OGJ Newsletter

May 24, 2004

Market Movement

Crude futures prices seesaw at record levels

Crude futures prices rebounded to within striking distance of a new record high May 19 on the New York Mercantile Exchange, following reports of yet another decline in commercial US crude inventories and a smaller-than-expected build in US gasoline stocks on the cusp of the peak summer driving season.

The June contract for benchmark US sweet, light crudes hit a record high of $41.55/bbl May 17 on NYMEX, pushed up by speculation among investment funds and escalating violence in Iraq, where the president of the Iraqi Governing Council was assassinated by a car bomb on that date. But the contract tumbled by $1.01 to $40.54/bbl May 18 as large speculative investment funds took profits amid signals that ministers of the Organization of Petroleum Exporting Countries might signal their intent to raise their production quotas at an international forum slated for May 22-24 in Amsterdam.

However, NYMEX's June crude contract rebounded May 18 to $41.50/bbl after the US Energy Information Administration reported US crude inventories fell by 1.1 million bbl to 298.9 million bbl during the week ended May 14. That was 17.1 million bbl below the 5-year average for that period. EIA recorded an increase in US gasoline stocks of 1.2 million bbl to 203.7 million bbl during that same period. However, gasoline inventories remained 7.9 million bbl below the 5-year average.

OPEC contemplates production hike

Saudi Arabia earlier called for the 10 quota-governed OPEC members, minus Iraq, to increase their total production quota by 1.5 million b/d to 25 million b/d to help drive down oil prices. Some traders expect OPEC to announce such an agreement at its scheduled June 3 meeting at the latest.

Saudi Arabia's Minister of Petroleum and Mineral Resources Ali I. al-Naimi said his country has the capacity to release 2.5 million b/d of additional crude into the world market. Saudi Arabia has that much spare production capacity "ready at a day's call," he said.

However, Algerian Energy and Mines Minister Chakib Khelil claimed that a boost in OPEC's official production quota to 25 million b/d would do little to reduce world oil prices. He blamed geopolitical problems, market speculation, and the "rigidity" of the US oil market, along with the US system of refining and distributing petroleum products.

There are indications that the OPEC 10 are already exceeding their combined quotas by 2 million b/d. Meanwhile, Purnomo Yusgiantoro, OPEC's conference president, said the group will ask the US government to take action to boost US gasoline supplies as a means of reducing pump prices.

OPEC officials last week increased their 2004 estimate of the world's call on OPEC's crude supplies by 360,000 b/d to 26.3 million b/d.

IEA increases demand estimate

Paris-based International Energy Agency also revised recently its estimate of 2004 world demand for crude, up by 330,000 b/d to 80.6 million b/d, a total increase of almost 1.8 million b/d from 2003. "First quarter demand growth in China is now seen at almost 1 million b/d," said IEA in its May report.

"Such steep growth [in global oil demand] is not incommensurate with a surge in the global economic recovery," said IEA officials. But that "brings to the fore the issue of securing the necessary supplies to sustain the recovery," they said. "An increase in drilling and investments in refining capacity are required if the demand projections are to be sustainable. Beyond today's needs, suppliers would be well advised to give thought to boosting investment to secure production for tomorrow."

World oil production declined by 440,000 b/d to 81.5 million b/d in April, with supplies from OPEC down by 415,000 b/d in that period, IEA said. Crude supplies from the OPEC 10 declined by 380,000 b/d to 25.4 million b/d, vs. the group's total current quota of 23.5 million b/d. Export disruptions caused Iraq's production to dip to 2.34 million b/d during April, said IEA.

In a separate report last week, Cambridge, Mass.-based Cambridge Energy Research Associates predicted that crude prices above $30/bbl will likely "persist longer than many believe—into 2005 and maybe 2006." CERA officials claimed, "Global oil demand is not being dampened by these prices primarily because the strong euro (and high tax component on motor fuels) is insulating European countries from their effects. And the strongest growth market—China, which has a huge surplus in its balance of payments—is not materially affected by high dollar-denominated prices because it has the financial reserves to offset them."

