimate US gas production will decline nearly 4% this year and won't likely regain 2001 levels before 2004.

Oil stocks decline

US crude inventories dropped 2.6 million bbl to 321.6 million bbl during the first week of June, the American Petroleum Institute reported. US gasoline stocks also declined, by 977,000 bbl to 216.7 million bbl, but total distillate fuel inventories increased by 1 million bbl to 128.2 million bbl.

That "is likely to modestly offset recent bearish market sentiment," said Matthew Warburton of UBS Warburg LLC, New York. "In total, US crude and product inventories fell 3.3 million bbl to 742.5 million bbl, remaining comfortably in the upper end of the 5-year range," Warburton said.

"Refining margins remain well below year-ago levels, albeit they have improved materially in recent weeks, helped by falling crude prices, resilient demand for gasoline (9.1 million b/d), and the strongest weekly demand for jet fuel in nearly 8 months," he said. US stocks of jet kerosine dropped 1.1 million bbl to 40.5 million bbl.

"Consequently, average refinery utilization rose for a third consecutive week to 93.8% of capacity, its highest point since the week of Sept. 7, 2001," said Warburton.

That will likely limit any additional improvement in refining margins and crude prices until overall demand for oil products strengthens and inventories are reduced, he said.

Industry Scoreboard

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Industry Trends

Future worldwide demand growth for motor fuels will focus on diesel, while demand growth for gasoline and fuel oil will stagnate.

Jean Sentenac, chairman and CEO of Axens, Rueil-Malmaison, France, projected those trends during a keynote address he made to the CatCon2002 conference in Houston earlier this month. Catalyst Group Resources, Spring House, Pa., organized the conference.

The trend toward higher future demand for diesel will be pronounced in Europe, where refiners will have to deal with more-stringent fuel regulations and clean air standards. Sentenac said that, in combustion engines, diesel is a more efficient fuel and creates fewer emissions.

The ratio of gasoline to diesel demand growth in motor fuels has steadily decreased in the past 15 years. In Europe, this ratio has declined from 1.6:1 in 1986 to less than 1:1 in 2000. While gasoline demand is still growing, it is at a lesser rate than that of diesel demand. In the meantime, fuel oil is steadily losing market share to diesel and kerosine and will continue to do so for the next 10 years. Sentenac predicted that diesel and kerosine will account for 37% of worldwide oil consumption in 2010, up from less than 35% in 2000.

Government-mandated fuel-sulfur reductions will be the largest factor affecting future fuel usage, Sentenac said. Other fuel specifications that also will impact refinery operations involve polyaromatic hydrocarbons, olefins, and total aromatics.

New catalytic cracking technologies for crude oil refining, chemical production, nanotechnology, and gas-to-liquids projects also were unveiled at the CatCon2002 conference.

During the last decade, US refiners have reduced their in-house catalyst research and development centers by half. Catalyst suppliers and independent R&D firms filled the void with efforts to create technology breakthroughs in catalytic cracking.

Warren Letzsch, Stone & Webster Engineering Inc., presented a new, low-temperature reactor technology in his paper, "FCC catalytic pyrolysis to C2s and C3s." Based on the FCC process and coupled with a specially designed dual-zeolite catalyst, the process enables a refinery to reconfigure operations to produce high-value propylene and ethylene from heavy, paraffinic crudes.

China, where a shortage of natural gas and LPG feedstocks exist, is a typical region that would benefit from this technology.

A presenter from Massachusetts-based Hyperion Catalysts International Inc. explained new developments in nanotechnology, as it applies to catalyst materials. These materials represent a cost savings for fixed-bed reactors due to stronger interactive support for metals and reduced precious metals requirements.

According to Sasol Technology R&D, part of Sasol Technology (Pty.) Ltd., Johannesburg, upgraded cobalt catalysts for use in Fischer-Tropsch GTL processes are an alternative to iron catalysts in low-sulfur feedstock operations. GTL is gaining renewed interest as a solution to the challenge of tightening restrictions for natural gas flaring by state governments and monetizing stranded natural gas reserves. This encourages GTL catalyst technology as well as larger plant designs to enhance economics.

Government Developments

Brazil's oil and natural gas industry doubled its participation in the country's gross domestic product during the first 4 years since the end of Petroleo Brasilero SA's upstream monopoly-1997 to 2000-the National Petroleum Agency (ANP) reported.

