OGJ Newsletter

April 5, 1999
U.S. INDUSTRY SCOREBOARD 4/5 [44,127 bytes] Topping oil industry news is the planned merger of BP Amoco and ARCO (see story, p. 38). The deal to create the world's second-largest oil company comes only 3 months after completion of the BP-Amoco merger.
Topping oil industry news is the planned merger of BP Amoco and ARCO (see story, p. 38). The deal to create the world's second-largest oil company comes only 3 months after completion of the BP-Amoco merger.

In other merger news, the European Commission has approved the union of Total and Petrofina, under the provision that Total sell minority interests in two of its five oil storage depots in northern France. Total says this means its acquisition of the Petrofina shares held by Belgium's Electrafina, Tractebel, Electrabel, and other major shareholders-about 41% of Petrofina stock-is now effective. The approval is also the final step before launch of the public offer to exchange the remaining Petrofina shares for Total stock, which is to be completed in June or July. The French competition authorities have yet to deal with the firms' concentration of oil storage in southern France.

British firms Enterprise Oil and Lasmo have ended their discussions about a possible merger (OGJ, Jan. 18, 1999, Newsletter). Enterprise said, "Having considered the potential merits of a merger, and the contributions that each company would make to the combination, both companies have concluded that they are better placed to add value independently."

In the power sector, engineering giants Alstom and Asea Brown Boveri (ABB) are merging their energy divisions to form one of the world's largest power generation/services businesses. The 50-50 combine, called ABB Alstom Power, will be based in Brussels. Alstom will pay ABB 1.4 billion euros to equalize the venture. The deal excludes Alstom's heavy-duty gas turbine joint venture with GE. The firms expect to achieve synergies of 400 million euros in 3-4 years.

Japan's oil firms will be exempt from taxes on capital gains accrued by combining facilities starting in April. The new legislation represents a substantial revision to the Japanese tax code. It enables companies to mothball and sell unprofitable facilities and create new corporate entities without paying taxes on the resulting gains, and is aimed at encouraging companies to restructure and eliminate surplus facilities that are weighing on profits. It also promotes new business development. MITI is considering further incentives to expedite shedding excess plants and workers and consolidating output.

Japan's downstream sector is undergoing a major restructuring in response to market reforms there (OGJ, Mar. 1, 1999, p. 23, and Mar. 8, 1999, p. 25).

Global oil markets are reacting favorably to the production cuts planned by OPEC and non-OPEC producers (see story, p. 42). During trading Mar. 31, Nymex crude for May delivery at one point topped $17/bbl. In London trading that day, Brent for May delivery settled at $15.24.

Meanwhile, U.S. gasoline prices are rocketing, due in part to refinery problems in California. The most recent gasoline production cut results from a fire at Chevron's Richmond plant (see Industry Briefs, p. 40). This and other outages, such as the month-long shutdown of Tosco's Avon refinery (OGJ, Mar. 8, 1999, p. 40), have cut California reformulated gasoline (RFG) output 150,000 b/d.

Petroleum Industry Research Foundation Pres. Larry Goldstein said, "Because of the unique quality specifications of California gasoline, it's not readily available, and the gasoline market there is in tenuous balance." He said wholesale prices in the state have jumped 55¢/gal. Majors have raised retail prices 30¢/gal, and the price of premium gasoline has been as high as $2.13/gal. Goldstein says the price spike has prompted refiners on the Gulf Coast and in the Virgin Islands, and as far away as Asia and Europe, to run batches of California RFG. That's caused gasoline markets in the U.S. Midwest and East Coast to tighten somewhat, increasing prices there.

California RFG prices may increase further if Gov. Gray Davis's planned ban of MTBE takes root (see story, p. 39, and Editorial, p. 27). Unless the U.S. EPA implements an oxygenate waiver for California, the ban could give a major boost to producers of ethanol, MTBE's biggest rival.

It also could cause problems for manufacturers of methanol, a key MTBE feedstock.

Not surprisingly, ethanol lobby group Renewable Fuels Association has pledged its full support of the MTBE phase-out. RFA Pres. Eric Vaughn said, "It is important to note that the problem has been MTBE in the water, not oxygen in gasoline. Ethanol can and will play a valuable role in California's cleaner-burning gasoline. The industry is confident that more-than-adequate supplies of ethanol are available today to meet California's oxygenate demand."

