OGJ Newsletter

OPEC needs to take special care not to panic over the recent $9/bbl price drop. Reneging on pledged production increases in response to a momentary case of the jitters could mean market-wrecking oil prices late in the year.

So says London think tank Centre for Global Energy Studies, whose price scenarios for dated Brent include hypothetical projections of $40 and even $50/bbl. But those extreme scenarios would assume IEA is correct in its projections that at least another 1 million b/d of crude supply-in addition to current OPEC output over quota plus the increase from new quotas-will be needed to balance the market in the second half. CGES thinks the high prices of late 1999 and early 2000 have already crimped demand and that IEA is overstating the case.

If OPEC thinks its output hike could collapse prices in the face of continued weakening of demand instead of the achieving the soft landing it hopes for and responds by rolling back the quota increase, it risks overheating the market, CGES says.

Instead, the analyst thinks demand will rebound as refiners rebuild crude and products stocks ahead of the driving season and take advantage of strong margins. This will demonstrate that OPEC's increased output-and even a little more cheating-is justified after all. The upshot: oil prices well within OPEC's desired range but not at a level likely to drastically deflate demand or cripple economic recovery (see table).

Meanwhile, oil prices lost more ground in the past week, with NYMEX crude for June dropping $2.70 on the week to close at $24.65/bbl Apr. 26, while IPE June Brent fell only 79 cents on the week to close the same day at $22.98/bbl.

US gasoline demand up

While CGES thinks high crude oil prices have already hurt demand, high prices haven't stopped US gasoline demand from continuing to climb.

API reports US gasoline deliveries, a key measure of consumer demand, rose 0.8% to 8.148 million b/d in March, despite substantially higher retail prices. US pump prices averaged $1.49/gal, up more than 50% from March 1999's near-record low. API reckons US retail prices in March were more than 20

All other US deliveries of major oil products declined in March, vs. the same month in 1999.

On the other hand, US crude production is not gaining a bounce from higher oil prices. US crude output in March slipped 0.6% to 5.857 million b/d from March 1999, despite world oil prices that peaked at $33.90/bbl.

IPAA: US oil output lagging
Echoing that last theme is the latest forecast from IPAA's supply-demand committee.

IPAA says the Lower 48 states "continue to be extremely slow to respond to the rebound in the crude oil prices," meaning that total US crude production in 2000 will rise a meager 0.1% to 5.93 million b/d, and total production, including NGL, will rise 0.2% to 7.72 million b/d.

All indicators point to a substantially delayed increase in US oil production, IPAA says.

"Rotary rigs searching for crude oil still are down 60% from the 10-year average of last decade of 400 rigs. The number of workover rigs now total 1,000, well short of the 1,400-to-1,500 that should be active, given the rise in crude oil prices."

IPAA also sees US crude and products demand climbing 1.3% to 19.87 million b/d and US natural gas consumption rising 1.7% to 22.56 tcf in 2001 vs. 2000-the latter finally topping the previous record in 1972.

Industry Trends

BTU
convergence alliances are increasingly taking on the visage of Wall Steet commodities traders. Power giant Entergy and privately held integrated Koch last week unveiled a JV to deliver, market, and trade power, natural gas, and other energy-related commodities such as weather derivatives. With assets of about $1 billion, the new Houston company, Entergy-Koch LP, will be among the top 10 US energy commodity traders in terms of combined volumes of electricity and gas traded, the firms say, pegging those volumes as high as 100 million Mw/year and 5 bcfd. Those assets include the 10,000-mile Koch Gateway Pipeline and the Bisteneau gas storage site.

Entergy-Koch is expected to benefit from Koch's market position and experience in energy commodity trading and risk management services and from Entergy's cash and its power trading interests in the US and Europe. Entergy-Koch would provide customers with a range of commodity sources and options, including gas, oil, coal, power, weather derivatives, and other risk management tools.

The JV also will market power and provide risk management and trading for Entergy's existing and future merchant power plants. Entergy will retain ownership of that fleet. It reckons the JV will add $0.25-0.30/share to its earnings in the first year of operations.

Entergy-Koch also is expected to add growth opportunities in the weather derivatives market. Koch Energy Trading now accounts for 30% of that market.

ALTERNATE FUELS
development can still incorporate some conventional fossil fuels.