In absolute terms, petroleum's contribution to Brazil's GDP at current values and basic prices (deducting ad valorem taxes) was 20.2 billion real in 1997, 26.3 billion real in 1998, 33.2 billion real in 1999, and 52.6 billion real in 2000, the report said.

The study attributed petroleum's rising stake in Brazil's GDP to a hike in international oil prices, increased domestic crude oil and natural gas production, and a new petroleum law regarding exploration and production activities.

Sebastiao de Rego Barros, ANP's general-director, said that the increased participation of the petroleum sector in Brazil's GDP also stemmed from more oil companies operating in Brazil since 1999, when ANP's licensing rounds began.

US industry groups are optimistic that Congress can pass a pipeline safety bill before members leave for the fall elections.

The House Committee on Transportation and Infrastructure last month approved a pipeline safety measure largely endorsed by industry. The House Committee on Energy and Commerce shares jurisdiction with the transportation committee on the issue and is drafting its own formal proposal.

Billy Tauzin (R-La.), Energy and Commerce Committee chairman, and ranking member John Dingell (D-Mich.) are discussing their own bipartisan pipeline safety reform bill, which is expected to include mandatory pipeline inspections. Transportation Committee Chairman Don Young (R-Alas.) shepherded HR 3609, which passed in his committee by a 55-13 vote on May 22.

The American Gas Association called HR 3609 bipartisan. "Language in the bill that establishes inspection intervals for transmission pipelines is a tough step, but achievable at the agreed-upon interval period," AGA said.

The Association of Oil Pipe Lines said, "The American public received a very clear and positive message regarding the safety and security of our nation's vital oil pipeline network-that the US House of Representatives is very committed to passing bipartisan pipeline safety and security legislation."

Congressional staff said Young's measure could be presented to the full House this summer. Lobbyists anticipate pipeline safety language will be part of a larger energy reform package that House and Senate lawmakers are preparing to finalize over the summer.

In Oklahoma state news, the Oklahoma Independent Petroleum Association (OIPA) has praised the Oklahoma legislature's recent passage of a statute containing tax incentives to spur natural gas exploration and encourage deep-gas drilling efforts.

Senate Bill 947 extends gross production tax rebates on deep and horizontal drilling to 48-60 months from 28 months. The bill also creates a tiered system of gross production tax percentages if the price of Oklahoma natural gas falls below $2.10/Mcf.

OIPA backed the measure, which was introduced by Sen. Johnnie Crutchfield (D-Ardmore) and Rep. Larry Rice (D-Pryor). Gov. Frank Keating signed the bill.

OIPA Pres. Mark Monroe called the legislation "another example of the responsiveness of state lawmakers on oil and gas issues."

"Our state's energy future is closely tied to how well we find and produce the hard-to-get deep gas," Monroe said, adding that deep-gas drillers risk investing up to $20 million/well.

Quick Takes

Eleven oil and gas companies have received offers to participate in new production licenses on the Norwegian Continental Shelf following Norway's 17th NCS licensing round, the country's Ministry of Petroleum and Energy reported late last month. The energy firms will be offered participation in a total of 18 blocks or parts of blocks, the ministry said.

"The 17th licensing round signifies a new focus on the Norwegian Sea," said Einar Steensnæs, minister of petroleum and energy. "Several of the blocks are in deepwater areas with substantial technological challenges. However, these blocks also represent considerable possibilities for making new, large discoveries," Steensnæs said.

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A total of 32 blocks was offered in this licensing round. The deadline for submissions was March. Norway's Norsk Hydro was offered operatorship of two blocks, while Agip SPA, Phillips Petroleum Co., Royal Dutch/Shell Group, and Statoil ASA were offered one operatorship each. Among the other firms participating were BP PLC, Gaz de France, ChevronTexaco Corp., Conoco Inc., Danish state firm DONG, and RWE-DEA AG (see table).

Norsk Hydro said that the latest licensing round enhances its position in what it considers an "important" exploration area. "Hydro's position in the Ormen Lange project, Fles Nord, and the company's remaining exploration possibilities in the Norwegian Sea, including the Solsikke prospect to be drilled later this year, gives the company a unique position for further development of proven and potential resourcesellipse," said Torstein Dale Sjotveit, Norsk Hydro president, exploration and development, Norway.

Meanwhile, Statoil was offered operatorship and a 30% stake in Production License 281, which covers deepwater Blocks 6405/4, 6405/7, and 6405/10 on the Grip Ridge north of the Ormen Lange discovery, the company said. These blocks lie in 700-900 m of water.

