Market Movement
Crude futures prices trend downward
After falling in the wake of the Organization of Petroleum Exporting Countries' June 3 decision to increase its oil production quotas, futures prices for crude and petroleum products fluctuated June 7-9 under the influence of other market factors.
Fears of terrorist strikes in the Middle East and news of refinery problems propelled energy futures prices upward June 7, with some traders predicting that prices would remain at or above $30/bbl for the remainder of the year.
Yet energy futures prices dropped June 8 by large margins, wiping out gains from the previous session. Reports of overproduction by OPEC in May spurred expectations that US government officials on June 9 would report increases in US inventories of both crude and gasoline. Inventory additions of as much as 2 million bbl each of crude and gasoline were expected and had already been factored into futures market prices, said analysts. Anything less, they said, could trigger another rebound in prices.
Mixed inventory report
Indeed, a modest rebound occurred June 9 after the US Energy Information Administration reported US gasoline stocks rose by 2.1 million bbl to 206.4 million bbl during the week ended June 4, while US crude inventories increased by just 400,000 bbl to 302.1 million bbl. That marked the highest level for US commercial crude inventories since the week ended Aug. 23, 2002, but still was 11.8 million bbl below the 5-year average for the most recent period, said EIA officials. US distillate stocks declined by 600,000 bbl to 108.3 million bbl, with a decrease in diesel fuel more than offsetting an increase in heating oil.
US imports of crude averaged nearly 10.5 million b/d during the week ended June 4, down by 220,000 b/d from the previous week, "which was the second largest weekly average ever," said EIA. Crude imports from Canada were "relatively large," they said.
Crude input into US refineries increased by 204,000 b/d to an average 16 million b/d, with facilities operating at 96% capacity during that period. Yet gasoline production declined, averaging 8.7 million b/d, EIA said.
"The key thing to note in the [latest EIA] data is the continuing drift of tightness out of crude oil and into oil products," said Paul Horsnell, analyst with Barclays Capital Inc., London. In the week ended June 4, he said, the deficit of US oil product stocks below their 5-year average increased for the fifth successive week, to a total 38.6 million bbl below average.
"This is the largest oil product deficit observed since early October 2003," Horsnell said. "While products are tighter than they have been for 8 months, the crude oil deficit is now at its lowest for 8 months.
"In the current situation, one can hardly say that OPEC has major problems defending the downside, but data like this will add to the misgivings some have felt about increasing crude oil production further," said Horsnell.
Price trends
Despite two small rebounds, energy futures prices generally trended down in early June. Some analysts claimed crude futures prices likely would have fallen further if not for reports of another US citizen murdered by terrorists in Saudi Arabia, additional sabotage of the pipeline that transports Iraqi crude to an export terminal in Ceyhan, Turkey, and a threatened strike by oil workers in Nigeria. If workers proceed with a general strike in Nigeria, energy prices could ratchet up again, analysts said.
Meanwhile, Horsnell claimed that the recent falloff in crude prices doesn't necessarily "herald a major downwards move." He said, "We expect that the oil market will again move above $40/bbl. The only question is whether this happens due to some turbulent geopolitics and short-run gasoline market dislocations at a time of painfully limited spare capacity, or whether it happens further down the line due to the grinding of some very ferocious fundamentals."
Barclays Capital analysts expect world demand for oil to total 83.2 million b/d in the fourth quarter—"too high a number to be met by current sustainable production, and so the market will have to be balanced through a heavy draw," said Horsnell.
"We are still not seeing enough of a stock build at the current time to provide enough of a cushion for the fourth quarter. However, those concerns almost pale into insignificance when the story is rolled on to the seasonal high for demand next year," he said.
As a result, Barclays Capital increased its average price forecast for West Texas Intermediate crude by $3.40 to $37.90/bbl in 2004, rising to $43/bbl by 2010.
Industry Scoreboard
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Industry Trends
DEMAND FOR unconventional oil and natural gas is on the upswing.
