OGJ Newsletter

Aug. 4, 2003
To no one's surprise, ministers of the Organization of Petroleum Exporting Countries voted July 31 to maintain their oil production quotas at the current total of 25.4 million b/d.

Market Movement

OPEC stands pat on production quotas

To no one's surprise, ministers of the Organization of Petroleum Exporting Countries voted July 31 to maintain their oil production quotas at the current total of 25.4 million b/d.

OPEC officials noted that world oil markets are "stable and well-supplied" and that prices are "within agreed levels." The average price for OPEC's basket of seven benchmark crudes was $27.31/bbl as of July 30.

Analysts earlier reported world markets had already factored into current prices the general expectation that OPEC members wouldn't change production quotas, despite recent reports that Iraq has increased its oil production to 1 million b/d. Iraq's oil production previously was reported at 300,000-400,000 b/d in the second quarter.

Natural gas

The August natural gas contract expired July 29 at $4.69/Mcf on the New York Mercantile Exchange, the lowest expiration price for a near-month gas contract this year. The August contract had moved into the near-month position in late June at $5.32/Mcf, but that price deteriorated by nearly 12% in the interim weeks, slumping through a series of new 7-month lows prior to its expiration.

The low expiration price for the August gas contract "really reflected the amount of weakness in the market and the lack of weather fundamentals," said analysts at Enerfax Daily, who saw more "room for even lower prices" in the gas futures market.

The September gas contract fell 2.7¢ to $4.64/Mcf on July 29 but rebounded to $4.67/Mcf in the next session as part a general rally of energy commodities.

Gas storage

On July 31, the US Energy Information Administration reported injections of 83 bcf of gas into US underground storage during the week ended July 25, raising current storage to 2.03 tcf, down from 2.5 tcf at the same time last year and below a 5-year average of nearly 2.3 tcf.

"With the large gas storage injections over the past several months, many sell-side analysts have thrown in the towel on US natural gas," said Wayne Andrews, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla.

However, Andrews said, "One of the changes between today and 2001 is the fact that a substantial amount of new gas-fired electric generation capacity is now in place. With gas-fired industrial demand down sharply and limited switching capacity for residential and commercial consumers, power generators are now the marginal consumers of natural gas and set the market-clearing price."

Much of the new gas-fired power generation capacity has remained idle, due largely to higher natural gas prices earlier this year and mild weather this summer in areas of the highest concentration of gas-fired power. "Average US temperatures have been so mild this summer that we have not really tested the new gas-fired system. Over the next couple of months, that is likely to change," Andrews said. "The reduced (price) incentive to burn oil products, combined with the potential for warmer weather, leads us to believe the US gas markets may be surprised by a sharp increase in gas demand as we move through August."

He warned, "If the weather in the south and south central parts of the country turns hot, then look out."

Gas sales to Mexico

US exports of natural gas to Mexico have increased during the last 4 months, hitting "an all-time high of 930 MMcfd in June, up 37%" from a year ago, said Robert S. Morris, Banc of America Securities LLC, New York, in a recent report.

"During the first 6 months of 2003, exports to Mexico increased roughly 50% to 720 MMcfd, on average, compared with 480 MMcfd, on average, during the same period last year," he said.

That trend "is not expected to be reversed anytime soon, with the Mexican Energy Ministry forecasting that Mexico will be a net importer of natural gas, of which the US is the only current source, through at least 2015," Morris said. "We expect US exports of natural gas to Mexico to be around 700 MMcfd to 1.2 bcfd over the next several years, although Mexican natural gas demand appears to be somewhat price-sensitive. Exports to Mexico fell sharply in March when the Henry Hub spot natural gas prices exceeded $13/Mcf for a short period."

Over the long term, he said, "We believe Mexico's ability to attract foreign investment to unlock the potential of its natural gas-rich northern basins, combined with LNG imports, should help decrease Mexico's reliance on the US for a meaningful portion of its natural gas supply."

Industry Scoreboard

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Industry Trends

WORLD DEMAND is strong and growing for cumene, phenol, and polycarbonate.