Pierre Choquette, president and CEO of Canadian methanol producer Methanex, said, "There is still some debate to go. But I think, from our perspective, it is prudent to plan on the assumption that the governor's order will be executed." Methanol demand for MTBE used in California is about 1.5 million metric tons/year, he said, or about 5.5% of total world demand. He sees the most likely scenario for global methanol demand, given the ban, as a 1-2%/year increase during the next few years. A "very negative scenario" involving other states following California's lead, would be flat methanol demand. "Clearly, that points to a need for restructuring in the industry," said Choquette.

"The debate in California is surely not over," Choquette warned.

"This needs to go through the legislature. And the reaction of the U.S. EPA at the federal level is unclear at this time."

A broad coalition of U.S. congressmen has filed bills in the House and Senate to restrain unilateral economic sanctions by the U.S. against countries such as Iran (see related story, p. 29). The Senate bill had 27 cosponsors, and the House bill 40. They require Congress and the administration to assess whether a proposed sanction has clearly defined and realistic goals, and if it is likely to be effective. The bills also require them to consider the effects of the sanction on U.S. security and exports.

API Pres. Red Cavaney said, "These bills are vitally important to oil and natural gas consumers. The U.S. already has sanctions in place against countries that make up 10% of the world's oil production and 16% of the estimated reserves."

Calgary's Ranger Oil is negotiating with Iraq-another country subject to sanctions, although not unilateral ones-regarding possible E&D projects.

Ranger has inked a deal on an exploration project in Iraq's Western Desert and three field development projects. The developments would involve reserves of more than 2 billion boe. Ranger was awarded a contract earlier this year to export 1.8 million bbl of crude from the Iraqi port of Mina Al-Bakr. The exports were approved by the U.N. under its oil-for-aid plan and are under way. The firm has received approval from Ottawa to establish an office in Baghdad.

Oilexco, a small Calgary-based producer, is also seeking production contracts in Iraq. Under Canadian law, firms can negotiate future agreements with Iraq but can't formally sign contracts.

Pertamina's monopoly in Indonesia may be doomed, reports the Jakarta Post. The newspaper says the firm will lose its monopoly over the oil and gas sector in 2 years. The 2-year period is part of a bill being debated in parliament, said the acting mines and energy minister. It is considered adequate time to enable Pertamina to restructure for operations as a limited liability firm.

The Republic of Georgia is considering an oil and gas law designed to encourage international oil company investments.

A parliamentary committee has proposed a bill creating an Agency of Oil and Gas Regulation with the authority to negotiate and sign leases and contracts with industry. To ensure that the "one-stop" agency is free from political pressure, it will report only to the president. The agency would assume the existing regulatory powers of Saknavtobi, the state oil company.

It also makes state pipelines common carriers, establishes the right of eminent domain for oil projects, and bans the flaring of gas in most cases.

U.S. DOE has signed contracts to receive central Gulf of Mexico royalty oil in the SPR. In May, Texaco, Shell, and BP Amoco will begin moving about 38,600 b/d of royalty oil to the Bayou Choctaw SPR site in Louisiana. Over 3 months, they will deliver nearly 3.5 million bbl. More firms are expected to participate later, until 28 million bbl is stored (OGJ, Feb. 22, 1999, p. 24).

Canadian gas producers and pipelines, at long last, have come to terms over the future of the 20-year-old postage-stamp tolling policy, which dictates identical unit prices for gas transportation regardless of transport distance (OGJ, Dec. 23, 1996, Newsletter).

TransCanada PipeLines and the Canadian Association of Petroleum Producers (CAPP) inked a memorandum of understanding that outlines the new pricing structure for gas transportation on the Nova Gas Transmission system.

The new policy, to be phased in over 4 years, will be more "receipt-point specific" with "pricing more reflective of the relative distance and diameter of pipe from each receipt point," said CAPP and Nova. The new policy, subject to regulatory approval, will create a more competitive pricing environment and greater customer choice, said TransCanada Pres. and CEO George Watson.

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