Industry Scoreboard

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Industry Trends

ANOTHER OIL SHOCK will accelerate the emphasis on natural gas and renewable fuels.

That forecast comes from analysts Douglas-Westwood Ltd., Canterbury, England.

The firm said that depleting oil reserves, coupled with growing energy demand, will result in sustained oil price increases, greater capital investment in gas production, drastic conservation regulations, and fevered development of renewable energy substitutes funded by "windfall" profits.

The current level of oil prices near $40/bbl likely will begin sustained rises soon, requiring massive development of gas and renewable energy resources, said the firm's John Westwood.

China's rising oil demand likely will continue, he said. China has five times the US population and is industrializing rapidly, Westwood said. Vehicle demand in China also is expanding.

"Any growth in global economic activity increases oil demand such that, at 1%[/year] demand growth, a production peak [will occur] in 2016; at 2%, it occurs in 2012; and at 3%, it occurs in 2008. The world's known and estimated yet-to-find reserves and resources cannot satisfy even the present level of production of some 76 million b/d beyond 2020," Westwood warned.

Westwood supply specialist Michael R. Smith added that 52 of 99 producing countries already are past their production peak, and 16 are at peak. Once a country passes peak production, he said, there is little chance it can reverse its decline.

"Large capital investments within the Organization of Petroleum Exporting Countries are already required to rapidly increase production after 2008 by at least an additional 1-2 million b/d every year to offset declines elsewhere," Smith warned. If such output is not achieved as fast as required, the world then will see sustained growth in oil prices, he added.

Once oil supplies approach peak and scarcity prevails, prices will double within 3-4 years—just as they did during the oil shocks of the 1970s—until oil demand falls significantly, Smith said.

"Drastic conservation will make prices fluctuate as they did in the oil shocks, always settling at a higher level," Smith said. A new stable energy mix ultimately might be achieved with substitute fuels, but it is uncertain how long that would take. "Meanwhile producers will face steadily increasing government, environmental, and conservation regulations," Smith said.

"Windfall profits arising from energy price surges, which traditionally have funded new oil and gas investment, will have to be, at least partly, employed in bringing other forms of energy to profitability."

"Global production of natural gas, currently some 2,600 billion cu m, is expected to grow to 4,755 billion cu m/year by 2025," an average increase of 2.75%/year at a cost of $25-40 billion/year, he said.

Smith forecast that more than $39 billion will be spent during the next 5 years on LNG facilities.

"The future driver for renewable energy will not be global warming, but security of supply," said Westwood, who forecasts major investment increases in all renewable energy sources, particularly windpower and biomass, to in response to soaring conventional energy prices.

Government Developments

THE US CONGRESS has urged the White House to reconsider the Strategic Petroleum Reserve fill policy. A bipartisan group of lawmakers has suggested a temporary suspension in filling the SPR until crude prices drop from record highs.

The US Department of Energy wants to fill the reserve's 700 million bbl capacity by July 2005 as part of the White House's homeland security efforts. To meet that target, DOE recently pumped as much as 300,000 b/d into the SPR's salt caverns in Louisiana and Texas.

The summer inventory schedule is expected to average 120,000 b/d.

But DOE's past actions have led some lawmakers to argue that fast-filling the SPR is counterproductive because it discourages private inventory builds. They also argue that policymakers are sending a negative psychological signal to a market already spooked by terrorism concerns and higher-than-expected global oil demand.

US House Energy and Commerce Committee Chairman Joe Barton (R-Tex.) said that it makes economic sense to wait for prices to drop before topping off the SPR. But he vehemently disagreed with Senate Democrats who want the White House to sell oil in efforts to dampen prices.

Rep. Barton argued that selling SPR crude would not impact the market for long and would not do much, if anything, to alleviate today's higher gasoline prices.

Sen. Pete Domenici (R-NM), chairman of the Energy and Natural Resources Committee, called the Senate Democrat's plan to sell reserve oil "one of the worst ideas I've heard this year." He argued that the market impact from a sale would be short-lived but the threat to US oil supply would be longer lasting.