Unconventional oil demand is forecast to reach 10.31 million b/d in 2008, up from 8.59 million b/d in 2003. That pace would represent an average annual growth rate (AAGR) of 3.7%, said Business Communications Co. Inc., Norwalk, Conn.
Meanwhile, unconventional gas demand is expected to increase to 12.78 tcf by 2008 from 7.68 tcf in 2003. BCC reached those conclusions in its soon-to-be-released report entitled "Demand for Unconventional Oil & Natural Gas Resources."
Improved exploration and production technology along with additional investments have led to significant levels of commercial production from unconventional oil and gas resources that previously were considered too costly to produce.
"Unconventional oil includes extra-heavy oil (oil sands), and bitumen, syncrude, shale oil, and conventional heavy oil. The strong gains in heavy crude supply can be attributed to a combination of favorable developments," BCC said.
Technological advances have reduced production costs. Demand growth has occurred in key US Midwest and Rocky Mountain areas because refiners have expanded their heavy crude processing capacity.
These US heavy crude refineries process mainly Canadian and Venezuelan heavy oil because of greater availability and improved performance in coking units and asphalt production, BCC said.
Strong commodity pricing has also brought a big influx of equity capital to the Western Canadian industry.
Technology advances, including steam-assisted gravity drainage, vapor extraction incorporating a solvent such as naphtha, and new cyclic steaming techniques are helping reach the bulk of Canada's ultimate postulated 300 billion bbl of recoverable oil in oil sands too deep to be tapped by conventional technology.
Unconventional gas deposits generally are stored more uniformly within reservoirs that can extend over vast areas. That compares with conventional gas that is typically trapped within isolated anticline closures.
During the next 5 years, demand for unconventional gas is forecast to increase at an AAGR of 10.7%. Recent recovery innovations have significantly raised the recovery rate for unconventional gas reserves.
Technological improvements are facilitating Rocky Mountain production of tight sands gas and coalbed methane. BCC statistics shows that marketed production in Wyoming, for example, increased to 7.1% of total US output in 2002 from 3.4% in 1996.
"Continued steady economic growth in the industrialized countries of Europe and North America will also sustain the level of natural gas demand. Resurgence in the developing countries is critical to demand growth, since economic growth in these countries is more closely tied to energy," BCC said.
Government Developments
THE UNITED NATIONS Security Council unanimously adopted a resolution that asserts the Iraqi people are free "to determine their own political future and control their own natural resources," including oil.
The UN resolution calls for the interim government to control the Development Fund for Iraq, an account set up by the US and the UN in which money generated from oil and gas exports—along with frozen assets from the regime of deposed President Saddam Hussein—is deposited. The International Advisory and Monitoring Board (IAMB) still will audit the account to make sure funds are being spent judiciously, an action applauded by human rights groups. IAMB's authority will expire after elections are held, now expected before 2006.
"This resolution makes clear that Iraq's sovereignty will be undiluted and that the government of Iraq will have the sovereign authority to request and to decline assistance, including in the security sector," said US Ambassador to the UN John Negroponte.
On June 8, Iraq's new Prime Minister Iyad Allawi said his interim government now controls the country's oil sector even though the US does not formally transfer power to Iraq until June 30. Oil exports are expected to remain a crucial cash stream for the new government; oil revenues are likely to be at least $14 billion this year, according to US government estimates.
Longer term, the country could attract serious industry investment. But that all will depend on how long it takes elected leaders to fashion regulations that spell how foreign companies can further develop the country's vast potential reserves. There is no consensus on what that timetable will be. Some analysts predict it could be as soon as 2 years, while others foresee things taking a decade or even longer.
Meanwhile, what is in place right now is still working—albeit very inefficiently by most industry standards—because there is so much outdated equipment that needs replacing, both upstream and downstream.
Along with a chronic shortage of spare parts, sabotage remains an ongoing issue, although oil workers have managed to keep exports fairly constant despite frequent disruptions.
For example, rebels bombed a northern oil pipeline June 9, which forced authorities to compensate by making a 10% cut to the power grid. However, exports were only slightly affected.
MEXICO has a new energy minister.
