OGJ Newsletter

June 23, 2003
Natural gas futures prices remained below $6/Mcf on the New York Mercantile Exchange last week out of concern for another big injection into US underground storage. On June 19 the US Energy Information Administration reported an injection of 114 bcf of gas for the week ended June 13. Traders anticipated a figure of 110-120 bcf.

Market Movement

Record storage injection crimps natural gas prices

Natural gas futures prices remained below $6/Mcf on the New York Mercantile Exchange last week out of concern for another big injection into US underground storage. On June 19 the US Energy Information Administration reported an injection of 114 bcf of gas for the week ended June 13. Traders anticipated a figure of 110-120 bcf.

Gas futures prices plummeted June 12 when EIA reported the largest ever injection, 125 bcf, into underground storage during the week ended June 6. The previous record high of 120 bcf was reported by the American Gas Association when it tracked these data.

Data raise doubts

Record gas storage injection data for the week ended June 6 reflect a "backed-out" demand loss of 8 bcfd from year-ago levels, "while the rolling 4-week average is 5.4 bcfd," said Robert S. Morris, an analyst with Banc of America Securities LLC, New York. Although some industrial demand has been destroyed as several dual-fuel plants switched from gas to cheaper petroleum products, Morris said, "We don't believe 3-4 bcfd of incremental demand was backed out in 1 week."

Instead, he blamed "the recent emergence of a strong economic incentive for operators or speculators to inject gas into storage, given the spread between the (Henry Hub, La., physical delivery point for NYMEX gas futures contracts) cash price and the outer-month NYMEX futures contract price." He said, "During the past week, the January 2004 NYMEX futures contract price was about 50-70¢/MMbtu higher than the Henry Hub cash price. Thus, operators and speculators could buy gas and put it into storage, sell the January 2004 NYMEX contract, and lock in a significant profit, since the total carrying cost for the gas in storage is only 3-4¢/MMbtu/month."

John Tysseland and James M. Rollyson, analysts in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla., said abnormally mild weather in much of the US this spring "makes it very difficult to determine exactly how much of the increased injection has been true demand destruction." As rising prices for natural gas outpaced those for NGLs, they said, more NGL has been left in the natural gas stream, increasing the amount of gas available to the market. As a result, the RJA analysts figure that the amount of available gas has increased as much as 400 MMcfd since the start of this year and as much as 750 MMcfd from year-ago levels. "As history tells us, however, this is not a sustainable trend," they said.

Moreover, they said, average consumption of distillate and residual fuel oil has increased by more than 500,000 b/d from year-ago levels "in the January-March timeframe." They also noted that natural gas prices had surged above $6/Mcf in recent weeks, despite "particularly mild" weather. "Assuming that all this demand growth in oil-related products is at the expense of natural gas demand, it means that an average of nearly 2.5 bcfd has been taken out of the market over the last 3 weeks due to higher natural gas prices," analysts said in a June 16 report.

Meanwhile, continued high futures prices for natural gas in conjunction with high injection rates demonstrate "exactly how an efficient gas market should work," said Tysseland and Rollyson. "As we have said many times before, the gas market will find the appropriate gas price that kills enough price-sensitive gas demand to rebalance the system and get summer-ending gas storage to a comfortable level." Based on "a big assumption" that recent gas storage data are accurate, the two analysts said, the equilibrium gas price appears to be $5-7/Mcf.

IEA revision

Meanwhile, the International Energy Agency last week reported worldwide oil inventories among Organization for Economic Cooperation and Development countries rose by 720,000 b/d to 2.4 billion bbl in April, including an "unprecedented" upward revision of March stocks by 79 million bbl. "The magnitude of these revisions is unprecedented and the timing unfortunate, given that the market is seeking direction in the aftermath of the war in Iraq," IEA said.

IEA reported world oil production rose by 289,000 b/d in May, with the Organization of Petroleum Exporting Countries contributing 221,000 b/d and non-OPEC producers adding 168,000 b/d.

Record imports

For the first time ever, imports of oil and petroleum products accounted for 65% of all US demand in May, the American Petroleum Institute reported last week. May imports totaled 12.6 million b/d, up 5.4% since the start of this year and 9.1% more than during May 2002. Crude imports alone totaled almost 10 million b/d in May, up 7.9% from year-ago levels.

