Market Movement
Natural gas futures price at year's low
Natural gas futures prices on the New York Mercantile Exchange fell below $5/Mcf, to $4.97/Mcf, for the first time this year on Sept. 1 as Hurricane Frances veered toward Florida's eastern coast and away from gas production facilities in the Gulf of Mexico.
On Sept. 3, at the start of the long US Labor Day weekend, the October gas contract dropped to $4.68/Mcf, a new low for this year on NYMEX. But it bounced back to $4.79/Mcf on Sept. 7 as Hurricane Ivan, described as the most powerful storm to hit the Caribbean in 14 years, pounded Grenada in its advance toward the US.
By the next session, however, Ivan was taking a more easterly course that appeared to be moving it away from the central gulf, and the October contract hit a new low of $4.63/Mcf.
Even so, the Category 5 hurricane had a small effect on US natural gas supplies by forcing Atlantic LNG Co. of Trinidad & Tobago Ltd., the largest exporter of LNG to the US, to halt export shipments temporarily on Sept. 7 as the storm neared Trinidad and Tobago. The company resumed loadings Sept. 8, said analysts at Enerfax Daily.
"Natural gas futures have lost 18% of their value in the past month and are at levels not seen since November 2003, while physical gas prices on the Henry Hub went as low as $4.22[/Mcf on Sept. 3]. Natural gas prices are off nearly 30% from their peak last May, but the potential exists for more downside in coming weeks, especially if there is not an early onset of cold winter temperatures," they reported Sept. 8.
LNG rerouted
But even before Ivan roared into the Caribbean, US imports of LNG were "negatively impacted by the relative weakness in domestic natural gas prices [vs.] robust prices in the Far East, given the strength of oil prices; above-normal summer temperatures [in Asia]; and the recent wave of nuclear plant shutdowns in Japan," said Robert S. Morris, analyst withBanc of America Securities LLC, New York.
"Several LNG shipments initially intended for the US have recently been rerouted to Japan and South Korea," Morris said in a Sept. 2 report. "About 11 bcf of US-bound LNG was rerouted to the Far East in August, and at least another 20 bcf is likely to be diverted in September and October."
He explained, "LNG prices in the Far East are linked to crude oil prices, with about a 4 month time lag and some smoothing provisions. According to industry sources, prices for spot LNG deliveries to Japan are currently running as high as $7/MMbtu, while US Henry Hub prices have fallen to about $5/MMbtu."
Transportation adds 65¢/MMbtu to the cost of LNG delivered to the US from the Pacific Basin, compared with deliveries to Japan, Morris said. On the other hand, LNG shipments to the US from Nigeria are cheaper by 30¢/MMbtu, relative to transporting that LNG to the Far East.
"The majority of the rerouted cargoes were sourced from Pacific Basin suppliers, given the higher transportation costs to the US, although at least one Cove Point[, Md.]-bound Nigerian cargo was also reportedly redirected to the Far East," said Morris.
Emerging gas market trends
Analysts at Barclays Capital Inc., London, recently outlined two emerging trends in US imports of LNG this year in their latest bimonthly Commodity Refiner report.
First is a surge in throughput at the four existing US LNG terminals during the second quarter.
"Whether through foresight or in response to spot-cargo availability," they said, regasification volumes finally exceed 2 bcfd "on a regular basis, with the next threshold to approach being the combined installed capacity" of 2.6 bcfd. However, they warned, "Full throughput on a sustained basis may not be possible, given the [various] port configurations."
The increased LNG imports produced greater tanker traffic in the Gulf of Mexico, with at times "four or five ships" waiting to offload, they said. That system is "not necessarily the most efficient, considering demurrage and the single berth available," but it does indicate "that domestic markets can command more offshore supplies, if at a higher landed price. Much greater contributions from offshore LNG to [US] supply balance will only come with the commissioning of new facilities," they concluded.
The second trend, said Barclays analysts, is "the boom in permitting, financing, and contracting activities for development of new LNG facilities. Recent months have seen the culling of some from the 40-plus list of projects proposed for North America, with the addition of others."
As of July, the US Federal Energy Regulatory Commission had approved six LNG terminals, including four to be built offshore.
