OGJ NEWSLETTER

Feb. 17, 1992
As OPEC members last week began wrangling over production cuts to avoid a near term price collapse, signs have continued to point to a climate of low oil and gas prices for the foreseeable future. Salomon Bros. has cut its forecast of oil and gas prices for 1992. It now sees average WTI price at $18.50/bbl, a drop of $1.50, and gas at $1.40, down 100 and the second cut in a month. Salomon Bros. thinks the Saudis will risk oil prices sliding past $15 in the second quarter rather than cut

As OPEC members last week began wrangling over production cuts to avoid a near term price collapse, signs have continued to point to a climate of low oil and gas prices for the foreseeable future.

Salomon Bros. has cut its forecast of oil and gas prices for 1992. It now sees average WTI price at $18.50/bbl, a drop of $1.50, and gas at $1.40, down 100 and the second cut in a month. Salomon Bros. thinks the Saudis will risk oil prices sliding past $15 in the second quarter rather than cut output enough to push prices to the mid-$20s in the second half.

More worrisome for a longer term oil price outlook is a surge in major new oil field development projects worldwide, says Salomon Bros. Reviewing its 5 year supply/demand outlook, the analyst says it's seen enough to shake its earlier belief oil prices would rise 4-5%/year in 1992-97.

Citing the deepening recession and plans by 10 nations to expand production capacity by a combined 12 million b/d in 1992-97, Salomon Bros. now thinks oil production capacity growth is almost certain to outpace demand growth in the first half of the decade.

The bleak price outlook continues to pull down predictions of upstream activity. Salomon Bros. expects U.S. E&P spending to plunge 25% in 1992 vs. an earlier forecast slide of 11%, the Baker Hughes count to fall to 690 for the year from an average 862 in 1991, and the number of rigs under contract in the Gulf of Mexico to decline to 75 from 116 in 1991.

The analyst predicts non-U.S. E&P outlays will rise 10% this year.

Baker Hughes' tally increased by 21 rigs last week to 674, after falling 33 units the previous week and reaching the lowest level since it began keeping score in 1942 (OGJ, Feb. 10, Newsletter).

Another big independent producer joins the list of U.S. gas shut-ins. CNG Producing Co. shut in 190 MMcfd--all but 20 MMcfd of that in the Gulf of Mexico out of its total capacity of more than 400 MMcfd. However, CNG notes profitable opportunities in a distressed market. It often can sell low priced third party production into term contracts at improved margins.

CNG maintains sales volumes at 500 MMcfd by buying 220 MMcfd of spot gas while minimizing spot sales of its own production.

California continues to extend the frontier of environmental regulations. South Coast Air Quality Management District has unveiled its new Regional Clean Air Incentives Market (Reclaim) program, which details emissions trading rights and requires stationary sources to reduce emissions of reactive organic gases and nitrogen oxides another 75-100% by 2010.

ARCO, which had supported the trading plan, is opposed to other aspects of the program, saying, "Neither the federal Clean Air Act nor state law requires such site specific targeting. What they seek is a reduction in total emissions, regardless of the source. The AQMD plan would impose an additional burden on industry that is technologically unrealistic and financially unreasonable. It would lead to a crippling of industry in this region."

Big capital outlays by refiners to meet stricter environmental standards aren't limited to the U.S. Petrofina will spend 29 billion Belgian francs the next 3 years to boost bottom of the barrel conversion and sulfur recovery at its Antwerp refinery. Plans call for installation of another 34,000 b/d of deep conversion capacity and two sulfur recovery units. Construction is to take 3 years, and start-up is slated for summer 1994.

Mexico's government has ordered car and truck fleet owners in Mexico City to convert 144,000 vehicles to natural gas or propane in a bid to cut air emissions in the capital, widely seen as having the worst air in the world. In addition, fleet owners must scrap another 147,000 vehicles and replace them with newer models that run on unleaded gasoline and have catalytic converters.

Mobil has established a strategic ventures group to develop business in the former U.S.S.R., eastern Europe, Mexico, and Venezuela.

"The potential in these countries warrants a substantial and focused effort on our part," says Mobil's Chairman Allen Murray. "We are investigating emerging opportunities where the diversity of Mobil's resources and strengths in exploration and producing, marketing and refining, chemical research and engineering, and financial organizations can be deployed for mutual benefit."