That's the conclusion of Chemical Market Associates Inc. (CMAI), Houston, in its 2003 World Cumene/Phenol & Polycarbonate Analysis. The study analyzes global polycarbonate markets, a driver for the phenol business.

CMAI consultants Ben Smith in Houston and John Bonarius in London said strong growth has been a trademark for cumene since 1993.

They said the cumene market has rebounded after a disappointing 2001. Demand is estimated to grow by more than 400,000 tonnes/year to possibly more than 11 million tonnes/year total in 2007. Smith and Bonarius noted that most new phenol units coming online in 2002-03 called for integrated cumene units.

The biggest risks to cumene demand will come from lower-than-expected polycarbonate growth, new feedstock routes to phenol, and inadequate propylene supply. In the very long term, another risk is new feedstock routes to bisphenol or polycarbonate, the study said.

Unlike many other petrochemical products, phenol demand is concentrated in highly developed industrialized economies, with almost 90% of demand coming from North America, Western Europe, and Northeast Asia.

Meanwhile, a "long-feared propylene shortage" in Asia could impact the cost structure of these new cumene-phenol units and likely would maintain the US as a major exporter to world markets.

Global demand for polycarbonate improved in 2002, but it was almost entirely attributed to China. Import statistics show that China imported more than 400,000 tonnes of polycarbonate in 2002, up 150,000 tonnes from 2001.

It is likely that much of this demand is really inventory building and initial stocking rather than true consumption, the report said.

NATURAL GAS prices are hurting US chemical producers' 2003 profits. Standard & Poor's Rating Service said chemical industry executives believe that volatile raw material prices and an uncertain economic recovery will delay an anticipated second half turnaround for their industry.

S&P conducted an informal survey of financial executives at chemical companies that it covers. Nine of 14 respondents said they expect that higher, more volatile natural gas prices will hinder 2003 operating profits.

Credit analyst Kyle Loughlin in S&P's New York headquarters said, "Companies with stronger business profiles or companies that benefit from differentiated products can be expected to ride out higher energy prices quite well, while less diverse commodity petrochemical companies will remain much more exposed to risk."

S&P does not expect relief from raw material cost increases until a sustained economic recovery leads to greater capacity utilization among chemical producers.

One survey respondent said, "In the near term, the higher natural gas prices will be passed on to the end customer. The longer-term competitive position of the US chemical industry will result in lower demand for US production."

Increased US production costs could prompt increased imports into the US market for some chemical products. Respondents cited greater import competition from the Middle East and Asia.

Most executives also said they likely will adopt more cautious financial policies until pressures subside.

Government Developments

THE EUROPEAN COMMISSION closed its investigation into alleged anticompetitive practices by BEB Erdgas & Erdol GMBH, a German natural gas joint venture of ExxonMobil Corp. and Royal Dutch/Shell Group.

At a July 29 news conference in Brussels, a European Union spokesman said the commission is investigating Gaz de France and Ruhrgas AG for allegedly blocking Marathon Oil Corp. from using their German gas pipeline to ship Norwegian gas.

BEB had been under investigation for its refusal to grant Marathon access to its northern German pipeline system.

In the EU settlement, BEB has agreed to improve access for third parties to its gas pipelines and storage facilities.

"The settlement of the Marathon case with BEB means a significant step forward for the German gas market, which currently is lagging behind in the liberalization process," said EU Competition Commissioner Mario Monti in a statement. "I can only encourage other German companies to follow BEB's example.... The settlement shows that the commission is fully committed to foster the liberalization process by chasing anticompetitive behavior."

The EU said the case started in the 1990s when Marathon's Norwegian subsidiary requested access to the pipelines of five continental European gas companies. The requests were denied.

The settlement enables Marathon and other third parties to book capacity in the pipeline where the companies want the gas to enter and exit instead of having to pay for transportation along the entire route. Among other settlement terms, BEB agreed to improve its network transparency by publishing and updating available transport capacity and available storage capacity on the internet.

Previously, the EU closed similar cases against the Dutch gas firm NV Gasunie Nederlands and German gas distributor and marketer Thyssengas.

