OGJ Newsletter

Oct. 21, 2002
Total oil stocks in Organization for Economic Cooperation and Development countries fell in August, and world oil production increased in September, but the International Energy Agency warned that current high oil prices carry too many financial disincentives for holding inventories.

Market Movement

IEA: High oil prices pose 'disincentive' for storage

Total oil stocks in Organization for Economic Cooperation and Development countries fell in August, and world oil production increased in September, but the International Energy Agency warned that current high oil prices carry too many financial disincentives for holding inventories.

"That refiners are not eager to purchase crude in today's environment is not a sign of a stable, balanced market," it said.

Inventories

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IEA said total OECD industry stocks declined in August to 2.62 billion bbl, covering demand for 55 days. Crude stocks were drawn down at a rate of 280,000 b/d during the month, while product inventories registered only a 45,000 b/d drawdown.

US refiners drew on crude inventories in August in a backwardated market as runs swelled to meet summer gasoline demand. At the same time, European stocks were flat with July levels in light of weak refining margins. European refiners have run at 85% utilization this year. Pacific OECD crude stocks increased during the month as refiners boosted purchases ahead of winter.

Gasoline stocks in North America declined 7 million bbl during August and were down 2 million bbl in Europe and 1 million bbl in the Pacific OECD countries. OECD storage of distillates grew despite a fall in North American inventories. Distillate draws in North America were led by a decline in US diesel stocks as agricultural demand firmed ahead of harvest season. US heating oil inventories increased, however, ending August 8% higher than a year earlier.

Prices, margins

Underlying supply-demand fundamentals, weather, and seasonal maintenance—in addition to the ongoing geopolitical risk premium—drove September oil prices. Crude oil futures on the New York Mercantile Exchange averaged $29.67/bbl last month. The differential between West Texas Intermediate and Brent crudes narrowed to $1.33/bbl in September from $1.68/bbl in August. Brent prices were supported by scheduled North Sea maintenance and rose sharply against WTI in the first part of the month. Rising European stock levels, however, pressured Brent in the latter part of September. Refining margins staged a slight recovery as product price increases outpaced gains in crude prices during September, IEA said. Margins were also supported by planned maintenance, discretionary run cuts, and US Gulf Coast weather-related outages. Mediterranean margins were especially strong, with hydroskimming margins up $1.38/bbl from August.

Demand

In line with a slowing economic recovery, IEA trimmed its estimate of 2002 global oil demand by 50,000 b/d to 76.64 million b/d. This puts demand growth at 170,000 b/d for the year.

Third quarter OECD oil demand was adjusted downwards 180,000 b/d as demand grew faster than anticipated in July but swung back into contraction during August. Preliminary data also suggest that last month US demand, while stronger vs. September 2001, fell short of expectations and trailed far behind September 2000 demand. Apparent demand in China and the former Soviet Union was stronger than expected, leading IEA to raise its assessment of third quarter non-OECD demand by 170,000 b/d.

IEA reduced its forecast of 2003 worldwide demand growth by 100,000 b/d to 1.04 million b/d. This reflects the impact of high oil prices and the sluggish economic recovery, officials said.

Industry Scoreboard

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Industry Trends

CALIFORNIA plans to dramatically increase the number of natural gas vehicles on its roads.

The newly formed California Natural Gas Vehicle Partnership has outlined 10-year targets for increasing the number of NGVs in use to 619,000 from 19,000. The partnership is an alliance of California air quality, transportation, and energy officials and private sector representatives.

"The status quo is unacceptable to those of us cleaning up the air," said Norma J. Glover, chairman of the partnership and of the South Coast Air Quality Management District, the public authority with responsibility for Los Angeles, Orange, Riverside, and San Bernardino counties. Glover also is a city council member for Newport Beach, Calif.

At an Oct. 8 news briefing in Washington, DC, during the World Natural Gas Vehicle 2002 conference, Glover announced these targets:

•Light-duty vehicle deployment: 33,000 NGVs in use within 3 years, 90,000 NGVs in use within 5 years, 500,000 NGVs in use within 10 years (10-year cumulative total is 516,000 light-duty NGVs including the 16,000 vehicles now on the road).

•Heavy-duty vehicle deployment: 10,000 NGVs in use within 3 years, 25,000 NGVs in use within 5 years, 100,000 NGVs in use within 10 years (10-year cumulative total is 103,000 heavy-duty NGVs including the 3,000 vehicles now on the road).

"If we meet these new targets, about 3% of the total number of vehicles on the road in California in 2012 will be powered by natural gas. That's an aggressive but attainable goal," Glover said. Currently, NGVs in California account for less than 1% of the total vehicles in use.

