Is there a chance OPEC will boost oil production in response to rising oil prices?
Don't count on it. With the Sept. 22 ministerial meeting looming and oil futures trading near $22/bbl, all the signs are that the group is in full agreement to extend the current, successful round of production cuts to the end of next March, when it is scheduled to meet again.
If anything, OPEC is hinting that it may extend the production cuts even beyond March, if oil prices soften then, as they usually do in the seasonally weaker spring demand period. That was the gist of comments from OPEC Sec. Gen. Rilwanu Lukman, who told an Indonesian oil and gas conference last week that the plan is for OPEC to keep oil supplies at a level to support an OPEC crude basket price of about $20/bbl-at least $18/bbl for a full year. While the OPEC basket price has rebounded to $15-20/bbl in recent months, it would still take a while for OPEC members to recoup the massive losses of 1998 and early 1999.
That in itself is a source of concern for Sheikh Ahmed Zaki Yamani, former Saudi oil minister and chairman of London think-tank Centre for Global Energy Studies, who gave the keynote address at a conference on oil price challenges into the next century sponsored by CGES and OGJ in Houston last week.
Yamani contends the OPEC-engineered oil price rises of 1999 have not solved any of the persistent problems that plague the oil industry; rather, they have added to the industry's catalog of worries. He pinpoints the enormous amount of OPEC's spare capacity, accounting for about 10% of global demand, with Saudi Arabia accounting for the lion's share.
"Not since 1988 has the market had to contend with spare capacity in excess of 9% of world demand," Yamani said. "Obviously, enormous self-discipline will need to be exercised by all the OPEC member-states to keep this oil from entering the market. So far, discipline has not been a problem for OPEC, but as the oil price gets ever higher, the centrifugal forces within OPEC will get ever greater-as standard cartel theory predicts."
Yamani contends the OPEC basket price is likely to head towards $25/bbl this winter, fueling an inexorably growing temptation by OPEC members to produce more oil and spurring more non-OPEC supply growth.
That is counter-productive to OPEC's longer-term interests, Yamani contends: "ellipseOPEC needs to develop a strategy that keeps oil prices constant in real terms at a level low enough to deter non-OPEC producers from adding to their reserves and keep worldwide demand growing at a healthy rateellipseOPEC's member-states should restructure their economies and fiscal regimes in such a way as to learn to live with whatever level of prices is commensurate with OPEC's longer-term interests."
Despite the upbeat outlook for oil prices in the near term, as Northwest Europe's upstream industry gathered in Aberdeen at the Offshore Europe conference last week, the mood was generally downbeat.
In one of the keynote addresses, Stig Bergseth, executive president of Statoil's technology division, told delegates that, even as recent mergers and acquisitions have effectively removed Amoco, Petrofina, Mobil, and Saga from the list of operators, there is no guarantee that further such losses will not happen in the foreseeable future.
Bergseth said that the current oil price of around $20/bbl showed that OPEC has regained its market influence in a most convincing way: "The big question, of course, is how long this situation will last. There are strong and complex forces affecting future price levels. What we are really observing is how these forces change in relative strength and impact."
In case anyone failed to grasp the show's message that industry must keep changing to survive (see stories, pp. 32, 40), Bergseth added, "During the last decade or so, the oil and gas industry has not been able to deliver returns comparable with business as a whole.
"It is impossible to understand the current restructuring without taking this challenge into account. Even without last year's price collapse, there would have been a need for increased efficiency and cost reductions in order to maintain a sustainable base of capital within our industry."
Meanwhile, more gloom and doom descended on the industry's jobs market with the news that Anglo-Norwegian engineering contractor Kvaerner is to reduce its North Sea payroll by 3,000.
The contractor expects the cuts in its work force of 14,000 to be split equally between the U.K. and Norway and to be made over the next 6 months. The news came as Kvaerner announced a return to modest profit in the second quarter after recent heavy losses and a poor year's performance that triggered a massive restructuring and sale of non-core operations.
Hearkening to the Bergseth comments, the prospect of the disappearance of one of the two French majors may be looming larger.
The sparring war conducted through the media between the chiefs of TotalFina (Thierry Desmarest) and Elf (Philippe Jaffr?) could well cease, as Desmarest called for a truce last week: "We have reached the stage where it is better not to talk too much if a quick solution is to be reached." He was vague on whether direct discussions were taking place with Jaffr?.
While TotalFina restated its wish for a friendly end to the proposed merger, Elf remains combative. It called for study offering a "super dividend" to Elf shareholders, a suggestion that did not figure in Elf's final communiqu? on its response to TotalFina's offer, because it had been vetoed by Paris stock exchange authorities as not specific enough. Previously, Jaffr? had expressed readiness to enter into direct talks with Desmarest, but on his own terms.
