OGJ Newsletter

Jan. 13, 2003
There was speculation at presstime last week that the Organization of Petroleum Exporting Countries would hike its new production quota by more than 1 million b/d on Jan. 12 in Vienna to offset the loss of oil supplies from Venezuela's strike and an imminent war in Iraq.

Market Movement

OPEC likely to boost production

There was speculation at presstime last week that the Organization of Petroleum Exporting Countries would hike its new production quota by more than 1 million b/d on Jan. 12 in Vienna to offset the loss of oil supplies from Venezuela's strike and an imminent war in Iraq.

Paul Horsnell, J.P. Morgan Securities Inc., London, said Saudi Arabia would push for an increase of 1.5 million b/d and "talk as high as 2 million b/d" before compromising on a lower figure. "Current (high oil) prices are seen as a problem, and Saudi Arabia is prepared to throw oil at that problem. Expect a compromise between the spare-capacity poor and the spare-capacity rich (OPEC members) of perhaps 1.2 million b/d," Horsnell said. Others said Libya and Algeria were backing a production increase of 1 million b/d; the compromise increase could be "as much as 1.3 million b/d," they said.

Back where they started

A hike of 1.2 million b/d to 24.2 million b/d would raise OPEC's official production quota to the actual level of production that its members achieved late last year through cheating. On Dec. 11, OPEC ministers agreed to raise their production quota by 1.3 million b/d to 23 million b/d, effective Jan. 1, while simultaneously trimming back overproduction to fit that new target. Analysts estimated at that time that 10 OPEC members, minus Iraq, were overproducing by 2.5 million b/d their previous quota of 21.7 million b/d, putting their actual production level at 24.2 million b/d (OGJ Online, Dec. 12, 2002).

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OPEC's action at its December meeting was aimed at improving its credibility with traders by reducing its amount of overproduction, rather than addressing a real shift in market fundamentals. The general strike that started Dec. 2 in Venezuela in an effort to oust President Hugo Chávez was still in its early stages by Dec. 11; its effects had not yet fully impacted US markets.

War imminent

Meanwhile, war with Iraq by US-led forces appears imminent—"by late January or early February," said Robert Morris with Salomon Smith Barney Inc., New York (OGJ Online, Jan. 6, 2003).

Analysts at Bear, Stearns & Co. Inc. expect a short war of about 1 month, with "minimal" allied casualties and the same economic results as in 1991, when "oil prices fell hard, the stock market soared, and oil stocks underperformed" (see chart).

They recalled, "In 1991, within minutes of the first bomb being dropped on Iraq, oil prices fell (to less than $20/bbl) from $34/bbl."

Bear, Stearns analysts said, "Differences between today and 1991 suggest to us that oil prices are unlikely to match the highs seen in 1990, but that the correction is apt to be as severe. First, Iraq is a less important supplier of oil. In the past year, Iraq has supplied about 25% less oil than it did in 1990.

"Second," they continued, "Kuwait's oil production, which ceased in August 1990 through late 1991, is flowing at about 2 million b/d and is capable of producing about 2.4 million b/d. Third, strategic reserves of crude oil and refined products in OECD (Organization for Economic Cooperation and Development) countries, at 1.25 billion bbl, are 50% higher than in 1991, and the ability to release oil is vastly better today."

Once Saddam Hussein is deposed, Bear, Stearns analysts expect Iraq's oil production to "hold steady" under military occupation of the country, rather than being used as a war weapon. Moreover, they said, "We believe the US military will oversee oil production operations to secure volumes near Iraq's current capacity of 3 million b/d or more, vs. production of 2 million b/d in 2002."

Industry Scoreboard

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Industry Trends

INTEGRATED companies in the US and Canada are apt to sell more producing oil and natural gas properties in 2003, compared with the previous 2 years, possibly triggering increased demand for oil field services and contract drilling there, Merrill Lynch forecast.

"We don't envision there being much cross sector M&A (merger and acquisition) activity, i.e., integrateds purchasing E&P (exploration and production) companies," analyst John P. Herrlin Jr. of New York wrote in a Jan. 2 research note.

