OGJ Newsletter

July 22, 2002
In its most recent report, the International Energy Agency slashed its 2002 global oil demand estimates and released its initial projections for 2003 demand and supply.

Market Movement

IEA slashes oil demand estimates

In its most recent report, the International Energy Agency slashed its 2002 global oil demand estimates and released its initial projections for 2003 demand and supply.

Citing weaker than expected second quarter demand and a lackluster economic recovery, the Paris-based agency now pegs this year's oil demand growth at 250,000 b/d, a cut of 170,000 b/d from previous estimates. Also playing a role in this reduction are concerns over the current corporate accounting scandals, which are dampening capital investment and could undermine household spending.

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IEA still expects second half 2002 demand to exceed that of the first half as economic recovery combines with seasonal growth patterns. Much of the 1.11 million b/d increase during the second half is expected to show up during the fourth quarter, as demand surges 1.67 million b/d over the third quarter.

2003 demand

Oil demand will increase 1.1 million b/d next year, IEA forecasts. This 1.4% upswing is expected to end several years of relatively anemic growth. It assumes lower average oil prices as compared with 2002, as well as a moderate global economic recovery and rising oil demand growth relative to growth in gross domestic product. IEA also assumes moderate El Niño weather conditions during the 2002-03 winter and a return to normal weather patterns in the second half of 2003.

Among industrialized coun tries, the US is expected to lead the recovery in 2003 oil demand. A 530,000 b/d boost in demand in member countries of the Organization for Economic Cooperation and Development (OECD) will reverse 2 consecutive years of decline. Among non-OECD countries, China's economic expansion is expected to be the growth leader, driving demand not only in China but also in the entire region.

"The assumption that economic growth necessarily translates into higher oil consumption is being challenged on several fronts," the agency noted. Much of the recent economic expansion has come in sectors that are low in oil intensity, such as telecommunications and services. And in previously centralized economies such as the former Soviet Union and China, the rationalization of inefficient state-run entities can result in substantial energy savings. In addition, increasing use of natural gas and coal can erode oil's share of the energy market. But while the link between oil demand and the economy has become more complicated, it is not broken, IEA concedes, as shifts in industrial output and manufacturing-the energy-intensive sectors of the 'old economy'-directly affect residual fuel oil and distillate consumption.

Supply

With continued strong investment in the upstream sector, oil supply growth outside the Organization of Petroleum Exporting Countries will remain robust. Current estimates gauge non-OPEC supply growth at 1.1 million b/d this year and 700,000 b/d next year.

The FSU and North America will lead output gains next year, while North Sea production holds steady.

Net oil output in OECD countries is forecast to rise 200,000 b/d in 2003, led by Canada and Mexico, each with a 150,000 b/d increase. Among non-OECD producers, Azerbaijan's output is expected to increase 40,000 b/d, while production jumps 60,000 b/d in Brazil, 80,000 b/d in Kazakhstan, and 340,000 b/d in Russia. Declines of 50,000 b/d in Colombia and 20,000 b/d in Egypt are expected to partially offset these advances. F

Industry Scoreboard

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Industry Trends

US energy stock prices could come under increasing pressure now that Standard & Poor's has decided to drop seven non-US companies from its benchmark S&P 500 index effective after the close of trading on July 19.

One of the companies being dropped is Royal Dutch Petroleum Co. of the Netherlands. Royal Dutch and Shell Transport & Trading Co. PLC of the UK jointly own Royal Dutch/Shell Group.

Royal Dutch holds 60% interest in Royal Dutch/Shell, while Shell T&T holds 40% interest.

S&P said it is replacing the non-US companies with US-based firms to make the index better reflect the large-capitalization US equities market. But at least two oil and natural gas company analysts question the possible overall impact on energy-related stock.

The S&P will not replace Royal Dutch Petroleum with a US-based energy company, said James M. Rollyson, a Houston analyst with Raymond James & Associates Inc.

"As such, the energy weighting of the S&P 500 will drop from 7.3% to 6%ellipseThat means that index funds and the myriad of other fund managers that are benchmarked against the S&P 500 will see their current relative energy weighting move up dramatically. As index funds and other active fund managers bring their portfolios back inline to their desired energy weightings, energy stocks overall are likely to be under (selling) pressure," Rollyson said.

Thomas R. Driscoll, a Lehman Bros. Inc. analyst based in New York, noted that oil and natural gas stocks have fallen faster than the stock prices of other industries in recent weeks.

"Large-cap, US-based E&P stocks have fallen roughly 11% over the past six trading sessions. This compares with a 6% drop in the S&P 500 over the same period. Extremely weak US equity markets and the removal of Royal Dutch from the S&P 500 all had an impact on energy stocks (earlier this month), as did falling natural gas prices," Driscoll said.

