OGJ Newsletter

Oct. 6, 2003
The Organization of Petroleum Exporting Countries' decision to cut production quotas was a step in the right direction, but it will not be enough to prevent additional oil price declines, analysts said.

Market Movement

World oil surplus predicted for spring

The Organization of Petroleum Exporting Countries' decision to cut production quotas was a step in the right direction, but it will not be enough to prevent additional oil price declines, analysts said.

The 900,000 b/d production cut, effective Nov. 1, that OPEC has mandated is less than half of the reduction needed to prevent a glut of oil on world markets by Mar. 31, said Stephen A. Smith, founder and president of Stephen Smith Energy Associates, Natchez, Miss.

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"Our supply-demand balances for the next 2 quarters suggests the need for a 2 million b/d OPEC-10 [currently active OPEC members, minus Iraq] production cut that should be taken as soon as possible," he said.

Oil production among the OPEC-10 averaged 25.5 million b/d in August, said Smith.

"If this OPEC-10 production [is] maintained for the rest of the year, and Iraq were to maintain its expected September average production of 1.8 million b/d through yearend, then our model projected a yearend surplus storage [among Organization for Economic Cooperation and Development member countries] of 46 million bbl (about 2%)," he said.

OPEC's agreement to reduce production "suggests that the upward August shift in Iraq's oil exporting capacity had not gone unnoticed. Certainly global oil markets had noticed the change in Iraq, which explains why $3[/bbl] was promptly clipped off [benchmark US crudes'] prices earlier in September," Smith said.

To make room for Iraq's increased oil production, the other 10 OPEC members "will most likely be required to take a deeper cut [in their production quotas] in the months ahead," Smith said. "They still have the option to take deeper cuts in December, and Uit appears they will have to do so."

OPEC's concerns

Meanwhile, OPEC member oil ministers have called upon non-OPEC countries to share in any 2004 production cuts. OPEC ministers are slated to meet Dec. 4 to set production for the first quarter.

On Sept. 29, Indonesia Energy and Mineral Resources Minister Purnomo Yusgiantoro said the international oil markets are expected to experience an oversupply during the first quarter of 2004. He estimated the oversupply at 1.4 million b/d.

"OPEC and non-OPEC countries have a commitment to reduce their oil output," he told OPEC News Agency after his return to Jakarta from the OPEC ministerial conference in Vienna. He is slated to take over as OPEC president on Jan. 1.

So far, major non-OPEC exporters Russia, Mexico, and Norway all seem reluctant to consider cutting production levels anytime soon.

OPEC's Sept. 24 output cut decision provided immediate price support. Light, sweet November crude oil futures settled on the New York Mercantile Exchange at $29.39/bbl on Oct. 2—the highest since Sept. 10.

Future price outlook

Stephen D. Gengaro, a Jefferies & Co. Inc. analyst in New York, said Sept. 29 that OPEC's decision increased "confidence that the cartel will be able to successfully navigate through the next several quarters and maintain prices."

He added, "The key factors to solid crude oil prices in 2004 include moderately low current inventory levels, continued OPEC discipline, possible cooperation between OPEC and non-OPEC producers (especially the former Soviet Union), and solid demand growth. We expect Iraq production to rise gradually."

For the next few years, Jefferies has a positive crude oil price outlook "predicated on slowing non-OPEC supply growth, which will enable OPEC to continue to act as the swing producer and manage worldwide oil supply and prices."

Regarding Iraq, Gengaro believes that it will be at least late 2004 before Iraqi oil production can be sustained "at or above earlier peaks" of 3.5 million b/d.

Michael Mayer, a Prudential Equity Group Inc. analyst, New York, said, "Oil production has comfortably exceeded demand over the past 6 months, leading to a substantial inventory build, which appears to have reversed virtually all of the inventory contraction that occurred in 2001-02."

Mayer forecast an average spot West Texas Intermediate oil price of $27/bbl for the fourth quarter and $24/bbl in 2004.