VENEZUELA'S oil company Petróleos de Venezuela SA has agreed to supply Ecuador's state oil company, Petroecuador, with LPG beginning next year, PDVSA announced. Under the agreement, PDVSA also will provide legal and technical advice to modernize Petroecuador and modify Ecuador's hydrocarbon laws.

Venezuela's Mines and Energy Minister Rafael Ramirez said, "The Venezuelan government and PDVSA are willing to provide legal, technological, and administrative assistance to other state-owned energy companies to unify marketing and distribution processes in the region."

PDVSA will supply Petroecuador with 500,000 tonnes/year of LPG, starting Jan. 1, replacing Petroecuador's current supplier, Dutch firm Trafigura Beheer BV. The Petroecuador-PDVSA contract is expected to save Ecuador $50 million/year.

The companies also are studying the possibilities of building a natural gas pipeline and forming a regional oil company.

PERU has appointed a new energy minister.

President Alejandro Toledo named Hans Flury as the country's new minister of energy and mines, succeeding Jaime Quijandria who held the office for 2 years until he recently was appointed minister of economy and finance.

A corporate attorney, Flury is vice-president of the National Mining, Petroleum, & Energy Society. He is a former president of that society and currently serves on the board of Southern Peru Copper Corp.

Quick Takes

BHP BILLITON LTD. and partners Apache Corp., Houston, and Japanese oil firm Inpex Corp. made an oil and natural gas discovery with exploration well Ravensworth-1 on the BHP-operated WA-155-P(1) permit area in the Exmouth subbasin of the Carnarvon basin off Western Australia, where there has been a number of recent discoveries. Ravensworth-1 is about 10 km southeast of Woodside Petroleum Ltd.'s Vincent oil and gas discovery.

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The well reached 1,432 m MD and encountered a gross oil column of 37 m and a gross gas column of 7 m, with 43.5 m of net pay in the Lower Barrow Group sandstone reservoir, BHP said. Transocean Inc.'s Sedco 703 semisubmersible began drilling the well July 15 in 209 m of water 45 km north-northwest of Exmouth.

Earlier this year, BHP, operator of neighboring WA-255-P, discovered Stybarrow oil field 55 km northwest of Exmouth.

In other exploration news, Angola's state-owned oil firm Sonangol EP and BP Exploration (Angola) Ltd. made an oil discovery on ultradeepwater Block 31 off Angola. Saturno-1 is the third exploration well BP has drilled on the block and the second successful discovery following the Plutão discovery made in third quarter 2002 (OGJ Online, Sept. 18, 2002). The Leiv Eiriksson semisubmersible drilled the Saturno well to 4,707 m TD in 1,804 m of water 170 km off Angola. The well is 14 km northeast of the Plutão discovery well. On test, Saturno flowed 5,000 b/d of oil but will require evaluation. Block 31 covers 5,349 sq km. BP is operator with 26.67% equity. Marathon E.G. Production Ltd., a unit of Marathon Oil Corp., reported making a natural gas discovery on Block D off Equatorial Guinea. The discovery is on Bococo prospect in 238 ft of water about 6 miles west of Alba gas-condensate field. The well, which was drilled to 6,110 ft TMD, found 185 ft of net dry gas pay. The well has been suspended for reentry at a later date. Plans call for the gas to be developed through the proposed LNG project associated with Alba field on Bioko Island, Marathon said. Marathon is operator of Block D with 90% interest. South Korea's SK Corp. holds 10%. Petroleos de Venezuela SA (PDVSA) announced it would award Blocks 3 and 5 in the Plataforma Deltana natural gas area off Venezuela this month, followed by seven blocks in the Gulf of Venezuela by yearend. Eight companies have been short-listed to participate in the auction, PDVSA said.

The government awarded Plataforma Deltana gas exploration licenses in February to ChevronTexaco and Statoil ASA (OGJ Online, Feb. 10, 2003). And Petrobras Energía, Petroleo Brasileiro SA's Argentina subsidiary, also has agreed to operate two Venezuelan oil fields.

