Market Movement
Energy prices fluctuate with market reactions
Energy futures prices fluctuated daily as markets reacted to changing supply indicators through the long US Independence Day holiday weekend.
Crude futures prices rose July 5 in London with reports of more damage to Iraqi oil pipelines and the possible shutdown of some oil operations by giant Russian firm, OAO Yukos.
The New York Mercantile Exchange was closed July 5 for the 3-day holiday weekend, but energy futures prices generally fell in profit-taking July 2. Only gasoline prices continued to climb. Trading was lower than normal during that shortened session. Those doing business generally locked in profits from price run-ups in the previous two sessions.
London market reacts
In London, the August contract for North Sea Brent crude declined during July 2 trading on the International Petroleum Exchange but rebounded July 5 to a 1 month high on reports of additional damage to oil pipelines in Iraq.
According to initial reports, a pipeline carrying crude oil to Iraqi terminals on the Faw peninsula was set on fire by an explosive device, and another explosion damaged a pipeline south of Baghdad, reducing exports roughly by one half.
The London market also was affected July 5 by reports that Yukos might be forced into insolvency. Yukos, which produces roughly 2% of the world's crude oil, might have to halt output after bailiffs in the Russian legal system froze its bank accounts in a tax dispute. Yukos said July 5 that it would slash some of its 400,000 b/d of oil and products exported by rail and river this month but would maintain its commitments on all other exports, said Robert S. Morris in a July 6 report for Banc of America Securities LLC, New York.
Energy futures prices jumped July 6 as traders returned to the New York market from their long holiday to face disruptions of crude exports from Iraq and Nigeria. Damage to a key pipeline in Iraq was reported almost repaired by July 7, and exports were expected to resume within a few days. Meanwhile, the suspension of 800,000 b/d of Iraqi crude exports had frightened traders.
July 6 reports from Dow Jones News wires said exports of petroleum products from Saudi Arabia into Iraq were halted after tanker trucks came under fire near the Jadidat Arar border crossing. According to wire service reports, a local contractor halted indefinitely all deliveries after 75% of its vehicles came under fire, damaging the trucks and injuring drivers. It was reported that no tanker trucks had entered Iraq for 5 days. Although it has huge oil reserves, Iraq's aging refineries cannot meet that country's own demand for gasoline and gas oil.
Total SA shut down its production in Nigeria on July 6 after workers threatened to strike. An ExxonMobil Corp. unit in Nigeria also faced a possible strike by oil workers, officials said.
New highs for prices
As a result of heightened concerns over supply, the NYMEX August contract for benchmark US sweet, light crudes jumped by $1.26 to $39.65/bbl July 6, the highest settlement for a front-month contract since June 2. Heating oil for the same month closed at $1.093/gal, up by 2.04¢ for the day, after hitting a 16 month high of $1.106/gal.
The August natural gas contract shot up by 27.6¢ to $6.42/Mcf on NYMEX. That market got "an additional boost by a shift to warmer-weather forecasts," said analysts at Enerfax Daily. "But despite the possibility of a short-term price surge, natural gas fundamentals remain benign. Current weather conditions remain relatively mild, but a significant warming trend next week is coming, although the official forecast is still calling for only moderate heat," they said last week. Natural gas prices previously had not mirrored the recent rise in oil prices "due to a lack of weather-related de- mand," Morris said. "The inelasticity of demand to high natural gas prices remains solid."
Although gasoline continued to climb on NYMEX, most energy futures prices fell again July 7, as Total announced a compromise among union leaders, government officials, and company representatives to avert the proposed Nigerian strike.
OPEC quota move
The market also was comforted by a statement by Saudi Arabian Oil Minister Ali al-Naimi that the Organization of Petroleum Exporting Countries wouldn't backtrack on its decision to raise its production quota by another 500,000 b/d on Aug. 1. Whether that will result in an actual increase in production is yet to be seen.
Traders were rattled when Al-Naimi earlier said OPEC no longer needs to adjust its total production quota now that prices have reached a "fair" level (OGJ Online, July 2, 2004).