Offshore LNG terminals represent "the path of least resistance (so far), providing some of the fastest progress," Barclays reported. "The projected operational date for the first offshore project is currently listed as 2005," analysts said. "After the first new facility, more commercial prospects might be anticipated by 2006, but greater potential rests in 2007."
The two proposed onshore terminals are both on the Gulf Coast, one in Texas and the other in Louisiana.
Meanwhile, the US Energy Information Administration reported 80 bcf of gas injected into US underground storage during the week ended Sept. 3, down from 81 bcf the previous week and 99 bcf during the same period a year ago. That boosted US gas storage to nearly 2.8 tcf, apparently well on its way to exceed 3.2 tcf by the start of the heating season, analysts said.
As of Sept. 9, the spread between the October and January natural gas futures on NYMEX had widened to $1.94/Mcf, providing "plenty of incentive to store gas, if traders have the discretionary storage capacity," said Enerfax analysts.
Saudi price cut
Saudi Arabia announced Sept. 6 that it is reducing prices on some grades of crudes for October deliveries to North American and European refiners. That incremental production is almost entirely sour crude is sold primarily to refiners in the Asia Pacific region, analysts said.
It is "probable" that "the Saudis are making a political statement," reported analysts at Raymond James & Associates Inc., St. Petersburg, Fla.
"The most vocal criticism of the Organization of Petroleum Exporting Countries (and Saudis in particular) is coming from Western countries. By incentivizing these countries to take more of their oil at lower prices, the Saudis may be hoping to defuse some of this criticism," analysts said.
However, they noted, "There is no long-term significance to the Saudi announcement. They are still trying to 'cool down' the market, and cutting prices is one of the few measures left to their disposal.
"The broader problem remains an almost total lack of excess production capacity, and this is not something the Saudis—or any other OPEC member—can change with a press release."
Scoreboard
Due to a holiday in the US, data for this week's Industry Scoreboard are not available.
MORE DIESEL VEHICLES are expected to be hitting US roads in coming years.
The US Department of Energy sees a trend for consumers to buy fuel-efficient diesel cars, pickup trucks, and sports utility vehicles vs. gasoline vehicles.
A report entitled "Future Potential of Hybrid and Diesel Powertrains in the US Light-Duty Vehicle Market" forecasted growth of 4-7% in light-duty diesel vehicles in the US market by 2012. DOE's Oak Ridge National Laboratory released the findings during a diesel engine emissions-reduction conference in Coronado, Calif., early this month.
"Since light-duty diesels currently account for only about 0.2% of the market today, this growth prediction is substantial," said Allen Schaeffer, executive director of Diesel Technology Forum, Washington, DC, which represents manufacturers of engines, fuel systems, and emissions control systems.
The study revealed that more than 50% of gasoline vehicle owners believe diesels are more powerful and cleaner than gasoline engines. About 75% consider diesels to be more fuel-efficient.
In addition, the study forecast that diesel engines will meet more-stringent 2007 (Tier II) federal emissions standards.
"When compared to forecasts for hybrid technology, the Oak Ridge study predicts an overly conservative estimate for diesel technology growth (4-7%)—one that is at odds with other recent studies that predict more than double the market penetration (10-15%) in the same timeframe," noted Schaeffer.
The DOE study joined a growing number of reports and forecasts on near-term energy-saving benefits of an increase in clean diesel cars, pick-ups, and SUVs in the US, he said.
Previous DOE studies have found that a gradual 20% penetration of diesel vehicles by 2020 would save the US 350,000 b/d of oil. Meanwhile in Europe, diesel technology already accounts for 44% of all new vehicles.
COAL GASIFICATON technologies are expected to be a key component in coal's anticipated resurgence—particularly integrated gasification combined-cycle (IGCC) projects, said Boston-based consultant and engineering firm R.W. Beck.
Herbert Kosstrin, principal and senior director at R.W. Beck, said IGCC is likely to prove "essential in continuing the renewed interest in coal-fired generation."
Coal currently costs less than natural gas, is less subject to price volatility, and its use improves US energy security, reducing the dependence on foreign oil, Kosstrin said.
