OGJ Newsletter

At midweek, spot market natural gas for next-day delivery at the Henry Hub was pegged at $4.26/Mcf.

Earlier, Dynegy Inc. reported the average monthly US spot market price jumped 21¢ to $3.01/MMbtu in September (see table). That was up sharply from an average price of $2.25/MMbtu in September 2001. In recent months, the average monthly spot price for gas has trailed year-ago prices, with the exception of July when the 2002 price of $3.04/MMbtu edged out the 2001 average by just 3¢.

Oil impacted

The back-to-back storms also impacted oil futures prices with their one-two punch, as shut-in oil production helped keep NYMEX crude futures above $30/bbl for most of last week.

The US Minerals Management Service reported offshore production of 8.6 bcfd of natural gas and 1.5 million b/d of oil was shut in by Hurricane Lili as of Oct. 2. MMS said Isidore earlier forced the shut-in of 60% of total Gulf of Mexico natural gas production, keeping 25 bcf of natural gas and 4.5 million bbl of oil off the market.

Moreover, Isidore forced closure of the Louisiana Offshore Oil Port for 6 days. LOOP opened briefly, only to be closed again by Lili last week.

The resulting delays of oil imports "will be made good in coming weeks," noted Paul Horsnell, head of energy research for London-based JP Morgan Chase & Co. "However, the Gulf of Mexico oil production shut in by Isidore, and now being shut in again by Lili, does represent a loss of oil from the market. This can only be replaced in the US balance by additional incremental import flows, and that takes time."

Moreover, Horsnell pointed out, "US crude oil inventories have hit their lowest level since 1977."

"With US inventories likely to tighten further following a second storm and given the continued uncertainty regarding potential US military action in Iraq, we expect oil prices to remain well supported over the near term," said Matthew Warburton, an analyst with UBS Warburg LLC in New York.

Industry Scoreboard

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Industry Trends

CANADIAN ENERGY COMPANIES led their US counterparts in mergers and acquisitions in Canada during the first half of this year, with the second highest activity level in the last 5 years, said Calgary-based Sayer Securities Ltd., an investment firm specializing in analyzing M&A activity.

The enterprise value of Canadian oil industry M&A activity during the first 6 months of 2002 totaled $20.5 billion (Can.), down 22% from the comparable half of 2001 (see chart). Total enterprise value was measured by total equity, plus long-term debt and other liabilities. This represented a change from Sayer Se- curities' previous use of equity value.

Energy M&A values have been driven up over the last 3 years by large firms—including many US exploration and production companies—completing deals worth more than $1 billion. But only two such deals were completed in the first half of 2002, both by Canadian companies, for a total of $18.2 billion.

US purchasers completed $177.1 million of the total M&A value for that same period, said Frank J.D. Sayer, firm founder and president.

In addition to overall M&A activity declining from last year, natural gas prices have not risen as some buyers anticipated when they financed those transactions. Some of those companies could be forced to return to the market soon, only this time as sellers.

"Many of the companies that purchased in the M&A market last year did so with a high ratio of bank financing, based on forecasts of high gas prices in 2002," Sayer said. "Gas prices have not reached these levels, and (the) slowing economic growth in 2002, combined with dropping stock prices, has left some of these buyers in need of a cash fix."

Consequently, some companies may be forced to put up for resale the assets they purchased last year, in order to get a quick return. "We may see a significant return of these participants to the Canadian M&A market in the near future," Sayer said.

US drilling activity jumped by 23 rotary rigs to 875 the week ended Sept. 27, the highest level since the first week of this year when the rig count topped out at 883, officials at Houston-based Baker Hughes Inc. reported.

That was down sharply from 1,168 rigs that were drilling during the same period a year ago, 11 weeks after the 2001 rig count peaked at 1,293 units working.

All of the recent gain was in land operations, where the rig count increased by 28 units to 745.

The number of offshore rigs in the process of drilling the week of Sept. 27 was down 2 to 112 in the Gulf of Mexico and 114 for the US overall. There were 16 rigs working inland waters, 3 fewer than the previous week.

Government Developments

SAUDI ARABIA has given international oil companies vying to develop and utilize natural gas reserves in the kingdom until Nov. 1 to respond to final offers on its proposed $25 billion in projects, the Organization of Petroleum Exporting Countries' news agency OPECNA reported Sept. 30.

Previously, Saudi officials indicated they wanted negotiations with the current players to end by October. Saudi Aramco also had earlier suggested it might reopen bidding to others later this fall if negotiations with early bidders fail (OGJ, Sept. 16, 2002, p. 26).

