OGJ Newsletter

Feb. 15, 1999
Arthur Andersen and Cambridge Energy Research Associates (CERA) are laying responsibility for the current oil price climate squarely on the shoulders of reduced demand. In their annual joint report, World Oil Trends, the firms said, "The combination of improving technology and liberalizing investment regimes continued to boost oil supplies, but faltering economies in Asia led to a severe slowdown in world oil demand growth."
Arthur Andersen and Cambridge Energy Research Associates (CERA) are laying responsibility for the current oil price climate squarely on the shoulders of reduced demand. In their annual joint report, World Oil Trends, the firms said, "The combination of improving technology and liberalizing investment regimes continued to boost oil supplies, but faltering economies in Asia led to a severe slowdown in world oil demand growth."

Global oil demand for 1998 was 73.85 million b/d, only 240,000 b/d (0.3%) more than 1997 levels, say the analysts. Regional demand changes were: Latin America +3.6%, Middle East/Africa +2.1%, Europe +1.3%, North America +1.0%, Asia-Pacific -2.1%, and FSU -14%. Non-OPEC production was up only 300,000 b/d to 38.23 million b/d-the weakest increase since 1993. CERA Pres. Joseph Stanislaw told reporters in Houston last week, "We've been here before, at a point (where industry) fundamentals are (working) against prices, and the industry is going through, yet again, another examination of itself-lower costs, significantly lower prices challenging those costs, restructuring, mergers and acquisitions. We've been here about five times in the past 15-16 years. It's relentless.

"One thing that's different about the current situationellipseis that the driving force is demand. The only reason there's too much supply is that all that demand we thought was going to be there is not there." Stanislaw says this has created an "oil bubble (that) makes the natural gas bubble of the 1980s look small."

The challenge, he says, is not low prices; it's how to revive demand. "The revitalization of the Asian (and Russian) economies is still a ways away" because both regions have political crises on their hands, he says.

Their transformations are limiting the speed of economic recovery.

"What's interesting is that, in the one part of the world where there seems to be economic crisis-Latin America, with the crisis led by Brazil-economic growth is going down, but oil demand is not. The economy is going into recession, but oil demand is still growing in Brazil," said Stanislaw. That's dramatically different from what happened when Asia went into recession.

Given that global oil demand is expected to remain in hibernation for a while, news that Northwest Europe's oil production will reach a new peak in 1999 comes at the wrong time. Combined output for the region is forecast to reach 7.4 million b/d by yearend-up 1.3 million b/d from December 1998.

Wood Mackenzie Consultants said that, while Norway's output fell 4% in 1998 to an average 3.14 million b/d, this year it will rebound to a new annual peak average of 3.4 million b/d. U.K. production in 1998 hit a new high of 2.62 million b/d, and there, too, production is expected to soar, with the analyst predicting that the 1999 average output will be 2.99 million b/d.

Denmark is also expected to beat its output records, with 1999 production anticipated to average 315,000 b/d. Only the Netherlands is expected to see its oil production decline, with output predicted to average 25,000 b/d in 1999.

IPAA is calling on U.S. Interior Sec. Bruce Babbitt to cut costs further for producers operating on public lands-which comes when relations are souring between Babbitt and the oil industry (see related story, p. 35).

IPAA wants Babbitt to go beyond the limited stripper-well relief he announced Feb. 4 (see story, p. 35). "While Secretary Babbitt's action is a step in the right direction," said IPAA, "it doesn't go far enough."

Among the IPAA proposals are: a cut in royalty rates, temporary suspension of mandatory maintenance in certain instances, reduced lease rentals, expedited permitting, and transfer of BLM oil and gas regulatory authority to states, to eliminate costs of complying with duplicate federal and state rules.

Efforts to shore up foundering small producers have met with success in Oklahoma and Texas.

Oklahoma's state legislature has passed a bill slashing the gross production tax on oil. The cut takes a three-tiered approach and amounts to a total of $29 million in emergency tax relief (OGJ, Jan. 11, 1999, Newsletter).

Oklahoma Independent Petroleum Association Pres. Jim Palm said, "This tax reduction will save jobs for companies large and small. And it will prolong the productive capacity of thousands of oil wells."

