OGJ Newsletter

Aug. 23, 2004
Fear of possible civil strife and disruption of crude production and exports in Venezuela drove US crude futures prices above $46/bbl Aug. 13 for the first time in the contract's history as panicky traders scrambled to cover outstanding sales positions ahead of the Aug. 15 recall referendum election against Venezuelan President Hugo Chávez.

Market Movement

Chávez, markets survive recall election

Fear of possible civil strife and disruption of crude production and exports in Venezuela drove US crude futures prices above $46/bbl Aug. 13 for the first time in the contract's history as panicky traders scrambled to cover outstanding sales positions ahead of the Aug. 15 recall referendum election against Venezuelan President Hugo Chávez.

Results of the election were delayed when Venezuelan officials were forced to keep polls open until midnight on election day because of heavy voter turnout and polling problems. But by the following day, a partial ballot count put Chávez in the lead with more than 58% of the vote. Two of the five directors of Venezuela's electoral authority initially rejected the partial vote count, claiming ballots had not been properly audited. But international observers certified that voting was fair, although the opposition claimed there was fraud and "gross manipulation" at the polls.

The election turned out to be a nonevent for world oil markets with none of the large, violent civil demonstrations or disruptions of oil supply that some had feared.

Record prices

The September contract for benchmark light, sweet crude closed Aug. 13 at a record $46.58/bbl after hitting a new contract high of $46.65/bbl in preelection trade on the New York Mercantile Exchange. During the next session, that contract closed lower but not before hitting a new all-time high of $46.91/bbl. Most analysts attributed that rollback to Chávez's peaceful victory, with traders hoping that political stability, crude production, and oil exports would continue in Venezuela. However, some claimed the general decline of energy prices during that session was the result of an overall market adjustment.

Purnomo Yusgiantoro, conference president of the Organization of Petroleum Exporting Countries, predicted crude prices might retreat to $30/bbl next year with improved political developments in Iraq and Venezuela and the end of the financial crisis for Russian oil giant OAO Yukos. "There is a psychological premium in the market of $15/bbl because of Yukos, Iraq, and Venezuela. If the premium can be eliminated, oil prices will be down to $30/bbl," Purnomo said.

Meanwhile, Chávez announced that he planned to ask other OPEC members to raise the group's targeted oil price band to $25-30/bbl from present levels of $22-28/bbl.

Oil prices resume climb

Crude futures prices continued climbing Aug. 17 after a Russian court rejected a petition from Yukos to suspend collection of $3.4 billion in back taxes from the company. The move didn't directly affect the company's current operations, but it triggered speculative buying in oil futures markets. As a result, the September crude contract touched a new high of $46.95/bbl before closing at $46.75/bbl in that session on NYMEX. On Aug. 18, the contract settled at $47.27/bbl, after trading as high as $47.39/bbl, having set record highs in 14 of the last 16 trading sessions on NYMEX.

The latest increase was sparked by a report from the US Energy Information Administration that commercial US crude inventories fell by 1.3 million bbl to 293 million bbl during the week ended Aug. 13, with gasoline stocks plunging by 2.6 million bbl to 205.7 million bbl.

Analysts noted that newly released US economic data showed that high petroleum prices in recent months have not yet fired inflation nor hindered economic recovery (see related story, p. 18). And in its Aug. 18 monthly oil market report, OPEC pointed out that the forecast growth of US gross domestic product for 2004 had been reduced to a still-healthy 4.3%. The forecast for Japan increased by 0.3% to 4.3%, and the Euro-zone forecast was up slightly to 1.9%.

For members of the Organization for Economic Cooperation and Development, the forecast was unchanged at 3.5% growth. "Forecasts for 2005 imply a return to more-normal growth rates following the sharp economic recovery that began in 2003," the report said.

OPEC price records

Meanwhile, average prices for OPEC's basket for seven benchmark crudes broke all records—monthly, weekly, and daily—in July and early August. "On a monthly basis, the rise of $1.68/bbl in July brought the monthly average to an unprecedented level of $36.29/bbl. Besides the previous monthly high of $36.27/bbl reached in May of this year, the basket [price] has never been above $34/bbl since October 1990," OPEC reported.

