OGJ Newsletter

Sept. 9, 2002
Debate over production quotas at the Organization of Petroleum Exporting Countries' upcoming ministerial meeting Sept. 19 in Osaka, Japan, should provoke "more fireworks" than similar recent sessions, predicts Tyler Dann, a financial analyst in the Houston office of Banc of America Securities LLC.

Market Movement

OPEC facing fight in Osaka?

Debate over production quotas at the Organization of Petroleum Exporting Countries' upcoming ministerial meeting Sept. 19 in Osaka, Japan, should provoke "more fireworks" than similar recent sessions, predicts Tyler Dann, a financial analyst in the Houston office of Banc of America Securities LLC.

"Opinion is evenly divided within OPEC as to whether they leave quotas unchanged at 21.7 million b/d or increase them by as much as 1.5 million b/d," Dann reported last week. "Already representatives from member countries are bickering in the press about appropriate action to be taken regarding output targets."

Member differences

Algeria submitted a formal request for an increase in its production quota that is scheduled for consideration at the Osaka meeting.

However, Dann said, "The talk about keeping quotas flat has been spearheaded by the Nigerians and Venezuelans. Generally, these countries appear to want to have their cake and eat it too, enjoying the high price environment of today while not complying with production quotas."

Dann noted, "Early surveys for the month of August pegged OPEC overproduction at 1.8 (million b/d) to over 2 million b/d over quota (we believe the overproduction was less severe at 1.6 million b/d); this represents serious 'cheating' and contributes to a growing credibility gap for OPEC."

Indonesia's energy minister was quoted last week as opposing any proposal at the OPEC meeting that would impact the present level of world oil prices. "Our government's policy is to see crude oil prices increase," he said.

Even non-OPEC producers are getting into the act. Oman's oil minister said last week there is no need for OPEC to increase its output, since the recent rise in world oil prices reflects escalation of political tensions in the Middle East rather than market fundamentals of supply and demand. He claimed that most oil-producing countries probably favor that same view.

Oman is invited to the Osaka meeting as an observer and is coordinating its policies with other non-OPEC producers, especially Russia and Norway, the minister said.

Ali I. Naimi, Saudi Arabia's minister of petroleum and mineral resources, said last week it is still "premature" to talk about any change in oil production quotas.

"The (Saudi) kingdom's petroleum policy always aims at stabilizing the international oil market, taking into account the importance of balance of supply and demand, stabilizing prices at a level that suits both producers and consumers, and, at the same time, serving the world's economy and ensuring its steady growth," he said.

Market outlook

Meanwhile, the oil futures markets are sending mixed signals as to whether an increase in OPEC production would be good or bad. In one recent trading session on the New York Mercantile Exchange, prices stabilized on assurances from the 10 active OPEC members that they would make up any shortages of oil supplies resulting from a possible armed conflict between the US and Iraq.

But the next day prices fell in that same market with speculation that OPEC would raise output quotas for the last few months of this year. Just a few short weeks earlier, virtually the same traders had been counting on OPEC members to hike production to satisfy an anticipated increase in world demand for oil during the last half of 2002.

"Demand growth is not accelerating," said Dann. "We believe the International Energy Agency's (and our own) forecast for 1.5% oil demand growth for 2003 will likely prove to be too aggressive; our demand forecast is under review with downward implications, with flat to 1% more growth likely."

He gave three reasons for that change:

  • Global gross domestic product indicators point to a softening economic outlook.
  • The coefficient relationship between oil demand growth and GDP growth has weakened.
  • Current oil prices are artificially inflated because of escalating US-Iraq tensions. If that continues, higher prices would "marginally crimp demand going forward."

Price forecasts

"Today's $28/bbl spot oil price implies about $4/bbl war premium embedded in the oil price for escalating US-Iraq tensions," said Dann. "Our inventory-driven regression model points to a fundamentally-driven oil price of $24-25/bbl (for benchmark US crude) for the remainder of 2002."

Last week, UBS Warburg LLC in New York raised its 2002 oil price forecast by $1 to $24.50/bbl, based on "the unexpected strength of oil prices year-to-date, supported by uncertainty surrounding potential US military action in Iraq, and the ongoing reduction in Iraqi oil exports due to the retroactive UN pricing mechanism."