IGCC uses a combined-cycle format with a gas turbine driven by combusted coal-gasification synthetic gas.
It's a proven technology representing the cleanest, least wasteful coal-processing technology, he said, adding that IGCC is increasingly cost-competitive and is gaining acceptance as the best available emissions control technology for coal.
The current generation of IGCC technology features 40% less water usage than other coal-to-power technologies. IGCC's variable fuel costs compare favorably with other coal plants, and its capital costs are equivalent to other clean coal technologies, Kosstrin said.
Above all, IGCC benefits from its coal feedstock. The US currently has proven coal reserves worth more than 225 years of supply at current consumption estimates, he said.
Government Developments
TEXAS AND MEXICO government energy officials met recently to discuss the state's oil andn gas policies.
A delegation from Mexico's national oil company Petróleos Mexicanos (Pemex), consisting of officials in the multiple service contract (MSC) division, met with technical staff at the Texas Railroad Commission. The discussion in Austin was geared to inform Pemex officials about the various rules, regulations, and policies that govern the Texas oil and gas industry.
"It was an honor to have the opportunity to host these federal energy officials of Mexico and arrange their visit with our technical staff," said TRC Commissioner Charles Matthews. "It is a great time for US and Mexican energy regulators and companies to come together to help build the infrastructure that both growing economies greatly need."
Pemex currently is conducting the second round of its MSC bidding process (OGJ Online, July 2, 2004). MSCs are intended to help Pemex boost its natural gas production from the Burgos basin directly across from the Texas border (OGJ Online, Apr. 23, 2004).
Matthews said, "These discussions opened the door for ongoing conversation between the Mexican and Texas oil and gas industries. I believe it is beneficial for both countries to develop ways to facilitate energy projects and production in both countries to help provide consumers and businesses on both sides of the border with competitive electric and gas rates." He has worked with Mexican federal energy officials regarding crossborder natural gas pipelines and various energy projects since 1997.
CAMEROON AND NIGERIA government representatives met late last month in Yaounde, Cameroon, to discuss how to peacefully implement a court order that the disputed and highly hydrocarbon-prospective Bakassi Peninsula be handed over to Cameroon.
The meeting was hosted by a United Nations commission set up to oversee the handover of the peninsula before Sept. 15. The International Court of Justice issued the ruling in October 2002.
In November 2002, the UN established the Cameroon-Nigeria Mixed Commission at the request of the two nations' presidents.
After protesting the ICJ ruling, Nigerian authorities have now started to cooperate, authorities reported. The dispute involves a 1,600 km peninsula border areathat juts into the Gulf of Guinea. The dispute started in 1913 with hostilities as recent as the early 1990s. Both nations have massed troops there.
THE US MINERALS MANAGEMENT SERVICE plans a Sept. 30 workshop in Houston to outline an ocean-current monitoring program aimed at helping deepwater operations across the Gulf of Mexico.
Under the program, operating companies will collect and share comprehensive current data from deepwater drilling and production sites. The monitoring program is geared to ensure that operators and drilling contractors have appropriate data on existing and forecasted current conditions.
The data and predictive information will enable operators to curtail drilling operations before currents build to threatening levels. The monitoring program also is expected to enhance capabilities for the design of deepwater production structures.
MMS proposes a 2-year pilot program, with a midterm evaluation workshop to assess the program. The program is expected to be fully operational by Mar. 1, 2005.
Quick Takes
TRANSCANADA CORP. and Petro-Canada, both based in Calgary, have signed a memorandum of understanding to jointly develop the Cacouna Energy LNG receiving and storing terminal and regasification plant adjacent the existing harbor at Gros Cacouna, Quebec—about 15 km northeast of Rivière-du-Loup. The proposed facility would have an average sendout capacity of 500 MMcfd of natural gas. The partners will share the $660 million construction costs equally, and TransCanada will operate the facility while Petro-Canada will supply the LNG. Pending regulatory approvals—expected to take 2 years—the facility could be in service by yearend 2010. Norway's Statoil ASA, Wiesbaden, Germany's Linde AG, and Aker Kvaerner of Lysaker, Norway, signed a 3-year collaboration agreement Aug. 25 to develop further cost-effective technology and solutions related to the ship-based production, storage, and discharging of LNG in remote areas. Statoil and Linde already have developed and qualified the components of advanced, spiral-wound heat exchangers (SWHEs), enabling Linde to become a qualified manufacturer and international process licensor of SWHEs for gas liquefaction. The new alliance will build on this technology, adapting it for a maritime environment. Particular emphasis will be placed on optimal integration of compact plants placed on floating installations.
