OGJ Newsletter

Nov. 10, 2003
Energy futures prices escalated in New York and London on Nov. 5 as traders were surprised by reports of lower-than-expected US inventories of oil and petroleum products.

Market Movement

Oil prices escalate with bullish stock reports

Energy futures prices escalated in New York and London on Nov. 5 as traders were surprised by reports of lower-than-expected US inventories of oil and petroleum products.

The US Energy Information Administration said US oil stocks rose a scant 100,000 bbl to 291.9 million bbl in the week ended Oct. 31, despite the highest weekly average oil imports ever for October. US oil inventories remained 11.2 million bbl below the 5-year average for the period. Moreover, EIA reported the first decline in US distillate stocks in recent weeks, down by 1.3 million bbl to 132.7 million bbl, with a drop in heating oil overriding a slight gain in diesel fuel. US gasoline inventories fell by 2.5 million bbl to 191.3 million bbl in the same period, it said.

The American Petroleum Institute reported US crude inventories fell by 1.4 million bbl to 292.2 million bbl during that period.

It showed a small increase in distillate stocks of 220,000 bbl to 128.8 million bbl and reported US gasoline stocks fell by 1.8 million bbl to 192.6 million bbl.

Those reports triggered price jumps, with the December contract for benchmark US light, sweet crudes closing at $30.30/bbl Nov. 5 on the New York Mercantile Exchange, up by $1.55 for the day after touching a peak of $30.38/bbl in that session—a level not seen on NYMEX since Sept. 24. On the US spot market, West Texas Intermediate at Cushing, Okla., gained $1.55 to $30.33/bbl. The December contract for North Sea Brent oil was up by $1.44 to $28.60/bbl on the International Petroleum Exchange in London.

Some traders later said the rise in crude prices probably was overdone, since the bulk of decline was in product inventories. They predicted crude prices would soon correct to lower levels as traders take profits from that rally.

'Buoyant demand'

However, Paul Horsnell, head of energy research at Barclays Capital Research, a division of Barclays Bank PLC, London, maintains that the supply-demand fundamentals of petroleum products are now leading world oil markets.

"The pattern so far is of pretty buoyant demand. [US] gasoline demand passed through 9 million b/d in October for the first time ever and shows an enormous 348,000 b/d growth from last year," he said.

US demand for gasoline averaged nearly 9.2 million b/d over 4 weeks through Oct. 31, up 3.9% from the same period last year, EIA reported. Demand for distillate fuels dipped by 0.4% in the same period.

US stocks of reformulated gasoline are "particularly tight" at present, said Horsnell. "Reformulated gasoline inventories have fallen to their lowest level since November 1994," he said. "To put that into context, there was no reformulated gasoline in the US until September 1994, except in test tubes. In that respect, reformulated [gasoline] inventories are effectively at an historic minimum."

Horsnell said, "Unless the tightness in gasoline abates fairly quickly, it is perhaps not too early to start worrying about another summer of discontent in the market.

"As we have seen before, when the schedule for seasonal gasoline restocking gets behind, it has proved very difficult for the physical system to catch up in time."

Meanwhile, he said, US heating oil inventories "at last" have started a seasonal downturn. "The situation can best be described as following a normal pattern from a lower-than-normal base," Horsnell said. "The important feature of distillate demand is how high the January and February peaks get. All we can say at this point is demand is currently climbing the foothills in exactly the same way as last year, and at this point we do not feel that anyone can yet be dogmatic that last year's high summit will not be regained."

Iraq's production questioned

Horsnell suspects "a little creative accounting" in recent claims by both Iraqi and US officials that Iraq has increased production to more than 2 million b/d and "will continue to rise remorselessly from now on." While Iraq apparently lifted some 2 million b/d of crude in October, he said, more than 300,000 b/d from wells in northern fields were "immediately reinjected due to the lack of any viable export route, given the sabotage of pipelines."

He said, "Wherever [Iraq's] true sustainable capacity for 2004 lies, it will certainly be a considerable distance from the 3.1 million b/d produced as recently as 3 years ago. That level now looks like a high-water mark, which Iraq is currently a massive 1.4 million b/d below. It may struggle to get within 700,000 b/d of that mark for a while to come."