"Domestic or international integrateds have tried to minimize dollar recycling in mature producing provinces and now, in our view, don't have the infrastructure or desire to get back into fast-track, small-reserve scale projects," added Herrlin, first vice-president of the Merrill Lynch Global Securities Research & Economics Group.

During 2002, upstream sector consolidation in the US and Canada totaled $17.6 billion worth of E&P mergers. Of that, $14.8 billion involved Canadian deals, while US deals totaled $2.8 billion, he said. "Going forward, we expect there to be more (property transactions), given greater wellhead cash flows, reopened capital markets, and the potential for more available properties from the integrateds," Herrlin said.

Merrill Lynch is basing its E&P models upon 2003 price assumptions of $25/bbl for West Texas Intermediate and $3.70/Mcf for natural gas at the Henry Hub.

"We realize that we might be too conservative on natural gas prices, but it's still early in the withdrawal season, and weather patterns are turbulent. On a dollar traded basis, natural gas remains the most volatile commodity around," he said.

A DECLINING US rig count going into January from December is normal based upon rig counts for each of the last 55 years, says Banc of America Securities LLC analyst James K. Wicklund.

Wicklund said normal seasonality of US drilling shows a drop in activity through the early months of each year before drilling activity bottoms and regains momentum. He expects 2003 to be no exception.

"Every year, investors are surprised, worried, or concerned about this phenomenon. They shouldn't be, in our view," Wicklund said.

For the week ended Jan. 3, Baker Hughes Inc. reported US drilling activity down 25 rotary rigs to 837 working for that week. That was down from 883 during the same period a year ago (OGJ Online, Jan. 3, 2003)."Our studies show that oil field service and equipment stocks typically drop, by an average of about 2%, from December into January," Wicklund added.

OIL SERVICES companies' near-term stock price performance is likely to dampen, agreed analyst Stephen D. Gengaro of Jefferies & Co. Inc. "The tremendous uncertainty surrounding the potential war with Iraq, the strike in Venezuela, and the overall hazy US economic outlook has created a cloudy near-term outlook," Gengaro said.

Jefferies has lowered its 2003 average weekly US rig forecast to 930 from 955, up from 831 in 2002 and 846 in fourth quarter 2002. Jefferies is optimistic about Canada, having boosted its average weekly rig count forecast there to 310 for 2003 vs. 266 in 2002.

Government Developments

IRAQ has replaced its oil minister with an acting oil minister.

Iraqi President Saddam Hussein replaced Oil Minister Amer Rashid, already 1 year past the mandatory retirement age of 63, with Samir Abdul Aziz al-Najim, OPEC News Agency reported.

Rashid served as minister since June 1995 after directing Iraq's military industrialization commission. Oil experts told OPECNA that the replacement would not affect Iraq's oil policy.

"The replacement has come somewhat as a surprise," said Tyler Dann, analyst with Banc of America Securities LLC. "Some are attributing the removal as being related to the possibility that Rashid and/or his biological weapons-specialist wife are to be called for questioning by (United Nations) weapons inspectors," Dann said.

UN inspectors questioned Rashid's wife, Rihab Taha, in the 1990s about biological weapons, Associated Press reported.

Al-Najim is a member of the ruling Baath party's regional command, OPECNA reported. He previously has served as Iraq's ambassador to Egypt, Turkey, Spain, and Moscow.

VENEZUELA is contemplating offers from three major international oil companies seeking to explore for natural gas in the Deltana Plataforma region.

The Energy and Mines Ministry's commission in charge of the tender must present a recommendation to the minister in order to proceed with granting the licenses. It's part of Venezuela's gas initiative, the linchpin of President Hugo Chávez's plans to stimulate additional investment in his country's oil and gas sector.

The ministry told OPEC News Agency that ChevronTexaco Corp. offered $19 million for Block 2 on the Deltana Plataforma, while TotalFinaElf SA bid $100,000 for Block 3. For Block 4, Statoil ASA offered $32 million, and TotalFinaElf offered $5.15 million.

Last year Venezuela announced plans to award gas-prone acreage to foreign multinational companies in the Deltana Plataforma region, which contains Loran and other undeveloped fields (OGJ, Sept. 30, 2002, p. 32).