Sen. Chuck Schumer (D-NY) leads the SPR sale efforts. He and a group of Senate Democrats want DOE to release 1 million b/d of oil for 30 days with an option to extend the release program an additional month. He dismissed Domenici's argument that releasing SPR oil incurs a security risk.

Sec. of Energy Spencer Abraham last week reiterated the White House's position not to sell oil from the reserve unless consumers are threatened by a sudden supply shortfall. Yet he did not rule out that the administration might, at some future date, consider a pause in the fill program.

US TRADING REGULATORS have requested records from natural gas storage companies as part of an investigation into whether price manipulation was involved in high gas prices in late 2003 and early 2004.

Oneok Inc., Tulsa, and TXU Corp., Dallas, acknowledged receiving subpoenas from the US Commodity Futures Trading Commission.

Oneok confirmed an "industry-wide investigation related to activities affecting the price of natural gas during Oct. 31, 2003, to Jan. 2, 2004.

"The CFTC specifically requested information regarding natural gas storage statistics that were reported to the Energy Information [Administration]. Oneok is complying with the subpoena and will cooperate fully with the CFTC's investigation."

TXU also said that it is cooperating with the CFTC's request for records. Traders and investors use EIA's numbers to determine gas supply trends and to make decisions.

Quick Takes

PALADIN EXPRO LTD., a unit of London-based Paladin Resources PLC and license holder of Montrose field in the North Sea, has proved up a significant northwest extension of the field with its recently completed 22/17-2 well. The well encountered a complete Forties Sandstone interval 400 ft thick, Paladin reported. "The top of the reservoir section was 23 ft high to prognosis at 8,254 ft subsea, and reservoir quality was as anticipated, with a net-gross ratio of 80% and average porosity of 21%. Preliminary well data indicates good pressure communication with the nearest well 1.8 km to the south, and that the oil-water contact at the well location is at the deepest level previously observed in the field," the company said. The 22/17-2 well has been plugged and abandoned while Paladin determines the optimum development plan for the extension area. The GSF 140 semisubmersible that drilled 22/17-2 is preparing to drill the Brechin exploration prospect on Block 22/23, about 3.5 km east of Arkwright field. Paladin acquired its majority shareholding in Montrose, Arbroath, and Arkwright fields from BP PLC and Amerada Hess Corp. and contracted Aberdeen-based Petrofac Production Services to operate Montrose and Arbroath fields (OGJ Online, Dec. 17, 2002). Paladin, which now is redeveloping Montrose field, signed a letter of intent with Prosafe Drilling Services UK Ltd., Aberdeen, to install a modular drilling rig on the platform and plans to begin a multiwell infill and stepout drilling program by yearend. Energy North Sea Ltd. is Paladin's joint-venture partner with 41.03%.

Statoil ASA has chosen FMC Technologies Inc., Houston, to supply subsea production systems for Stær and Svale fields in the North Sea 200 km off Norway. The fields will be tied into the floating production, storage, and offloading vessel serving Norne field. FMC's $79 million contract will cover eight subsea trees, manifolds, production controls, and associated systems. An additional contract will include technical services related to systems installation and start-up. Oil production from Stær and Svale is expected to begin by late 2005.

Brazil's Petroleo Brasileiro SA (Petrobras) has awarded a $36 million contract to FMC's CBV subsea business unit to supply subsea production equipment for Petrobras's Roncador third-phase development project off Brazil in the northern part of the Campos basin in 4,900-6,200 ft of water. Under the contract CBV, which provided subsea systems for two previous phases of Roncador field's development, will supply manifolds, production controls, and associated equipment.

VIET NAM'S state-run oil and natural gas firm Petrovietnam, Hanoi, awarded an engineering and design contract to Des Plaines, Ill.-based UOP LLC for a 6,500 b/d isomerate unit to be added to the planned naphtha complex at its Dung Quat refinery currently under construction in Quang Ngai Province, Viet Nam. The isomerate unit will use the Penex process, which produces high-octane gasoline blending components from light naphtha. Output will be used as feedstock in producing "ultraclean" gasoline. Basic engineering on the unit began in March. Petrovietnam's 130,000 b/d, $1.3 billion Dung Quat refinery—Viet Nam's first—is expected to be operational by yearend 2006 (OGJ Online, Sept. 24, 2003).