The report noted a new weekly high average price of $37.40/bbl for the week ended July 29 and a daily record of $40.08/bbl on Aug. 11, that since has been surpassed. On the date that report was published, OPEC's basket price was up to $42.07/bbl.

Industry Scoreboard

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Industry Trends

THE CREDIT RATINGS OUTLOOK for the Asia Pacific oil and gas sector is stable, New York-based Moody's Investors Service said in a recent study from its Sydney office.

Moody's rated nine major oil companies in the Asia Pacific region as stable, citing strong international crude oil prices that are expected to continue well into 2005 and sound production growth profiles for 1-2 years.

"The [exploration and production] companies have used the current strength in oil prices to enhance their balance sheet structures through lowering financial leverage and creating solid levels of liquidity," Moody's Vice-Pres. and Senior Credit Officer Terry Fanous said. The scheduled commissioning of major projects ensures a strong production rebound.

"Accordingly, positive rating trends could emerge over the medium term for some of the E&P companies, which post solid and sustainable growth in output and hence strong cash flow," Fanous said.

Moody's noted that four of the nine Asia Pacific companies that it covers are state-owned, adding that state ownership of certain companies in the region is expected to remain a dominant feature of government policy. The study excluded Japan.

In Malaysia, Thailand, and China, oil and gas companies are wholly or majority government owned. Australia has a deregulated regime. South Korea maintains a deregulated oil sector, but its government continues to protect the industry, Fanous said.

Above-average oil prices are expected to continue for 6-12 months, driven in part by strong demand from China and India, in addition to improved Western demand.

"China's oil consumption grew 11.5% last year, the highest in the worldU. Other factors behind the strength in oil prices include security concerns in the Middle East and tightness in supplies for oil products," Fanous said.

Moody's predicted that "The current cyclical upswing in Asia is likely to persist for some time," Fanous said. "We do not expect government initiatives to curb growth in certain industries to materially affect domestic oil consumption. China's demand for fuel oil should remain strong, given its increasing role in supporting the power sector. Other fuels, such as gasoline, diesel, and jet fuel, should also be well-supported."

The credit rating agency forecasts a base case average price of $28-30/bbl for US benchmark West Texas Intermediate crude for 2004 and $20-22/bbl beyond that.

However, the study notes that the region's oil and gas companies still face various challenges, including the need for high capital spending programs to develop reserves and boost production, strengthen gas networks, and upgrade refining facilities.

Furthermore, acquisition and development of reserves in politically less stable countries are raising operating challenges and event risk, Fanous said. Almost all E&P companies in the Asia Pacific region are pursuing overseas investments as part of their growth strategies, a trend that has gained pace in the past 2-3 years because of the mature nature of Asia Pacific basins, he said.

Moody's expects that these companies will continue seeking overseas opportunities, especially onshore China, Malaysia, and Australia, where production output is undergoing a long-term natural decline.

Government Developments

THE US GOVERNMENT has ensured that crude oil will continue to be delivered to the nation's Strategic Petroleum Reserve so that the SPR will be filled to its 700 million bbl capacity as scheduled by mid-2005.

The Department of the Interior's Minerals Management Service awarded exchange contracts to two companies in late July. These contracts involve royalties taken in the form of oil—rather than cash—from federal lease operators in the Gulf of Mexico (OGJ Online, Mar. 25, 2004).

That oil is delivered to market centers where the Department of Energy takes custody, pending an exchange for crude of suitable quality that is delivered to SPR sites in Texas and Louisiana.

"The royalty-in-kind program provides an efficient and cost-effective means to continue filling the nation's [SPR] to maintain emergency oil stocks and support national objectives for energy security," said MMS Director Johnnie Burton.

MMS awarded exchange contracts to ChevronTexaco Products Co. and Shell Trading US Co. Delivery on the 6-month contracts is scheduled to begin Oct. 1.

The current fill initiative started in April 2002. Last month, the SPR inventory was 663 million bbl.

CANADA'S NATIONAL ENERGY BOARD expects a tight balance between natural gas supply and demand during the next few years.