The Deltana Plataforma is the first project for the extraction of nonassociated gas in the Delta Amacuro 200 km from the coast near the maritime border with Trinidad and Tobago.

The project involves an investment of $4 billion and is expected to generate up to $800 million annually in revenue beginning in 2007. Natural gas reserves in the area are estimated at up to 38 tcf.

REGULATORS from US oil and gas producing states have signed a cooperation agreement with the US Environmental Protection Agency to "facilitate more open and timely communication."

The Interstate Oil and Gas Compact Commission said a memorandum of understanding was signed last month during the IOGCC annual meeting in Little Rock, Ark.

IOGCC and EPA agreed to assemble a task force to identify issues of concern involving concurrent jurisdiction between the states and EPA. The task force also will outline ways to streamline environmental permitting and identify joint activities, including training opportunities, field visits, and technical symposiums.

The task force will include IOGCC, EPA, and senior state oil and gas regulators. Among others, the group will consult with state and federal agencies and Indian tribes.

Quick Takes

DELIVERIES OF BITUMEN from the Athabasca Oil Sands Project (AOSP)—the first new fully integrated oil sands project in 25 years, which started up Dec. 29, 2002—have been delayed following a brief fire Jan. 6 at the Muskeg River mine 75 km north of Fort McMurray, Alta.

The fire, which occurred when a hydrocarbon leak ignited in piping near the facility's Train 2 solvent recovery unit and was quickly extinguished, caused little damage to major process equipment or piping systems Shell Canada Ltd. reported, and is not expected to materially impact the scheduled start of first synthetic crude oil production from the Scotford upgrader near Fort Saskatchewan, Alta.

However, shipments of diluted bitumen into the Corridor pipeline and associated tankage for delivery to the upgrader have been suspended pending the restart of Train 1, which sustained minor damage. "The extent of damage and required repairs has not yet been fully determined," Shell said.

The $5.2 billion (Can.) project—a joint venture of Shell 60%, Chevron Canada Ltd. 20%, and Western Oil Sands LP 20%—has been one of the world's largest construction projects in recent years.

When the project ramps up to full production of 155,000 b/d of bitumen this year, Shell said, it is expected to supply the equivalent of 10% of Canada's oil needs. The project is intended to replace an equivalent amount of imported oil, Shell said.

ConocoPhillips subsidiary Phillips China Inc. (PCI) and China National Offshore Oil Corp. Ltd. (CNOOC) have begun first production from Peng Lai 19-3 field in China's Bohai Bay. PCI is operator with 49%, and CNOOC holds 51%. PCI has invested $2 billion at Peng Lai field, which analysts say may hold China's second-largest reserves behind the onshore Daqing field complex (OGJ Online, Dec. 14, 2001). Peng Lai 19-3 eventually is expected to produce 120,000-150,000 b/d of oil. Phase I development will utilize a single, 24-slot wellhead platform and a floating production, storage, and offloading vessel with expected gross production rates of 35,000-40,000 b/d of oil.

OMAN has awarded an $879 million contract to a Japanese consortium of JGC Corp. and Yokohama-based Chiyoda Corp. for construction of a new refinery at Sohar, 250 km northwest of Muscat.

The facility, which will have a capacity of 75,000 b/d, will be completed by second quarter 2006, the consortium said.

The official Oman news agency said 10% of the new refinery's production would be used for domestic consumption, with the remainder left for export.

Oman currently has one refinery at Mina al-Fahal, which was constructed in 1982 and produces 85,000 b/d for domestic consumption.

The new refinery also will produce 350,000 tonnes/year of propylene to supply a polypropylene plant to be built in Sohar's industrial port.

Aromatics (Thailand) PLC (ATC), operator of Thailand's first aromatics complex, plans to build a $20 million condensate splitter to convert condensate residue to light oil products. It will process excess condensate residue from its aromatics production and from condensate delivered to Rayong Purifier Co's condensate splitter near ATC's complex in Map Ta Phud, Rayong, about 220 km southeast of Bangkok. PTT PLC, the Thai energy firm that owns a majority stake in ATC, said installation of the new splitter could start in 2003. ATC can produce 972,000 tonnes/year of aromatics products. The splitter is part of additional facilities planned to improve the economy of ATC's operation. ATC is implementing a second-stage debottlenecking program expected to boost aromatics output by 13.27% to 1.1 million tonnes in first quarter 2004 (OGJ Online, Aug 14, 2002).