Industry Scoreboard

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Industry Trends

Oil and natural gas prices are likely to go up, funding more US drilling in 2004 as producers spend a greater percentage of their cash flow, said analysts at the annual meeting of the International Association of Drilling Contractors (IADC) in Houston late last month.

"Our outlook for world oil prices is that they will go up pretty substantially," said George S. Littell, partner at Groppe, Long & Littell, a Houston-based market analysis and forecasting firm which predicts major price changes.

Even without an increase in commodity prices, US drilling activity will increase by 15% next year as producers spend a greater percentage of their cash flow on drilling programs, predicted James K. Wicklund, managing director of oil field services research in the Houston office of Banc of America Securities LLC.

"Historically, [exploration and production] companies spend 85-90% of their cash flow [on field operations]," he said. "This year, they will spend 60-65%" as they concentrate on paying down corporate debt. In 2004, he predicted, E&P companies will switch their focus to increased drilling.

Littell and Wicklund both expressed confidence that the Organization of Petroleum Exporting Countries will continue to manage its oil production so as to keep oil prices in the upper level of its targeted price band of $22-28/bbl for an OPEC basket of crudes.

As for natural gas operations in the US, Wicklund said, the fundamentals of supply and demand "point to just one ending—a shortage of gas." More drilling will be necessary just to maintain US gas production at its current levels, so rig activity should see higher highs in the futures, he said.

The latest census of the US rig fleet indicates "slow and steady" growth in US drilling, with a predicted utilization rate of 81% in 2004, said John Deane, president of ReedHycalog, a unit of Houston-based Grant Prideco Inc., at the IADC annual meeting.

US rig utilization in 2003 is 78%, better than the 50-year mean of 73% but significantly below the 93% utilization determined in the 2001 census. Utilization peaked in 1981 at 98%, and the historical low came in 1986 at 26%. There were 1,334 rigs defined as "active" in the 2003 census vs. 1,593 in 2001.

The 50th ReedHycalog rig census was based on rig activity during May 10-June 23. This year's census compares with the 2001 census; the census was not produced in 2002 because of cost cutting by Schlumberger Ltd., then parent of ReedHycalog. Grant Prideco bought ReedHycalog from Schlumberger in December 2002 and reinstated the annual census this year.

Rig availability increased to 1,719 in 2003 from a low of 1,636 rigs available when the market bottomed out in 2000. The net change in fleet size from 2001 is a loss of 3 rigs.

Rig day rates for 2003 increased 6% over 2001, but the increase has been offset by increases in maintenance spending (17%), labor costs (4%), and insurance.

Government Developments

THE NIGERIAN GOVERNMENT, under President Olusegun Obasanjo, has intensified efforts to cut off the flow of stolen crude oil from hot-tapped sections of exposed pipelines.

To that end, and to protect its citizens in the strife-ridden Niger Delta, Nigeria is strengthening its navy. It received a third US warship under a security cooperation program aimed at ending both oil theft and civil unrest in the delta area.

The NNS Nwambe is one of seven $3.5 million former Coast Guard cutters being refurbished and sent to Nigeria by the US before yearend.

Sent without arms or ammunition, the ships are fitted with cannons and machine guns by Nigerian authorities, who estimate that criminal gangs steal 200,000-300,000 b/d of crude oil—10-15% of production—and transfer it to ocean-going vessels for sale abroad and to refineries in West Africa.

It is believed that money from the illegal oil transfers is used to buy weapons that arm pirates and ethnic militias around the delta.

Even though fighting has forced Royal Dutch/Shell Group, ChevronTexaco Corp., and Total SA to shut down most of their oil wells in the western delta itself, oil is still being smuggled out of the disputed region.

Vice-Adm. Samuel Afolayan, head of Nigeria's navy, said in June that stepped-up navy operations already had greatly reduced petroleum products lifting, pipeline vandalism, smuggling, illegal bunkering, poaching, and piracy.

FRANCE might increase its auto diesel tax.

French Prime Minister Jean-Pierre Raffarin plans to introduce a tax increase of 2.5 centimes/l. on diesel fuel for private cars in the country's draft budget for 2004.