Warburg Analyst Matthew Warburton said, "This increase reflects the fundamental tightening of crude markets and our belief that the 10 active OPEC producers will continue to restrain output during the second half of 2002 despite a gradual increase in global crude demand."

He said, "We expect average crude prices to fall in 2003 but have raised our average forecast for next year by $1.50 to $23/bbl, based on a demand recovery (in excess of 1 million b/d), no lengthy interruption to Iraqi exports, and continued production restraint by OPEC-10. Our long-term price assumption for 2004 and beyond remains unchanged at $20/bbl, but the risks are skewed to the upside."

Meanwhile, as NYMEX resumed trading Sept. 3 following the long Labor Day weekend, energy futures prices plummeted as an Iraqi proposal to negotiate the possibility of renewed arms inspections deflated some of the oil price war premium. The market recouped some of that loss by the next session, however.

Iraq wants to tie an arms-inspection agreement to a program that will end international economic sanctions against that country. In the interim, once-strong expectations that the US would attack Iraq as part of its war on terrorism appear to be diffusing.

Warburton recently reported, "We would put a 70% probability on an OPEC-10 (the 10 active OPEC members, minus Iraq) quota increase of 500,000-1 million b/d on Sept. 19 (effective from Oct. 1). What will influence cash prices in the fourth quarter is what OPEC produces, not the quota, but the decision on the latter will influence market sentiment."

Saudi Arabia's role

Ultimately, said Dann, "The final decision will come down to the wire, largely resting upon Saudi Arabia's ability to convince OPEC member states of their preferred course of action, which has not been decided yet."

He said, "The Saudis appear prepared to add as much oil as necessary to the market in order to maintain balance. Visibility on demand remains poor, however, and so even though prices remain high, the Saudis do not believe that the pricing is driven by strong fundamentals; rather, they believe a $5-6/bbl war premium is embedded in the oil price at the moment."

Industry Scoreboard

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Due to a holiday in the US, data for this week's Industry Scoreboard are not available.

Industry Trends

THE US rig count is lower than current oil and natural gas prices would justify, but two analysts say anticipated sharply higher gas prices this winter should result in a sharp rebound in US drilling activity next year.

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"The US rig count has historically tracked very closely with energy prices. Recently, however, a substantial disconnect between energy prices and drilling activity has emerged as (exploration and production) companies seem reluctant to reinvest their increased cash flows," said Marshall Adkins of Raymond James & Associates Inc. (see chart).

Banc of America Securities LLC Oil Service Analyst James Wicklund agreed that the cyclical and longer-term outlook remains positive despite near-term concerns about drilling activity.

"It will take a higher natural gas price than expected to ramp up drilling activity and more confidence in the stability of that price. But with supply decreasing and demand increasing, moving in different directions, a drilling recovery at some point is inevitable. As a result, the 2003 and the 12-month outlook continue to be positive," Wicklund said.

The US rig count "will likely be at best flat for the next month or two with some seasonal acceleration in the December quarter," Wicklund predicted.

RJA has lowered its third quarter 2002 US rig count to 846 from 882 and lowered its fourth quarter estimate to 856 from 958.

"It is important to note that, despite these lower near-term forecasts, we are leaving our 2003 US rig count forecast unchanged at 1,075. Even though our revised 2002 US rig forecast results in the lower beginning rig count for 2003, we still believe that US drilling activity will see very solid 30% average increase in 2003," Adkins said.

He anticipates higher US gas prices during the winter, adding that most operators are taking a wait-and-see attitude regarding the sustainability of higher prices.

"By holding back spending (and the rig count), gas producers have been able to mend balance sheets and build cash positions. In the next 4-5 months, however, these frugal spending habits are likely to change dramatically," Adkins said.

He expects that both the gas markets and producers will believe in the "sustainability of $4+/Mcf" during the winter, which will consequently trigger a higher US rig count.

Wicklund said the oil and gas industry has not yet accelerated drilling because "the price required for economic development of natural gas in the current risk environment has been underestimated. This is the dichotomy not currently understood by many, and the reason the rig count and oil field services' earnings are not going up. At least not yet."