Norway's Storting has approved Conoco/Statoil's plan to build an 830,000 metric ton/year methanol plant in Central Norway.

The plant, using gas feedstock from Conoco's Heidrun field on the Haltenbanken off Norway, is to start up in 1996.

Polar Lights Co., a Russo-American oil company registered in Russia earlier this year by Conoco and Archangelskgeologia, could begin producing oil next year if tax issues are settled and export licenses issued as expected, says Conoco Pres. Constantine Nicandros (OGJ, Feb. 3, Newsletter). Nicandros says Conoco is proceeding with plans to begin preparing drillpads next summer on Polar Lights' first project area in Timan-Pechora region. Drilling would start soon after the first freeze, perhaps September.

More companies are lining up for a piece of the Sakhalin pie.

Hyundai and BHP are sounding out Mitsui on joining the Sakhalin Island development project.

Mitsui, McDermott, and Marathon were approved to conduct feasibility studies on the project, and the Russian government later asked that group to cooperate with Japan's Sodeco group and Mobil (OGJ, Feb. 10, p. 27).

Iran plans to build a gas pipeline from near its northern border to the Nakhichevan autonomous republic, an Azerbaijani enclave cut off from the main republic by a strip of Armenian territory. The pipeline is scheduled to start up this year. It's not clear whether the project is part of a joint venture of Iran 45%, Ukraine 45%, and Azerbaijan 10% involving three proposed pipelines for exporting a total of 2.6 tcf of Iranian gas to Europe via former Soviet territory. Iran's official news agency quoted Iranian Oil Minister Gholamreza Agazadeh as saying the venture would be fully operational by early 1996. Iran will export at least 100 bcf to Ukraine in 1992-93 and 80,000 b/d of crude oil this year in a barter deal that calls for Ukraine to buy 600,000 tons of iron billets and scrap plus other goods. Talks are under way for shipping 1-1.4 million b/d of oil to Europe via Ukraine.

Indochina continues to open up.

Nine companies or combines have submitted bids to develop Dai Hung oil field off southern Viet Nam at a cost of about $300-400 million, Kyodo News Service reports. The government's tender was to close Feb. 15, and the successful bidder is to be announced by late June at the earliest.

The field, with reserves pegged at 400-500 million bbl, is expected to start up in 1994 and reach 100,000-120,000 b/d. Bidders include BP, Royal Dutch/Shell, Enterprise, BHP, Mitsui, Nissho Iwai/Japex/Indonesia Petroleum Ltd., Sumitomo/Total, Marubeni/Norsk Hydro, and a South Korean group.

Meantime, Japan's Arabian Oil Co. agreed with Petrovietnam to jointly explore a 2,500 sq km block about 350 km off southern Viet Nam near Bach Ho oil field. Final accord could come by late June with seismic work to begin by yearend.

Cambodia has begun receiving bids for another 20 tracts, reports Singapore's Business Times. The government put out a tender for 26 undisputed tracts last year, awarding its first acreage to a foreign oil company, Enterprise, in almost 20 years (OGJ, Oct. 14, p. 28). In all, the government has awarded six blocks to foreign oil companies, the Singapore daily reported.

Seismic work has begun, and the first wells could spud in 1993. Another six tracts lie offshore in waters disputed by Thailand, and the two governments began negotiations in December over a proposal to allow exploration on disputed acreage with royalties to be split 50-50.

Enterprise's exploration program in Laos has been delayed, the Singapore newspaper reports. The company's plans to use explosives for seismic surveys on its 20,220 sq km block in the Savannakhet basin of southern Laos are stymied by discovery of thousands of unexploded U.S. bombs left over from the Viet Nam war. The Ho Chi Minh trail runs through a portion of the block. Enterprise hopes to begin drilling in 1993.

Kuwait Oil Co. has opted to undertake draining Kuwait's huge oil lakes that resulted from Iraqi sabotage of oil wells after the government rejected bids from international contractors.

Government officials said projected costs of recovering and desanding the crude was more than the value of the oil, unofficially estimated at 30 million bbl. KOC has agreed to complete the work within a year.

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