BG GROUP PLC has received authorization to start engineering, procurement, and construction (EPC) of the $550 million proposed Egyptian LNG (ELNG) second train. Initial detailed engineering, procurement of long-lead-time items, and site preparation work is to be completed early in the third quarter when the Train 2 EPC contract will commence.

BG said the first shipment of LNG from Train 1 is on target for third quarter 2005 and Train 2's first production, for mid-2006.

US engineering firm Bechtel Inc., which is undertaking the $900 million EPC of Train 1, will carry out preliminary work using its design and construction subcontractors, including Egyptian General Petroleum Corp. (EGPC) affiliates Petrojet and Enppi.

The $1.35 billion first train, engineering of which is under way, is designed to produce 3.6 million tonnes/year of LNG, all of which has been sold to Gaz de France under a 20-year agreement (OGJ Online, Jan. 21, 2002). The second train will double output at the plant, which is located at Idku 50 km east of Alexandria.

Both trains will be built using the Phillips liquefaction technology and will share storage and marine facilities. The site can accommodate up to five trains, BG said.

Partners in ELNG Train 2 are BG Group 38%, Edison International 38%, EGPC 12%, and Egyptian Natural Gas Holding Co. 12%.

The Kizomba developments off Angola are planned for an ETLP-FPSO combination for best extraction and reservoir management. Illustration from OGJ archives.
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EXXONMOBIL CORP. has placed a $760 million order with Seoul-based Hyundai Heavy Industries Co. Ltd. for a second FPSO vessel to be used in its Kizomba project off West Africa.

Hyundai is scheduled to install the FPSO in Kizomba-B oil field on Block 15 off Angola by June 2005.

The FPSO will store 2.2 million bbl of oil and have processing facilities and a production capacity of 250,000 b/d. It will weigh 81,000 dwt, and measure 285 m long, 63 m wide, and 32 m high.

Hyundai said it would be the second largest FPSO project it has built, after the $800 million unit built for ExxonMobil's Kizomba-A development in August 2001. Both FPSOs have the same dimensions and production and storage capacities.

The Kizomba project, considered West Africa's largest deepwater development, is 370 km off Angola in 3,300-4,200 ft of water.

First oil from Kizomba-A is expected by yearend 2004, while production from Kizomba-B should begin after 2005. A third phase, Kizomba-C, will follow 12-18 months after Kizomba-B.

The Kizomba consortium includes ExxonMobil's subsidiary, Esso Exploration Angola (Block 15) Ltd. (operator with 40% interest), BP Exploration (Angola) Ltd. 26.67%, Agip Angola Exploration BV 20%, and Statoil ASA 13.33%. Angola's state oil company Sonangol EP is the concessionaire.

In related Kizomba development activity, ABB Lum- mus Global Inc. is performing the detailed de- sign of an ex- tended tension leg platform (ETLP) for Kizomba-A field's surface wellhead platform, a new generation TLP on which the columns have been moved in- board (OGJ, Mar. 4, 2002, p. 83).

The ETLP will be installed in 3,863 ft of water on Block 15 and will be the first floating dry-tree unit to operate off West Africa. It will allow for dry-tree completions while the adjacent FPSO provides processing, utilities, and storage facilities.

Kizomba-A development will include tie-ins from Hungo and Chocalho fields, and Kizomba-B development plans call for tie-ins from the Kissanje, Mirimba, Dikanza, and Xicomba discoveries.

In addition, BP Exploration (Angola) Ltd., a unit of BP Group PLC, has contracted Paris-based society Bureau Veritas for classification and certification of its planned Plutonio FPSO vessel to be used in Block 18 off Angola. The massive FPSO, which will have a 2 million bbl storage capacity, is designed to handle 220,000 b/d over a 25-year life span. To be installed in 3,863 ft of water, it will handle production from five fields. Following approval by Sonangol, BP will call for construction bids for the vessel. Slated to be on stream in 2007, it will be anchored in Plutonio field with subsea tiebacks from nearby fields. BP operates Block 18 on behalf of itself and 50:50 partner Royal Dutch/Shell Group. Front-end engineering and design currently is under way on the block's development (OGJ Online Sept. 18, 2002).