Industry Scoreboard

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Industry Trends
FINDING AND DEVELOPMENT costs are on the increase worldwide, making profitability increasingly challenging for oil and natural gas companies.

The Merrill Lynch Global Securities Resesearch & Economics Group used 2002 statistics to examine trends regarding companies' progress in replacing reserves and growing production.

The study covered integrated oil companies in developed and emerging markets along with US and Canadian exploration and production companies.

The study's participants had an aggregate market capitalization of more than $1 trillion and combined 2002 production of 25 million b/d of oil and 76 bcfd of natural gas.

Recently, some companies have announced missed production targets and have slashed 2003 production forecasts.

Although technological advances led to lower finding and development costs in the early 1990s, F&D costs have increased since 1997, Merrill Lynch analysts said in the May 29 report.

Unless capital efficiency improves through renewed technology changes similar to those seen in the early 1990s, future F&D costs are likely to rise because of deteriorating returns within an aging resource base, they said.

"Companies have already captured most of the benefits from earlier breakthrough technologies in mature areas and are now required to increase their maintenance capital just to maintain production levels from their established production base," the report said. Lower costs in emerging countries and potential of the deepwater areas partially offset the struggle to replace reserves in mature areas, but companies are opportunity-constrained in these lower-cost areas, analysts said.

"After a dip in F&D costs in 2000, costs have risen even more dramatically in both 2001 and 2002," they noted. Single-year data showed 2002 F&D costs, excluding acquisitions, were $7.30/ bbl—more than double 1997 levels.

Reserve replacement also declined since the late 1990s because companies have limited capital spending instead of pursuing higher-cost projects.

"Despite the fact that oil prices have averaged over $23/bbl since 1997 and $28/bbl since 2000, the integrated oil companies have conservatively established a normalized oil price of $18-20/bbl in determining whether they will pursue new projects. Our view is that a normalized oil price in the $24-26/bbl range is likely for the foreseeable future."

For the Merrill Lynch global oil universe, reserve replacement declined from 130% of annual production in 1998 to 122% in 2002, excluding acquisitions and sales. "Increasing F&D costs and flat capital spending suggest that industry reserve replacement figures will likely decrease further in the future," the study said.

Meanwhile, a growing proportion of reserve additions are in the proven undeveloped category, suggesting that the quality of the total reserve base may be deteriorating, analysts noted.

Despite a surge in cash flow starting in 2000, the core integrated oil companies only recently increased total spending to 1997-98 levels of $54 billion/year, the report said.

"A reluctance to spend, coupled with higher F&D costs have resulting in weaker production growth than many analysts had anticipated. Going forward, we see no signs that the industry intends to significantly increase its level of capital spending," Merrill Lynch analysts said.

Government Developments

CONSTRUCTION OF two semisubmersible platforms slated for the Campos basin off Brazil might be suspended if Rio de Janeiro state implements a new oil production tax.

Petroleo Brasileiro SA (Petrobras), Brazil's state-owned company, is protesting the possibility of paying an 18% sales tax on oil production. Petrobras Pres. José Eduardo Dutra said, "With this tax, the platforms will become unviable."

Rio de Janeiro state legislators recently passed such a bill, but Gov. Rosinha Mateus has yet to approve it. If approved, the legislation would become effective in July.

Dutra said that taxing oil at the origin would lead to double taxation because levies already are charged at the consumption end. The production tax would generate additional expenses of $1.93 billion/year for Petrobras, which called the measure unconstitutional.

The P-53 and P-54 semisubmersible platforms are considered vital for Brazil's goal to become self-sufficient in oil by Dec. 31, 2006. Petrobras plans to publish tenders for the platforms by June 30.

PERUVIAN ENERGY regulator Osinerg has set the maximum tariff rates for the transportation of natural gas from Camisea natural gas fields. Transporte Gas Natural plans to transport the gas through a main pipeline from the eastern slopes of the Andes to the Lima-Callao city gate.

The tariffs have been established as $0.8874/Mcf of gas for electricity generators and $1.2663/Mcf of gas for other users.

