OGJ Newsletter

Oct. 4, 2004
Threats to oil production in Nigeria and slow recovery of Gulf of Mexico production shut in by Hurricane Ivan briefly pushed benchmark US crude futures through the "psychologically important" price level of $50/bbl for the first time in late September.

Market Movement

Oil futures price pushes past $50/bbl on NYMEX

Threats to oil production in Nigeria and slow recovery of Gulf of Mexico production shut in by Hurricane Ivan briefly pushed benchmark US crude futures through the "psychologically important" price level of $50/bbl for the first time in late September.

The November contract for benchmark US light, sweet crudes hit an all-time high of $50.47/bbl on the New York Mercantile Exchange before registering a record closing of $49.90/bbl on Sept. 28.

But it pulled back to $49.51/bbl in the next session with reports of a possible cease-fire agreement between rebel and government forces in Nigeria, the fifth largest exporter of crude.

The Niger Delta People's Volunteer Force, a major rebel group, earlier threatened to attack foreign oil workers and oil infrastructure in the oil-rich delta, effective Oct. 1. Some 35,000 b/d of Nigerian production was reported shut in due to security precautions.

Meanwhile, the overall union for Nigerian workers on Sept. 30 gave the government a 14-day ultimatum to roll back a 30% price increase on domestic gasoline and other products.

On Sept. 28, the US Minerals Management Service reported 485,128 b/d of crude and 2.3 bcfd of natural gas production remained curtailed in the Gulf of Mexico from Hurricane Ivan, which went ashore Sept. 16 in Alabama. Lost production from shut-in offshore wells during Sept. 11-29 totaled 12.4 million bbl of oil and 55.5 bcf of gas, MMS said.

"A loss of so much light, sweet crude in a location so close to market would have had a significant impact under any circumstances. With the current tightness, that impact is greatly magnified," said Paul Horsnell, Barclays Capital Inc., London.

"With the market precariously balanced, the loss of a major supply source for several weeks could see prices move well above $50[/bbl]," said James Burkhard, director of world oil analysis at Cam- bridge Energy Research Associates, Cambridge, Mass. "However, if fear of a supply disruption recedes and demand growth moderates and supply grows, prices could slip to the low $40[/bbl] range."

President George W. Bush's administration said it's watching energy prices, but so far high prices have not slowed US economic growth.

Low inventories

The US Energy Information Administration reported Sept. 29 an increase in US crude inventories for the first time in 9 weeks, up by 3.4 million bbl to 272.9 million bbl in the week ended Sept. 24, after plunging by 9.1 million bbl the previous week and by 7.1 million bbl the week before that because of storms in the Gulf of Mexico.

Industry sources said Hurricane Ivan dropped US refinery production to the lowest level since April 2003.

IEA reported US gasoline stocks fell by 900,000 bbl to 198.8 million bbl during the latest week, with distillates down by 1.3 million bbl to 125.5 million bbl as a decline in diesel fuel more than offset a small increase in heating oil.

Ivan's main effect "has been to create a real problem with US oil product inventories," Horsnell said. "Heating oil prices have moved to ever higher record levels," he observed. "While heating oil remains the key market driver, the gasoline market is also tightening significantly."

Production capacity

Traders shrugged off a statement by Saudi Arabian Oil Minister Ali al-Naimi that the kingdom would increase its oil production capacity by 1.5 million b/d to 11 million b/d by intensifying drilling in producing fields. A recurrent claim by officials of the Organization of Petroleum Exporting Countries that the world market is oversupplied with crude "misses the point," Horsnell said. "If you push someone with claustrophobia into a small cupboard and tell them not to worry because they have got enough air, you would not expect that to remove their unease. Likewise, the market is responding to the lack of flexibility and the need for more insulation from shocks, and not the day-to-day adequacy of supply. As it happens, we believe that the market is not oversupplied and that inventory builds have not happened fast enough on a global level in the third quarter," he said.

"For most of the last decade, the world has had a spare capacity buffer of 3-5 million b/d—but no more," said Burkhard. "We currently have about 1.4 million b/d of spare capacity, which is less than at the beginning of the 1973 oil crisis. With so little spare capacity, supply worries in oil-producing countries are amplified in the price of oil. Trouble in Iraq, Nigeria, Russia, or bad weather in the Gulf of Mexico can lead to strong upward price movements."

Industry Scoreboard

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Industry Trends

Of the 26 redeployments of floating production, storage, and offloading vessels proposed in 2004-08, 21 probably will be completed at an estimated cost of $830 million, said John Westwood, managing director of Douglas-Westwood Ltd., Canterbury, UK.

