OGJ Newsletter

Nov. 24, 2003
Acceleration in global economic growth has prompted the International Energy Agency to revise upwards its monthly assessment of oil demand growth.

Market Movement

IEA sees more growth in world demand for oil

Acceleration in global economic growth has prompted the International Energy Agency to revise upwards its monthly assessment of oil demand growth.

In its most recent report, the Paris-based agency cited robust third quarter GDP in the US, faster than expected expansion of the Japanese and European economies, and Chinese GDP growth as the drivers of this change. IEA expects that China will contribute nearly 35% of global demand growth this year and 30% next year.

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Worldwide oil demand is now estimated to increase 1.3 million b/d this year, up 170,000 b/d from the prior estimate. IEA forecasts 2004 demand growth of 1.1 million b/d, an upward adjustment of 20,000 b/d. Next year's slowdown in growth is attributed to the loss of one-time factors that supported this year's expansion, including high natural gas prices, nuclear issues, and colder-than-normal weather.

OECD demand

IEA cut its 2004 demand forecast in member countries of the Organization for Economic Cooperation and Development, where oil demand growth remains weak. OECD oil demand is forecast to rise 617,000 b/d this year and 247,000 b/d next year, a reduction of 80,000 b/d from the previous Oil Market Report.

This year's growth rate is better than last year's contraction of 77,000 b/d, IEA said, but it falls short of the previous 5-year average growth rate for 1995-99. Further, the agency explained that despite the recent surge of economic activity, 2004 oil demand growth reflects a shallower industrial recovery, more comfortable gas inventories, and an extrapolation of recent growth patterns. Current projections call for North American demand to increase 300,000 b/d next year, roughly in line with 2003, as accelerating economic growth replaces weather and other one-off factors as the growth drivers there.

Supply

The call on crude from the Organization of Petroleum Exporting Countries plus stock change moved up 600,000 b/d for the second half of this year because of upward adjustments to non-OECD demand and downward revisions to OECD supply. October non-OPEC crude supply recovered from suppressed September levels. IEA reported that UK and Norwegian oil production last month partially rebounded following extended disruptions, while Russian production continued to rise sharply in spite of curtailed exports. The agency noted additional supply came from new fields in Africa and increased Gulf of Mexico and natural gas liquids output in the US.

OPEC crude production averaged 27.2 million b/d, according to IEA estimates. Production in Iraq is estimated at 1.6 million b/d, with 1.3 million b/d derived from the southern part of the country (see related story, p. 32).

Excluding Iraq, the OPEC-10 averaged 25.6 million b/d last month, "within 200,000 b/d of the prevailing target level but over 1 million b/d above November's new target. Venezuela and Indonesia are producing around 20% below November target levels, but Algeria and, to a lesser extent, Qatar and Kuwait appear to be substantially over target in percentage terms," the agency said. For this quarter, the call on OPEC crude plus stock change is 26.6 million b/d. Demand revisions centered on China have raised next year's call 200,000 b/d from IEA's previous report. However, the call still falls on average 800,000 b/d in 2004, with a low of 23.4 million b/d in the second quarter.

Industry Scoreboard

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Industry Trends

THE US NATURAL GAS production decline rate is accelerating.

Third-quarter US natural gas production decreased 3.1% from the year-ago level, according to a survey of 46 of the largest US gas producers.

Those producers account for 56% of total US gas production, said Raymond James & Associates Inc., St. Petersburg, Fla.

"The decline rate actually appears to be accelerating, despite the fact that record cash flows for E&P companies had funded a 30% increase in drilling since late last year," analyst Wayne Andrews of the Houston RJA office said in a Nov. 10 research note.

Accelerating decline of US production means average natural gas prices "should stay within the $4.50-6.50/Mcf range" for several quarters, Andrews forecast.

Second-quarter US gas production posed a 0.8% drop from the first quarter.

The RJA survey showed third quarter US gas production was down 1.5% from the second quarter.

"Much like in the 1970s when oil production continued to fall, regardless of how many rigs were drilling, we think we are nearing (if not at) a similar crossroads in the US natural gas supply picture," Andrews said.

"Perhaps most importantly, the majors (and gas utilities) continue to show the biggest decline in US natural gas production, coming in this quarter at down 8.3% vs. last year and down 4% from the second quarter of 2003," he said.

The majors and gas utilities represent a major proportion of US gas supply, and drilling activity among the majors and gas utilities is essentially flat since the start of the year. "This indicates that further production declines lie ahead for this group," Andrews said.

It also spotlights "an even more astonishing reality: The independents are driving nearly all of the drilling activity increases, with little production response to show for it," he said.