Jaffr?'s contradictory sentiments, voiced on different occasions, prompted Desmarest to hope that any new leader of the merged groups would "have more consistent ideas." The extra dividend suggestion failed to impress markets, which see it as aiming to retain Elf shareholders and force TotalFina to up its offer, thus running the risk of losing the latter's earlier deadline advantage. It is believed Elf would pay the extra dividend with all or part of the 4.3 billion francs it expects from the sale of the 15% stake in Sanofi it is putting on the market. But observers note the contradiction of asking Elf shareholder on Oct. 15 for a capital increase to pay the cash part of the Elf share exchange offer while being prepared to spend money on a super dividend.
It appears that discussions between both groups are taking place, but at a lower level. They reportedly involve the role of Elf people in the new group and the more precise scope of the chemicals business-the main subjects of dispute between the two giants.
Now that Sudan has rejoined the ranks of oil exporters, E&P interest is returning to that country.
TotalFina's E&P manager, Christophe de Margerie, has had talks with Sudan's energy minister in Paris over restarting exploration on a Marathon oil field discovery where predecessor Total had run seismic in the 1980s.
Total had pulled out because the area was unsafe but had managed to have the license renewed regularly. If TotalFina believes conditions are safe to resume work on the field, it will go ahead, eventually looking for a partner. Especially helpful in the case of a commercial development is a new export pipeline from fields in south-central Sudan to a port on the Red Sea (OGJ, July 12, 1999, p. 34).
Caspian territorial disputes are simmering anew, with the latest boil-over the result of Iran awarding a domestic company rights to explore and develop a block in the Caspian Sea that is also claimed by Azerbaijan.
According to press reports from Tehran, National Iranian Oil Co. awarded an E&D contract to Petro Iran Development Co. covering what Iran calls the Alborz area and Azerbaijan calls Alov. Baku signed a production-sharing agreement for the Alov block with a group led by BP Amoco in July 1998 that calls for the consortium to drill three wells by 2001. NIOC gave Petro Iran the right to solicit foreign joint-venture partners-part of a continuing push by Tehran (see related story, p. 27), and while BP Amoco acknowledges the Azeri claim, it says the dispute can be settled only by the two governments.
Privatization efforts have stalled in two key oil producing countries.
A decision on an oil and gas bill before the Indonesian House of Representatives that would strip national oil firm Pertamina of much of its strength was postponed until later this month. A final decision had been expected by late August, but the house has not reached accord on several key issues in the bill (OGJ, Aug. 23, 1999, Newsletter).
After more than 4 months of debate, Indonesian Mines and Energy Minister Kuntoro Mangkusubroto is becoming less optimistic that the bill will become law. "My hope for the bill to be enacted is fading," he said, adding that he would like to see it pass before the new house takes office at month's end.
Major points of conflict are the government's proposals that all oil and gas contracts be managed by Mines and Energy and that Pertamina be made a commercial firm. The house dissents on these points and has called into question the fate of Indonesia's existing production-sharing contracts.
Pertamina Pres. Martiono Hadianto said the firm was preparing to operate as an independent firm. He added that Pertamina is ready to be privatized and that numerous restructuring plans were being negotiated: "In the face of the changing global, regional, and domestic environments, which influence drastically the domestic oil and gas business, the past successes and constraints of Pertamina now constitute a challenge." He added that previous Pertamina operations had been restricted by tough regulations, a tight financial policy, limited assignment completion fees, and cross-subsidies.
Meanwhile, Pemex Director Adrian Lajous has called off plans to partially privatize Mexico's petrochemical operations. The pronouncement carries little weight, however, given Pemex's repeated futile attempts over several years to begin selling interests in its chemical complexes (OGJ, Jan. 25, 1999, p. 44). The terms of Mexico's privatization offer were widely viewed as inadequate by international chemical companies.
Lajous also dismissed any speculation about other privatization plans for Pemex, indicating that no such moves would take place during his administration. He says he remains optimistic about a global recovery for petrochemicals next year and about the future of the Mexico's oil industry (see related story, p. 36).
Phillips Petroleum has developed a new process that would significantly reduce the sulfur content in gasoline, thus promoting cleaner air with minimal manufacturing cost increases. Phillips is designing a demonstration unit to test the process, which it calls a "breakthrough" desulfurization technology. The process uses a regenerative sorbent that chemically attracts sulfur and removes it from gasoline blendstocks. Phillips says that it consumes very little hydrogen compared with conventional desulfurization techology and that the sorbent material can be regenerated on-line, permitting prolonged operating run times between shutdowns.