At a recent conference in London, Westwood said FPSOs "are the world's most popular floating production system."

Through yearend 2003, there had been 136 FPSO deployments worldwide—more than all the other FPSs.

"There are currently 89 FPSOs in operation, and as the fields they are working on are depleted, the vessels become available for redeployment," Westwood said.

Unlike fixed platforms, an FPSO can be moved to new locations, and its capital cost can be amortized over the life of several small fields.

However, Westwood said, "In a period of very high oil prices, it is more likely for existing contracts to be extended as oil companies retain FPSOs on depleting fields to 'scrape the barrel.'"

Georgie MacFarlan, a Douglas-Westwood FPSO data analyst, said, "The Asia region is expected to see the highest number of redeployments, with eight units forecast for the period to 2008, compared to just one redeployed unit in the previous 5-year period."

Development of marginal fields, a key driver for the FPS market, is expected to underlie much of the demand for redeployments.

"We are now seeing companies emerging with the sole aim of targeting this small-fields market, such as the Aberdeen-based Vienco [Oil & Gas Ltd.], and this is expected to provide significant upside potential to our forecasts, particularly in the North Sea area," MacFarlan said.

The lower upfront costs and shorter delivery times provided by redeployments make this "an increasingly attractive field development solution," the analysts said.

They see strong opportunities for FPSO leasing contractors during the next 5 years.

GLOBAL OIL DEMAND will require increasing volumes of oil and natural gas from members of the Organization of Petroleum Exporting Countries, said the head of state-owned oil company Petroleos de Venezuela SA (PDVSA).

"This is not a matter of ideologies or politics, but a reality," PDVSA Pres. Alí Rodríguez Araque said Sept. 14 during a conference "Assured Oil Supply—The Venezuelan Example" held in Vienna and organized by the International Institute for Peace and the Venezuelan embassy.

In coming decades, global oil and gas demand dramatically will increase because of improving economics and social development, he said.

"We need to accept this reality instead of making decisions that will imply larger costs and risks for energy security," Rodríguez said.

He believes that oil and gas will continue to be the predominant energy sources because they remain the least costly and most versatile compared with alternate energy sources available today.

Government Developments

US REFINERS remain on target to supply ultralow-sulfur highway diesel fuel during the next 5 years, the US Environmental Protection Agency reported.

When fully implemented, EPA's Clean Diesel Program will reduce 2.6 million tons/year of nitrogen oxides (NOx) emissions from diesel exhaust—the equivalent of eliminating air pollution from 13 million trucks, the agency said. The reductions in NOx, an ozone precursor, largely will come from catalytic converters required for the first time in new diesel vehicles. Reduction of the sulfur in fuel is necessary to protect catalysts in the new equipment.

In its "Summary and Analysis of the 2004 Highway Diesel Fuel Precompliance Reports," EPA said that 95% of the 3 million b/d of highway diesel produced will meet the 15 ppm sulfur-content standard in 2006. Refiners have to produce diesel with a sulfur content of 10 ppm or lower to assure delivered product meets the standard.

EPA's analysis of information from more than 120 refineries shows that fuel suppliers are prepared to comply with the standard on time. Enough 15 ppm highway diesel fuel will be available nationwide to meet expected demand, the report said.

Allen Schaeffer, executive director of Diesel Technology Forum, Washington, DC, said, "For the manufacturers of on-highway diesel engines, fuel refiners, and exhaust after-treatment manufacturers, 2007 is the ultimate clean-diesel milestone. From the time these new standards were adopted in 2000, the entire diesel industry has been working toward theUfuel mandate."

He said that preparation for the new sulfur standard involved "an unprecedented level of investment in research and development of new technologies on behalf of the diesel industry."

THE US DEPARTMENT OF ENERGY agreed to short-term loans of crude oil from the Strategic Petroleum Reserve to help relieve hurricane-related shortages for two companies in the Gulf of Mexico region.

DOE officials Sept. 24 confirmed the approval of a 1.4 million bbl loan to Shell Trading US Co. because of oil supply disruptions caused by Hurricane Ivan (OGJ, Sept. 2, 2004, p. 5). Oil flowed Sept. 25 for use at Shell refineries.

In addition, DOE agreed to lend 300,000 bbl to Placid Refining Co., Port Allen, La. Volumes matching the oil loans are to be returned to the SPR once supply conditions return to normal.

Similar loans were made in October 2002 after Hurricane Lili (OGJ Online, Oct. 22, 2002). The SPR was designed to protect American consumers against supply disruptions, including natural disasters, DOE said.