CHEVRONTEXACO has signed an 18-month time charter contract with Stelmar Shipping Ltd., Athens, for the Rimar double-hull Handymax tanker for $14,000/day. Handymax tankers are 10,000-60,000 dwt vessels. The charter began at the end of July.

ChevronTexaco retains the option, effective until the end of September, to replace the Rimar with a Handymax newbuild at $14,500/day and to charter a second vessel at $14,500/day for a like duration.

PETRONET LNG, the Indian state-owned LNG consortium, plans to double the capacity of its LNG receiving terminal at Dahej, on the Gujarat coast, to 10 million tonnes/year in response to an expected rise in LNG demand in India.

S.C. Mathur, Petronet's chairman and managing director, said work was nearing completion on the 5 million tonne/year Dahej terminal, which would require "minimal additional investments to expand its capacity."

In Phase II, Petronet would construct a 2.5 million tonne/year LNG terminal at Kochi, in Kerala.

Petronet is counting on National Thermal Power Corp. buying 3 million tonnes/year of LNG and is negotiating with its supplier, Qatar's Ras Laffan Liquefied Natural Gas Co. Ltd., for a reduction in the price of LNG. In addition, in the country's fiscal year 2003-04 budget, India's finance minister reduced customs duty on the import of regasification plant and machinery to 5% from 25%.

The Indian group is understood to have already reduced its rate of return on investment, cut costs on the Dahej building infrastructure and regasification terminal, and negotiated more-favorable transportation terms from shippers.

EXXONMOBIL unit Mobil Producing Nigeria Unltd. (MPN) and joint venture partner Nigerian National Petroleum Corp. (NNPC) have begun early production from Yoho field off Nigeria, 2 years ahead of full field start-up, reported OPEC News Agency.

The field, on shallow-water Oil Mining Lease 104, has estimated reserves of 400 million bbl of oil (OGJ Online, Sept. 6, 2002). MPN and NNPC are using the Falcon floating production, storage, and offloading vessel to handle Yoho production, which will add about 100,000 b/d of crude oil and 100 MMcfd of gas to the joint venture, ExxonMobil reported.

Full field start-up in March 2005 targets peak oil production of 150,000 b/d. The Yoho development is a $1.2 billion project. The JV has spent more than $400 million to date for engineering, procurement, construction, and installation of facilities. Indian Oil Corp. (IOC) and ONGC Videsh Ltd. (OVL), the overseas subsidiary of the Indian government-owned Oil & Natural Gas Corp., are conducting talks with ChevronTexaco Corp., BP PLC, and ExxonMobil Corp. to form a consortium to bid for a project to hike output from an oil-producing block in Kuwait. IOC and OVL would be nonoperating partners with a 10% equity stake in the $7 billion North Kuwait project. If a bid is secured, the Indian firms' participation would ensure Indian oil equity from Kuwait as well. The project involves a block that currently has four fields producing an aggregate 450,000 b/d. Kuwait Petroleum Corp., operator of the fields, has called for expressions of interest for facilities to double that production.

UniPure Corp., Houston, said it has successfully produced diesel fuel containing sulfur levels less than 15 ppm at its demonstration plant at Valero Energy Corp.'s refinery in Krotz Springs, La.

The plant was built to prove UniPure's technology, which will enable refiners and fuel product marketers to meet ultralow-sulfur levels for diesel fuels.

US Environmental Protection Agency regulations require that refiners and fuel marketers produce diesel with a maximum sulfur level of 15 ppm by mid-2006 (OGJ, June 23, 2003, p. 38).

UniPure said it expects to make its advanced sulfur-removal process commercially available by fall.

PARTNERS IN THE CHAD-CAMEROON oil development and pipeline megaproject reported first oil operations July 28 and the start-up of pipeline fill activities. Once central treating facilities and drilling operations are completed, the $3.5 billion project is expected to produce 225,000 b/d of oil.

The pipeline, which was completed a year ahead of schedule, will transport oil more than 660 miles from Bolobo, Miandoum, and Kome oil fields, near Doba in Chad, through eastern Cameroon, to an export terminal at Kribi, Cameroon, on the Gulf of Guinea. From there, oil will be shipped to a floating storage and offloading vessel 7 miles offshore for export.