Iranian Petroleum Minister Bijan Namdar Zangeneh was quoted July 5 by the Iranian news agency as saying, "We believe the oil market is in a balanced position for both oil consumers and producers."
Rising demand
Although OPEC ministers see balance in today's market, analysts project rising demand later in the year.
"While incremental barrel availability from Saudi Arabia will rise by the end of the third quarter, with Qatif and Abu Safah projects coming online, the fourth quarter of the year also sees a seasonal increase in market requirements for OPEC oil," said analysts at Merrill Lynch Global Securities Research & Economics Group, New York. "Our supply-demand balance forecasts the call on OPEC crude to be 27.7 million b/d [in the fourth quarter], meaning spare capacity will remain thin even with the kingdom's projects being completed."
So far this year, OPEC's basket price has averaged $32.59/bbl, sparking speculation that OPEC ministers may discuss adjusting upward the group's target price band of $22-28/bbl at their July 21 meeting in Vienna.
Merrill Lynch analysts said that Venezuela is the primary proponent for raising OPEC's target price. They noted that Venezuela's production capacity has declined by 15% since early 2003, "owing to the effects of the general strike in late 2002." However, they said, "Reliable indications strongly suggest that key member countries will continue to oppose any upward adjustment," although "prices are likely to gravitate generally at or above the top end of OPEC's targeted price band for the foreseeable future (which is the equivalent of $30/bbl for [West Texas Inter- mediate] crude)."
After projecting for months that US crude futures prices would begin declining to close to $30/bbl in 2005, the US Energy Information Administration in a major shift said July 7 that prices for benchmark US crude will likely average about $37/bbl through next year. That change is based on the failure of industrialized countries to mount a sustained increase in petroleum inventories in recent weeks despite increased production by countries like Saudi Arabia.
"Growth in global oil demand in excess of 2 million b/d is expected for 2004 and 2005 and is likely to keep spot crude oil prices near current levels through next year," said EIA. "Chances for even a gradual, sustained decline in crude oil prices through 2005Useem to have diminished."
Industry Scoreboard
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Scoreboard
Due to a holiday in the US, data for this week's Industry Scoreboard are not available.
Industry Trends
MEXICO'S national oil company Petroleos Mexicanos has improved the terms and conditions for bidders interested in the second round of multiple service contracts (MSCs), said a research note from Wood Mackenzie Ltd., Edinburgh.
MSCs are intended to help Pemex boost its natural gas production from the Burgos basin (OGJ Online, Apr. 23, 2004).
Matthew Shaw, a WoodMac senior Latin America analyst, said in a July 1 research note that he believes the new terms should prove attractive to industry while also providing insight into how MSCs are evolving.
"In particular, the new terms are a test case ahead of a far more ambitious third round that Pemex plans to hold in 2005. Round 3 should offer a far wider variety of acreage, with oil projects potentially being made available for the first time," Shaw said.
Round 2 terms were changed to:
- Accelerate repayment of costs to contractors. This will increase available cash flow, which should be particularly attractive for smaller contractors, Shaw said. Pemex cannot link profits for contractors to either gas production or gas prices.
- Reduce bureaucracy. The administrative burden is being lessened in efforts to streamline daily operations. Round 1 blocks were "plagued" by cumbersome bureaucracy, he noted.
- Lower qualification criteria to attract smaller companies. Mexican companies in particular are being encouraged to participate through the elimination of a previous requirement for international experience.
Pemex requires fast progress on the MSC work in hopes that the MSCs can produce 800 MMcfd of gas yet this decade. Some 350 MMcfd is forecast to come from the Round 2 blocks, he said.
"We consider the new terms and conditions to be a step in the right direction towards making MSCs more attractive. However, restrictions imposed by the Mexican Constitution and related laws narrowly confine the contract that Pemex can offer, and make it very difficult for all the demands of the industry to be met," Shaw said.
In addition, Pemex faces "political sensitivities" about MSCs and is taking a "very careful approach to attracting new investment" to the exploration and production sector, he said.
Industry still has concerns regarding what acreage is offered, the harshness and complexity of the terms, and the bureaucracy.