OPECNA reported the Saudi negotiating team has presented final offers to Royal Dutch/Shell Group and ExxonMobil Corp., which lead three consortiums consisting of eight international companies selected to implement the three projects. Negotiations started more than a year ago but recently took a downturn, with many industry analysts assuming the Saudis were nearing abandonment of the talks, at least with these consortiums.

"If (the western companies) reject the offers, it means the negotiations have collapsed and all agreements and preliminary commitments will be deemed null and void," a high-level source was quoted as stating Sept. 20 in Arab News.

The final offers include additional areas for gas exploration, countering reports that the exploration and production firms had been allocated areas that did not contain much gas, according to the same source, OPECNA said.

The source also said the Saudi authorities had increased the rate of return from the downstream facilities "to 15.5%, which was the highest rate compared with others offered for similar projects in the US, Europe, and other countries."

The US Chemical Safety and Hazard Investigation Board (CSB) called on federal regulators and trade groups to improve the safety record of US chemical plants by broadening the scope of process safety rules in the workplace.

At a Sept. 17 meeting in Houston, the board said that workers continue to be exposed unnecessarily to "reactive hazards" that can occur when volatile chemical processes are not controlled.

The group's new findings and recommendations stem from a 2-year special investigation into hazards at US sites that manufacture, store, or use potentially reactive chemicals. The study examined 167 serious chemical accidents in the US during the last 20 years that involved uncontrolled chemical reactions. Those accidents caused 108 deaths and hundreds of millions of dollars in property damage.

The CSB is an independent, scientific investigative agency that makes recommendations but does not issue fines or assign responsibility for accidents.

"The lack of comprehensive regulatory coverage for reactive hazards has been a deficiency since the process safety rules were first issued in the 1990s," said Carolyn W. Merritt, CSB chairman and CEO.

The CSB asked the US Department of Labor's Occupational Safety and Health Administration to have companies conduct improved hazard analyses. The board also plans to ask for improvements to industry codes and guidance such as the American Chemistry Council's Responsible Care program and the National Association of Chemical Distributors' Responsible Distribution Process.

Quick Takes

HARVEST NATURAL RESOURCES INC. (HNR), Houston, formerly Benton Oil & Gas Co., is accelerating development of Uracoa oil field in eastern Venezuela following the signing of a contract to sell as much as 198 bcf of natural gas for $1.03/Mcf through July 2012 to Venezuela's state oil firm Petroleos de Venezuela SA (PDVSA). The field, in south-central Monagas state, is producing 40 MMcfd of associated gas that currently is being reinjected for lack of a market.

HNR plans to spend $25 million in 2003 to build a 54 mile pipeline that will deliver gas to a PDVSA line, modify the Uracoa field processing plant, and provide other infrastructure.

The company expects to invest an additional $21 million starting in 2004 for a gas pipeline, infrastructure, and drilling in Bombal field to sustain the gas production profile throughout the life of the gas sales contract.

Initial natural gas production will come from Uracoa field's 100 wells, which have been drilled through a gas cap.

Production of the gas cap is also projected to provide incremental oil volumes. As a result of this expected increase, HNR agreed to sell 4.5 million bbl of oil to PDVSA at a price of $7/bbl during the gas contract's duration.

Oil production initially will come from the 10-12 oil wells in the field that are presently shut in because of their high gas-to-oil ratio. HNR expects to increase oil production by drilling infill wells.

PDVSA's contract is with HNR's 80%-owned subsidiary Benton-Vinccler CA, Maturin, Venezuela. Gas sales of 40-50 MMcfd in fourth quarter 2003 will gradually increase to 70 MMcfd in 12-18 months, Harvest said. x‡

In offshore development news, Nuevo Energy Co.'s bid to slant drill from Platform Irene in federal waters of the Santa Barbara Channel off California to tap reserves under state waters was denied 3-2 by the Santa Barbara County Board of Supervisors Sept. 24. "The project was denied, so that's it—there is no next step," Jim Bray of Houston-based Nuevo told OGJ. The project would have been the first new offshore lease application within the state's 3-mile limit since the infamous 1969 Union Oil Co. of California platform blowout in the channel—although new wells have been drilled on existing leases. Nuevo had targeted recovering as much as 200 million bbl of oil and 50 bscf of natural gas over 30 years. Had the project—entailing as many as 30 development wells—been approved, the company estimated its oil production would have increased to a peak of 30,000 b/d from the current 6,500 b/d. Santa Barbara County Energy Division staff and the supervisors' majority cited a history of safety problems by Nuevo and its previous operator, Torch Operating Co., including a 1997 pipeline rupture off California that spilled 1,240 bbl of oil (OGJ, Oct. 6, 1997, p. 38).