Raffarini said the increase was "ecological" because an anticipated 800 million euros in tax revenue would be dedicated to developing rail in an attempt to reduce the number of diesel-fueled cars on the road. This in turn would reduce sulfur dioxide and other particle emissions.

Jean-Louis Schilansky, delegate general of oil industry trade group Union Française des Industries Pétrolières (UFIP), which encompasses Total, BP PLC, Shell, and a unit of ExxonMobil Corp., had conflicting opinions about the tax hike.

On one hand, he said, UFIP dislikes "tax increases on [its] products," while on the other hand, the union always favors reducing the gap between low diesel taxation and high gasoline taxation, which has encouraged the purchase of diesel-powered cars in France.

Diesel-fueled cars currently account for about half of the automobiles driven in France, with purchases of such cars rising at a rate of 3%/year. Meanwhile, there exists a corresponding decline in purchases of gasoline-fueled cars.

The popularity of auto diesel has caused an imbalance for refineries, which are compelled to import 11-12 million tonnes/year of diesel fuel to satisfy France's needs while exporting 3-4 million tonnes/year of gasoline.

"We would, of course, have preferred 'killing two birds with one stone' with a decrease of the tax on gasoline," Schilansky said.

Road transportation in France reportedly accounts for 24% of greenhouse gas emissions.

Quick Takes

THREE COMPANIES BID $8.9 MILLION in apparent high bids for rights to drill on 34 tracts off Alaska in Beaufort Sea federal lease Sale 186 Sept. 24 in Anchorage. The sale offered nearly 1,800 offshore blocks spanning 9.4 million acres for 10-year leases at a 12.5% royalty rate.

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ConocoPhillips Alaska Inc. had three apparent high bids totaling $4 million for Beechey Point leases northwest of Prudhoe Bay oil field, including the sale's highest bid, nearly $2.2 million. The leases are near the former Sandpiper Unit, where Shell Oil Co. and BP predecessor Amoco Corp. found oil and gas in the mid-1980s (OGJ, Mar. 3, 1986, p. 32). BP later sold its Alaska assets to ConocoPhillips predecessor Phillips Petroleum Co.

Armstrong Alaska Inc., a unit of Denver-based Armstrong Oil & Gas Co., offered more than $1.3 million for seven leases, five in Harrison Bay and two near Beechey Point.

EnCana Oil & Gas (USA) Inc., a unit of Calgary-based EnCana Corp., apparently won 24 tracts for a total of $3.5 million, 19 in Dease Inlet and 5 near Beechey Point.

In all, bidders exposed $10,175,949 for the tracts.

In other exploration activities, Norsk Hydro AS, operator of Production License 036 off Norway, reported an oil discovery with the Klegg well (25/4-9S) about 208 km from Stavanger. It is located in 120 m of water about 11 km north of the Heimdal platform. The Deepsea Delta rig drilled the well to 2,268 m TD in the Heimdal formation, ending in Tertiary rocks. It encountered good quality oil in a gross oil column of 65 m. Norsk Hydro now is evaluating the discovery, which is expected to contain 3-5 million cu m of oil. Other partners are Marathon Petroleum Norge AS, Total E&P Norge AS, and AS Ugland Rederi. Statoil ASA has upgraded by 50% the reserves estimated for its North Sea Glitne field. The new calculation suggests that total recovery could be 37 million bbl, and production now is likely to extend to the end of 2005, Statoil said. The additional oil is worth 2.5 billion kroner at current prices. Statoil attributes the improvement partly to good well location in the reservoir, a lower-than-expected water cut, and better pressure support. Glitne's four original production wells is expected to yield some 6 million bbl of oil above original forecasts, and a new well now being completed is expected to recover another 6 million bbl.

VENEZUELA'S Paraguana Refining Complex (CRP) plans to ship 6 million bbl of reformulated gasoline (RFG) to the US in the next 3 months, reported OPEC News Agency.