US SPENDING for formulated oil field chemicals is expected to increase by 6%/year through 2007 to $4.15 billion compared with a 2002 demand base of $3 billion, reported Freedonia Group Inc., a Cleveland market research firm.

Numerous factors will drive oil field chemicals growth, including deeper and more-complex wells being drilling in harsher environments as well as the continued maturity of US crude oil fields, said the Freedonia study.

Drilling fluids, the largest segment of the formulated products market, will provide the best opportunities for growth through 2007, Freedonia said.

Commodity chemicals, such as clay and barite, are the most commonly used raw materials in drilling fluid formulation. They will see rapid growth as drilling activity expands through 2007, the study predicted.

Stimulation chemicals and enhanced oil recovery products also will see healthy gains through 2007, the study said.

Declining oil reserves and maturing US oil fields are expected to require greater amounts of chemicals to improve or maintain production levels. Efforts to increase US oil production to limit the nation's dependence on foreign oil also will fuel demand for EOR and stimulation chemicals, the study said.

Government Developments

THE US HOUSE last week voted 246-180 to finalize an omnibus energy bill more than 2 years in the making. It largely follows the May 2001 White House energy blueprint with two large exceptions: it dramatically expands domestic drilling incentives including royalty holidays, and it does not include a provision to allow leasing in the Arctic National Wildlife Refuge (OGJ Online, Nov. 16, 2003).

The measure does include as much as $18 billion in a federally backed loan guarantee for an Alaskan natural gas export line to the Lower 48. But the Secretary of the Department of the Interior has wide discretion on how the money can be spent. The bill does not include the "commodity risk" provision sought by Alaska North Slope producers to keep shipments profitable even under a supply glut.

The Senate was poised Nov. 19 to take action on the bill; a modified version endorsed by House and Senate Republican leaders was voted out of a House-Senate conference late Nov. 16. Parliamentary rules prevent any more amendments from lawmakers although a senator theoretically could stop the bill by talking it to death through a filibuster.

The White House supports the bill even though total energy tax provisions—including production and efficiency—are nearly three times what the administration said it wanted over a 10-year period.

Republican congressional leaders promised legislation will be on President George W. Bush's desk before the Thanksgiving holiday. Congress is expected to adjourn by Nov. 23 after finishing the last of several annual spending bills.

In a letter Nov. 18 to energy bill comanager Sen. Pete Domenici (R-NM), the nonpartisan Congressional Budget Office estimated that the bill, HR 6, would increase direct spending by $3.7 billion during 2004-08 and by $5.4 billion from 2004-13. CBO and the Joint Committee on Taxation further estimate that the act would reduce revenues by $17.4 billion over 2004-08 and by $25.7 billion during 2004-13.

With a deal essentially in place since last week, only a handful of amendments survived the final conference committee markup on Nov. 17.

One controversial clean air provision did, however, make its way in to the bill at the last minute, voted in along party lines.

Rep. Joe Barton's (R-Tex.) measure calls on the US Environ- mental Protection Agency to extend ozone attainment deadlines if the agency finds that an area is affected by pollution from an upwind area.

Of key interest to fuel suppliers was the fact that the conference committee did not alter the clean fuel title. Provisions such as ethanol mandates and limited liability for methyl tertiary butyl ether producers stirred up controversy, with the MTBE liability language especially contentious—several US Northeast senators come from states that blame water contamination problems on the additive (see related story, p. 34).

Some of these senators have threatened to try and kill the bill specifically because of the liability provision. But the chances of that happening appeared remote given that Republican leaders seemed confident they have the 60 votes needed to shut down debate.

Quick Takes

IN A BUSY WEEK for LNG activity, Shell US Gas & Power LLC subsidiary Gulf Landing LLC applied for a license under the Deepwater Port Act to construct and operate an LNG storage and regasification terminal 38 miles off Louisiana on West Cameron Block 213.

Shell said the terminal would have the capacity to deliver 1 bcfd of natural gas into the US interstate pipeline network starting in 2008-09.

Shell US Gas & Power LLC's proposed offshore 'Gulf Landing' LNG terminal shown offloading a carrier. Illustration from Shell.
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The Gulf Landing terminal will be a concrete, gravity-based structure that will be floated to the site and lowered to the seafloor in water about 55 ft deep. It will include LNG storage and regasification facilities, a berth for mooring LNG carriers, and pipelines to connect with existing gas pipeline systems in the Gulf of Mexico.