HURRICANE FRANCES forced nine companies to evacuate 16 platforms and 17 drilling rigs in the Gulf of Mexico off New Orleans and Houma, La., during Sept. 3-7, reported the Minerals Management Service Sept. 7. These evacuations represented 2.09% of the 764 manned platforms and 14.53% of the 117 drilling rigs working in the gulf, MMS said. Production of 61,896 b/d of oil was shut in during those 5 days—equivalent to 0.01% of the annual production of oil in the gulf, which is about 605 million bbl. In addition 118.42 MMcfd of natural gas was shut in, equivalent to 0.003% of the yearly production of gas in the gulf, which is about 4.45 tcf. All operations were reported back on line by Sept. 7. The Kahili-1A well operated by Austral Pacific Energy Ltd. in Taranaki, NZ, is on stream, producing an average of 2.2 MMcfd of raw natural gas, with a condensate-to-gas ratio exceeding 60:1, and a surface flowing pressure exceeding 2,300 psi, Austral Pacific reported. NGC Corp. is purchasing the gas, which is flowing from its Kahili separation plant to the Kapuni treatment station, where propane and butane will be recovered and sales gas injected into the national gas grid. Austral Pacific partners are Tap (New Zealand) Pty. Ltd. and Claire Energy (Australia) Pty. Ltd.
Nelson Resources Ltd., Toronto, plans to hike oil production in Kazakhstan after acquiring a controlling interest in Chaparral Resources Inc., Houston, the key participant in Karakuduk field. Kazakhoil Aktobe (KOA), a state concern in which Nelson holds 50% interest, debottlenecked processing facilities at Alibekmola field to a capacity of 25,000 b/d and plans to increase that to 42,000 b/d. Alibekmola produced 21,505 b/d in June. KOA also has completed the Kozhasai processing facility. North Buzachi field yielded 7,957 b/d at the end of June, when a 6 month drilling program began. KOA is building a central processing facility and gathering station at Buzachi and has moved a heater-treater to Arman field to increase processing capacity to 11,000 bdkrom 10,000 b/d. Karakuduk field operator CJSC Karakudukmunai, a Chaparral unit, reported 8,056 b/d field production at the end of June. Nelson's 60% interest in Chaparral gives it a 36% interest in Karakuduk production. AS Norske Shell has engaged Western Geco, Houston, to acquire 3D seismic data on Production License 326 in the Vøring basin of the Norwegian Sea, where the company recently was awarded operatorship in the 18th bidding round. Shell and 40% partner Statoil ASA said work would begin this fall. PL 326 contains large, high-risk prospects in an area of the Norwegian Sea with water deeper than 1,000 m. Western Geco is providing the Western Pride Q Marine vessel for the project.
SHELL PETROLEUM DEVELOPMENT CO. OF NIGERIA LTD. awarded Saipem SPA, Milan, a 120 million euro contract for debottlenecking the Soku LNG gas supply plant facilities in Nigeria. Saipem will perform engineering, procurement, and construction of additional facilities at the plant to increase capacity and improve operability. Completion is expected in second half 2006.
IRAN has launched a new $215 million petrochemical complex in Sanandaj in western Iran, reported Iranian news agency IRNA. The 300,000 tonne/year polyethylene complex will take more than 4 years to complete. In addition, Oil Minister Bijan Namdar Zangeneh said that six petrochemical projects are being launched in western provinces. Iran's petrochemical sector, expected to produce 15 million tonnes of petrochemicals this year, has attracted $12 billion in investment within the past 6 years. Iran is expected to produce 70 million tonnes/year of petrochemicals, valued at $20 billion, by 2010. Taiwan's petrochemical manufacturers have been among companies hardest hit as a 2 week water shortage continues to cripple one of the island's major industrial areas following Typhoon Aere. The storm swept across northern Taiwan late last month, following two earlier major storms, causing severe silting of the Shihmen Reservoir that damaged water treatment equipment and forced a water plant shutdown that officials estimate could take as long as a year to rebuild. The reservoir is the sole source of water for scores of chemical companies, most of which have halted operations until an emergency water pipeline can be completed. Taiwan's Ministry of Economic Affairs put Taoyuan County petrochemical and chemical manufacturers' losses at $9.3 million during the first 8 days of the water stoppage, but a Kuanying Industrial Park official claims losses to all industrial firms there have exceeded $20 million/day.