E&P companies have a "free option to wait on their drilling plans" while they watch the economy and market direction, Wicklund said.

Government Developments

SAUDI ARABIA has reiterated a commitment to unilaterally make up any shortfall in global oil supply in the event of a US-led attack on Iraq.

"In case of a US attack upon Iraq, there would be no world oil shortage, since in a short time Saudi Aramco could make available an additional 3 million b/d of oil, aside from its present 7 million b/d output," Abdallah S. Jum'ah, president and CEO of the state owned Saudi company, told the World Petroleum Congress in Rio de Janeiro last week.

Jum'ah made the comments at a press conference following a presentation to WPC delegates on the topic of social responsibility and the petroleum industry, a theme recurring throughout the 5-day congress (see related story, this issue).

He added that the company could ship 5 million b/d through the Red Sea and has crude oil in storage totaling 5 million bbl in the Caribbean Sea region and 3 million bbl in Rotterdam, possibilities available in case of a worst-case scenario.

Restoring price stability to the world market is seen by Jum'ah as part of Saudi Aramco's commitment to social responsibility. He cited similar precedents:

•"During the Iranian revolution of 1979 and the Iran-Iraq war of 1980, Saudi Aramco rapidly filled the gap.

•"Again during the (Persian) Gulf crisis of 1990, the company alone promptly added more than 3 million b/d to the world's supply."

Jum'ah said Saudi Arabia holds 260 billion bbl of oil, about a quarter of the world's total, and is the world's largest oil producer. In addition, Saudi Aramco is looking for possible investment opportunities in that country's downstream sector through an initiative that ties in with Saudi Aramco's policy to expand its downstream presence throughout the world.

The company has four important international partnerships: with Royal Dutch/Shell Group in the US (Motiva Enterprises LLC), in South Korea (S-Oil Corp.), in the Phillipines (Petron Corp.), and in Greece (Motor Oil [Hellas] Corinth Refineries SA).

There also are talks under way with China concerning investment in a new refinery, Jum'ah added.

WELL LOGS are available to industry faster now thanks to the US Department of the Interior's Materials Management Service Gulf of Mexico region's new web-based ordering system.

While historically it took about 30 days to fill a customer's request for well logs, which was limited to about 125 well logs, the new system completes an order in less than 30 minutes, and there is no limit to the number of logs that can be ordered, MMS said.

"The response from the customers has been very positive. During the first 2 months of operation, 180 CDs containing over 33,000 well log images have been delivered," MMS Director Johnnie Burton said.

Ongoing communication with customers has resulted in improvements to the system. "We are listening to the customers and making changes accordingly," Burton said.

Quick Takes

A CONFIRMATION WELL that Agip Petroleum Co. spudded in April in K2 field-on Green Canyon Block 562, 180 miles south of New Orleans in the Gulf of Mexico-has increased the field's estimated reserves to more than 100 million bbl of oil, Agip said, enabling the owners to start production in 2004.

The appraisal well is in 3,900 ft of water and was drilled in an untested fault block to 25,700 ft TD, en- countering a total of 339 ft of oil pay in three sands.

The first discovery well, K2-1, about 4,000 ft away, and its sidetrack had been drilled by Conoco Inc. (now ConocoPhillips Inc.) on the same block in May 1999. Conoco had developed a technique, patented last year, to improve exploration results in areas having subsalt provinces such as Green Canyon (OGJ, Nov. 26, 2001, p. 40).

K2 lies beneath the Sigsbee Salt Canopy. However, K2-1 encountered only one zone with about 60 ft of net pay, leading Conoco to assess the original discovery at less than 100 million boe (OGJ, Nov. 5, 2001, p. 80).

Anadarko Petroleum Corp., which holds 52.5% working interest in the project through a 2001 purchase from BP PLC, announced the appraisal success Sept. 3, saying "the well results from this discovery extend the limit of proven oil both laterally and downdip on the K2 structure."

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Other K2 field partners are operator Agip-the US subsidiary of Italy's ENI SPA-18.2%, Conoco 16.8%, and Unocal Corp. 12.5%. The partners plan additional appraisal drilling on the field for 2003.