Mexican President Vicente Fox named attorney Fernando Elizondo Barragán to the post, effective June 3, to succeed Felipe Calderón Hinojosa, who resigned suddenly.
Previously, Elizondo had served as interim governor of Nuevo Leon state. He was Nuevo Leon's finance secretary and treasurer during 1997-2002, the president's office said in a statement earlier this month.
Calderón resigned after Fox criticized him for participating in a May 30 rally to support Calderón's unofficial entry in the 2006 presidential race. The National Action Party (PAN) organized the rally. A past national PAN president, Calderón was Mexico's energy minister for 9 months.
Quick Takes
HUSKY ENERGY INC., Calgary, is seeking expressions of interest by June 30 from companies interested in producing and transporting natural gas from White Rose field, 350 km off Newfoundland and Labrador. The field has estimated gas reserves of 2.7 tcf. Husky wants to evaluate the viability of producing and transporting natural gas and the key technical, economic, and regulatory issues critical to development on the Grand Banks, as well as capital and operating costs required. A marine transportation system using compressed natural gas has potential, Husky said, but it wants to consider other possibilities. The oil project has a capital cost of $2.35 billion and is scheduled to commence oil production by yearend 2005 or early 2006.
Vintage Petroleum Inc., Tulsa, operator of An Nagyah field on the S-1 Damis block in Yemen, has completed the 4,593 ft TD An Nagyah #7 appraisal well. Electric log analysis indicates a gross oil-bearing interval of 144 ft. An 89 ft interval in the Upper Lam formation was perforated at 3,366-3,478 ft, and testing is under way. Vintage plans seven wells this year. It also has budgeted $17 million this year to construct a pipeline and a 10,000 b/d processing facility at An Nagyah for completion in second quarter 2005. Oil production began in late March. Combined gross production capacity from three producing wells exceeds 3,000 b/d. Russia's OAO Gazprom has invited Norway's Norsk Hydro AS to join the partnership that will develop giant Shtokman gas field in the Russian Barents Sea about 500 km from Murmansk, where a liquefaction plant and LNG export terminal would be built. Shtokman has estimated reserves of 3.3 trillion cu m (OGJ, Aug. 25, 2003, p. 100). The $40 billion project has been on hold since 1992 because of financial, legal, and technical problems. Norsk Hydro said its offshore expertise, especially its experience with Orman Lange, could reduce Shtokman's development costs by 30%. Norsk Hydro said its participation, however, is pending clarification of the development plan, ownership stakes, and other conditions.
ExxonMobil Canada Ltd., which is involved in the Sable Offshore Energy Project (SOEP) off Nova Scotia, is drilling at Cree field, between Alma and Thibaud fields, using the Rowan Gorilla V heavy-duty, hostile-environment jack up. The Cree I-34 well was spudded May 15 in 57 m of water. ExxonMobil Canada Pres. Alex Dodds said the company expects the well to reach 3,962 m TD in August. The jacket for South Venture field (also part of SOEP) was set using a heavy lift operation on May 22, and the topsides will be installed later this year. Drilling at South Venture is slated to start this month from the Galaxy 1 jack up. ExxonMobil plans to have compression facilities in place by 2006.
ANADARKO PETROLEUM CORP. extended its K2 North oil discovery on Green Canyon Block 518 in the Gulf of Mexico with the K2 North No. 2 delineation well that encountered 165 ft of net oil pay. The well is 1 mile northwest of the K2 North No. 1 discovery (OGJ, Nov. 24, 2003, p. 9). The semisubmersible rig that drilled the well remained on location to further delineate the field. The field will begin production through the Marco Polo platform in 2005, along with production from K2 field immediately to the south in Block 562. Anadarko is completing the first of six predrilled development wells from Marco Polo field, on schedule for first production in July. BHP Billiton Ltd., Melbourne, and Apache Corp., Houston, reported an oil discovery with the Stickle-1 well on the WA-12-R retention lease in the Exmouth subbasin of the Carnarvon basin off Western Australia. Stickle-1, drilled to 5,407 ft MD in 640 ft of water, found an 88 ft oil column in the Pyrenees member of the Cretaceous age Barrow group, Apache said. Logs, pressure readings, and wireline oil recovery confirmed the oil pay, Apache said. Operator BHP plans to drill a fourth exploration well, Harrison-1, and appraisal wells around nearby discoveries Ravensworth, Crosby, and Stickle this quarter.