US NATURAL gas storage levels through early next month will stay well ahead of the 5-year average, according to a study of natural gas injection and withdrawals conducted by economists with the consulting firm C.H. Guernsey & Co., Oklahoma City.

The study shows the net injection rate has kept pace with the historical average since early April.

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The study, based on a Guernsey model, predicts stored gas will reach 2.61 tcf through the week ending Aug. 2. This maintains the gas storage level above the 5-year average of 2.17 tcf (see table). Many analysts set 3 tcf as a target for ideal gas storage levels at Nov. 1.

"Although there has been a decline in production during the injection season because of lower prices this year, the decline has been effectively offset by demand-side factors, such as the weather and economic activity," said Donald Murry, a Guernsey economist.

Government Developments

PERU'S ENERGY and Mines Minister Jaime Quijandria retained his position through a cabinet shake-up last week by President Alejandro Toledo.

Toledo's reshuffling of his cabinet was triggered July 5 by the sudden and "irrevocable" resignation of Foreign Minister Diego Garcia-Sayan. Five other ministers also walked out in the wake of political turbulence resulting from Toledo's plans to privatize two power companies in southern Arequipa province. Two people were killed and more than 100 others were injured last month in massive protests against privatization.

Quijandria, who was named energy minister by Toledo when he designated his first cabinet last year, helped write the government's master plan-including privatization of energy companies-before Toledo's election. Recent polls indicate a large percentage of Peru's population oppose privatization of remaining state-owned companies.

Toledo said that his new cabinet is the first step in giving new strength to his government.

Luis Solari, the newly named head of the Council of Ministers, or cabinet, said regional governments-which face elections in November-must shoulder responsibility for any decisions against privatization of state-owned energy and other companies that could block investments in critical areas such as Arequipa, Cuzco, Tacna, and Puno in southern Peru. Solari has said he favors delaying privatization until after regional elections.

ALSO IN PERU, the Hydrocarbons Bureau estimates that investments in oil and gas exploration and development this year will total $391 million, of which $280 million is earmarked for development and $48 million for exploration.

The main development is in the Camisea natural gas fields 500 km east of Lima in the Ucayali basin.

Meanwhile, Peru's oil trade deficit reached $61 million in the first quarter, when average demand was 138,000 b/d, the bureau said. Oil production averaged 96,257 b/d at the end of May. Oil demand increased to 141,000 b/d during May and June. The market, however, also consumes 5,000 b/d of products imported illegally from Bolivia and Ecuador, mainly as gasoline, diesel oil, and LPG. Peru's official oil imports are shipped from Ecuador and Venezuela.

THE US DEPARTMENT of the Interior has asked Congress to clarify that it has the authority to grant easements or rights-of-way for renewable energy and LNG facilities on the Outer Continental Shelf in the Gulf of Mexico. In a June 20 letter to Vice-Pres. Dick Cheney, Interior Asst. Sec. of Land and Minerals Management Rebecca Watson said the legislation would "simplify permitting for energy production in an environmentally sound manner."

Watson said the legislation would establish a uniform permitting process, coordinated among all "appropriate" federal agencies for energy-related project approvals on the OCS.

Interior has clear authority over oil and gas related activities. But DOI officials say legislation is needed to ensure the department also oversees other traditional and nontraditional energy projects, including renewable energy projects such as solar, wind, and wave, as well as proposed offshore LNG and CNG facilities.

Quick Takes

OJSC NK Rosneft, on behalf of an alliance including BP PLC, has received a 5-year exploration license for part of Russia's Sakhalin V area off Sakhalin Island in Russia's Far East.

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The license covers seismic acquisition and exploratory drilling on the Kaigansky-Vasuykansky blocks in the East Smidt (East Shmidtovsky) area in the southern part of the Sakhalin V tract. The blocks cover an area of 10,000 sq km (see map).

A partnership of BP Exploration & Operating Co. Ltd. 49%, Rosneft 25.5%, and Rosneft-Sakhalinmorneftegas 25.5%-formed in 1998 to develop Sakhalin V hydrocarbons-will set up a joint venture company to hold the license and jointly carry out all operations, including geo logical studies in the license area. The alliance conducted a 5,000 line-km 2D seismic survey of the Sakhalin V area in 2000. Water depths range as deep as 140 m.

Rosneft estimates exploration could take as long as 6 years. It postulates that the Sakhalin V structures identified thus far could hold resources of as much as 600 million tonnes of crude oil and 600 billion cu m of natural gas.

The partnership plans to purchase seismic data from a survey that Petroleum Geo-Services ASA and Dalmorneftegas are conducting this summer over Sakhalin V. Drilling could begin as early as 2004, depending on results of the survey.