"However, Wood Mackenzie believes that improvements have been made and is confident more will be made in the future. But, just as important, the industry keenly awaits results from the Round 1 acreage in order to ascertain how successful (or not) contractors have been in making money from their projects," Shaw said.
The second round involves simply a reoffering of acreage, with modifications, that received no bids during the initial round last year, he noted (OGJ Online, Oct. 29, 2003).
The three blocks being offered cover 3,443 sq km, and Pemex estimates that they contain 194 bcf of proven plus probable reserves, with additional potential of 184 bcf of possible reserves and an undiscovered potential of 416 bcf.
Government Developments
The US Federal Trade Commission July 7 took steps to curb what it sees as potentially anticompetitive behavior by Royal Dutch/Shell Group and Unocal Corp.
Following testimony before the subcommittee on Energy Policy, Natural Resources and Regulatory Affairs of the House Committee on Government Reform, FTC General Counsel William Kovacic told lawmakers commissioners had approved a formal investigation of Shell. The probe will focus on agency concerns that the company's November 2003 decision to shut down its Bakersfield, Calif., 70,000 b/d refinery may be illegal. Subpoenas have been issued, although senior FTC officials declined to say when or to whom the documents were sent. Agency officials also declined to say when they expect the staff to finish the investigation.
Following the staff inquiry, it is up to FTC commissioners to decide what corrective action, if any should be taken, although regulators said the government could "in theory" force Shell to keep the refinery open.
Shell is cooperating with federal authorities; the facility still is slated to close by November. The company last fall cited the "continual decline" of San Joaquin Valley heavy crude as a key reason for closing the plant. Some West Coast lawmakers and consumer groups allege Shell's action is being taken to help drive up retail gasoline prices even further; company critics argue there already is little or no competition in the US's most expensive motor fuel market.
Also at the hearing, FTC officials invited Congress's independent watchdog, the General Accounting Office, to participate in a public conference on gasoline markets.
Specifically, FTC wants the two independent agencies to debate whether a recent GAO report definitively proves that recent oil mergers have exacerbated retail fuel price increases and encouraged anticompetitive behavior. FTC disagrees with the way GAO conducted the study, released last May. A GAO official present at the hearing said he supports the conference, pending "institutional" approval by his supervisors.
Some industry observers said FTC's announcements reflect the White House's desire to help smooth tensions between the administration and Congress over volatile energy public policy issues. In May, West Coast lawmakers led by Sen. Ron Wyden (D-Ore.) placed a "hold" on the nomination of Deborah Majoras, a former US Department of Justice antitrust official, to chair FTC.
At a Senate hearing this spring, Majoras said that, if confirmed, she would appoint a special energy counsel at FTC to study gasoline markets, including the impacts of past mergers on the industry.
But so far the hold remains in place, and it is unclear when or if the senators will remove the procedural block before Congress recesses later this fall.
In a separate action, the agency said it reinstated charges that Unocal violated antitrust laws by defrauding the California Air Resources Board as it mulled new reformulated gasoline specifications. FTC commissioners on a 5-0 vote reversed the ruling of an agency administrative law judge and sent the matter back for agency review.
Quick Takes
INDONESIA is requesting bids for exploration and development of 10 oil and gas blocks on which it is offering better production-sharing splits and other incentives. Bid winners will be announced in October, reported the Jakarta Post. Acreages on offer are Lhokseumawe Block in Aceh province, Ujung Kulon in Banten, East Java's Northeast Madura III, IV, and V blocks, East Nusa Tenggara Rote I and II, Maluku's Babar and Selaru, and Manokwari in Papua province. Indonesia will offer a higher production split of 35% for oil, up from 15%, and 40% for natural gas, up from 30%, for remote areas. It also will offer other fiscal incentives for gas development on most blocks. The Ministry of Finance delayed bids for a year to impose a value-added tax on the importation of exploration equipment. Pogo Producing Co., Houston, said development of the Kenderes gas-condensate area on Szolnok Block in Hungary is on hold because a delineation well encountered "very limited hydrocarbon shows." The Orm-K-3 well tested the size and commerciality of the Kenderes discovery area, and Pogo has yet to establish enough hydrocarbon accumulation to justify infrastructure expenditures needed for production (OGJ Online, Dec. 4, 2003). Final well logs still were being analyzed in early July. Pogo anticipates a second quarter write-off of $17 million on the four Kenderes wells drilled as of July 2. However, the company said it does not plan to stop exploring in Hungary. Pogo said it would spud the Orm-K-5 well by mid-July.