When the NGV goals are fully implemented in 10 years, statewide emissions will be reduced by nearly 6,000 tons/year of nitrogen oxide relative to what they would be if gasoline or diesel powered vehicles were deployed instead.

LOW PRICES for Rockies gas continues to spur shut-ins in the region.

Ton Brown Inc., Denver, has curtailed 20 MMcfd of gas production in the Rocky Mountains because of low regional gas prices, but the company's operating performance is anticipated to offset the effect.

Tom Brown maintained its production guidance for the third quarter of 2002, saying if low gas prices continue in the Rockies, then the company might curtail production into the fourth quarter, which could result in a change in future guidance.

"We believe it is in the best interest of our shareholders to curtail production," Jim Lightner, Tom Brown chairman and president, said last month.

"We remain fully committed to the potential of the Rocky Mountain region and confident that these issues will be resolved in the future."

The Rockies' natural gas price has traded at a steep discount to the New York Mercantile Exchange futures price for the second half of 2002.

The Colorado Interstate Gas index for September was $1.09/MMbtu, which was $2.20/MMbtu below NYMEX. Earlier this year, Rockies natural gas traded as low as 60¢/MMbtu.

Robert Morris at Salomon Smith Barney Inc. in New York has said that he doubts that gas production curtailments by some Rocky Mountain producers will significantly affect third quarter US volumes (OGJ Online, Sept. 6, 2002).

Rocky Mountain gas historically trades at a steeper discount relative to NYMEX and Henry Hub gas prices during the summer.

Government Developments

France's Foreign Affairs ministry has confirmed that "initial results" of the investigation being conducted by French, Yemeni, and American investigators aboard the tanker Limburg indicate a terrorist attack.

However, the investigation is continuing, the ministry told OGJ. Yemen authorities early on had called upon US experts and the US Federal Bureau of Investigation to join in the investigation into the explosion and fire that racked the vessel Oct. 6 off Yemen. The double-hulled supertanker, which was flying the French flag, is 2 years old.

French media on Oct. 10 reported that fiberglass sections from a boat not belonging to the Limburg were embedded in the tanker at the site of the explosion, and a communiqué sent to Agence France-Presse by a Yemeni militant group, Islamic Army of Aden-Abyan, claimed responsibility for the attack.

The Foreign Affairs ministry has asked its diplomatic and consular posts in high-risk areas to bolster safety and protective measures. Under the guidance of the general secretariat for marine affairs, France's navy and commercial shipowners also are examining reinforced support measures that could be brought to the commercial fleet in these same risk areas.

"The apparent terrorist attack on an oil tanker (off) Aden, Yemen, has underscored the potential for Al Qaeda to target the global oil industry," said Boston-based Energy Security Analysis Inc. in a weekly intelligence briefing. "This is a chilling thought for the oil market, especially given the likelihood that there will be a war in Iraq.

"While a war contained within Iraq's borders would have limited impact on the global supply and demand for crude, there are concerns that if the conflict spills into Israel, or another (Persian Gulf) producing country, the impact on the oil markets could be dramatic," ESAI said. "Saddam Hussein could conceivably try to bring other countries into the conflict, or groups opposing US presence in the gulf—such as Al Qaeda—could use terrorist attacks to complicate if not widen the conflict."

THE US COAST GUARD on Oct. 11 created three new security zones for LNG carriers in Boston Harbor to protect vessels and surrounding areas from sabotage or accidents. The new zoning is likely to mean more vessel traffic congestion but is "necessary for the protection of life and property," the Coast Guard said.

The Federal Energy Regulatory Commission recently approved the reactivation of two LNG import projects and the expansion of an existing terminal.

The agency is expected to delve deeper into security and permitting issues surrounding LNG and natural gas at an Oct. 25 public conference.

Quick Takes

PETRÓLEO BRASILEIRO SA (Petrobras) has stabilized its P-34 floating production, storage, and offloading vessel off Brazil that suddenly listed at 32° Oct. 13, interrupting oil and gas production and threatening to capsize the vessel.

The FPSO listed so quickly that 30 members of the crew jumped into the sea, fearing that it would overturn completely (see photo). The FPSO was then evacuated. Petrobras said there has been no structural damage to the vessel, and there were no injuries (OGJ Online, Oct. 14 and 16, 2002).

An electrical failure affecting pumps and ballast equipment is thought to be the cause of the accident.

P-34 FPSO. Photo courtesy of Petrobras.
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Petrobras connected a pipeline from one of the P-34's starboard tanks to a service tug designed for collecting and pumping seawater, and pumped 4,300 cu m of seawater into the P-34's tank, reducing the list to 17° on Oct. 16.

Petrobras is losing about $1 million/day due to the interruption of production, say specialists contacted by OGJ, and a Petrobras official told OGJ that he estimates it will take 2 weeks to recover the vessel.