The Sakhalin area, considered a world-class hydrocarbon province, lies off the east coast of mainland Russia in the Sea of Okhotsk, which is ice-bound for about 6 months and technically challenging for developers.

In another award, Gaz de France has been granted the Touat exploration permit, with hydrocarbon exploration and development rights in the Sbaa basin in southwestern Algeria. GdF submitted the winning bid, under an international licensing round, for Blocks 352a and 353 on the permit, which holds natural gas reserves discovered previously. As sole interest holder GdF will operate the permit, its first such opportunity in Algeria. Covering 15,392 sq km, the permit lies 200 km northwest of the Ahnet basin, where GdF has been associated with Malaysia's Petronas Carigali Sdn. Bhd. and Algeria's state oil and gas company Sonatrach in a production-sharing contract since 2001. It also is 200 km southwest of the In Salah gas and NGL megaproject. Plans call for an initial 3-year exploration and assessment program to reevaluate the permit's total potential reserves, currently estimated at 60-120 billion cu m of natural gas.

Conoco Canada Resources Ltd, a subsidiary of Conoco Inc., will participate with ChevronTexaco Canada, a ChevronTexaco Corp. unit, and Petro-Canada in the drilling of the Newburn H-23 wildcat off Nova Scotia. Drilling of the well, which lies in 3,115 ft of water, is under way. Operator ChevronTexaco expects to conclude operations on the well in early September. ChevronTexaco's interest in the well will now be 37%, and Petro-Canada's, 43%. Through its farmout via participation in the well, Conoco's interest in EL2359 Block l will be 20%.

MARITIMES & NORTHEAST PIPELINE LP (M&NE), Halifax, and its customers have agreed to 2003 pipeline tolls of $0.6536/gigajoule (Can.), or $0.6896/MMbtu (Can.).

The agreement, reached in late June, will likely eliminate the need for a formal hearing, although the settlement is still subject to National Energy Board review and approval.

Now that the agreement has been reached, M&NE Pres. Phil Knoll said the company plans to expand its system and add new customers.

M&NE sponsors are Charlotte, NC-based Duke Energy Corp. 75%, Emera Inc., Halifax, 12.5%, and ExxonMobil Corp. 12.5%.

Infinity Inc., Chanute, Kan., is awaiting permits to increase the compressor capacity at its LaBarge coalbed methane project in Wyoming to 5 MMcfd from 500 Mcfd because gas production has reached the operating capacity of the existing compression facilities.

Infinity completed five LaBarge wells in February, and gas sales from the wells started in May. Well dewatering has contributed to gas production.

Infinity expects gas sales to average 400-500 Mcfd with the current compressor system.

Infinity expects production rates to increase significantly once greater compression capacity comes on line and the dewatering process continues. Infinity said it is optimistic that the increased compression capacity will be available before the end of the third quarter.

Production rates at Suncor Energy Inc.'s oil sands operation, however, moved in the opposite direction, dropping to about 50% of capacity last week while the company performed repairs on a 35-year-old fractionator. A second fractionator at the site continued to produce about 100,000 b/d. While the malperforming unit underwent repairs, Suncor moved forward some other routine maintenance for execution during the 8-10 day downtime to improve production reliability. The company said it does not expect the plant's yearend production target of 200,000 b/d to be impacted by the partial shutdown. Fabrication of a new fractionator to replace the aging unit is about 60% complete and the new unit is expected to be operational in 2004.

A detailed investigation is continuing into a fire at the National Refinery Ltd. (NRL) refinery in Karachi July 9 that claimed the lives of three workers and injured six others.

The fire, which broke out in a lube base manufacturing unit undergoing annual maintenance, apparently ignited when welders cut an oil pipeline to the plant as part of a routine maintenance turnaround.

At the time of the fire, the lubes unit was already shut down for the turnaround, although all other units at the refinery remained in normal operation.

Controversy surrounds the cause of the incident. According to firefighters, the fire occurred outside a furnace when workers were on scaffolding carrying out the routine scheduled maintenance work. An NRL statement said contract workers within the furnace were trapped, suffering serious burns.

Some refinery workers, however, alleged negligence on the part of NRL's safety department as the cause, claiming the department did not fully examine the area before issuing work permits and that the oil pipeline being cut was not properly voided.