WOODSIDE ENERGY LTD. has awarded FMC Technologies Inc., Houston, an $89 million contract to supply subsea systems and related services for Chinguetti field off Mauritania. The project agreement includes 12 subsea trees, manifolds, production controls, and associated systems. FMC Technologies also will furnish installation and start-up services. The contract is part of a preferred supplier agreement for subsea systems that the two companies signed last year. Chinguetti is 50 miles west of Mauritania in 2,620 ft of water.
STATOIL ASA has awarded Bergen, Norway-based Odfjell Drilling ASA and Stavanger-based Smedvig Offshore ASA contracts totaling 3.3 billion kroner to drill production wells from 10 Statoil-operated platforms. The contracts are for 4 years with renewal options. Smedvig has secured a 1.7 billion kroner drilling assignment to drill from fixed platforms on Statfjord and Gullfaks fields in the Tampen area, and Odfjell has a 1.2 billion kroner contract for Tampen area fields Visund, Snorre A, and Snorre B and a 450 million kroner contract for Heidrun field drilling. Work will be phased in during the second half of this year. US drilling activity pushed past the 1,200 rig mark for the first time since early September 2001, with 1,201 rotary rigs working the week ended July 2, up by 25 from the previous week and up from 1,077 during this same period in 2003, Baker Hughes Inc. said. Most of the increase was in land activity, up by 22 rigs to 1,085 working. Offshore drilling also increased, by 1 rig to 93 in the Gulf of Mexico, with an increase of 3 to 98 in the US offshore as a whole. Drilling in US inland waters was unchanged, with 18 rotary rigs working. Canada's rig count jumped again, by 63 to 397 that week, compared with 375 during the same period a year ago.
Finland's FORTUM OIL and its affiliate Neste Engineering Oy, Porvoo, Finland, are investing 500 million euros in a diesel capacity expansion project at Fortum Oil's Porvoo refinery. Designed with a 200,000 b/d capacity crude unit, Porvoo currently has one 19,400 b/d hydrocracker. The companies are adding two hydrocracking reactors and three reciprocating compressors, all to be supplied by GE Energy, Atlanta. The compressors will be shipped from Florence, Italy, in first quarter 2005 and the reactors from Massa, Italy, in second quarter 2005. The oil refinery expansion is expected to begin commercial operation in 2006.
THE US CHEMICAL SAFETY BOARD (CSB) will hold a public meeting July 15 in Washington, DC, to consider a new safety bulletin for methyl tertiary butyl ether (MTBE) producers. CSB recently reviewed a Jan. 11 explosion and fire that occurred at a 10-year-old petrochemical plant in Port Neches, Tex., owned by Huntsman Petrochemical Corp. (OGJ Online, Jan. 15, 2004). Board investigators say the fire occurred as workers prepared a process pipe for scheduled maintenance within a 27,000 b/d MTBE production unit. CSB officials said plant personnel did not know that the pipe contained residual feedstock chemicals that overheated when steam was directed through it, building pressure and rupturing the pipe, releasing a flammable vapor cloud that then ignited. Two workers were hospitalized and others suffered minor injuries from the explosion and fire. CSB officials said the safety bulletin reviews good practices for preventing such incidents when lines and equipment are opened. CSB, an independent federal agency charged with investigating industrial chemical accidents, does not issue citations or fines but makes safety recommendations to plants, industry organizations, labor groups, and regulatory agencies.