Industry Scoreboard

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Industry Trends

NEW RESERVE REPORTING guidelines from the Alberta Securities Commission (ASC) could boost merger and acquisition activity.

These guidelines, beginning next year, could lead to reserve writedowns and a reclassification of reserves. Consequently, producers might sell certain assets that they suspect will be reclassified.

Sayer Securities Ltd., Calgary, said reclassifications would affect small producers the most because their reserves generally involve a higher percentage of nonproducing properties than do the reserves of larger companies. In addition, oil and gas companies also might be forced to sell properties because revised reserve estimates could mean a lower borrowing capacity, said Tom B. Pavic, an accountant with Sayer Securities.

Small producers could alleviate this problem altogether by selling assets with nonproducing reserves before companies are required to comply with the guidelines.

"The rumblings on the street are that any reserve writedowns at the end of 2004 could lead to a subsequent detailed review of both the reporting issuer and its independent engineer by the ASC," said Pavic. "Consequently, the independent engineers may be aggressively cutting reserves this year on properties that have not recently met forecasts, with a view to applying an overly negative revision for the end of 2003 so that future revisions are positive rather than negative."

Most engineering firms have indicated that the total volume of reserves probably will not change but that some reserves previously classified as proven might be classified as probable. Reclassification might affect the borrowing capacity of smaller companies.

"The banks generally lend money based on a percentage of total proved producing reserves from an independent reserve report," Pavic said. "If a company's proved producing reserves decline because of the new standards, this might lead to a declining borrowing base available to these specific firms, depending on the individual bank's reliance on an independent engineer's reserve report."

CANADA'S RATIFICATION of the Kyoto Protocol on Climate Change is expected to have minimal effect on the development of Alberta's oil sands resources, New York-based Moody's Investors Service said.

Since the protocol's ratification late last year, the Canadian government has assured oil and gas companies that industrial greenhouse gas emitters will not be responsible for emission reductions beyond those already outlined (OGJ Online, Dec. 18, 2002).

In a report issued Oct. 16, Moody's said the credit ratings of numerous oil and gas companies having oil sands development should not be affected by the ratification.

Moody's surveyed several oil sands operations and concluded that additional costs related to Kyoto implementation generally ranged 5-30¢/bbl (Can.), with a few companies expecting costs as high as $3/bbl. The high estimates were driven almost entirely by uncertainly relating to certain key assumptions, Moody's said.

"The impact of Kyoto will be different for each individual project depending on the extraction method being used and the amount of processing being done," said John Cassidy, Moody's vice-president and senior credit officer. "But overall, this doesn't appear to represent a significant increase in costs."

Government Developments

White House officials Nov. 5 reported progress in resolving outstanding issues surrounding a sweeping energy bill more than 2 years in the making.

Congressional Republicans and members of US President George W. Bush's administration say legislation is needed this year to keep energy supplies plentiful and reliable.

During the week of Nov. 4, US Vice-Pres. Dick Cheney took a more active role in the process, and it yielded results, at least among divided Republicans.

He is credited with brokering a compromise between House and Senate Republican tax writers over how ethanol tax credits will be accounted for in the federal budget.

House Republicans remain publicly optimistic; they expect comprehensive energy legislation to pass Congress this year. But some lawmakers, mostly Democrats, say more deals are needed before legislation can pass both chambers. And just solving the ethanol tax issue isn't enough for the bill to pass muster with Democrats, party leaders suggested.

"From all that I hear, the energy bill is in serious trouble; not only in trouble with those of us who are strong ethanol supporters but in trouble within the Republican ranks. They are having great difficulty at arriving at a consensus on just about all the issues that are still on the table," Senate Minority Leader Tom Daschle (D-SD) told reporters Nov. 4.

"So I am pessimistic about our chances of getting something done, even though I think that it's still within the realm of possibility."

Time is running short. Congress's latest adjournment date is Nov. 21, although there is always a chance the timetable to finish work on the delayed federal budget will keep lawmakers in Washington, DC, past the Thanksgiving holiday.