That was the conclusion of a recent report entitled, "Looking Ahead to 2010—Natural Gas Markets in Transition." NEB hosted eight roundtable sessions during February to examine how gas markets might evolve through the end of the decade.

The sessions drew 90 people representing natural gas consumers, gas producers, regulatory agencies, government agencies, local distribution companies, pipeline companies, environmental groups, and various associations and service providers.

Participants suggested that regulators, governments, and market participants emphasize market forces and pricing to facilitate a smooth gas market transition in coming years.

Upon reviewing suggestions from the roundtable sessions, NEB said it would seek to improve regulatory effectiveness and efficiency by working to develop coordinated, clear, and predictable regulatory processes.

NEB also said that it would coordinate with other energy information providers to ensure that Canadians have improved access to complete and timely energy information.

An independent federal agency, NEB regulates several aspects of Canada's energy industry to promote safety, environmental protection, and economic efficiency. It monitors energy commodity supplies and publishes market assessments.

PAKISTAN has agreed to temporarily allow oil and natural gas exploration and production companies to import drilling equipment, seismic vessels, and certain specialized vehicles without payment of customs duty and sales tax.

Last month, the government agreed that oil companies as well as service and supply firms are entitled to the tax concessions, which also apply to their contractors and subcontractors.

Companies will be asked to submit a corporate guarantee valid for 2 years that equals the value of import duties and taxes exempted. The period could be extended by Pakistan's Collector of Customs provided that the importer has a definite contract, officials said.

Quick Takes

LIBYA'S NATIONAL OIL CORP. (NOC) delineated 15 areas that contain 55 blocks available for bidding in the country's first exploration and production-sharing licensing round. The blocks total 126,646 sq km. Six are all or partly in the Mediterranean Sea, and the others are onshore in the Ghadames, Sirte, Cyrenaica, and Murzuk basins. One Murzuk block is near Libya's borders with Niger and Chad. Bidding areas cover 4,374-11,317 sq km each and comprise of two to four blocks available in each. Data room fees are $12,510-129,565 per bidding area. NOC published the notice on its web site (www.noclibya.com/NOCbid_English.htm) and will hold information meetings in Tripoli Sept. 5 and in London Sept. 14.

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The US Minerals Manage- ment Service in New Orleans on Aug. 18 received 421 bids from 54 companies in Lease Sale 192 for the western Gulf of Mexico's Outer Continental Shelf planning area off Texas and Louisiana. In what was called "the best western gulf sale in 6 years" in the number of bids received and tracts sought (OGJ Online, Aug. 18, 2004), apparent high bids totaled $171.4 million for 351 tracts. Deep gas prospects attracted bidders to 135 tracts in water less than 200 m deep, and companies continued to express avid interest in deepwater and ultradeepwater plays, bidding on 193 tracts in water 400-1,600 m or deeper. Brazil's sixth oil and gas licensing round last week netted $219 million in bids, "a record compared to the previous five rounds," said the government's National Petroleum Agency. The minimum investment program to which the companies that won concessions committed themselves totaled $666 million. During the Aug 17-18 round 913 blocks were offered in 29 sectors of 12 basins, and 154 blocks were snapped up by bidders. Of these blocks 89 are onshore, 10 in shallow waters, and 55 in deep waters—together totaling 39,658 sq km (OGJ Online, Aug. 13, 2004). State-owned Petròleo Brasileiro SA dominated the sale, winning 55 blocks alone and 52 in partnerships. Thailand's PTT Exploration & Production PLC (PTTEP) received a production-sharing contract to explore Blocks M-3 and M-4 in Myanmar's Gulf of Martaban, 200-300 km south of Yangon. PTTEP has a 100% interest in the blocks, which are gas- prone, sharing basic characteristics with producing Yetagun and Yadana gas-condensate fields. The company will spend $13 million in the first 4 years for geological and geophysical studies, seismic surveys, and drilling at least one exploration well over the two tracts, which total 18,000 sq km.