ABU DHABI GAS INDUSTRIES LTD. (Gasco) awarded a process design and engineering service contract to Jacobs Engineering Group Inc., Pasadena, Calif., for two sulfur recovery units and an acid gas enrichment unit in an expansion of the Habshan gas complex in Abu Dhabi. Gasco is boosting the sulfur recovery capacity by 1,600 tons/day to help meet increasing crude oil production needs. Jacobs will provide its Superclaus proprietary technology for the expansion.

ANADARKO PETROLEUM CORP. unit Anadarko Qatar Block 4 Co., Doha, signed a production-sharing agreement with Qatar Petroleum Co. (QP) for oil and gas exploration on QP's Block 4 off Qatar. The 3,132 sq km contract area is 40 km off northern Qatar adjacent Anadarko-operated Al Rayyan oil field on Block 12. Terms call for an initial 5 year exploration phase during which Anadarko will perform technical studies, seismic reprocessing, acquisition of 2D and 3D seismic data, and exploratory drilling. Sister company Anadarko Qatar Energy Co. operates Al-Rayyan oil field on Block 12 and is conducting exploration on Block 13. Anadarko also holds 49% interest in Block 11, operated by Germany's Wintershall AG. In related news, QP last month awarded a PSA for the Block 5 Extension Area to Denmark's Maersk Oil Qatar AS, which will conduct an extensive exploration program for a possible fast-track development. Maersk operates Al Shaheen field on Block 5, and currently is appraising its development potential.

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Occidental Petroleum Corp. clinched partnerships with Calgary-based Talisman Energy Inc. and Amerada Hess Corp. to explore Block 64 in Peru's Marañon basin, which lies near the border with Ecuador, according to Peru's Energy and Mines Minister Jaime Quijandria. Oxy, the operator, holds half of the contract, and the other two companies will hold 25% each. Oxy currently is constructing its base camp and drillsite and plans to drill a first well late this year. A second well is planned for sometime during 2005. Peru state oil firm Perupetro lifted a force majeure, in effect for the past 6 years, after Oxy reached agreements with local indigenous communities to work in the contract area.

Murphy Oil Corp. reported that its Kikeh No. 7 appraisal well has confirmed the downdip limits of Kikeh field on Block K, which covers more than 4 million acres off Sabah, Malaysia. The well, the deepest penetration in this deepwater basin, reached 14,899 ft TD in 4,217 ft of water. The well has been abandoned and all costs capitalized, Murphy reported. "This well was deepened below known field pays and encountered oil in multiple sands previously undrilled [on] Block K," Murphy added. Water limits now have been established in five of the eight known oil reservoirs in the field. Murphy said that this well has "opened up a completely new play" in the deep water off Sabah. "The oil we encountered in the deep section is higher gravity than the Kikeh oil and is contained in good quality rocks," Murphy said. Murphy is targeting first oil from Kikeh field for fourth quarter 2007. Operator Murphy holds an 80% working interest in Block K, while Petronas Carigali Sdn. Bhd. holds 20%.

ExxonMobil de Colombia SA, together with Colombia's state oil company Ecopetrol and Brazil's Petrobras, signed a participation agreement to begin exploration off Colombia. The agreement covers the 11 million acre Tayrona Block in the Caribbean Sea off northern Colombia. Petrobras will serve as operator during the exploration phase, and ExxonMobil will serve as operator during the development phase if gas is discovered on the block, ExxonMobil said.

The US Minerals Management Service said no bids were received by May 19 for Cook Inlet Lease Sale 191, which involved about 2 million acres in 30-650 ft of federal waters, 3-30 nautical miles off Alaska. MMS Regional Director John Goll said, "Part of our job is to provide access to acreage, but companies then must decide whether it fits in with their exploration plans." He noted that, "companies continued to express interest right up through the last few weeks." Another federal lease sale is proposed for Cook Inlet in 2006. The federal Outer Continental Shelf area in Cook Inlet remains relatively unexplored, he said.