Daschle for example said he is still unhappy with the way the House wants to structure a clean-fuels reform plan that would guarantee a market for ethanol-blended gasoline. He suggested that the House's timetable for a part of the bill called the Renewable Fuel Standard takes too long. And most Senate Democrats, along with some Republicans outside of oil producing regions, still have serious problems with the House's plan to extend limited liability protection to the clean-fuels blending component methyl tertiary butyl ether.

Also still being discussed is a tax package to promote an Alaska natural gas export pipeline that, if built, would be the largest US construction project ever. Congress generally supports the line receiving expedited permitting, provided the route runs through most of Alaska. But Republicans remain divided over what role the US government should play in moving the project forward.

Latest indications at presstime were that Republican leaders and the White House were leaning toward support for loan guarantees that finance only the portion of the line built in Alaska. A separate "commodity risk" tax break guaranteeing a gas price for North Slope producers appeared to still technically be out of the bill, but sources close to the Alaska delegation insisted the item was still in play.

Quick Takes

CHINA'S CNOOC LTD. will become a partner in the Gorgon fields natural gas development off Western Australia, having signed an agreement in Canberra Oct. 24 that it said is expected to lead to "one of the biggest LNG deals in the industry's history."

Subject to completion of formal contracts, CNOOC Ltd. will purchase an equity stake in the Gorgon gas development, and its parent China National Offshore Oil Corp. (CNOOC) will purchase an undisclosed but "significant" volume of LNG directly from Gorgon for use in the growing Chinese market.

CNOOC Ltd. already participates in two China LNG receiving terminal projects in Guangdong and Fujian.

The company also has identified Zhejiang and other coastal provinces as potential new locations for its expanding LNG trade in China.

Prior to this equity purchase agreement, ChevronTexaco Corp. held a four-sevenths interest in the Gorgon development, Royal Dutch/Shell Group unit Shell Development (Australia) Pty. Ltd. held two sevenths, and ExxonMobil Corp. unit Mobil Australia Resources Co. Pty. Ltd. one seventh. CNOOC Ltd.'s equity interest was not disclosed.

The Gorgon fields development has estimated proved reserves of 12.9 tcf of gas, with total gas resources in the Gorgon area exceeding 40 tcf.

The Gorgon consortium late this summer also reported that it had agreed to supply at least 2 million tonnes/year of LNG over 20 years starting in 2008 to a ChevronTexaco-sponsored LNG terminal planned for construction off Baja California (OGJ Online, Aug.6, 2003).

BRAZIL'S National Petroleum Agency (ANP) plans to offer a greater variety of areas in its sixth annual exploration and production round, which is scheduled for June 2004, in order to attract more bidders.

In its fifth E&P round in August it offered 908 blocks but only awarded 101, with state-owned Petróleo Brasileiro (Petrobras) securing all but 13 of those. Only six companies bid in E&P Round 5. Mines and Energy Minister Dilma Rousseff said last month that in the next round, ANP would offer highly prospective areas containing significant discoveries, which should attract the larger local and international investors. It also would offer blocks in more mature fields that will play to medium and smaller companies and unexplored frontier areas, which the government wants developed.

Among the more desirable areas are potentially oil-rich blocks in the Campos, Santos, and Espírito Santo basins that Petrobras must relinquish according to an agreement it made in 1999 when Brazil first opened E&P activities for competition. At that time, some of the most prospective areas were reserved for Petrobras, which was given 5 years to either develop or relinquish them. Rousseff said those blocks are an emerging focus of interest to many larger companies, and he expects the sixth licensing round to be a much more exciting event.

Restructuring Brazil's tax code, particularly as applied to deepwater discoveries also may be necessary. Petrobras was the only company to bid on deepwater blocks in the August round (OGJ Online, Aug. 25, 2003).

In other exploration news, Apache Corp. said its Egyptian Qasr-2X appraisal well confirmed the Qasr-1X discovery announced in July (OGJ Online, July 8, 2003).