The company said it would try to start the onboard electrical system when the vessel achieves an inclination of 10°, after ensuring that there is no risk of explosion from possible hydrocarbon leaks.

The $200 million, 17,900 ton FPSO lies between Barracuda and Caratinga fields in 2,800 ft of water 50 miles off Rio de Janeiro state, where it has been producing since 1997.

Meanwhile, Petrobras said that, because the accident occurred so late in the year, it would not prevent the company from hiking oil production this year.

Two new Campos basin production systems will begin operations by yearend, Petrobras said: The Seillean FPSO will be connected to the recently discovered Jubarte oil field, which is expected to produce 13,000-15,000 b/d of oil, although its crude is low gravity and produces from 1,400 m of water.

In November, the Brasil FPSO will connect to wells in Roncador field that have been shut in since the sinking of the P-36 semisubmersible platform in 2001 (OGJ Online, Mar. 15, 2001). Production at Roncador field will ramp up again until it reaches 90,000 b/d of oil within 6 months.

At yearend 2003 Petrobras expects to boost production further with installation of the new P-43 and P-48 FPSOs in Barracuda and Caratinga fields. The P-43 and the P-48 will each have production-handling capacity of 150,000 b/d of oil. Petrobras expects combined production from Barracuda-Caratinga to reach 247,000 b/d of oil and 3.4 million cu m/day of natural gas by 2004-05.

Petro-Canada started up operations Oct. 9 at its $290 million (Can.) MacKay River oil sands facility 60 km northwest of Fort McMurray, Alta. MacKay River utilizes steam-assisted gravity drainage to extract bitumen from more than 100 m underground. Each of the facility's 25 initial well pairs is expected to produce about 1,200 b/d of bitumen by yearend. The largest commercial operation of its kind in Canada, MacKay River is slated to ramp up to full production of 30,000 b/d by yearend 2003 and retain that level for the full 25-year life of the plant. The company has applied for a permit to convert its refinery in Strathcona County, east of Edmonton, to process the bitumen. Preliminary cost estimates for refinery reconfiguration are $4-5 billion. F In other production news, Dallas-based EXCO Resources Inc. has installed temporary production facilities on the Miami Corp. No. 35 natural gas well in South Pecan Lake field, Cameron Parish, La., following a loss of control Oct. 1 during workover operations to restore production. The incident resulted in the release of 20 MMcfd of natural gas and 2,800 b/d of formation water, but no injuries or fires resulted, EXCO said. About 15 MMcfd of gas from the well is now being sold, and 2,350 b/d of produced water is being routed to EXCO disposal wells. A relief well will be drilled at a cost of $3.5-4 million. Mobilization and drilling of the relief well is expected to take 40-50 days.

Teekay Shipping Corp., Nassau, has entered into agreements with Daewoo Shipbuilding & Marine Engineering Co. Ltd. and Samsung Heavy Industries Co. Ltd., both of South Korea, to purchase two new, high-specification Aframax (80,000-200,000 dwt) tankers from each company.

According to terms of the agreements, Teekay also retained options to order additional ships later. The four newbuilds, scheduled for delivery in 2004, will each be 115,000 dwt. The total purchase price of $152 million includes construction supervision costs and capitalized interest.

SGR HOLDINGS LLC, Houston, announced that its wholly-owned subsidiary, SG Resources Mississippi LLC (SGRM), has received FERC approval to construct and operate the Southern Pines Energy Center, a new salt cavern natural gas storage facility to be developed in Greene County, Miss.

The storage center, scheduled to be operational by early 2004, will be a high-deliverability, natural gas storage facility that, when completed, will provide 12 bcf of natural gas storage in two caverns, each with 8 bcf of capacity (OGJ Online, Jan. 15, 2002). It will be capable of supporting natural gas withdrawal rates of up to 1.2 bcfd and injection rates of up to 0.6 bcfd.

The center will serve as a supply and storage market hub for nine major pipelines serving the southeastern US.

The Southern Pines facility initially will have a bidirectional interconnect with the Destin pipeline that provides direct access to five major pipeline systems.

Construction plans include a Phase II development, which SGRM plans to submit for regulatory approvals in early 2003. Phase II will include bidirectional, direct interconnects to three main pipelines. These interconnects will be operational by first quarter 2004.

The 80-acre site also will accommodate three additional caverns to support future demand growth, SGRM said.

TESCO CORP., Calgary, has completed the successful application of its casing-drilling technology on a modified conventional drilling rig in South Texas adapted for Conoco Inc. (now ConocoPhillips). Previously, the technology of drilling with casing was only accomplished using specifically designed and built rigs having a split crown, traveling blocks, and other characteristics specific to this type of drilling (OGJ, Mar. 18, 2002, p. 64). In the South Texas project, a 41/2-in. casing string with buttress profile connections was drilled (rotated) to 6,700-10,000 ft, passing through a severely depleted zone and through numerous zones normally associated with severe loss circulation, Tesco said.