Senate Energy & Natural Resources Chairman Pete V. Domenici (R-NM) said he fully supported the loans.

"This loan is consistent with existing SPR policy. We store oil in the SPR in the event of a severe disruption in oil supply. Congress didn't create SPR as a price control tool. We didn't create it as a spare cash fix. We didn't create it as a political ploy. We created it to protect you, me, and every American citizen," in case of severe supply disruptions, Domenici said.

Quick Takes

AZERBAIJAN has approved the third and final development phase of the massive Azeri-Chirag-Gunashli oil field complex in the Caspian Sea 100 km off Baku. BP PLC is operator for the 10-company consortium developing the complex, which has reserves of 5.4 billion bbl of oil. Phase III, to come on stream in mid-2008, involves development of the deepwater Gunashli reservoir. Facilities will include a 48-slot drilling platform bridge-linked to a production platform. Plateau production in 2009 should exceed 1.1 million b/d. Phase II production will come on stream through two Azeri field platforms in 2006 (OGJ Online, Sept. 18, 2002). Five international oil consortia, headed by Royal Dutch/Shell Group, Total SA, Statoil ASA, Norsk Hydro AS, and Repsol YPF SA, have submitted bids for developing Iran's Yadavaran oil field, OPEC News Agency reported. Seyed Mehdi Hosseini, managing director of National Iranian Oil Co., said NIOC also is negotiating LNG purchase-marketing deals with three groups from India, China, and Spain in exchange for 20% shares in the Yadavaran development project, said Hosseini. The companies, which would not be involved in operations, would obtain the share in investment, costs, and interests of the contracts, in exchange for purchasing 5 million tonnes/year of LNG, OPECNA reported. Unocal Corp. and Royal Dutch/Shell have elected not to participate in five contracts to explore for, develop, and market natural gas resources in the Xihu Trough of the East China Sea (OGJ Online, Aug. 21, 2003). China National Offshore Oil Corp. and China Petrochemical Corp., each holding a 30% working interest in the contracts, are the other project participants. Unocal East China Sea Ltd. and Shell's Pecten Orient Co. LLC each hold 20%. The decision not to proceed followed a detailed resource assessment and study of development options.

VALERO ENERGY CORP., San Antonio, has let a multimillion-dollar contract to GE Energy, Florence, to supply equipment for a power recovery system at Valero's Paulsboro, NJ, refinery. The system will have the capacity to generate 18 Mw of electricity to support operations, GE reported. The equipment will be shipped in fourth quarter 2005 and installed during second quarter 2006, when the system begins operation. GE also will provide project management assistance. Matrix Service Industrial Contractors, Eddystone, Pa., is the installation contractor. The power recovery system features a hot-gas expander, gearbox, synchronous generator, power control room, piping, and related equipment. Shell Oil Products US, which said it would continue to operate its Bakersfield refinery until Mar. 31, 2005, is evaluating bids from companies interested in purchasing the facility. Shell proposes selling it as an operating refinery and currently is holding discussions with 20 companies, a number of which have provided bids and purchase conditions. Shell is evaluating these and will develop a short list for further discussions. This process is now closed to new entrants. Shell also will lease the products terminal and tanks adjacent to the refinery to the refinery purchaser under a long-term agreement, assuring the terminal's continued operation.

BG GROUP plans to add two wells at Scarab Saffron field 90 km off Egypt's Nile Delta to debottleneck facilities and enable delivery of 800 MMscfd of natural gas by first quarter 2005. While Scarab Saffron will continue to supply 475 MMscfd of gas to Egypt's domestic grid, BG signed agreements with Egyptian General Petroleum Corp., Egyptian Natural Gas Holding Co., and Petronas also to export 225 MMscfd of gas through the Spanish-Egyptian Gas Co. LNG plant in Damietta, Egypt, for 4 years and 150 MMscfd in the fifth year (OGJ June 14, 2004, p. 58).

Repsol YPF is joining Irving Oil Ltd., Saint John, NB, in the development of an LNG receiving terminal in Saint John. Irving Oil received approval for the project Aug. 6 (OGJ Online, Aug. 6, 2004). Repsol and Irving Oil are moving ahead with detailed engineering for the facility, which will be located at Irving's existing deepwater petroleum-receiving marine terminal, Irving Canaport. Plans call for three 160,000 cu m LNG tanks and a throughput capacity of 1 bcfd of natural gas. Canaport, 65 miles from the US border, is expected to supply eastern Canada and New England.