In other LNG activities, BG Group PLC subsidiary BG Energy Holdings Ltd. and Amsterdam-based Petroplus International NV agreed to create Dragon LNG Ltd. as a 50-50 joint venture to own and operate an LNG import and regasification facility at Milford Haven, Wales. Dragon will adapt a mothballed refinery complex that Petroplus Tankstorage BV currently operates as a commercial tank farm for petroleum products. The complex has 1.55 million cu m of storage capacity, deepwater jetties, and a cogeneration facility. Its marine docking and unloading facilities with three berths will be adapted for use as an LNG tanker berth, with pipelines and other facilities for unloading LNG and transporting it to onshore storage tanks within the existing site. The regasification plant is expected to start operations in 2007. BG will contract for 2.2 million tonnes/year of capacity at the facility, half of the initial planned throughput capacity. Meanwhile, ChevronTexaco Corp. subsidiary Port Pelican LLC received approval from the US Department of Transportation's Maritime Administration for a Deepwater Port License to construct, own, and operate an LNG receiving and regasification terminal in the Gulf of Mexico about 40 miles off Louisiana (OGJ Online, Dec. 3, 2002). The development will comprise an LNG ship receiving terminal, LNG storage and regasification facilities, and a pipeline interconnection to existing offshore infrastructure. Natural gas will be delivered into the US interstate gas pipeline network via Henry Hub in Louisiana. The proposed terminal will be a freestanding concrete gravity-based structure (GBS) capable of handling 1.6 bscfd of gas. GBS construction is expected to start next year, and commissioning is projected for 2007. ChevronTexaco has awarded major contracts for front-end engineering design and currently is securing LNG supplies.

A WORLD RECORD for water depth drilling—in water 10,011 ft deep—was set Nov. 16 in the Gulf of Mexico, reports the US Minerals Management Service.

The Transocean Inc. drillship Discoverer Deep Seas spudded the well for ChevronTexaco on Alaminos Canyon ultradeepwater Block 951 in ChevronTexaco's Toledo prospect, MMS officials said.

The previous world water-depth drilling record was set in October 2001 in 9,727 ft of water on Alaminos Canyon Block 903 by another Transocean drillship, the Discoverer Spirit, working for Unocal Corp. (OGJ Online, Nov. 19, 2001).

JGC CORP. of Japan has awarded subcontracts for construction work at Oman Oil Co.'s $1.205 billion Sohar refinery in Oman 250 km northwest of Muscat.

Chicago Bridge & Iron Co. NV of The Woodlands, Tex., received a $50 million contract for engineering, materials supply, fabrication, construction, testing, painting, and insulation of 55 miscellaneous storage tanks, 16 spheres, and one elevated water storage tank.

Athens-based Consolidated Contractors Inter- national Co. won a $140 million contract to construct and install civil, mechanical, and electrical units, and India's Dodsal & Co. received a $30 million contract for civil works outside the refinery.

All work is to be completed by early 2006, with start-up slated for May 1, 2006.

JGC will oversee construction of the refinery (OGJ Online, May 20, 2003). BP PLC has agreed to purchase 90% of the refinery's output for 10 years.

In other refining news, Shell Oil Products US, a unit of Shell Oil Co., reported it would shut down its 65,000 b/d Bakersfield, Calif., refinery by Oct. 1, 2004. Shell said San Joaquin Valley heavy crude, the primary supply for the plant, has declined continually the last few years, making continued operation beyond third quarter 2004 "no longer economically viable." Citgo Petroleum Corp., Tulsa, has started up a new ISAL unit at its Lemont, Ill., refinery the first such grass-roots unit built in the US. The ISAL process removes sulfur from gasoline while maintaining the fuel's octane value. Such technology is critical to the refining process in meeting required TIER II fuel specifications that take effect in January 2004. Citgo also is designing an ISAL unit for its Corpus Christi, Tex., refinery.

SEMINOLE GROUP LP, Tulsa, plans to build a 280 mile, 20-in. "Liberty" crude oil pipeline from Longview, Tex., to Cushing, Okla., that will create a 200,000 b/d "transportation corridor" to access Gulf of Mexico oil discoveries, including Royal Dutch/Shell Group's Mars discovery. Production from deepwater gulf fields is expected to increase steadily through 2006, peaking at 1.9 million b/d of oil, according to an MMS report released in May.

Seminole awarded an engineering contract to Denver-based Trigon-Sheehan LLC. The $150 million pipeline is slated for completion before yearend 2005.

In other pipeline news, Oman Oil Co. has received bids from five international companies for a project management contract to oversee construction of a 220 km crude oil pipeline to the planned Sohar refinery in Oman from Oman Oil Co.'s existing refinery in Muscat (see Refining). Companies bidding on the 100,000 b/d pipeline include Mott MacDonald of the UK, ILF Consulting Engineers of Munich, Tebodin BV of The Netherlands, and Canadian companies Veco Engineering and Electrowatt En- gineering. Bids ranged from 660,000 rials submitted by Mott MacDonald to 1.4 million rials from Veco Engineering. Florida Gas Transmission Co. (FGT) has placed into service its $100 million Phase VI expansion comprised of 33 miles of pipeline and 18,600 hp of compression. The project will provide 121 MMcfd of incremental firm natural gas transportation service. FGT said that its system now has more than 2.1 bcfd of gas capacity available to its Florida customers. China has embarked on a major expansion of its natural gas infrastructure, including the 3,800 km West-East Pipeline, the largest pipeline project in the world. Fueled by an unprecedented economic boom, China is consuming more natural gas and recently announced plans for natural gas to replace coal as the major fuel for generating electricity in Beijing by the time of the 2008 Olympics.