The republic of Georgia has signed an agreement with Northrop Grumman Corp., Los Angeles, to develop an aerial surveillance system to monitor the Baku-Tbilisi-Ceyhan (BTC) export pipeline and its adjacent area. Giorgi Chanturia, president of Georgian International Oil Corp., said Georgia would receive radar configurations similar to those used by the US in Afghanistan.

US officials allocated $11 million to Georgia to form a 400-member special military unit to protect the BTC pipeline, Chanturia said. The rapid reaction unit would consist of US-trained Georgian military personnel under a program for development of antiterrorist forces. One unit has already been trained, while a second group, the Sachkhere mountain rifle battalion, will commence training Jan. 15.

Ground was broken for the BTC pipeline last September, and Georgia approved construction through its territory Dec. 1, 2002.

Georgia's government is plagued by separatist elements in Abkhazia, South Ossetia, Adzhana, and a spillover of fighting from neighboring Chechnya, where a rebellion has been waged against Russia since the early 1990s.

THE TIBAT-1 WELL off Oman, operated by Novus Petroleum Ltd., Sydney, was drilled 250 m deeper than originally projected due to the discovery of a considerably larger reservoir section, and it has been successfully logged, reported well partner Heritage Oil Corp., Calgary.

The well, drilled to 3,097 m TD in 50 m of water, is on Block 8 in the Persian Gulf off the Musandam Peninsula 12 km south of the Bukha field platform. The well was targeting two Cretaceous reservoirs—Mauddud and Thamama—in a fault-bounded structure originally thought to be at 2,550 m and 2,710 m, respectively.

Good shows were encountered while drilling the Thamama target reservoir, Heritage said, and logging data supports the reservoir potential, so the joint venture is preparing to test the reservoir section.

"We appear to have encountered a reservoir section that is twice, possibly three times larger than originally mapped—some 350-400 m in total," said Michael Wood, Heritage president and CEO. "However, until the test program has confirmed the productivity of these reservoirs, no decisions about the commerciality of Tibat can be taken" without a successful well test, he said.

Novus holds a 40% interest in the well and Heritage 10%. Other partners are LG International Corp. 25%, and Atlantis Holding Norway 25%.

Deer Lake Oil & Gas Inc., St. John's, Newf., said an exploratory well encountered the Cambro-Ordovician carbonate platform for the first time at depth in the Deer Lake basin onshore western Newfoundland, and the company bid successfully for more acreage nearby. Western Adventure-2 on EP 93-103 encountered the carbonate platform at 761.5 m. The carbonate platform is the target reservoir in the Parsons Pond and Port au Port andeGarden Hill areas of western Newfoundland 60-100 km to the southwest. The company intends to reenter and deepen the well, suspended at 1,325 m (see maps, OGJ, Dec. 24, 2001, p. 36). The well found gas shows in porous and fractured zones at several levels and will be logged to determine whether any zones are candidates for drillstem tests. "Field outcrop and laboratory studies of rock samples from the area west of the Deer Lake basin (where the Cambro-Ordovician carbonate platform sequence is exposed at surface) demonstrate that excellent porosity and permeability can be developed over thick intervals of this sequence, particularly where overthrusting of the sequence occurs," the company said.

Overthrusting appears to be present on seismic at the well's location, and the company plans to deepen the well to test targets in the footwall carbonate sequence. Carboniferous and Cambro-Ordovician carbonates will both be targets of future drilling. Deer Lake bid successfully for 150,927 acres on two permits adjacent to EP 93-103, bringing its holding in the basin to 223,000 acres in mid-December. The company was successful on a 35,063-acre parcel in the Parsons Pond area. Interests there are private East Resources Inc., Wexford, Pa., 72.47%; Deer Lake 17.39%; and Ammonite Resources Inc., New Canaan, Conn., and private 554568 Alberta Ltd., each 5.07%.