Maximum tariffs for the distribution of gas through high-pressure lines in the Lima and Callao concessions are set at $0.1460/Mcf for electricity generators and $0.1961/Mcf for other users.

The first 2-year tariff period is to begin May 1, 2004, and will be applied from the start of commercial operations expected in August 2004.

TRINIDAD AND TOBAGO plans to host a Western Hemispheric Energy Summit this fall. The summit, to be cosponsored by the US government, will focus on natural gas.

Participants will discuss supply-demand scenarios for the next decade, said Trinidad and Tobago Energy Minister Eric Williams.

Members of the 15-member Caribbean regional economic union (Caricom) are going to be invited along with OLADE (Latin American Energy Organization). Venezuela belongs to OLADE.

Venezuela has been trying to get into the LNG business and has been working closely with Trinidad and Tobago.

"We can be the catalyst that brings all these groups together to come up with a hemispheric position on short and long-term energy issues," Williams said. Various issues being studied by the Caribbean Hydrocarbons Cooperation Commission also might be discussed.

Topics could include LNG regasification plants in the Caribbean basin and a cost cap on petroleum products sold to Caricom member countries by Trinidad and Tobago and Venezuela.

"If we are going to look at long-term energy supplies into the US, which we all agree is our major market, and we are looking at the supply position from the perspective of the gas-producing countries, it makes sense for the suppliers and demanders to get together and talk," Williams said.

Quick Takes

CHINA NATIONAL PETROLEUM CORP. (CNPC) and Kazakhstan signed agreements June 3 to revitalize work on an $850 million oil pipeline from Atasu in the Karaganda region of western Kazakhstan to the border with China at Druzhba-Alashankou.

KazMunaiGas, Kazakhstan's national petroleum company, and CNPC began work last month on plans for the 1,010 km pipeline.

CNPC and KazMunaiGaz will research pipeline construction, and a jointly operated special design company will select a contractor to design, supply, and build the new line.

The Atasu-Alashankou line is the second stage of the western Kazakhstan-to-China pipeline.

The first section, the 450 km pipeline connecting Kenkiyak oil fields in northwestern Kazakhstan with the oil hub of Atyrau, started operations in March. MunaiTas, a 51:49 joint venture of KazMunaiGas and CNPC, respectively, implemented the feasibility study, financing, and construction of the pipeline.

It links the fields with the two major pipelines from Kazakhstan to Russia, Atyrau-Samara and the Caspian Pipeline Consortium system, which will ship crude from the Caspian to Baltic and Black Sea export outlets. The new line will transport 6 million tonnes of crude this year, while capacity gradually will rise to 12 million tonnes/year in 2006.

Although it currently ships oil westward, the Kenkiyak-Atyrau line will play a key role in the western Kazakhstan-China global export project. In 2005, MunaiTas plans to reverse flow in the pipeline and use it as the main section of the Kazakh-Chinese transcontinental oil pipeline.

In other pipeline news, construction is under way on a $550 million natural gas pipeline program in Trinidad and Tobago, that has three main components:

NGC Trinidad & Tobago LNG Ltd. is laying the $200 million, 56-in. Cross Island pipeline to transport 800 MMcfd of gas to Atlantic LNG Co. of Trinidad & Tobago Ltd.'s Train 4 and another 800 MMcfd for the fifth train, if built. Cross Island has a 2.4 bcfd capacity without compression. BP PLC unit Amoco Trinidad (LNG) BV wants to offload gas from its 36-in. pipeline from Beachfield in Guayaguayare to Atlantic LNG. BP leases the line from NGC and transports 760 MMcfd to Atlantic LNG's Trains 1 and 2. NGC would establish NGC Pipeline Co. Ltd. to own and operate the new line.

BP is building the 48-in. Bombax pipeline to link its new Cassia B central processing unit (CPU) in Cassia field off Trinidad's east coast to BP facilities at Rustville in Guayaguayare. The 65 km pipeline can transport 1.8 bcfd of gas at an operating pressure of 1,070 psi. BP will consolidate its supply for Atlantic LNG's Train 1 and its share of gas in Trains 2 and 3 through the $190 million Bombax pipeline, along with gas for the Atlas Methanol plant, which is under construction. BP will supply another 600 MMcfd to NGC under a domestic gas contract.