US DRILLING ACTIVITY rebounded the week ended May 14 with the biggest weekly rig count so far this year and the largest number of rotary rigs working in more than 21/2 years. There were 1,162 rotary rigs working in the US and its waters, 9 more than the previous week and up from 1,040 during the same period a year ago, said Baker Hughes Inc. That gain was primarily in land drilling, up by 11 rigs to 1,043 units that week. Inland waters activity also increased by 1 unit to 24. Offshore operations were down by 3 rigs to 93 in the Gulf of Mexico and 95 in US waters as a whole. Canada's rig count declined by 18 to 167, up from 99 units the same time last year.

Statoil and Norsk Hydro ASA chartered Ocean Rig ASA's Eirik Raude semisubmersible (see photo, OGJ, May 17, 2004, p. 45) to drill three exploration wells in the Barents Sea. The 340 million kroner charter also covers the cost of upgrading the rig to a full eight-point anchoring system, a mobilization fee, and an option to drill a well for Norsk Hydro in the North Sea prior to the Barents Sea program. (OGJ Online, Apr. 19, 2004). Starting in late autumn, the Eirik Raude will drill one well each in Areas G and F for Statoil and one in Area C, which Norsk Hydro operates.

SHELL EXPLORATION & PRODUCTION CO. and partners have brought oil and natural gas on production from Llano field on Garden Banks Blocks 385 and 386 in the deepwater Gulf of Mexico. Llano, in about 2,600 ft of water, is producing 10,500 b/d of oil and 26 MMcfd of gas from a single well through a subsea system tied back 11.5 miles via pipe-in-pipe looped flow lines to Shell's Auger tension-leg platform. Dedicated production capacity at Auger is 25,000 b/d of oil and 75 MMcfd of gas. A second well will be placed on production later this month, Shell said. Total $215 million development costs included modifications to the Auger TLP. Shell's partners are Amerada Hess 50% and ExxonMobil 22.5%.

United Heritage Corp. subsidiary, UHC Petroleum Corp., Cleburne, Tex., is preparing to inject nitrogen into its Val Verde basin leases in Texas to recover a greater portion of the lease's estimated 168 million bbl of OOIP. UHC has applied for the injection permit and completed site work on 26 production wells and 4 injection wells to be used in Phase 1 of the project. All flowlines, electric power line components, wellheads, and well controllers were delivered to the field for installation last month. The nitrogen generator, designed with the minimum specifications of producing 4,000 scf/hr of nitrogen, is scheduled for delivery by May 25.

PAKISTAN has become the top country in Asia—and third in the world—in the use of CNG as a motor fuel, said Hilal A. Reza, director-general of the Hydrocarbon Development Institute of Pakistan. Reza said 15 billion rupees has been invested in CNG development in Pakistan, with another 3 billion rupees planned. All new government vehicles will be converted to CNG by June 2005, he said, and the conversion of diesel vehicles is being pursued. In addition, Pakistan and Iran have agreed to cooperate in the development of CNG manufacturing and use. Iran plans to establish 700 CNG filling stations within the next 5-7 years and convert 1.5 million motor vehicles to CNG, including 100,000 taxis that it earlier had converted to liquefied petroleum gas, saving the LPG for value-added products or export.

INEOS CHLOR LTD., Runcorn, UK, awarded a front-end engineering and design contract to Aliso Viejo, Calif.-based Fluor Corp. for a proposed chlor-alkali plant at Ineos Chlor's manufacturing complex at Runcorn, Cheshire, UK. The plant, which will use Ineos Chlor's chlor-alkali membrane technology BiChlor, will produce 400,000 tons of chlorine/year. The facility will include brine treatment, electrolysis, chlorine drying and liquefaction, hydrochloric acid and sodium hypochlorite synthesis, storage, loading, and utilities. Fluor will be the overall project manager while working with engineers from Uhde GMBH, Dortmund, Germany, and Ineos Chlor. Engineering is currently under way at Fluor's office in Haarlem, the Netherlands.