Statoil ASA recently reported an oil discovery on its Linerle prospect northeast of Norne field in the Norwegian Sea. The West Navigator drillship spudded the well Apr. 30 and completed it on May 23. Linerle is on Block 6608/11 in production license 128, known as the Norne license. Statoil is operator, with ENI Petroleum Co. Inc., Norsk Hydro ASA, Petoro AS, and a Royal Dutch/Shell Group unit as partners. Further assessment is planned to determine if development is feasible.
First Calgary Petroleums Ltd., Calgary, reported that the LEC-1 exploration well on its 100%-held Ledjmet Block 405b in Algeria indicated 42 m of net hydrocarbon pay over multiple intervals on a geological structure separate from that of its MLE field about 8.4 km to the northeas. EC- was drilled and logged to 4,437 m. A production liner is being set to total depth in preparation for completion and production testing. Proven, probable, and possible reserves within Block 405b were estimated at 7 tcf of natural gas equivalent Dec. 31, 2003. FCPL plans four other wells on the block in 2004.
Cairn Energy PLC, London, said the Mangala-4 appraisal well in Rajasthan, India, encountered 110 net m of "high quality oil-bearing Fatehgarh sands." Mangala-4 was drilled 1.75 km updip from Mangala-2 and 1.5 km from Mangala-1. The Mangala-4 results were consistent with the oil water contact determined in other Mangala wells. A 7-day interference test between Mangala-1 and Mangala-4 established both vertical reservoir continuity and lateral connectivity between the two. Cairn CEO Bill Gammell said that "reinforces our confidence for the future Mangala development." Mangala-5 and Mangala-6, which will be drilled between Mangala-1 and Mangala-3, are expected to spud this month, the company said.
QUODDY BAY LLC, Tulsa, has signed an agreement with the Sipayik tribal government of Pleasant Point, Me., for an LNG import terminal, storage, and regasification facility to be developed on tribal land near the port of Eastport, Me. The terminal would be designed to receive, store, and regasify 0.5 bcf of natural gas, scalable to 1 bcf. Project proponents expect to notify the Federal Energy Regulatory Commission by Dec.1 of their intent to file an application. Quoddy Bay is a partner in the venture with Smith Cogeneration and the Sipayik tribal government. The tribe's unique legal status could provide an important advantage in the permitting process, Smith said. Peru LNG SRL, led by Dallas-based Hunt Oil Co. for partner SK Corp. of South Korea, is seeking additional partners for the construction of a $1 billion liquefaction plant to be built at Pampas Melchorita near Cañete, 169 km south of Lima. The plant would have an initial capacity of 4.4 million tonnes/year of LNG. The company hopes to begin operating in late 2007 or early 2008. F
SUMITOMO CHEMICAL CO. of Japan and Saudi Aramco have agreed to form a 50:50 joint venture to build a $4.3 billion refining-petrochemical complex on the Red Sea coast at Rabigh, Saudi Arabia. Aramco would supply the JV with 400,000 b/d of crude oil, 95 MMscfd of ethane, and as much as 15,000 b/d of butane. Sumitomo will provide proprietary petrochemical technology and marketing expertise. Aramco owns and operates a 400,000 b/d refinery at Rabigh that will serve as the base platform for the proposed complex. Scheduled for start-up in late 2008, the complex is designed to produce 1.3 million tonnes/year of ethylene, 900,000 tonnes/year of propylene, and 80,000 b/d of gasoline.