In other exploration news, partners in the Cascade prospect on Walker Ridge Block 206 in the ultradeepwater Gulf of Mexico discovered an "encouraging hydrocarbon-bearing column," they said. Further drilling will be required to determine the size of the find, the partners said. The Cascade-1 well was drilled in 8,200 ft of water to 27,929 ft TD (measured from the deck of the drilling vessel) using GlobalSantaFe Corp.'s C.R. Luigs drillship. Partners are operator BHP Billiton Ltd. 50% and Petroleo Brasileiro SA and Devon Energy Corp., each with 25%. Drilling of the well began on Jan. 31, the partners said, and an appraisal well could be drilled later this year following analysis of core samples and other available information, the partners said. Cascade lies about 35 miles south-southwest of the Mad Dog and Atlantis oil and gas discoveries, where earlier this year BHP Billiton and partners, led by operator BP PLC, approved funding to advance these fields into development and production.

Husky Energy Inc., Calgary, plans to drill an exploration well in the Jeanne d'Arc basin, 350 km east of Newfoundland and Labrador, as part of Husky's exploration strategy off Canada's East Coast. The well will be drilled on the Trepassey exploration license. Husky holds 100% interest in the license, EL 1044. The Newfoundland offshore area covers about 225,000 sq miles, with eight basins of potential interest to the industry. But none except Jeanne d'Arc has been drilled in recent years (OGJ, Jan. 21, 2002, p. 58). The Trepassey exploration well will test the oil potential of a large structure 10 km south of White Rose oil field. Husky Energy holds six additional licenses in the Jeanne d'Arc basin and anticipates drilling a second well in late 2002 or in 2003. GlobalSanteFe International (Canada) Drilling Co. will provide the Glomar Grand Banks semisubmersible drilling rig for the Trepassey well. The well will be spudded in the third quarter and will be drilled to 3,100 m, Husky Energy said.

Marathon Oil Corp. unit Marathon Oil Co. and Tulsa-based Syntroleum Corp. said they will expand on the design and capabilities of the planned demonstration gas-to-liquids complex now under construction at Catoosa, Okla., near Tulsa. The GTL plant-which is slated for completion in mid-2003-is part of an ultraclean-fuels production and demonstration project being managed by the US Department of Energy's National Energy Technology Laboratory.

The expanded design will include the installation of a gas turbine and other equipment to make the completed $36 million, 70 b/d unit "mirror" the major workings of a commercial-scale plant.

DOE will supply $16 million in funding for the project, while Marathon will supply most of the remaining funding, including that for "additional equipment to better evaluate the probable cost of scaling up the demonstration plant and to support future operator training for commercial-scale GTL plants after the DOE project is complete," Syntroleum said.

Marathon also is providing technical and project management personnel to work with Syntroleum in the engineering, construction, and operation of the plant. Syntroleum will contribute "key components" from its previously developed GTL demonstration plant, which has been relocated from Washington state to Tulsa. Also, "The agreement contemplates the additional participation of other Syntroleum licensees in the project," Syntroleum said.

Marathon's additional investment will grant the company access to the plant for operator training as well as the right to convert its original venture capital into a combination of credits against future license fees and Syntroleum stock at no less than $6/share, Syntroleum explained. "Additionally, under the new agreements, a previous contractual restriction that prevented Marathon from acquiring more than 10% of Syntroleum's common stock has been waived," the company said. Presently, Marathon holds less than a 1% equity interest in Syntroleum.

In other gas processing news, Hackberry LNG Terminal LLC, a wholly owned unit of Dynegy Midstream Services LP, has filed an application with the Federal Energy Regulatory Commission for permission to construct and operate an LNG receiving and regasification terminal in Hackberry, La., on the site of its existing terminal. The Dynegy unit reported its plans for the terminal's construction last year (OGJ, July 16, 2001, p. 8). If built, the facility would bring to five the number of LNG terminals in the US. If approved, the new terminal would be the first new LNG terminal constructed and placed into operation in the continental US in nearly a quarter century, Hackberry LNG said. The proposed facilities-which will be capable of receiving and processing 1.5 bcfd of natural gas-are expected to come online by the fourth quarter of 2006, the Dynegy unit said.

The oil ministers of Pakistan, Turkmenistan, and Afghanistan met late last month to finalize the draft memorandum of understanding (MOU) for the prefeasibility study of the proposed Turkmenistan-Afghanistan-Pakistan oil and gas pipeline project.