Qasr-2X, 1.6 miles from Qasr-1X, has "a 707 ft gross hydrocarbon column, and logs indicate that net Jurassic pay in the Qasr-2X increases to 669 ft, vs. 461 ft in the Qasr-1X discovery," said Apache Pres. and CEO G. Steven Farris. "Reserve potential is now in the range of 1-3 tcf of gas and 20-70 million bbl of condensate." The new field is located on Apache's 100%-owned Khalda concession. Based on 3D seismic data, the prospect area potentially encompasses more than 13,000 acres. Apache plans to drill four more appraisal wells to better define potential reserves and determine pipeline and processing requirements. Apache expects to begin production within 2 weeks from an existing 6-in. pipeline that will accommodate 30 MMcfd of gas from Qasr-1X, Farris said. It test-flowed a combined 51.8 MMcfd of gas and 2,688 b/d of condensate from flow tests in two zones in the Lower Safa formation. "We do not believe we have penetrated the Ras Qattara sands on this structure as of yet. Our net-to-gross in the Lower Safa sand package increased from 76% in Qasr-1X to 93% in Qasr-2X," Farris said. Unocal Corp. has made a major hydrocarbon discovery on Walker Ridge Block 678 on the deepwater St. Malo prospect in the Gulf of Mexico. The $62 million discovery well, which lies in 6,900 ft of water about 250 miles south-southwest of New Orleans, encountered more than 450 net ft of oil pay over a gross hydrocarbon interval of 1,400 ft, Unocal said. The Discoverer Spirit drillship spudded the well July 6, drilling it to 29,066 ft TD in 100 days. Operator Unocal expects to begin an appraisal program in early 2004 to further evaluate and quantify the discovery. Unocal holds 28.75% working interest in the prospect, and partners are Petrobras 25%, Devon Energy Corp. 22.5%, ChevronTexaco Corp.12.5%, EnCana Gulf of Mexico LLC 6.25%, ExxonMobil Corp. 3.75%, and ENI Petroleum Inc. 1.25%.

Peru's President Alejandro Toledo approved a contract Oct. 25 to Argentina's Repsol Exploracion Peru and Burlington Resources Peru for the exploration and development of Block 90 in Peru's Amazon rainforest on the eastern slopes of the Andes. Block 90 is directly north of Block 57 where Repsol also is seeking a contract (OGJ Online, Mar. 5, 2002). Block 57 is adjacent and directly north of Peru's Camisea natural gas fields. Repsol currently is exploring Block 39, after returning Blocks 34 and 35 to Perupetro, the state oil agency. The US Minerals Management Service (MMS) has released the environmental assessment (EA) for proposed Lease Sale 190 in the Gulf of Mexico Outer Continental Shelf Central Planning Area (CPA), the second CPA lease sale scheduled in the 2002-07 OCS oil and gas leasing program. MMS reexamined potential environmental impacts based on information unavailable when the final environmental impact statements (EIS) on CPA Sales 185, 190, 194, 198, and 201 were completed in November 2002. It found no new significant impacts and said a supplemental EIS is not required. The EA is available on the MMS website at http://www.gomr.mms.gov.

THE EUROPEAN COMMISSION presented the final draft of its registration, evaluation, and authorization of chemicals (REACH) legislation Oct. 29, after whittling down an initial version under fierce lobbying by industry and the leaders of France, the UK, and Germany.

Under the draft legislation, the EU's chemical industry must prove that the 30,000 products it produces for market, and has since 1981, do not harm health or the environment and must register the data with a European chemical products agency to be established. Dangerous substances such as carcinogens and very toxic materials will require Commission authorization and monitoring.

The final version decreases regulations on volumes of 1-10 tonnes of manufactured or imported products, and scraps registration for volumes of less than 1 tonne.

It also excludes polymers from the process, leading the commission to cut its estimate of the cost of these procedures to 2.3 billion euros from the initial 12.6 billion euros over a period of 11 years. The cost for downstream users would hover around 5.2 billion euros.

The European Parliament and the EU's Council of Ministers still must examine the REACH proposals, so actual legislation is not expected before 2005.

MARATHON ASHLAND PETROLEUM LLC (MAP), Findlay, Ohio, is planning to fund $300 million in capital projects to upgrade its 74,000 b/d Detroit refinery.

One $110 million expansion project will increase crude oil throughput at the refinery by 35% to 100,000 b/d, MAP said. Other projects will enable the refinery to produce new low-sulfur gasoline and ultralow-sulfur diesel fuel.

Construction is expected to begin in early 2004 and to complete in 2005. Chicago Bridge & Iron's process and technology group, CB&I Howe-Baker, The Woodlands, Tex., has been selected to complete a major portion of the project.