Cairn Energy PLC, London, estimated a mean 300 million bbl of OOIP in northern Rajasthan in India with its N-V-1 exploration well on Block RJ-ON-90/1. However the 21° gravity oil's density and viscosity limited the flow rate. A cased hole test on pump will be required to determine true formation productivity. N-V-1 is 18 km west-northwest of Mangala field, which is 19 km west-southwest of the N-C discovery. The 812 m deep well encountered a 62 m oil column with 35 m of net oil pay in Fatehgarh sands. The structure's full extent is unknown; India must agree to a second extension area beyond the block boundary before further appraisal is possible. Cairn holds 100% interest in the 5,831 sq km block.

Occidental Petrolera del Peru Inc. has signed a third exploration license with Peru's state oil agency Perupetro SA, for Block 103 between the Loreto and San Martin regions in Peru's Upper Amazon, where it will record 400 km of 2D seismic and drill two exploratory wells. Occidental also expects to start drilling by 2006 on Block 101, which it licensed in April. A socioenvironmental impact study is under way along with preparations for geological studies and reprocessing 1,000 km of 2D seismic. Meanwhile, Occidental spudded the Situche Norte No.1-S well on Block 64 Aug. 2 and plans to spud the Situche Central prospect in early 2005. Talisman Energy Inc., Calgary, and Amerada Hess Corp. will participate in Blocks 101 and 64. Husky Energy Inc., Calgary, operator of the $2.35 billion White Rose oil field project, drilled an oil producer and three water injector wells in the field off Newfoundland and Labrador and expects to produce first oil by late 2005 or early 2006. Oil flowed on test from the horizontal White Rose B 07 2 well at more than 9,000 b/d, the maximum allowed by the rig's test facilities. The well is expected to have a productive capability of 25,000-35,000 b/d through permanent production facilities. Husky, which owns 72.5%, estimates probable reserves to be 200-250 million bbl, and anticipates peak production of 100,000 b/d.

AN EXPLOSION AND FIRE Aug. 13 shut down a catalytic hydrotreater at BP PLC's 420,000 b/d Whiting, Ind., refinery, according to press reports. The fire injured three people and downed the processing unit, but other areas of the plant reportedly were operating normally. BP has 300,000 b/d of catalytic hydrotreating capacity at the plant—the third largest US refinery. BP did not indicate how long the unit would be down.

SONORA PACIFIC MEXICO, a subsidiary of Houston-based DKRW Energy LLC, has purchased 1,500 acres of property at Puerto Libertad on the Gulf of California for its planned 1.3 bcfd LNG regasification and storage terminal and pipelines (OGJ Online, May 26, 2004). El Paso Corp., Houston, has agreed to install pipelines to deliver 500 MMcfd of gas from the terminal to Sonora and Sinaloa states and 800 MMcfd through Nogales to El Paso's existing system in the southwestern US. Sonora Pacific plans to start construction in mid-2005. Bechtel Corp. and Chicago Bridge & Iron, The Woodlands, Tex., will manage engineering and construction.

PEQUIVEN, the petrochemical subsidiary of Venezuelan state oil firm Petróleos de Venezuela SA (PDVSA), and ExxonMobil Chemical have agreed to jointly develop a world-scale project to produce olefins and derivatives at the Jóse petrochemical complex in Anzoategui state, eastern Venezuela. According to Venezuelan state news agency Venpres, specialists from both firms will begin feasibility studies in September. Pequiven said the complex would include a cracking plant that would produce 1 million tonnes/year of ethylene and its derivatives. PDVSA said that projects of this size typically cost $2.5-3 billion.

NABUCCO CO. PIPELINE STUDY GMBH, Vienna, has engaged ABN Amro Bank NV, Amsterdam, as financial advisor for the proposed 3,400 km, 4.4 billion euro Nabucco pipeline that would deliver 25-30 billion cu m of gas to Europe from the Middle East and Caspian Sea regions. The Nabucco study firm, which will research the feasibility of building the pipeline, represents the national oil companies of Turkey, Bulgaria, Romania, Hungary, and Austria (OGJ Online, Aug. 16, 2004). ABN Amro Bank will develop project financing, a construction model, and investor incentives and will coordinate marketing activities and negotiate transportation contracts with potential shippers. Construction could begin in 2008 and be completed in 2012. An investigation is continuing into the cause of a pipeline leak that led to a disastrous natural gas pipeline explosion in southwestern Belgium July 31 that killed at least 16 persons and injured 115 or more. The chain of explosions occurred at the Ghislenghien industrial site near the French border 20 miles southeast of Brussels. Fluxys NV, operator of the large-diameter, high-pressure line between Zebrugge and the French border, confirmed that a leak was reported 30 min prior to the explosion and that emergency personnel investigating the leak and securing the area were among the casualties. The pipeline is thought to have been damaged by construction workers building a road over the pipeline. Fluxys, which said disruptions to gas supply were minor, shut off gas to the line following the explosion and diverted deliveries to France through a parallel line. Fluxys is owned jointly by Royal Dutch/Shell Group, French utility giant Suez Group, and a number of municipalities.