CRP Programming & Supply Manager Ervin Amaya was quoted by state news agency Venpres as saying CRP is maintaining its monthly export of six to nine shipments of 240,000-280,000 bbl. This represents a 7% increase in CRP's RFG exports, compared with the last 3 months of 2000, OPECNA reported.

INTEROIL CORP., Toronto, has accelerated its drilling program in Papua New Guinea and the surrounding region. The company contracted Simmons Rig 3, which currently is being mobilized to drill on the nearby Sterling Mustang prospect this month.

Interoil also is negotiating to contract other rigs by yearend to drill exploration wells on other prospective structures and appraisal and development wells as needed. Testing and appraisal drilling on the Moose structure secondary target—168 m of limestone—is expected to follow completion of current drilling and coring activities. This follows 14 oil shows in the limestone section. InterOil is preparing two drillsites for the first appraisal wells on Moose to delineate the extent of the potentially productive limestone. In other drilling news, Ecuador state oil company Petroecuador could award a contract for three drilling rigs by next week to boost its oil production to 218,000 b/d by yearend, reported Business News Americas (BNA). The tender falls under what Petroecuador called an "emergency," following the cancellation by its production subsidiary Petroproducción of plans to hire two rigs from local firm Drillfor to renew drilling activities in Shushufindi and Lago Agrio oil fields, reported newspaper El Comercio. Petroecuador reportedly rescinded its contract with Drillfor when the rigs did not pass technical inspections and could not be upgraded in time. Drillfor is said to be preparing legal action against Petroecuador. Meanwhile, Petroproducción said it is 2 months behind schedule and "urgently" needs to start drilling. It wants to hire a rig from Occidental Ecuador Inc. to drill two wells in Sacha oil field, which could produce an added 8,000 b/d, and it plans to drill five wells by itself and one in partnership with local company Dygoil to produce another 1,000 b/d.

ROMANIA'S state-owned Romgaz SA and BASF AG subsidiary Wintershall AG signed a 50:50 joint operating agreement in Medias, Romania, to produce natural gas from Sighisoara gas reservoir in Transylvania, central Romania. The partners expect to begin production by yearend.

Exploratory drilling began in May 2002, following encouraging seismic survey results at an area 2 km north of Sighisoara city in southern Transylvania. This gas discovery is expected to help reduce Romania's dependence on natural gas imports.

TRINIDAD AND TOBAGO and Venezuela have agreed to study the feasibility of constructing a natural gas pipeline under the Caribbean Sea to Miami. Trinidad and Tobago previously announced that it would proceed with a $510-600 million intra-Caribbean natural gas pipeline to provide gas to seven southern Caribbean islands (OGJ Online, Oct. 18, 2002).

Inter-Caribbean Gas Pipeline Co. would construct 596 miles of 20-in. trunkline from Trinidad and Tobago and possibly Venezuela to French Martinique and Guadeloupe, with a 10-in. lateral to Barbados. A longer line could extend to the northern Caribbean, including Cuba, to help reduce energy costs there.

Gas could be used to generate electric power in the islands, where such demand is expected to rise by 3%/year. Energy cost reductions could be 40-50% for power companies now using No. 2 fuel oil.

Trinidad and Tobago remains skeptical, however, about the chances of a longer line being built because of current financing and technical difficulties, and operators such as BP Trinidad & Tobago LLC and BG Group PLC reportedly advised that a Miami pipeline was not as economically advantageous as continued expansion of the country's LNG capacity.

In addition, the population and potential gas use in the former French colonies Martinique and Guadeloupe are essential to the project, but Electricité de France has exhibited a reluctance to participate. In other pipeline news, BG reported that caustic soda contaminated oil from Karachaganak field in Kazakhstan as it entered the Caspian Pipeline Consortium export pipeline Sept. 23 during the project's Phase II sequential start-up. The contamination has delayed sales of oil through the pipeline until the fourth quarter. Operator BG said it still expects to be within 2% of its 2003 production target—160.6 million boe. Oleoducto de Crudos Pesados Ecuador SA (OCP) will begin moving 180,000 b/d of heavy oil from Ecuador's Oriente basin this month through its recently completed 450,000 b/d OCP pipeline, BNA reported. The pipeline was completed in August. The OCP consortium consists of operator Techint International Construction Corp., Buenos Aires, and five Oriente basin producers. Test loads in September transported about 3.6 million bbl to seven tankers. Meanwhile, Ecuador's state oil company Petroecuador said it would ship 74,000 b/d through the alternative SOTE (Trans-Ecuadorian Pipeline System) pipeline, rather than OCP, because of a lower transport cost, according to newspaper El Universal.