ExxonMobil Chemical Co. has expanded its world-class plasticizer and oxo alcohol plants in the Asia Pacific region. In Panyu, South China, it expanded the capacity of its 4-year-old plasticizer plant to 90,000 tonnes/year of di-isononyl phthalate from 40,000 tonnes/year. Capacity at ExxonMobil's oxo alcohol plant on Jurong Island in Singapore has increased to 180,000 tonnes/year of isononyl alcohol from 150,000 tonnes/year. Oxo alcohol is feedstock for the manufacture of plasticizers. The plant became operational in 2001. The improvements increased efficiency and expanded capacity to better meet customers' growing demand for C9 alcohol and polyvinyl chloride plasticizers in the region, ExxonMobil said. Iranian President Mohammad Khatami has commissioned five major petrochemical projects in Mahshahr, in the southwestern Iranian province of Khuzestan, reported OPEC News Agency. Khuzestan Petrochemical Co., completed a 600 billion rial polymers facility, and the $142 million Bandar Imam MTBE plant is designed to produce as much as 500,000 tonnes/year of MTBE. Fajr Petrochemical Co. completed a $310 million petrochemical utilities project, and Fanavaran Petrochemical Co., a $134 million petrochemicals plant put into operation ahead of schedule. Construction of a $3.5 million petrochemicals export dock began in 2000, and the dock is now in operation. It has a 2.5 tonne/day capacity for loading and offloading liquid products.
ALASKA accepted Enbridge Inc.'s Stranded Gas Act application to negotiate fiscal and tax issues related to its proposal to build a natural gas pipeline from Alaska's North Slope to the Yukon border (OGJ Online, May 7, 2004). The state already has approved an application from ConocoPhillips, BP PLC, and ExxonMobil Corp. to negotiate those issues, and an application from TransCanada PipeLines Ltd. (OGJ Online, June 22, 2004). Alaska's Gas Development Authority allows the state to negotiate such issues as taxes and royalty adjustments, Alaska content hiring, offtake points, and access. The state expects to present a contract to the legislature in January from one or more of these companies. Cheyenne Plains Gas Pipeline Co., a unit of Houston-based El Paso Corp., awarded a $60 million contract to London-based AMEC PLC to construct two thirds of the Cheyenne Plains natural gas pipeline project. The 380 mile system will run from El Paso's Cheyenne Hub south of Cheyenne, Wyo., to Greensburg, Kan. (OGJ Online, May 28, 2003). The contract calls for US Pipeline Inc., a Houston-based unit of AMEC, to construct 255 miles of 36-in. pipeline and 4 miles of 30-in. pipeline between eastern Colorado and western Kansas. The contract also calls for construction of 9 launcher-receiver facilities, 13 mainline valve installations, and 6 delivery sidetap installations. Initial capacity would be 560 MMcfd of gas, which could be increased to 730 MMcfd within 1 year. The proposed pipeline is planned to be in service in early 2005.
PRODUCTION has started up at In Salah natural gas fields in central Algeria, reported Mohamed Meziane, managing director of Algeria's state oil and gas company Sonatrach. The fields, which are expected to produce about 10 billion cu m/year of gas, will be linked by pipeline to Hassi R'mel field, and the gas marketed to southern Europe. Sonatrach and BP jointly developed the $2.5 billion project under a 30-year production-sharing contract signed in December 1995. Norway's Statoil recently became affiliated with the project by purchasing 43% of BP's stake (OGJ, Dec. 4, 2000, p. 44).