MURPHY OIL CORP. has successfully appraised its previously announced Kikeh No. 1 oil discovery on deepwater Block K, off Sabah, Malaysia. The discovery well, the first deepwater oil discovery off Malaysia, was drilled this summer and "encountered several hundred feet of high quality oil reservoirs," company officials said (OGJ, Aug. 12, 2002, p. 39).

"The results from the Kikeh No. 2 well are excellent," said Claiborne P. Deming, Murphy Oil president and CEO. "This (appraisal) well was drilled approximately 1 mile from the discovery well and found the same five primary oil reservoirs full to base, encountering over 400 ft of net pay," Deming said. "We subsequently plugged back and sidetracked the well downdip where we found oil full to base in the same primary reservoirs, with only a secondary sand having an oil water contact," he said.

The rig will now be moved to drill another appraisal well, Kikeh No. 3, which will be almost 2 miles from Kikeh No. 2.

The Kikeh discovery lies in the southern part of Block K in almost 4,400 ft of water. Murphy is operator and holds an 80% interest in Block K and adjoining Block H, which combined cover more than 6 million acres. Petronas Carigali Sdn. Bhd., the wholly owned exploration and production arm of Petronas, holds the remaining 20%.

EL PASO ENERGY PARTNERS LP has finalized agreements with Red Hawk field's equal-interest partners—Ocean Energy Inc. and Kerr-McGee Oil & Gas Corp.—to build and operate a new 16-in. natural gas gathering pipeline from the field, which lies in the deepwater Garden Banks area of the central Gulf of Mexico, to the ANR Pipeline Co. system at Vermilion Block 397.

The 86 mile pipeline, which will be capable of transporting as much as 330 MMcfd of gas, will originate in 5,300 ft of water at Red Hawk field. El Paso plans to place the new pipeline in service during second quarter 2004. Development drilling at Red Hawk field is expected to begin in early 2003.

With estimated proven reserves of more than 250 bcf of gas, Red Hawk is expected to have an initial production capacity of 120 MMcfd and ultimate capacity of 300 MMcfd. Field operator Kerr-McGee will develop the field using the world's first cell spar, currently being developed by Technip Offshore Inc. (OGJ, Sept. 2, 2002, p. 8). The producers also expect the Red Hawk production facility to become a host structure for the cost-effective development of nearby satellite fields.

CABINDA GULF OIL CO. LTD., a unit of Chevron Texaco Corp., has arranged for the world's first newbuild LPG FPSO, which is slated for operation in Sanha field on Block O, off Angola.

Cabinda Gulf—operator of Sanha field, with a 39.2% interest—signed a contract last spring with Single Buoy Moorings Inc. (SBM) of Monaco for an 8-year-lease time charter of an LPG FPSO unit for Sanha to be built and owned by Sonasing, a joint venture of SBM and Angola's state oil company Sonangol, which is a 41% interest holder in Sanha field. Other stakeholders include TotalFinaElf SA 10%, and ENI SPA's Agip Petroleum Co. 9.8%.

Mitsui & Co. Ltd. and Ishikawajima-Harima Heavy Industries Co. Ltd. (IHI) have signed a construction contract with SBM to build the Sanha LPG FPSO. The unit is slated for completion in mid-2004, with first product to be shipped in 2005.

With an LPG storage capacity of 135,000 cu m and a daily processing capacity of 6,000 cu m, the Sanha LPG FPSO will be the largest LPG hull ever built and the first floating production facility built to combine all LPG processing and export functions onboard the same unit. The LPG production plants will include gas separators, gas refrigerators, and boil-off gas reliquefaction units.

Sanha LPG FPSO. Illustration courtesy of ABS Corp.
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Mixed LPG, received from two production platforms in Block O, will be fractionated onboard the FPSO to separate butane and propane products. Each product will then be chilled for storage in atmospheric pressure storage tanks and transferred to LPG export tankers for shipment and sale (see illustration).

ABS Corp., Houston, will provide classification services. The vessel will use IHI's self-supporting, primatic-shape, IMO Type-B tank system. Previously, ABS had classed the only LNG carriers to use this containment system and also classed the first LPG FSO newbuild, the Escravos, which is fitted with the same type of tanks.

Correction

Anadarko Petroleum Corp. expects to book 50 million boe of proved reserves at the closing of its acquisition of Houston-based Howell Corp., not 500 million bbl as reported in OGJ Oct. 7, 2002, p. 32.