In other refining news, an investigation is under way to determine the cause of an explosion and fire Oct. 23 at Petrobras's Henrique Lage refinery in São Jose dos Campos, São Paulo. Petrobras said the blast occurred in one of the two kerosine hydrodesulfurization units. Although the fire disrupted operations, there were no casualties, and workers who suffered slight injuries were treated at the site. Petrobras said deliveries would be met, as the refinery has adequate stocks.

PAKISTAN Minister for Petroleum and Natural Resources Chaudhry Nauraiz Shakoor has confirmed that the previously proposed gas pipeline from Iran to India, via Pakistan, had been shelved, but Tehran has agreed to export natural gas to Pakistan.

Shakoor said technical experts from Pakistan and Iran would meet in about 2 months to discuss the route and other details related to laying a pipeline in the two countries.

Pakistan produces about 3.4 bcfd of gas and has estimated gas reserves of about 42 tcf. It is forecast to face a shortfall of more than 17 million cu m/day of gas by 2009-10, however, and has been actively investigating the possibility of piping natural gas from energy-rich countries in the region, including Turkmenistan and Qatar.

Iran recently proposed to Pakistan that the two countries build the gas pipeline between them, not continue to wait for India to make up its mind. The minister said India could connect to the proposed pipeline later, if it chose. "But for the time being, this pipeline would be laid between Pakistan and Iran only," he added.

There are various other proposals on the table for piping gas from Iran, including one through Iran's southeastern port of Chahbahar to Pakistan's southwestern coastal town of Gwadar.

Shakoor said the two sides also discussed onshore and offshore exploration, regional pipeline projects, and updating of refineries.

In addition, they discussed the issue of petroleum products smuggling and agreed to establish stringent preventative measures at the borders, as smuggling is causing massive losses to Pakistan's national exchequer (OGJ Online, Sept. 30, 2003).

IRAN AND PAKISTAN also plan to sign an agreement this month for cooperation in establishing compressed natural gas (CNG) usage in Iran. Pakistan is one of the largest users of CNG as substitute fuel.

The Hydrocarbon Development Institute of Pakistan will provide assistance and technical expertise to the Iranian Oil Ministry on building a network of CNG stations in Iran.

BENTON-VINCCLER CA, the Venezuelan operating arm of Houston-based Harvest Natural Resources Inc., has signed an agreement with Petroleos de Venezuela SA (PDVSA) to evaluate the productive capacity of PDVSA's Temblador and El Salto oil and gas fields in Eastern Venezuela.

Temblador already has produced more than 115 million bbl of oil and 60 bcf of gas since its discovery in 1936, but it was partially shut in in 2002. El Salto, by contrast, has never produced since it was discovered and delineated in the 1980s.

The fields cover a 700 sq km license area and lie near Harvest's South Monagas Unit.

Benton-Vinccler has 6 months to submit a field development plan and negotiate terms whereby it would join PDVSA in producing the remaining reserves.

FIRST GAS for export began flowing Oct. 27 from the Sonatrach and BHP Billiton Ltd.-operated wet gas development at Ohanet, Algeria. At peak production the $1 billion facility will treat about 710 MMscfd of gas and produce a maximum of 30,000 b/d of condensate and 26,000 b/d of liquefied petroleum gas for export, together with pipeline sales quality gas for Sonatrach.

The Ohanet Development is located in the Illizi province, 1,300 km southeast of Algiers and 100 km west of the Libyan border.

A total of 28 new wells has been drilled and completed and 15 existing wells recompleted to develop the four reservoirs targeted by the project. An additional four wells will be drilled after 3-4 years of production history have been gathered, BHP said. More than 150 km of flowline connects the producing wells to the central processing facility.

Sonatrach owns and markets the pipeline sales gas, and under terms of a risk service contract signed in July 2000, the joint venture partners funded the project and will receive a portion of the liquids production over 8-12 years.

BHP Billiton holds a 45% interest. Other partners include Japan Ohanet Oil & Gas Co. Ltd. 30%, Woodside Energy (Algeria) Pty. Ltd. 15%, and Petrofac Resources (Ohanet) LLC 10%.