TOTALFINAELF SA unit TotalFinaElf Explor-ation Norge has awarded a contract to Mitsubishi Heavy Industries Ltd. to build a 145,000 cu m LNG carrier that will carry LNG from the Snøhvit gas project in northern Norway to TotalFinaElf's customers in Europe and the US. TotalFinaElf will lease the tanker, which is slated for delivery in January 2006, from co-owners Leif Hoegh & Co. ASA and Mitsui OSK Lines Ltd.

TotalFinaElf holds an 18.4% equity interest in the Snøhvit project, which is operated by Norway's Statoil ASA.

Once completed, Snøhvit—the world's northernmost LNG project—will export 4.2 million tonnes/year of LNG, Statoil said.

In other LNG activities, Dallas-based Hunt Oil Corp., which is leading the Camisea consortium's feasibility study for an LNG export project in Peru, is currently working on an environmental impact assessment for a proposed LNG plant near Cañete on Peru's southern coast (see related item, p. 9).

KUWAIT PETROLEUM EUROPOORT BV awarded a contract to a subsidiary of Foster Wheeler Ltd., Clinton, NJ, to revamp a vacuum unit and hydrodesulfurization units at its 75,500 b/d refinery near Rotterdam.

Foster Wheeler unit Foster Wheeler Italiana SPA is providing engineering, procurement, construction management, and supervision services. Work has begun, and completion is slated for autumn 2003.

"The revamp work will enable the refinery to operate more efficiently and also meet the European Union's more-stringent specifications on diesel fuel," Foster Wheeler said.

In other refinery refurbishment activities, Pak-Arab Refinery Ltd. (Parco) said it shut down its 100,000 b/d Parco refinery for a 38-day maintenance turnaround. Operations are expected to resume Nov. 7. The Parco refinery, near Multan at Mahmood Kot, Pakistan, has the capacity to process about 4.5 million tonnes/year of oil but has been running at about 85% capacity, the company said. It was commissioned in February 2001 and has a crude feed of 60% Arabian Light and 40% Upper Zakum crude. Parco is a joint venture of Pakistan, Abu Dhabi, and Austria, with the government of Pakistan holding 60% and Abu Dhabi Petroleum Investment and Austria's OMV AG sharing the remaining 40%.

UNION CARBIDE CORP.'s olefins plant in Seadrift, Tex., is the preferred location for a new 900,000 tonne/year ethylene cracker, said the company's parent, Dow Chemical Co., Midland, Mich., upon completing a site study for constructing a world-scale ethylene plant.

Dow launched the site study last fall when it was announced that Union Carbide plans to close its Seadrift and Texas City, Tex., olefins plants by 2005.

The cracker, expected to be operational in 2007, will use ethane and propane as feedstocks.

Any ethylene shortfall between the shutdowns and the start-up of the replacement capacity will be bridged through purchase agreements and internal efficiencies, Dow Chemical said.

GTL BOLIVIA SA (GTLB), Santa Cruz, has secured funding for a study to determine the feasibility of building a 10,000 b/d gas-to-liquids plant near Santa Cruz. Under terms of a licensing memorandum of understanding that GTLB and Denver-based Rentech Inc. signed earlier this year, the proposed plant would use Rentech's patented GTL technology process primarily to make sulfur-free fuels (OGJ Online, June 28, 2002).

GTLB, a new company whose principal shareholder is the Deane Group—a private US company that operates business ventures owned by Disque D. Deane—has contracted Jacobs Engineering UK to conduct the 4-6 month study, which is expected to provide a basis for moving to the next phase of the project.

Bolivia contains some of South America's largest natural gas reserves, estimated to be in excess of 52 tcf. The reserves are in part stranded due to low demand relative to their location and Bolivia's small population and limited infrastructure.

Currently, Bolivia imports conventional, high-sulfur diesel fuels.

Rentech said its GTL process converts syngas into products utilizing an iron-based catalyst technology to achieve GTL conversion. The primary source of syngas feedstock for GTL plants using the Rentech technology is expected to be natural gas wells that are not producing due to their remote location, or from the conversion of coal or low value refinery bottoms.