Anadarko said development of its first deepwater discovery at Marco Polo in Green Canyon Block 608 (6 miles from K2) is under way. Four development wells were drilled this year, and a platform is under construction and scheduled for installation in third quarter 2003, the company said. Production capacity will be 100,000 b/d of oil and 250 MMcfd of natural gas. First Marco Polo production is targeted for first quarter 2004.

BP EXPLORATION (ALASKA) INC. and outside experts are investigating the integrity of subsurface casings on 137 North Slope oil wells that the company shut in after an Aug. 16 explosion and fire at Prudhoe Bay well A-22 that seriously injured a well pad operator.

The investigating team recommended that BP Exploration shut in wells that had outer annulus pressures greater than 1,000 psi. The company began taking the wells off production Aug. 24.

"We hope to get a recommendation from the technical team in the next week or so, but we won't bring the wells back on line until we're sure they're safe," a BP Exploration spokesman told OGJ Online Sept. 4. The shut-in wells normally produce an aggregate 45,000 b/d, representing 5% of total North Slope production, he said.

One of the issues being investigated by the technical team is why the outer annulus casing of well A-22 failed. The well earlier had been shut in because of high pressure in the outer annulus of its production casing, but was brought back on line "4-5 hours" before the accident. The pressures, in excess of 2,000 psi, recorded at that well before the accident were "significantly lower" than the casing's official rating of more than 5,000 psi, BP Exploration reported.

Natural gas produced in association with oil contributes to the annulus pressure on those wells, the company spokesman said.

In other production news, OAO Sibneft has signed an agreement with Baker Hughes Inc., Houston, under which the two firms will establish an operational center at Sibneft's upstream base in the Noyabrsk area of Western Siberia, where they will form a joint engineering group. Sibneft said the initiative is part of its plan to drill more than 100 sidetrack wells in the area next year to enhance production from existing Noyabrsk area oil wells. Baker Hughes's Centrilift subsidiary already has supplied Sibneft with over 1,000 submersible pumps, it said. Sibneft and Baker Hughes are designing a development plan for the enhanced production, using many of the service firm's products and services for reentry, directional, and multilateral wells, the companies said.

Statoil ASA signed a 200 million kroner contract with Transocean Sedco Forex Inc. for the use of Transocean Searcher drilling rig on Statoil's Alpha North satellite in Sleipner West field in the North Sea.

Alpha North is scheduled to begin producing gas and condensate Oct. 1, 2004.

The rig will perform drilling and completion of three wells on the Alpha North structure, which will be tied back to Sleipner A platform.

Plans call for Transocean Searcher to begin drilling next summer when the rig has completed assigned work in Åsgard field in the Norwegian Sea. Operations are expected to proceed for 270 days.

CHEVRONTEXACO CORP. affiliate Texaco Nigeria Outer Shelf Ltd. (TNOS) and Shell Nigeria Exploration & Production Co. Ltd. said they may jointly develop Aparo and Bonga discoveries off Nigeria, following an Aparo appraisal well that indicates the two discoveries may share a common structure, ChevronTexaco said.

TNOS's Aparo-2 appraisal well "encountered a substantial amount of net oil sand" during test drilling on its deepwater oil prospecting license (OPL) Block 213 oil discovery in Aparo field, the company said. TNOS, which operates the block and holds 100% contractor equity, drilled the successful well on behalf of Nigerian National Petroleum Corp. Aparo-2 was drilled in 4,100 ft of water to 11,573 ft TD.

The well is 5.5 km north of TNOS's 2001 Aparo-1 oil discovery and only 1.2 km south of Shell Nigeria's Bonga field appraisal well OML 118 SW-2, drilled earlier this year about 120 km off the Niger Delta's southwestern coastline. Chevron- Texaco said the success of the Aparo program indicates that Aparo OPL Block 213 and Bonga OML Block 118 SW share a common structure and will likely become a joint oil development by both operators.

"We will be working jointly withellipse(Shell Nigeria) over the next few months to ascertain the optimum development of these resources," TNOS said.