GE Energy has completed the testing of three large refrigerating compressors trains to be installed in Europe's first LNG liquefaction-export plant being constructed on Melkøya Island in the Arctic Ocean north of Hammerfest, Norway. The compressors, driven by variable speed electric motors instead of the usual gas turbines, were tested in Massa, Italy, but under conditions designed to reproduce actual project operating conditions and using most of the actual project equipment. The units satisfied all operating requirements, with efficiency higher than expected, GE reported. Germany's Linde AG, the main contractor, is constructing the LNG plant for project operator Statoil.

Ras Laffan LNG Co. Ltd. (II) [RasGas (II)] has signed an agreement to charter three LNG vessels—each with a 151,700 cu m LNG cargo capacity—from Teekay Nakilat Corp. for 20 years. The carriers will be built at ewoo Shipbuilding & Marine Engineering Co. Ltd, South Korea, and delivered to RasGas II by April 2007. Teekay Shipping Corp. will operate the ships, but Qatar Gas Transport Co. Ltd. will assume a 30% equity interest in the three carriers. RasGas (II) is a joint venture of Qatar Petroleum and Mobil QM Gas Inc.

Joint venture partners Apache Energy Ltd. and Santos Ltd. will supply Energy Developments Ltd. (EDL) 55.1 bcf of natural gas over 20 years, starting in 2006, for an LNG project. The gas will come from the John Brookes gas-condensate field being developed in the Carnarvon basin off Western Australia. Field operator Apache has a 55% interest, and Santos holds 45%. EDL will convert the gas to LNG at a plant to be built at Karratha, 10 km from the North West Shelf LNG plant on the Burrup Peninsula. Trucks will transport the LNG to four new natural gas-fired electric power stations under construction at Broome, Derby, Fitzroy Crossing, and Halls Creek.

A NEW, 3 BILLION KRONER natural gas liquids extraction unit at the Kollsnes plant northwest of Bergen, Norway, began processing gas Sept. 27 from Kvitebjørn field in the Norwegian North Sea. The unit, which has increased overall processing capacity at Kollsnes by 20 million standard cu m/day to 146 million standard cu m/day, was designed to process well-stream mixes from Kvitebjørn, Troll, Visund, and fields to be developed in the Tampen-Sogn North Sea area. Norway's state-owned Gassco AS operates the plant on behalf of the owner Gassled—a joint venture of oil and gas companies on the Norwegian continental shelf and the owner of the Norwegian gas transport infrastructure. Statoil is the plant's technical service provider.

FIRST CALGARY PETROLEUMS LTD. (FPC), Calgary, reported gas and condensate success with its LEC-1 exploration well on Ledjmet Block 405b in Algeria's Berkine basin. LEC-1 was logged to 4,437 m, and wireline logs indicated 42 m of net hydrocarbon pay over multiple intervals (OGJ Online, June 7, 2004). Gas and condensate flowed at 20,059 boe/d from two intervals on test—105 MMcfd of gas and 2,602 b/d of condensate—normalized to a flowing wellhead pressure of 2,000 psi. The well is 8.4 km southwest of FPC's MLE field. "These results confirm the continuation of the prolific Devonian-age rocks to the west of the MLE field onto a previously undrilled structure," said FPC Pres. and CEO Richard Anderson.

Pan Ocean Energy Corp. Ltd., St. Helier, Jersey, UK, confirmed a commercial light-oil discovery on its Tsiengui prospect in the Maghena permit in Gabon. The 2 TST exploration well, north of 1 TST, was drilled to 1,816 m TD (OGJ Online, Jan. 20, 2003). Petrophysical logs and pressure analysis indicate net oil pay of 14 m in the Gamba sandstone. A 31 m gas column also was encountered. Pan Ocean plans to drill and complete a horizontal section immediately to prepare the 2 TST for production. It holds 100% interest in Tsiengui field prior to a government back-in of 7.5%.