Meanwhile, Syntroleum Corp., Tulsa, said its Sweetwater GTL project in western Australia might get suspended, although the company is continuing to explore alternatives. Syntroleum will take a third quarter write-down of $25-30 million to cover the capital costs for plant design and other costs related to the 11,500 b/d GTL plant under development on the Burrup Peninsula for several years. "The chances of the project going forward are looking slimmer and slimmer. It's on life support," a company spokesman said. Syntroleum said its engineering, procurement, and construction contract with German engineering firm Tessag Industrie Anlagen GMBH expired Aug. 31(OGJ Online, Sept. 4, 2001). Syntroleum said it is pursuing other projects that incorporate its proprietary process to convert natural gas into synthetic liquid hydrocarbons. These include the potential development with Ivanhoe Energy Inc., Vancouver, BC, of a 185,000 b/d GTL plant in Qatar; the installation of a GTL plant in Peru by Syntroleum unit Syntroleum Peru Holdings Ltd.—provided it confirms sufficient natural gas reserves on Block Z-1 off Peru's far northern coast (OGJ, Sept. 23, 2002, p. 90); construction of a GTL fuels demonstration plant near Tulsa to provide fuel to government vehicle fleets under the US Department of Energy's Ultra-Clean Fuels Program; and development of a contract with the US Department of Defense involving the use of a floating GTL plant to provide battlefield fuel.

A THIN HYDROCARBON SHEEN has been reported near a Unocal Corp. deepwater well in the Makassar Strait, 46 miles off East Kalimantan, Indonesia. Unocal said its Unocal Indonesia Co. subsidiary has notified Indonesian authorities and mobilized resources to address the leak.

A survey by a remotely operated vehicle showed hydrocarbon seepage from the plugged casing of Unocal's Ranggas 6 appraisal well, which was drilled in August. Water depth at the site is 5,500 ft.

After drilling the successful well, Unocal Rapak Ltd. had plugged and abandoned it and moved the drillship. A ship removing anchors in place for the drillship first observed the sheen Sept. 5.

Unocal activated its emergency response team and reported the incident to the Indonesia Directorate General of Oil and Gas and to the State Implementing Body for Upstream Oil and Gas Activities.

Unocal said that, as of Oct. 1, there had been no reports of hydrocarbons impacting the shoreline. "The sheen is not expected to have any impact on human health," Unocal said.

The company said it is working with the relevant regulatory bodies and other entities to devise the best strategy for containing the hydrocarbons and managing any potential impacts.

THE $1.3 BILLION CAMISEA natural gas project 500 km east of Lima expects to obtain financing from the Inter-American Development Bank (IADB) and other banks by early 2003 in order to begin producing and transporting natural gas and liquids to Lima by August 2004. Transportes de Gas del Peru (TGP), the natural gas transportation consortium led by Argentina's Tecgas—a Techint SA unit—will pipe the gas from Camisea to the city gate south of Lima, where it is scheduled to arrive in early August 2004. Belgium's Tractebel SA will then distribute the gas throughout Lima and Callao (OGJ, Sept. 23, 2002, p. 8).

An IADB official in Lima said it expects to contribute towards project financing, as does the Andean Development Fund and commercial banks, from which the partners anticipate securing credits.

IDB financing is subject to final approval of the project's environmental impact assessments (EIAs). An official in Peru said the bank did not anticipate problems and were working closely with the energy and mines ministry to satisfy observations brought up by ecologists, who had placed Camisea on a "red list."

The Camisea consortium, led by field operator Pluspetrol SA, has invested $250-300 million in the project, Pluspetrol said, and TGP has invested about $300 million on pipe and equipment.

A Camisea manager said that the consortium also is awaiting approval by Peruvian firm Graña y Montero, which is assessing the environmental impact of constructing a fractionation plant at Pisco. Work on the plant—key to the project—is scheduled to start at the beginning of next year.

Environmental watchdog Inrena, however, has delayed that approval pending resolution of a fishmeal-plants-relocation issue. Pisco and the fishmeal plants are near the Paracas nature reserves.

An EIA for a Camisea gas-fed LNG plant also is under way at Melchorita, which lies between Cañete and Chincha, just south of Lima (see related item, p. 8).

In other pipeline news, Salt Lake City-based Kern River Gas Transmission Co. has begun construction on its 2003 pipeline expansion. The $1.2 billion project will increase the pipeline's capacity by 906 MMcfd once placed in service in May 2003, the company said.

KERR-MCGEE CORP., Oklahoma City, reported that production is under way in Tullich and Maclure oil fields in the UK North Sea, using existing infrastructure in Quadrant 9.

Both fields were developed as subsea tiebacks to the Kerr-McGee-operated Gryphon A floating production, storage, and offloading vessel.

Tullich field, on Block 9/23a, is producing at a rate of 7,500 b/d from two wells. Production is expected to peak at 15,000 b/d from four wells early next year. Kerr-McGee owns and operates Tullich, 3 miles southeast of Gryphon, in 370 ft of water, with reserves of 40 million boe (OGJ Online, Jan. 8, 2002).

Maclure field, operated by BP PLC, is producing 12,000 b/d from one well.