POLAR TANKERS INC., a wholly owned subsidiary of ConocoPhillips has received the Polar Discovery, a new double-hulled, Endeavour-class tanker.

The Polar Discovery is ConocoPhillips's new Endeavour-class tanker. Photo courtesy ConocoPhillips.

The vessel joins sister ships Polar Endeavour and Polar Resolution in the ConocoPhillips US flag fleet carrying crude oil from Alaska to the US West Coast and Hawaii.

Endeavour-class vessels have double hulls with 10 ft of space between the inner and outer hulls, two independent engine rooms, twin propulsion and steering systems, a bow thruster, and state-of-the-art navigation systems.

ConocoPhillips has ordered two more Endeavour-class tankers, currently under construction at Northrop Grumman's Avondale, La., yard. They are scheduled for delivery in 2004 and 2005. ConocoPhillips said its entire US flag tanker fleet would be double-hulled by 2008. In other shipping activities, Gaz de France has concluded a contract with France's Chantiers de l'Atlantique for construction of an LNG carrier holding the liquid equivalent of 153,000 cu m of methane. The carrier will be fitted with tanks using the membrane cryogenic isolation technology developed by GDF subsidiary Gaztransport & Technigaz, and it will have a diesel- electric propulsion system that runs on natural gas. The very large carrier will be delivered in October 2005 to serve GDF's Montoir-de-Bretagne terminal until a new and larger LNG facility at its Fos terminal on the French Mediterranean coast comes on stream (OGJ Online, July 8, 2002).

The vessel will become part of GDF's eight-carrier fleet, four of which it will own after delivery at yearend 2004 of the Gaz de France energY LNG carrier. That vessel, also under construction at Chantiers de l'Atlantique, will be a 74,000 cu m LNG carrier. The smaller vessel will deliver Algerian LNG to the Fos terminal.

The planned larger LNG terminal at Fos also will receive deliveries from Egyptian LNG, which is building a natural gas liquefaction plant at Idku, near Alexandria, Egypt (OGJ Online, Mar. 20, 2003).

MARATHON OIL UK LTD., operator of Braemar natural gas field in the North Sea, has begun production of 50 MMcfd of natural gas and 4,500 b/d of condensate. The field holds reserves of 116 bcf of gas and 10 million bbl of liquids, Marathon said.

Braemar is on Block 16/3c about 315 km northeast of Aberdeen. A single well is tied back to the Marathon-operated East Brae platform 12 km to the south, where the liquids and gas are processed.

Braemar condensate is delivered to the Forties pipeline system, and the gas flows into the Brae gas processing and transportation complex. Gas will be delivered through the 9 km, 16-in. Link Line, currently under construction, that will connect Brae B's platform with the BP Group-operated Miller platform. The Link Line, to be operated by BP Exploration (Alpha) Ltd., is slated for completion in the fourth quarter.

SAUDI ARABIAN OIL CO. has awarded a Jacobs Engineering Group Inc. subsidiary a $100 million contract to oversee the 800 MMscfd expansion of its Hawiyah gas processing plant east of Riyadh, Saudi Arabia, and the development of a natural gas liquids recovery plant on the site, along with other related projects.

The Hawiyah gas processing plant, which started up in 2001, was Saudi Arabia's first plant to be fed only nonassociated gas (OGJ Online, Sept. 10, 2003).

Jacobs will provide project management consultant services, including front-end engineering, and construction management for both the plant expansion and the new NGL facilities. The expansion facilities are due on stream in 2007.