Partners in the project are ExxonMobil unit Esso Exploration & Production Chad Inc., operator with 40%, ChevronTexaco 25%, and Malaysian oil firm Petronas 35%.

Construction began in October 2000 (OGJ Online, Oct. 19, 2000). ExxonMobil said the project is expected to generate $2.5-8.5 billion for Chad over the life of the project.

SPAIN'S REPSOL-YPF SA, Vancouver, BC-based Ivanhoe Energy Inc., and Syntroleum Corp., Tulsa, have launched a study to evaluate the commercial potential for a 90,000 b/d gas-to-liquids plant in Bolivia.

If the plant proves economically feasible and the project meets financing requirements, the group said it would use Syntroleum's proprietary GTL technology process.

The project would include development of gas reserves, liquid stripping to extract condensate and NGL, and the processing of methane through the GTL plant for manufacturing diesel and naphtha products, which would be marketed to the US and Japan.

Ivanhoe currently is developing NGL projects in the Middle East, which enhanced its access to financial resources, including the formation of GTL Japan Corp. and an alliance with China International Trust & Investment Corp.

Negotiations recently were terminated, however, between Ivanhoe and Qatar Petroleum Co. for developing a block in Qatar's North field for NGL and GTL production (OGJ Online, June 4, 2003). Another consortium, GTL Bolivia SA, also has been studying the feasibility of constructing a 10,000 b/d GTL plant in Bolivia near Santa Cruz—which would use Denver-based Rentech Inc.'s patented GTL technology process (OGJ Online, Apr. 4, 2003). The technical portion of that study has been completed and indicates favorable economics for that project (OGJ, Oct. 7, 2002).

THE SAIPEM 7000 crane barge, one of the world's largest, delivered a new filtration plant to Statoil's Heidrun platform in the Norwegian Sea July 23.

The new 27 m high, 970 tonne unit, designed to remove naturally occurring sulfates from injection seawater to prevent piping and subsurface formations from becoming plugged, was lifted onto the barge in the Åmøy Fjord outside Stavanger. Leirvik Module Technology fabricated the modular plant at Stord, between Stavanger and Bergen.

Heidrun platform receives sulfate-removal plant. Photo courtesy of Statoil ASA.
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The unit is necessary because high concentrations of barium in the Heidrun reservoir mix with sulfates to produce deposits that would coat inside tubing and rock formations.

The facility, constructed as a single unit, is the second of two large modules being installed on Heidrun as part of its water-injection project, with the first module holding three large pumps.

Statoil expects work on the 1.5 billion kroner project to be completed in November. Fabricom and Sørco are the main contractors.

Shell WindEnergy Inc., a unit of Shell Renewables, is planning a 160 Mw wind farm 90 miles southeast of Lubbock, Tex., in Scurry and Borden counties as a 50-50 joint venture with Padoma Wind Power, La Jolla, Calif.

The Brazos wind farm, planned for completion by yearend, will consist of 160 Mitsubishi MWT 1000-A wind turbines, some of which will stand 226 ft and weigh more than 170 tons. Total output from the wind farm will generate enough electricity to power 30,000 homes, Shell said.

The wind farm is being developed by Cielo Wind Power LLC, Austin, and Orion Energy LLC, Oakland, Calif. Dallas-based TXU Corp. has agreed to purchase electricity generated by the wind farm. Shell WindEnergy will serve as the wind farm's operator.

Shell said the Brazos project would increase its installed gross capacity in the US to 392 Mw from 232 Mw.

Shell WindEnergy currently owns four US wind farms: the 50 Mw Rock River I in Wyoming, the 80 Mw White Deer in Texas, and the 41 Mw Cabazon and 61 Mw Whitewater Hill, both in California.

In other news, Shell WindEnergy also announced it acquired a 40% share of the La Muela wind park in northeastern Spain from TXU Europe Energy Trading BV. The transaction marks the beginning of Shell's commercial-scale wind operations in Europe.