PETROM SA, Romania's state-owned oil company, has signed a three-party license and basic design agreement with SK Engineering & Construction, South Korea, and Haldor Topsøe AS, Lyngby, Denmark, for engineering and site supervision services and the supply of catalyst, equipment, and materials for a spent sulfuric acid regeneration plant at Petrom's Petrobrazi refinery in Romania.The plant, which will process 100 tonnes/day of spent sulfuric acid from an alkylation plant, will use Topsøe's wet gas sulfuric acid technology. It is expected to go on stream in 2006.
PETRÓLEO BRASILEIRO SA (Petrobras), Brazil's state-owned oil company, has more than doubled its estimate of light oil reserves on Block Seal-100 in Sergipe-Alagoas basin off northeastern Brazil, which could help shift Petrobras's reserves profile more from heavy crude to more light oil and natural gas. The oil is 41-43° gravity, Petrobras said. The National Petroleum Agency increased the Sergipe-Alagoas basin's oil reserves estimate to 76 million bbl from 28 million bbl. The discoveries, in Piranema field in 1,200-1,600 m of water, are expected on stream by August 2006. The basin's light oil will enable Petrobras to decrease imports of light oil. Peru awarded a license contract Sept. 7 for exploration on Block 56 in Peru's Amazon rainforest to Peru LNG consortium partners led by Hunt Oil Co. and including Pluspetrol Peru Corp. SA, SK Corp., Sonatrach, and Tecpetrol del Peru SAC. Block 56, adjacent the Camisea natural gas megacomplex, holds reserves estimated at 3 tcf of natural gas from Pagoreni and Mipaya fields (OGJ Online, June 16, 2004). Gas from Block 56 would be exported as LNG to Mexico and the US by 2008 from a proposed $2.25 billion liquefaction plant south of Lima that the group plans to begin building July 1, 2005 (OGJ Online, June 16, 2004). A $55 million exploration program on the 8.6 million acre Tenere Block along the Central African Rift in eastern Niger is on again after licensees settled differences. Subject to government approval, a unit of China National Petroleum Co. will operate the block and carry the Niger unit of TG World Energy Corp., Calgary, for 20% of the 4 year work program. CNPC will pay TG World $1 million in back costs. Niger earlier had canceled TG World's rights to the block and awarded operatorship to CNPC (OGJ, Mar. 8, 2004, p. 38). The program, to start this year, requires acquisition of 1,500 km of seismic surveys and the drilling of three exploration wells. The Tenere contract provides the option for two 3-year terms, each of which would include further exploration well commitments. Esso Rep, the E&P arm of Esso SAF, and Lundin Petroleum AB, Stockholm, gauged 36° gravity oil at the rate of more than 1,600 b/d in the South Mimosa-1 exploration well in France's Aquitaine basin. The producing formation is a Purbeckian (uppermost Jurassic) sandstone at about 3,300 m TVD. The 50:50 partners will fast-track the development, but further well evaluation is required to define the final development of Les Mimosas field, the companies said. The discovery well is near the Bay of Biscay on the Lege exploration permit, which contains Les Pins, Courbey, Les Arbousier, and Tamaris fields.