THE CHAD-CAMEROON development project exceeded 200,000 b/d of oil production at times during the second quarter, said operator Esso Exploration & Production Chad Inc. The project exported 33.2 million bbl—60% more oil than in the first quarter—through Kribi, Cameroon. Kome and Miandoum fields were almost fully developed at the end of June, and first oil from Bolobo field is expected to reach the export pipeline by September. The consortium has signed a new convention with Chad for future exploration and development opportunities. It increases royalty payments on oil from new field developments not covered under the 1988 convention. Malaysia's Petronas and ChevronTexaco Corp. also are partners.

TOTAL E&P INDONESIE, through PT Dataco Citra Indonesia, has awarded a 3 year contract to Enventure Global Technology LLC, Houston, to provide solid expandable tubular systems for a development project in Peciko natural gas field off East Kalimantan, Indonesia. The equipment will be used as a contingency to cover drilling in shallow gas zones in the field. A challenge in Peciko field is reaching TD with adequate hole size, Enventure said. Total currently drills two wells inside a single conductor, whereas the new open-hole liner system will allow an extra string in the well design without compromising the hole size.

THE FIRE that sank the GSF Adriatic IV jack up drilling rig in the Mediterranean Sea Aug. 10 (OGJ Online, Aug. 11, 2004) spread to the Temseh natural gas production platform at which the rig had been working, causing "considerable" platform damage, said an oil ministry official. The 150 platform workers were evacuated uninjured. The platform, 25 miles off Port Said, Egypt, had been shut down for maintenance since early August. Temseh field normally produces 150-180 MMcfd of gas. Officials said the rig fire was caused by an overflow of natural gas during drilling. The platform is operated by Petrobel and owned by ENI SPA, BP PLC, and Egypt's General Petroleum Corp.

Talisman Energy (UK) Ltd., a wholly owned unit of Talisman Energy Inc., Calgary, began production of 6,000 b/d of oil from North Tartan field on Block 15/16a, 118 miles northeast of Aberdeen in the central North Sea. The field, which lies next to Talisman-operated Tartan platform, was drilled and tested in August 2003 with the 15/16b-23 exploration well. The well found a 302 ft oil column in high-quality Jurassic Piper sandstones. Tartan North field was developed initially as a single-well subsea producer tied back to Tartan platform. F OPTI Canada Inc. and Nexen Inc. awarded Emerson Process Management a $35 million (Can.) contract to provide automation for the $3.4 billion (Can.) Long Lake oil sands extraction project in Alberta. It will be the oil and gas industry's first combination of a steam-assisted gravity drainage oil sands extraction facility with a field upgrader that processes bitumen into synthetic crude. Phase 1 will begin in 2006 with an upgrader designed to produce 60,000 b/d of 39° gravity synthetic crude within 3 years (OGJ, June 7, 2004, p. 43). Emerson and partner Spartan Controls Ltd. will supply automation-specific engineering, project management, commissioning, and ongoing maintenance and operations support. Husky subsidiary Husky Oil China Ltd. signed a production-sharing contract with China National Offshore Oil Corp. (CNOOC) for Block 29-26 in the Pearl River Mouth basin of the eastern South China Sea. The block covers 3,965 sq km in water 300-2,000 m deep. CNOOC shot more than 4,500 km of high- quality 2D seismic in the area during 1986-2004. Exploration will take place in three phases to 2011, with one wildcat per phase and the first well scheduled for 2005. Husky will fund 100% of the exploration costs, while CNOOC retains the right to back into the project with a 51% interest.