The Texas state Senate last week passed a bill providing a $45 million tax break for marginal wells. The bill would exempt owners of oil wells producing 15 b/d or less from paying severance taxes when the monthly average WTI price falls below $15/bbl. It will now go to the House, where it is expected to pass quickly, given the 25-1 Senate vote. The tax relief would expire Aug. 31, or when $45 million in taxes have been waived, whichever comes first.

Strategic alliances are proliferating as the industry continues to look for ways to cut costs and improve earnings.

ARCO and Chevron have agreed to pursue formation of a new company to jointly operate their Permian basin producing assets. If negotiations are successful, the 50-50 firm would undertake development and production of oil and gas and marketing of crude oil, natural gas, NGL, and related products. It would also produce, transport, and market CO2. Combined production would be more than 170,000 boed, and proved reserves 600 million boe.

The move would likely involve cutting staff by 130-170, say the firms.

In a move designed to save ?7 billion ($62 million) in distribution costs over 4 years, Japan Energy Corp. and Showa Shell K.K.-Japan's fourth and fifth largest refiners-say they will sign a logistics cooperation pact shortly. The agreement would cover areas such as trucking and terminals as well as alliances between subsidiary distributors. JEC currently operates 32 oil storage terminals, and Showa Shell 36, including those managed by Japan Oil Network, which is owned 49% by Showa Shell. Most of the cost savings will come from the closure of 20-30% of those terminals over the next 4 years.

JEC is also considering making a capital investment in Japan Oil Network. This, together with an existing agreement to barter oil shipments, would bring Showa Shell and Japan Energy into a "virtual merger" of their oil distribution operations. However, both have categorically denied recent reports that they have agreed to merge their refining operations.

A Showa Shell official did admit, "Our scale of operationsellipseis too small to satisfy our shareholders, and we are therefore actively looking at ways to increase our size through partnershipsellipseBut, as yet, nothing has come of (talks)."

India has revealed details of the first licensing round under its New Exploration Licensing Policy (NELP). Attendees at a Houston presentation of the NELP terms appeared to consider them favorable.

Licenses will be awarded through an open, international, competitive bidding process. No preference will be given to domestic vs. foreign companies or to public vs. private enterprises. And foreign firms will be allowed 100% participation in the 48 blocks on offer (OGJ, Nov. 23, 1998, Newsletter).

Under India's new model production-sharing contract and petroleum tax regime, royalties will be borne directly by the participants and pegged to international market prices: 12.5% for onshore crude, 10% for offshore crude, and 10% for all gas. Deepwater blocks will carry, among other benefits, a reduced rate of 5% for the first 7 years. There is no signature bonus, no import duties, and no requirement for participants to register for business in India. And foreign firms will be free to market oil and gas domestically. India's NELP road show also was staged in New Delhi, London, Calgary, and Singapore.

Saudi Arabia has clarified that its interest in allowing foreign firms to participate in its petroleum industry is limited to natural gas and downstream projects. Saudi Minister of Petroleum and Mineral Resource A* I. Naimi told reporters in Riyadh last week, "We are looking for concepts that deal with integrated projects, which, as far as gas is concerned, will give us an end-product such as desalinated water, power, or petrochemicals." The kingdom's other priorities include improving refinery efficiency and producing lubricants.

Naimi and U.S. Energy Sec. Bill Richardson jointly announced the signing of an agreement outlining steps to enhance cooperation between the two countries in the energy sector. Naimi said outside investment in oil exploration would be "attractive and profitable" but not necessary.

For the moment, the kingdom is focused on exporting gas, as its reserves are estimated at 207 tcf. But Naimi did not shut the door completely on future upstream oil investments.

Richardson said the U.S. would support domestic companies interested in investing in Saudi Arabia.

Taiwan's Ministry of Economic Affairs plans to restrict private power plant operators to the use of natural gas.

While the new rules won't immediately affect existing power plants, all future private plants must be gas-fired. An official of the ministry's Energy Commission said the government hopes the new restrictions will encourage state-owned Taiwan Power Co. to increase its use of natural gas.

Gas-fueled plants account for only 13% of electricity generated by TPC, and the government would like to see this increased to at least 30% in the short term.

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