US drilling activity dipped slightly the week ended June 4, with 1,168 rotary rigs working, down 1 from the previous week but up from 1,054 a year ago, said Baker Hughes Inc. Land operations were down by 5 units with 1,054 working that week. Offshore operations were down by 1 rig to 90 in the Gulf of Mexico and 92 in US waters as a whole. Drilling activity in inland waters showed the only gain, up by 5 rigs to 22. Canada's rig count was up by 61 to 265 rotary rigs working that week, but 12 fewer rigs than were working for the same period a year ago.
SHELL EXPLORATION & PRODUCTION CO., New Orleans, will keep its Mars tension leg platform in the Gulf of Mexico Mississippi Canyon Block 807 shut in for "several more weeks" to repair a damaged gas pipeline. Shell discovered deterioration to the gas line's flexjoint during the TLP inspection as it prepared to restart the platform after repairing the oil pipeline flexjoint. The TLP has been shut in since May 22 (OGJ Online, May 24, 2004). Before shutdown, Mars was producing 150,000 b/d of oil and 170 MMcfd of gas. TransCanada Corp., Calgary, has applied to Alaska under the Alaska stranded gas development act (SGDA) for the Alaska Highway pipeline project and is seeking right-of-way across state lands. TransCanada anticipates that fiscal negotiations between Alaska and the North Slope producers will continue simultaneously with ROW activities and the SGDA application review. TransCanada has updated the pipeline's design to include the latest technology and ensure that the pipeline meets modern environmental and regulatory standards. Once the ROW lease application is approved and Yukon-Alaska border interconnection agreements are in place, TransCanada said it could convey the lease to another partnership. The $1.6 billion Camisea project began test-pumping natural gas through its pipelines June 2, according to Peru's Energy and Mines Minister Jaime Quijandria. Operators of the project, which is slated to begin commercial production by Aug. 9, are Pluspetrol SA of Argentina and Tecgas unit Transportadora de Gas del Peru. The gas pipeline route extends 730 km from fields in Malvinas to Lima's city gate. A parallel line for liquids extends 540 km to Pisco on the south coast where the consortium is completing a fractionation plant for production of butane, ethane, and other products.
PETRÓLEO BRASILEIRO SA has commenced oil production from the Marlim Sul floating production, storage, and offloading vessel in Marlim Sul field in the Campos basin off Brazil. The FPSO, 110 km off Rio de Janeiro state in 1,160 m of water, can process 100,000 b/d of oil, store 1.6 million bbl of oil, compress 2.3 million cu m/day of gas, and inject 125,000 b/d of water. The vessel will increase the oil producing capacity of the field to 250,000 b/d from 185,000 b/d. Nine wells in Phase 1 development, will tie into this FPSO, which is owned by Single Buoy Moorings Inc., Marly, Switzerland. Nexen Inc. and OPTI Canada Ltd., both of Calgary, awarded a contract to GE Energy, a division of General Electric Co., Atlanta, to supply dual-fuel gas turbines for the JV's Long Lake oil sands project near Fort McMurray, Alta. The generators, part of an integrated gasification-cogeneration plant the JV is constructing, will be the first gas turbines in Canada to use synthetic gas as the primary fuel, GE said, and will mark the first use of syngas-fired gas turbines in a steam-assisted gravity drainage oil production facility. Nexen will operate the cogeneration facility, while OPTI Canada will operate the gasification facility. Commercial operation is slated to start in fourth quarter 2006.
FULL DEMONSTRATION PRODUCTION has begun from a 1,000 b/d semicommercial gas-to-liquids plant at Mossel Bay in South Africa. The GTL plant is owned equally by Norway's Statoil ASA and Petroleum, Oil, & Gas Corp. of South Africa (Pty.) Ltd. Feedstock first was fed into the facility on Apr. 19. Synthetic oil and wax production began on May 18, when the plant's output was at 50% of capacity. The demonstration phase is due to be completed by yearend 2005, when the technology will be ready for application in full-scale commercial plants.
CORRECTION
Due to a copyediting error, new Indian Prime Minister Manmohan Singh recently was misidentified as India's oil minister. OGJ was reporting Singh's appointment of Mani Shankar Aiyar as India's new oil and gas minister (OGJ, June 7, 2004, p. 26).