Also, a new $150 million gas pipeline is to be built linking the Cassia B CPU to a hub NGC is creating onshore to increase its transmission capacity. The 36-in. line will transport 700 MMcfd of gas.

Unocal Corp. unit Unocal Midstream & Trade (UMT) announced an open season closing July 5 for 700,000 b/d of remaining firm capacity on a crude oil pipeline to be built from its proposed Bulk Oil Offshore Transfer System (BOOTS) facility in the Gulf of Mexico 100 miles south of Beaumont, Tex. Once UMT has these commitments, it will begin the deepwater port permit application process. BOOTS will consist of a pumping platform; two single-point moorings (SPMs); a 100 mile, 48 and 42-in. pipeline to Unocal's Beaumont terminal and connections with existing pipelines in the Texas Gulf Coast area; and a 50 mile, 42-in. pipeline to Texas City, Tex. The $500 million system could be in operation by early 2007, UMT said. The Asian Development Bank has awarded a contract to Penspen Ltd., London, to conduct a 5 month technoeconomic feasibility study for its proposed Turkmenistan-Afghanistan-Pakistan (TAP) natural gas pipeline project. The pipeline would transport gas produced in the Dauletabad field in southeastern Turkmenistan to undersupplied markets in Pakistan, Afghanistan—which also would benefit from transit fees—and possibly northern India. India has been invited to join the TAP project, but has not yet responded, although Indian companies have expressed an interest in participating (OGJ Online, June 3, 2003).

IVANHOE ENERGY INC., Vancouver, BC, and Qatar Petroleum Co. have terminated negotiations for Ivanhoe to develop a block in Qatar's North field for production of natural gas liquids and gas-to-liquids (GTL) products.

Ivanhoe said it plans to reassess the priorities of its GTL plans relative to California, Texas, China, and other oil and gas exploration and production and enhanced oil recovery projects.

CNPC has become 100% owner of the CNPC-Aktobemu- naigaz Kazakh-Chinese joint venture development after purchasing Kazakhstan's 25.12% stake for $150 million May 28.

CNPC-Aktobemunaigaz is developing Kenkiyak and Zhanazhol fields in the Aktyubinsk region of northwestern Kazakhstan. The fields have total reserves estimated at 123 million tonnes. The firm produced 4.3 million tonnes of oil in 2002 and plans to increase annual production to 5.5 million tonnes by 2005.

CNPC plans to invest $400 million in Kazakhstan during 2003, adding to the $600 million invested in the last 5 years.

Argentina's Pluspetrol SA, operator in the upstream Camisea natural gas project in the Andes, 500 km east of Lima, has begun leveling work in Pisco on the south coast for the construction of a 50,000 b/d liquids fractionation plant. The plant is scheduled for operation by June 2004, according to local unit Pluspetrol Peru. Work on an underwater pipeline and cargo terminal remain on hold, pending final approval of the environmental impact assessment, Pluspetrol Peru General Manager Norberto Benito said. The fourth Camisea development well in San Martin field has been drilled to 2,800 m of a 3,580 m TD and is due to be completed shortly. A fifth well will be drilled to reinject dry gas.

Petroleos brasileiro SA has reported three more successful exploratory wells drilled on Block BC-60 on the continental shelf off Espírito Santo, Brazil. Last month, 630 million bbl of oil reserves were discovered in the same area with the 1-ESS-121 well.

Initial mapping for the discoveries—1-ESS-119, 1-ESS-122, and 1-ESS-125—together indicated 500 million bbl of reserves, Petrobras said. The wells are all near Jubarte and Cachalote fields in 1,473-1,535 m of water.

The four wells on Block BC-60, together with Jubarte and Cachalote fields, currently under development, confirm the new petroleum area to the north of the Campos basin off southern Espírito Santo state. Together, Petrobras estimates that the six accumulations on Block BC-60 contain 2.1 billion bbl of oil reserves.