Bonga, twice as large as other discoveries in Nigeria, will be the first deepwater oil and gas field in Nigeria to be developed-at a cost of $2.7 billion-and its infrastructure would be in place before that of Aparo. Bonga is expected to produce as much as 220,000 boe/d starting in 2003 (OGJ, June 17, 2002, p. 22). The Bonga Southwest discovery well, OML 118 SW-1, on the same block, was drilled in 1,245 m of water to 4,160 m TD in spring 2001, and its confirmation well was drilled earlier this year. x

In other development news, ConocoPhillips let a $24 million contract to Houston-based Dril-Quip Inc. to provide eight production riser systems for its Magnolia field tension leg platform, which will be installed in 4,700 ft of water in the Gulf of Mexico-a record depth for this type of floating structure. Installation is planned for 2004. Each riser system will include a tieback connector, tapered stress joint, numerous production riser joints, a tensioner system, and surface wellhead and Christmas tree systems. Magnolia, discovered in 1999, is on Garden Banks Blocks 783 and 784 about 180 miles south of Cameron, La. Conoco and partner Ocean Energy Inc., Houston, which holds 25% of the field, expect Magnolia to produce 150 million boe. Development costs are estimated at $600 million (OGJ Online, Dec. 17, 2001).

PETROLEOS DE VENEZUELA SA confirmed at the 17th World Petroleum Congress in Rio de Janeiro Sept. 3 that it will enter Brazil's lubricants and fuels market under the PDV brand name, marking the start of the sale of PDV products at service stations there. PDVSA last month had signaled its intent to enter Brazil's retail fuels and lubricants market (OGJ Online, Aug. 2, 2002).

PDVSA Pres. Alí Rodríguez Araque declined to say how much PDVSA would invest in Brazil.

Sebastiao de Rego Barros, director-general of Brazil's National Petroleum Agency, told OGJ that "PDVSA was granted the right to distribute oil products in Brazil but has not asked permission to import them yet."

Bob Clingan, CEO of Citgo International Latin America, PDVSA's subsidiary for marketing PDV products in Latin America and the Caribbean, said, "Our medium-term plan for fuels is to identify the PDV service stations we will be opening at the end of 2002 in northern and northeastern Brazil with our corporate flag." Clingan added that the subsidiary's focus for lubricants would be southeastern Brazil.

PaCIFIC GAS & ELECTRIC CO., San Francisco, has completed a $40 million expansion project that adds 14.1 miles of new 42-in. transmission pipeline to its existing Line 401 system, which "significantly increases the capacity of natural gas available to California's residents, businesses, and power plants," the utility said. The added infrastructure-two new sections of pipeline added in Shasta and Modoc counties in northern California-will increase the system's capacity by 180 MMcfd and increase firm pipeline capacity on PG&E's California Gas Transmission Redwood Path, which transports Canadian natural gas from Malin, Ore., to California. Redwood Path, said PG&E, has been operating at more than 95% of its rated firm capacity, on average, since 1998.

SONATRACH, Algeria's state oil and gas company, and Shell Gas & Power, a unit of Royal Dutch/Shell, have entered into an LNG master sales agreement that will provide a framework for the terms and conditions of LNG sales on an individual cargo basis, Shell said.

The agreement came on the heels of a memorandum of cooperation (MOC) signed between the two firms whereby they will identify and develop upstream and downstream projects "throughout the energy chain" both in Algeria and throughout the world. Joint project groups will be set up for that purpose, Shell said. "This is anellipseopportunity for us to identify projects of mutual interest that build on the strengths of both companies," said Lew Watts, Shell regional director. Sonatrach Downstream Vice-Pres. Bachir Achour added, "This MOC is the result of several months of work by both parties. We hope it will beellipsethe beginning of mutual and beneficial cooperation in our upstream and downstream activities."

Drilling barge joins Axxis Drilling's fleet

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Independence, a new 2,500 ton, 2,000 hp drilling barge, was recently completed in the Port of Iberia, La., for Axxis Drilling LLC.

The 210 ft long, 54 ft wide barge-de- signed for shallow-water drilling-is be- ing touted as the first of its kind to be built in the US since 1981.

Houston-based IDM Equipment Ltd. designed and built the barge's drilling machinery, power control system, and instrumentation, which includes analog and digital electronics to obtain well data in real time. Photo courtesy of IDM Equipment.