Marathon Canada Petroleum ULC said it did not encounter commercial quantities of hydrocarbons with the Crimson F-81 deepwater wildcat well off Nova Scotia. The Crimson well is on the Annapolis block, Exploration License 2377, located 211 miles southeast of Halifax in 6,861 ft of water. The well, drilled to 21,903 ft, will be permanently plugged and abandoned. Marathon and its partners will analyze data from the well to evaluate their next steps regarding the Annapolis discovery made in 2002. Marathon operates the Annapolis block. Partners are EnCana Corp., Norsk Hydro Canada Oil & Gas Inc., and Murphy Oil Co. Ltd. For $135 million, Cairn Energy PLC will farm out to Oil & Natural Gas Corp. Ltd. (ONGC) a 90% operated interest in deepwater exploration Block KG-DWN-98/2, a 15% exploration interest in Cambay Block CB/OS-2, and a 10% interest in the Lakshmi and Gauri field development areas, all off India's Gujarat state (OGJ Online, Sept. 16, 2002). ONGC, in turn, will farm out to Cairn Energy a 30% working interest each in onshore Block GV-ONN-97/1 in northern India adjacent the Nepal border, and Block CB-ONN-2001/1 in Gujarat, western India. Cairn will pay ONGC the value of the blocks assessed at the time of the bidding for the interests. Shell Gabon, operator of the Koula prospect in the onshore Awoun permit in Gabon, reported a light oil discovery with the Awokou-1 exploration well. The well lies 8 km north of the Total SA-Shell producing Avocette field and 5 km northwest of producing Obangue field in West Africa. Obangue operator Pan-Ocean Energy Corp. Ltd., St. Helier, Jersey, UK, is Shell's 40-40 coventurer, and Gabon will have a 20% back-in interest. The Simpler 101 rig drilled the Awokou-1 well to 1,926 m TD. The first well drilled as part of a two-well exploration campaign in the permit, AWOKOU-1 found and logged oil in thick Gamba sandstone. The second exploration well, Awodam-1, will be drilled in October.
US DRILLING ACTIVITY hit a new 3-year high the week ended Sept. 3, up by 10 units with 1,249 rotary rigs working, reported Baker Hughes Inc. That's the largest weekly rig count since the same period in 2001 when 1,252 rigs were drilling. That compares with 1,091 active rigs at this time in 2003. Again, US land operations accounted for the bulk of the increase, up by 10 to 1,137 units. Offshore operations increased by 1 rig to 89 in the Gulf of Mexico and 94 in US waters as a whole. Drilling in inland waters decreased by 1 unit to 18 rigs. Canada had 295 rotary rigs working that week, 16 more than the previous week but down from 367 a year ago.
BBL CO. awarded Saipem a 100 million euro contract to install 230 km of 36-in. natural gas pipeline across the North Sea from Callantsoog, the Netherlands, to Bacton, England, a short section of onshore pipeline at the Dutch entry point, and associated tie-ins and landfall work at Bacton. BBL is a joint venture of NV Nederlandse Gasunie 60%, Ruhrgas AG's unit E.ON Ruhrgas 20%, and a subsidiary of Belgium's Fluxys 20%. Saipem's Castoro Sei pipelay vessel will install the pipeline during second and third quarter 2006. PetroChina Co. Ltd., the domestic unit of China National Petroleum Corp. Ltd., awarded a contract to Weatherford International Ltd.'s Pipeline & Specialty Services unit for drying and precommissioning 500 km of the 3,900 km West-East natural gas pipeline in China. The $24.1 billion pipeline will traverse eight China provinces (see map, Mar. 17, 2003, p. 68), carrying 12 billion cu m/year of natural gas from the Tarim basin in Northwest China's Xinjiang Uygur Autonomous Region and the Changqing gas field in Shaanxi Province to Shanghai. Construction on the western section, from Lunnan, Xinjiang, to Jingbian in Shaanxi, is slated for completion in early 2005.
SHELL NIGERIA EXPLORATION & PRODUCTION awarded John Wood Group PLC subsidiary Deepwater Specialists Inc. (DSI), Houston, a $4 million contract to provide commissioning services for Shell's 300,000 dwt Bonga floating production, storage, and offloading vessel off Nigeria. DSI will support London-based AMEC PLC in verifying construction readiness and precommissioning and commissioning all systems. AMEC is responsible for engineering, procurement, and construction of the topsides under a £300 million contract awarded by Royal Dutch/Shell Group in early 2001 (OGJ Online, Mar. 15, 2001).