CONOCOPHILLIPS has approved the $1.1 billion Surmont oil sands project 60 km southeast of Fort McMurray, Alta., and plans to start construction in early 2004. Initial bitumen production will commence in 2006, increasing to more than 100,000 b/d by 2012, ConocoPhillips said. The Surmont project will use the steam-assisted gravity drainage method of injecting steam into the oil sands to melt the heavy bitumen.

ConocoPhillips subsidiary ConocoPhillips Canada, with a 43.5% stake in the project and lands, is Surmont operator. Partners are Total SA 43.5% and Oklahoma City-based Devon Energy Corp. 13%.

FAR EAST ENERGY CORP., Houston, recently spudded its first coalbed methane exploration well under a 30-year production-sharing contract (PSC) on the Enhong-Laochang blocks in Yunnan Province, southern China. It is the first of five exploration wells that the company expects to complete by next spring. It then will drill eight wells to test production before beginning development.

This first well will be drilled to 2,600 ft TD. Based on data from 1,561 coal exploration drill holes and more than 30 geological reports over the past 30 years, the Yunnan Provincial Coal Geology Bureau estimates that the 264,863 acres covered by the contract contain 5.24 tcf OGIP, making it a world-class prospect.

Far East has a 60% working interest in the PSC, with the remaining 40% owned by China United Coalbed Methane Corp. Ltd. (CUCBM).

Far East also initiated a PSC with CUCBM for the Zhaotong block in northeast Yunnan. And in northern China's Shanxi Province, Far East signed a farmout agreement with ConocoPhillips for two PSCs, with CUCBM again being the Chinese partner.

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In other exploration news, Anadarko Petroleum Corp., operator of Gulf of Mexico Green Canyon Block 518, reported a deepwater discovery on the block that significantly extends northward the boundaries of K2 field in Block 562 (OGJ Online, May 27, 2003). The well was drilled to more than 26,700 ft TD, the deepest offshore well Anadarko has ever drilled. The Green Canyon 518 No. 1 well, spudded in July in about 4,000 ft of water 150 miles south of New Orleans, encountered 128 ft of net oil pay in the same pay zone as the Agip Petroleum Co.-operated K2 discovery in Block 562 to the south (see map). The successful deepwater subsalt exploratory well is expected to come online as early as 2005 through a fast-track subsea tieback to Anadarko's Marco Polo tension-leg platform currently under construction. First production from 518 Well No. 1 is slated for March or early April 2004. Anadarko plans to drill another well on Block 518 immediately to further delineate the field and also plans to drill its wholly owned Genghis Khan prospect early next year. Anadarko also made a discovery on DeSoto Canyon Blocks 620 and 621 on the deepwater Spiderman-Amazon prospect in the eastern Gulf of Mexico. The well, 90 miles southeast of Venice, La., in 8,100 ft of water, was drilled to 18,065 ft TD, targeting Middle Miocene sands at 14,000-17,000 ft. It encountered more than 140 ft of net pay in its two primary targets. The partnership will drill a sidetrack well immediately. Operator Anadarko holds a 45% working interest. Partners are Dominion Exploration & Production Inc., Richmond, Va., 36.67% and Houston-based Spinnaker Exploration Co. 18.33%.

FOREST OIL CORP. Nov. 17 reported initial production from its deep shelf discovery Well No. 21 on South Timbalier Block 72, off Louisiana. The No. 21 well was drilled to 19,072 ft TD. It is producing 2,000 b/d of oil for sale and 1.4 MMcfd of natural gas, with a flowing tubing pressure of 5,500 psi, Forest said. Operator Forest holds a 75% working interest in the well, and Dominion Exploration & Production Inc., a subsidiary of Dominion Resources Inc., holds 25%.

Unocal Corp. reported a discovery on the Red Pepper prospect on High Island Block 37 in the Gulf of Mexico. The well found 55 ft of net natural gas pay and began producing 40 days after the rig moved off location. Red Pepper is now flowing 25 MMcfd of gas. BOC Group, Murray Hill, NJ, has opened a new depot in Hobbs, NM, to distribute liquefied carbon dioxide to customers in the Permian basin for use in boosting production from natural gas wells.