In other refining news, Shell Refining (Australia) Pty. Ltd., a unit of Royal Dutch/Shell Group, let a $90 million (Aus.) lump-sum turnkey contract to CBI Constructors Pty. Ltd., a unit of Chicago Bridge & Iron Co NV, the Netherlands, to engineer and build a new hydrodesulfurization plant at Shell's refinery at Geelong, Victoria. The new plant, called HDS 2, will have a capacity of 6,000 tonnes/day. Under the contract, CBI will be responsible for the plant's engineering, procurement, construction, and precommissioning. Work on the project, which began last month, is expected to reach completion in September 2003. The new plant will produce ultralow-sulfur diesel to meet Australia's new clean fuels specifications that will come into effect in January 2006.

BP Oil Refineria de Castellon SA, a unit of BP PLC, also let a contract-to Foster Wheeler Ltd. unit Foster Wheeler Iberia SA-for the upgrade of its 120,000 b/sd refinery at Castellon de la Plana, Spain. The $100 million project will upgrade the facility to produce ultralow-sulfur fuels, BP said. Foster Wheeler will be in charge of engineering, equipment and materials procurement, and construction supervision for the project, which is slated for completion in mid-2004. The upgrade will include the installation of a new diesel hydrotreater, a hydrogen plant, and a naphtha hydrotreater. Foster Wheeler also will revamp the existing distillation, heavy-light gas oil, monoethanolamine regeneration, and sour-water stripper units. In addition, Foster Wheeler will renovate the main utilities, including the distributed control system and electricity. Technip-Coflexip SA will participate in the hydrogen plant and utilities portion of the revamp.

A UNIT OF ARGENTINA'S PLUSPETROL SA, operator of the Camisea fields' consortium, said drilling has begun on the first of four development wells planned for the Camisea gas development project in Peru. Parker Drilling Co., Houston, is the drilling contractor (OGJ, May 13, 2002, p. 9). The timetable is to drill four wells to depths of more than 2,000 m in the San Martin I structure on Block 88 by 2003.

Pluspetrol said the wells would produce enough gas to supply Lima, as initial demand is expected to be low, so part of the gas will be reinjected. Pluspetrol subsequently expects to drill in the San Martin III structure, but this will depend on the level of future de mand.

Energy and Mines Minister Jaime Qui jandria earlier this month visited the project in a jungle region 500 km east of Lima.

So far, companies involved in the overall project consortium have invested $250 million, he said. The total project cost of the upstream and midstream portions is estimated at $1.3 billion. This includes the natural gas field development, a gas pipeline and a liquids pipeline, and a gas distribution network in Lima and Callao (See related LNG item on this page).

Quijandria said that 80 km of welded pipe had been laid on the route for the pipeline from Pisco on the south coast towards Ayacucho in the southern Andes. He added that the project is very close to reaching a point of no return.

Parker earlier this month finished a workover of appraisal wells drilled in 1997 by a partnership between Shell Prospecting & Development (Peru) BV and Mobil Exploration & Producing Peru Inc. (OGJ, Nov. 18, 1996, p. 16).

On another major development scene, Kerr-McGee Corp., Oklahoma City, has ap proved de velopment of Red Hawk natural gas field in the deepwater Gulf of Mex ico, which -at more than 5,300 ft deep-is its deepest-water development to date. First production is anticipated in second quarter 2004. In developing the field, Kerr-McGee says it will use a "new, state-of-the-art mini-floating production facility" to develop the field, located on Garden Banks Block 877. The company is in the final stages of selecting the specific type of vessel for the facility, which is being designed to process 120 MMcfd of gas. Facility construction is scheduled to begin in October, with development drilling slated for early 2003. The floating facility also will serve as a new processing hub for other area deepwater fields, including those of third parties, the company said. Kerr McGee holds interest in 181 undeveloped leases in the deepwater gulf that that will be explored in a joint venture formed earlier this year by Kerr-McGee Oil & Gas Corp.-the Kerr-McGee unit that operates Red Hawk, with a 50% interest-and its partner, Ocean Energy Inc., Houston, which holds the other 50% (OGJ Online, Feb. 1, 2001). Kerr-McGee and Ocean hold interests in 27 blocks in the area, which offer additional satellite exploratory opportunities.

HUNT OIL CO., Dallas, a partner in the Camisea consortium, is working on a feasibility study for the construction of an LNG or gas-to-liquids export project facility in Peru. If an export project were to be authorized, the total cost of the upstream, midstream, and export portions of the Camisea project, including transportation vessels, would increase to an estimated $2.5 billion (see related development item on this page).

The goal is to construct an LNG or GTL plant linked to the Camisea project. Hunt is considering the selection of LNG or GTL technology for exporting natural gas or gas-derived liquid products when the project comes on stream by August 2004 (OGJ Online, Feb. 6, 2002).

Carlos del Solar, general manager of Hunt Oil in Peru, said that the company is talking to at least five potential LNG or GTL buyers now that the project is on schedule for the gas to arrive in Lima in 2004.