Pakistani Minister for Petroleum and Natural Resources Usman Aminuddin, Minister for Oil and Gas of Turkmenistan Gurbamanov Nazarov, and Afghan Minister for Mines and Industry Muhammad Alam Razm led their respective countries' delegations at the talks.

Usman Aminuddin said that early implementation of the proposed project will usher in a new era of progress and prosperity for the people of the member countries and pave the way to enhance bilateral interactions, particularly in the oil and gas sector.

He added that Pakistan was rapidly developing Pakistan's third Gwadar deepwater port and coastal area, which would become a hub of oil and gas activity.

The ministers of Afghanistan and Turkmenistan said they hope that the project would play a crucial role in development of the region.

Elsewhere on the pipeline front, BP PLC unit BP Berau Indonesia has awarded J.P. Kenny Group, a subsidiary of Wood Group, a front-end engineering and design contract for the subsea pipelines that will link gas production off Indonesia with the Tangguh LNG plant being built in Irian Jaya Province, Indonesia. J.P. Kenny, in conjunction with local partner PT Supraco, will carry out the detailed design work for the pipelines in both Australia and Indonesia. The project will entail the design of three subsea pipelines totaling 70 km that will transport untreated gas from Wiriagar and Vorwata gas fields, which lie in 95 m of water off Papua Province. BP will construct offshore gas production facilities as well. BP noted that the design and installation of the pipelines will present numerous challenges, including a high pipeline inlet temperature with a CO2 component in the gas stream; a lack of local supply and construction infrastructure; and extreme, on-bottom currents, poor visibility, and high tidal range. Health, safety, and environmental concerns also will come into play, J.P. Kenny noted, given the active fishing and logging industries in the area.

BG International (NSW) Ltd. and its partners have awarded a £30 million contract to Coflexip Stena Offshore Ltd. (CSOL), a UK unit of Technip-Coflexip, for the pipeline tieback portion of the firms' Juno gas fields project in the southern UK North Sea. The UK government late last year approved development of the second phase of the Juno fields complex (OGJ, Nov. 26, 2001, p. 9). Partners in the project are operator BG, BP, and Amerada Hess Corp. The contract-which covers engineering, procurement, construction, installation, and commissioning-includes the tieback of four of Juno's seven wells this year; the remaining wells will be tied back in 2003. First gas from the project is expected by yearend. As part of the contract, project manager CSOL will supervise the engineering, design, manufacture, and installation of 77.6 km of production and piggybacked pipelines. CSOL also will be responsible for the project management, engineering, and installation of 51.8 km of production control umbilicals and associated equipment as well as the transportation and installation of two subsea manifolds.

Occidental of Oman Inc. and Schlumberger Oilfield Services claim to have achieved a world first for the successful geosteering of a 4,712 ft, 61/8-in. slimhole lateral well in Oman's Safah field. The field test follows a successful run last month of Schlumberger's slimhole rotary steerable drilling system for Shell UK Exploration & Production in the UK North Sea's Brent Delta field (OGJ, May 13, 2002, p. 8).

This latest project underscores the capabilities of using such a steerable system in Oman, said Hal Owens, drilling manager, Occidental of Oman. Ownes added that the use of the company's current systems would require drilling in the slide mode about 30% of the time, thus decreasing by two thirds the firm's penetration rates. In addition, by remaining in rotary mode, greater lateral length can be reached, Owens said.

The Occidental Petroleum Corp. unit plans to use the system to drill two additional wells, with the second well getting under way in the next few weeks, he said.

Although the new lateral well received a "significant gas influx" from a neighboring injector well, all of the well's horizons registered as planned and log responses proved accurate, Schlumberger said. "To respond to the gas influx, mud weight had to be increased and drilling rates had to be controlled at times," the company said, adding that the use of conventional mud motors would have slowed the well's progress and may have impeded reaching TD.

Ceska Rafinerska AS's residual fluid catalytic cracking (RFCC) unit in Kralupy, Czech Republic, is on stream and has met all guarantees, said UOP LLC, Des Plains, Ill.

The 68,000 b/d crude refinery's new RFCC unit met guarantees for gasoline production yield and quality; light cycle oil, propylene, butylene, and main column bottoms quality; and catalyst consumption.

The 27,740 b/d RFCC unit uses UOP's Optimix feed distribution system, VSS riser disengager, and high-efficiency stripper, as well as UOP's regenerator technology, including a high-efficiency combustor regenerator and catalyst cooler.