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Phillips China Inc., a unit of ConocoPhillips, announced two additional discoveries on Bozhong Block 11/05 in Bohai Bay off China, making a total of seven Phillips China discoveries on the block. In January, ConocoPhillips drilled the PL 19-9-1 exploration well 2 miles east of PL 19-3 field. The well found 31 m of net hydrocarbon pay in Lower Minghuazhen and Guantao Sandstone reservoirs. The PL 13-1-1, 18 miles north of the PL 19-3 field, was completed in March. That well encountered 40 m of net hydrocarbon pay in the same reservoirs. The company plans to drill appraisal wells. Production in Phase I of the PL 19-3 development began in December 2002, and the field produces 30,000 b/d gross. Phase I facilities include a 24-slot wellhead platform and a floating production, storage, and offloading facility. Phase II development is under way. National Oil Corp. of Libya has contracted Repsol-YPF SA of Spain, as operator, and partner OMV AG of Austria to undertake the exploration of six blocks onshore and off Libya. The agreement covers a total area of 76,700 sq km in four areas: Murzuk basin (Block M1), Sirte basin (Block S36), Kufra basin (Blocks K1 and K3) and offshore (Blocks O9 and O10). In a 6 year, $90 million exploration program, OMV and Repsol-YPF agreed to drill 12 exploration wells and acquire 6,500 km of seismic lines. Repsol-YPF holds 60% interest, and OMV will hold the remaining 40% interest.

CHEVRON PHILLIPS CHEMICAL CO. LP (CPChem) reported plans to shut down the cumene and Udex benzene extraction units at its Port Arthur, Tex., facility by yearend.

When market conditions improve, the company said, it would consider restarting the unit.

Operations will continue at its olefins complex as well as the existing cyclohexane unit at the facility, CPChem said, and the planned construction of a new cyclohexane plant at this facility will continue as planned, with start-up expected early next year.

Interest in CPChem is held equally by ChevronTexaco Corp. and ConocoPhillips.

Union Carbide Corp., a wholly owned subsidiary of Dow Chemical Co., shut down its Texas City, Tex., olefins plant on June 16. It also has scheduled closing of its Seadrift, Tex., olefins plant by yearend.

EMIRATES NATIONAL OIL CO.'s transportation subsidiary Dubai Shipping Co. (DSC) has awarded South Korea's Hyundai Heavy Industries Co. a $70 million contract to build two 75,000 dwt double-hulled, clean product tankers for delivery in 2005. Emirates Bank Group will provide financing.

The newbuilds will join DCS's $150 million fleet, which currently comprises oil and chemical tankers, including two double-hull tankers, five single-hull vessels, and one double-side ship.

ESSO TAIWAN has suspended the planned expansion of its retail gasoline network, citing intense competition from the Chinese Petroleum Corp. and Formosa Petrochem-ical Corp., along with an 11% import duty on refined products. Esso Taiwan, a joint venture between ExxonMobil Corp. and Taiwan's Pan Overseas Corp., operates 31 service stations across the island and had earlier announced plans to open another 19 stations by Dec. 31. At the same time, a company official denied reports by some media outlets that Esso was considering pulling out of Taiwan altogether.

SOUTHERN LNG INC. has awarded a $90 million lump sum turnkey contract to Chicago Bridge & Iron Co. NV, The Woodlands, Tex., to perform engineering, procurement, construction, and commissioning of an LNG terminal expansion near Savannah, Ga. The terminal expansion is expected to be completed by the end of 2005. The project is designed to increase the facility's storage volume by 80% to 7.3 bcf and the design send-out rate to 800 MMscfd. Petronet LNG is setting up a 2.5 million tonne LNG import terminal at Kochi, in Kerala, on India's southernmost tip.

Oman LNG (OLNG) has signed an agreement with Petrodiamond Singapore, a unit of Mitsubishi Corp., for the supply of 360,000 tonnes of LNG over 2 years.

Mitsubishi will charter the 12,680 dwt oil and chemical tanker Belisaire, owned by Bruges-based Petromarine SA, to carry 20-24 cargoes/year, about 180,000 tonnes of LNG, from OLNG's plant at Qalhat in the Wilyat of Sur.

Based on the agreement, BP will receive about 12 cargoes of LNG.

CORRECTION

Sheikh Abdullah ibn Hamoud al Tariki was Saudi Arabia's oil minister when he and others initiated efforts that led to the establishment of the Organization of Petroleum Exporting Countries. Al Tariki was incorrectly identified as a resident of Iraq in OGJ (May 19, 2003, p. 28).