OMAN's state-owned Qalhat LNG SAOC will supply LNG to the Far East under terms of contracts recently signed with Japan's Itochu Corp., Osaka Gas Co., and Mitsubishi Corp. Itochu said it would purchase 700,000 tonnes/year of LNG from Qalhat for 20 years starting in 2006, while Osaka Gas will buy 800,000 tonnes/year for 17 years from 2009. Mitsubishi Corp. will purchase 800,000 tonnes/year for 15 years, possibly extending that to 20 years. The sultanate is expanding its LNG carrier fleet to transport increased production from Oman LNG's projected third train at its Qalhat liquefaction terminal near Sur on Oman's northeastern coast 75 nautical miles southeast of Muscat (OGJ Online, June 9, 2003). Oman's total LNG production increased by 10.6% by late April—to 247.5 bcf from 223.8 bcf in 2003—according to Omani official figures. The sultanate plans to charter a 138,000 cu m LNG carrier and sublease it to Oman LNG for $67,000/day. The vessel will join Sohar and Muscat, the other two carriers in the government's fleet. Oman reportedly has proven gas reserves of 30.3 tcf. In contrast to its LNG growth, figures from Oman's Ministry of National Economy indicated that Oman's production of crude oil and condensate in the first 4 months of this year dropped to 95.5 million bbl from 100.4 million bbl the same time in 2003, and oil exports dipped to 86.9 million bbl from 94.1 million a year earlier. Ras Laffan LNG Co. Ltd. II (RasGas II), Doha, has awarded a contract to a joint venture of Yokohama-based Chiyoda Corp. and Snamprogetti & Co. WLL, Milan, for the onshore engineering, procurement, and construction of its LNG Train 5 at Ras Laffan Industrial City in Qatar.
The JV will construct the world-scale, 4.7 million tonne/year liquefaction train and additional facilities to extract NGLs from the inlet gas stream. Train 5, to be built adjacent Train 4, will be completed by yearend 2006 with start-up and deliveries scheduled for mid-2007.
Qatar's North field, which has proven natural gas reseves exeeing 900 tcf, will provide the feed gas for the unit.
Rasgas II plans to increase LNG exports from Qatar to more than 60 million tonnes/year by the end of the decade. Rasgas II, a joint venture of Qatar Petroleum 70% and ExxonMobil RasGas Inc. 30%, has sale and purchase agreements under development with European customers. RasGas II also has chartered another seven LNG carriers, bringing the company's fleet to 13 when the final vessel is delivered by second quarter 2008. Daewoo Shipbuilding & Marine Engineering Co. Ltd. in South Korea will build the carriers, which two JVs will own: Teekay Shipping Corp. and Qatar Gas Transport Co. will jointly own three 151,700 cu m ships, and Maran Gas Maritime Inc. and Qatar Gas Transport Co. will jointly own four 145,700 cu m ships. RasGas will charter the vessels for 20 years to deliver LNG to customers from Ras Laffan Industrial City in Qatar. Qatar Petroleum's Qatar Terminal Ltd. and ExxonMobil unit Zeebrugge LNG Trading Co. Ltd. have agreed to supply Fluxys SA 3.5 million tonnes/year of LNG at Fluxy LNG's Zeebrugge, Belgium, LNG terminal, beginning in 2007. This accord, the first long-term agreement Qatar Petroleum has signed with an existing terminal operator, will enable Fluxys to expand its terminal capacity to 7 million tonnes/year. Fluxys is a member of Paris-based Suez Group. Iran is seeking buyers for the natural gas from its giant Pars field and is planning three LNG projects, officials say. Rokneddin Javadi, managing director of National Iranian Gas Export Co., said that an LNG project would take 5 years to complete, but the company in February awarded a 1.6 billion euro contract to a group comprised of Total SA, Malaysia's national oil company Petronas, and National Iranian Oil Co.'s NIOC-LNG to build an LNG plant utilizing natural gas feedstock from South Pars.
Finding buyers was expected to take 7-8 months. Total also is said to be a strong contender for Phase 11 of the 25-phase South Pars develoent project that is expected to be awarded shortly. BP PLC, Statoil, and ENI SPA also are competing for development of Phase 11 gas, which is earmarked for European markets.
DOMINION TRANSMISSION INC., the interstate gas transmission subsidiary of Dominion, Clarksburg, W.Va., has received US Federal Energy Regulatory Commission approval to convert 15 existing oil wells in Lewis County, W.Va., to an underground natural gas storage system.The project, estimated to cost $9.2 million, would involve converting the wells in Fink field, in central West Virginia, to gas storage and connecting them to Dominion's existing Sweeney compressor station. The project includes installation of new pipelines and testing-replacement of existing pipelines where needed and other facilities. The field will be part of the Fink-Kennedy-Lost Creek storage complex.