Woodside Energy Ltd., Perth, and Dana Petroleum PLC, London, have signed a comprehensive heads of agreement covering equity interests off Mauritania, Kenya, and Australia and a study area off Ghana. The agreement allocates Dana a 6.25% interest in the Block 2 permit off southern Mauritania. Woodside, operator, will retain a 41.5% interest in the block and will deepen the new Dorade-1 wildcat within the next 2 months using the Stena Tay semisubmersible (OGJ Online, Sept. 24, 2004). In return Dana allocated Woodside a 5% interest in Block 7, retaining 63.85%. Woodside will pay $100,000 up front and carry Dana through its seismic and drilling obligations on Block 7 to $1.44 million, when Woodside may exercise an option over an additional 10% of Dana's interest. Meanwhile, Dana will assign Woodside a 10% interest each in production-sharing contract areas L-5 and L-7 off Kenya in exchange for a 10% interest in four Woodside blocks in the largely undrilled Great Australian Bight deepwater acreage off South Australia (EPPs 28, 29, 30, and 31). On EPP 29 last year Woodside drilled its first well, Gnarlyknots-1A to 4,736 m TD in 1,315 m of water without encountering commercial hydrocarbons. Woodside also is participating in a study of the Western Tano basin off Ghana, with an option to acquire 50% of Dana's interest there once the study is complete, subject to Ghana's extending the permit term. In a final agreement, Woodside would drill Dana's planne Perel1 wildcat on Mauritania Block 1, in which Woodside has no equity. The total deal remains subject to regulatory and joint venture approvals.

PetroTech Peruana SA recently closed a third offshore exploration and exploitation contract with Perupetro, the state oil agency, for Block Z-33, in Peru's territorial waters off the Lima and Cañete provinces in 400-1,200 ft of water. The company is committed to process and interpret 1,500 km of conventional seismic data, shoot 150 sq km of 3D seismic, and drill three exploratory wells. Perupetro estimates the company will invest $22 million in the new block. PetroTech has been producing oil and gas on Block Z-2B for 11 years and has been exploring Block Z-6 in the same area since March 2002. Stratic Energy (UK) Ltd., the UK-based subsidiary of Stratic Energy Corp., Calgary, has been awarded interests in four blocks in the recent 22nd licensing round covering the UK continental shelf (OGJ Online, June 16, 2004). Blocks 211/12b and 211/13b in the northern North Sea and Block 16/2b in the central North Sea were awarded to Stratic in a 50:50 partnership with Nippon Oil Exploration & Production UK Ltd. Block 3/22, also in the northern North Sea, was awarded to Stratic at 100% interest. The blocks were awarded under the "Promote License" initiative, introduced by the UK licensing authorities in 2003 (OGJ Online, Aug. 12, 2003).

DESPITE STORM DISRUPTIONS of offshore operations, US drilling activity increased slightly the week ended Sept. 24, with 1,239 rotary rigs working, 7 more than the previous week and up from 1,095 in the same period a year ago, Baker Hughes Inc. said. Land activity accounted for all of the gain, up 13 rigs, with 1,134 working. Offshore drilling declined by 4 rigs to 83 working in the Gulf of Mexico and was down a total of 6 units to 87 for the US as a whole. Drilling in inland waters was unchanged at 18 active units. Canada's rig count increased by 45 to 291 rotary rigs working, still down from 308 a year ago.

EL PASO BLUE ATLANTIC US INC. and Houston-based DKRW Energy LLC's LNG subsidiary Sonora Pacific Mexico agreed to lay a 350-mile pipeline in Sonora, Mexico, to carry natural gas from the proposed 1.3 bcfd Sonora Pacific LNG facility at Puerto Libertad on the Gulf of California. The system would transport 500 MMcfd of gas to replace residual fuel oil at electric power stations in Naco, Hermosillo, Guaymas, Ciudad Obregon, and Navojoa, and 800 MMcfd to an interconnection with El Paso Natural Gas Co.'s interstate pipeline system at the Mexico-US border. Initial operations are targeted for 2008. Northern Border Pipeline Co., Omaha, concluded its open season with sufficient commitments to support expansion into the Chicago market. It plans to expand pipeline capacity from Harper, Iowa, to Chicago by 130 MMcfd, or 15%, by adding a 16,000-hp compressor in Iowa and making minor modifications to existing facilities. Costs are estimated at $20 million, with a target service date of spring 2006, subject to federal approval.

FAR EAST ENERGY CORP., Houston, has successfully completed the hydraulic fracture stimulation test on the QN-002 well drilled previously by ConocoPhillips on its acreage on the Qinnan Block in Shanxi Province, China. The test was performed on the No. 3 coal seam at 550 m. The well is being dewatered, and initial gas production is expected in 30-60 days. The No. 3 coal seam, extensively mined in Shanxi Province, has an average gas content of 600 scf/tonne and a thickness of 4-7 m. Production from this well will be monitored for 90-180 days.

CORRECTION

The footnote in Fig. 9 in the article "Oil and gas in energy research spending: a call for balance" contained an error (OGJ, Sept. 27, 2004, p. 22). The number for proposed federal spending on energy research in fiscal 2005 should have been $766 million.