US DOE says a new type of natural gas-fed fuel cell power plant has been constructed and will be tested soon.

Siemens Westinghouse's 220-kw power system is claimed to be the first to combine a solid oxide fuel cell and a gas microturbine in an innovative hybrid configuration. DOE says the combination should be the cleanest and most efficient way to produce electricity.

Energy Sec. Bill Richardson said, "For a world that is becoming increasingly electrified, this new power technology comes at the right time."

The system is expected to generate power at 55% efficiency, meaning that 55% of the energy value of the natural gas fuel will be converted into electricity. That compares with respective efficiencies of 35% and 50% for conventional coal and gas-fired power plants. The technology relies on a solid oxide fuel cell, an assembly of 1,152 tubular ceramic cells that will generate about 200 kw. The unit is said to be the world's first to operate the cells under high pressures and to use hot, pressurized exhaust gases to drive a microturbine generator, which will generate another 20 kw.

Siemens Westinghouse expects electrical efficiencies of more than 70% can be achieved as its hybrid technology improves. The firm will develop and test several solid oxide fuel cell systems over the next 2 years under DOE's advanced fuel cell program.

SOME NONCONVENTIONAL
fossil fuels are having a rough time of it.

Suncor says costs for its $2 billion (Can.) Millennium oilsands expansion program in northern Alberta have increased by $150 million and could increase a further 5-15%. The firm says increased expansion costs are due to design change improvements for Millennium and rising labor and material costs stemming from the heating up of the Alberta economy. The expansion will almost double Suncor's oilsands output to 210,000 b/d by 2002. The company is continuing with plans to sell off its conventional oil assets in Western Canada and expects to cut 85 jobs in the restructuring. It also says a pilot shale oil project in Australia is behind schedule due to technical problems, and a decision will be made later this year on whether to proceed with a commercial operation.

Government Developments

RUSSIA
wants to move ahead with plans to let Rosneft, the country's last fully state-owned oil company, take control of Chechnya's oil industry, says a source in the Russian Fuel and Energy Ministry.

Moscow earlier said it wants to let Rosneft manage the oil sector in the embattled would-be breakaway republic but so far has made no move to transfer assets there. However, the ministry source says his agency is preparing to give Rosneft the right to operate the old Chechen segment of the Baku-Novorossiisk oil pipeline. This idle segment, which had been carrying Azerbaijani oil exports for a time, has been replaced with a 312-km bypass that runs through neighboring Dagestan. Rosneft, the official contends, would use the line only to deliver oil produced in Chechnya.

But before the pipeline can be put under Rosneft's control, its ownership must be determined. Some evidence indicates that the line belongs to Russian state oil pipeline operator Transneft, while other documents cite ownership by the government of former Chechnyan President Aslan Maskhadov. Transneft is willing to transfer the pipeline to Rosneft once Moscow figures out who owns it. Moscow hopes to see Chechnya produce 30,000 b/d of crude this year, which would require 90 workovers.

INDIA
has set up a committee to formulate a comprehensive LNG policy encompassing all aspects of LNG, including supply, distribution, shipping, and imports.

Last December, Petronet inked LNG marketing agreements with GAIL, IOC, and Bharat Petroleum, unifying their disparate efforts to snare India's LNG marketing rights. GAIL will be chief marketer at Petronet LNG's terminals at Dahej and Cochin, while IOC and Bharat will be subsidiary marketers in, respectively, the northern and southern regions. Petronet LNG will sell its LNG to the firms on a take-or-pay basis and transfer its accords with various power and fertilizer companies to the marketers (OGJ, Dec. 25, 1999, p. 38).

Petronet is developing a 5 million tonne/year terminal at Dahej, Gujarat, and a 2.5 million tonne/year terminal at Cochin, Kerala, and has signed contracts for LNG imports, including ones with Qatar and Oman.

Petronet Managing Director S.C. Mathur thinks India can become one of the largest markets for LNG, if enough infrastructure is developed there. Secretary of the Petroleum and Natural Gas Ministry Narayan notes that a number of suppliers are keen to ship LNG to India and have sought clearance from the foreign investment promotion board. Narayan wants all regions in the country to have access to LNG and LNG projects, allowing a level playing field among LNG users.

FRANCE
plans to monitor gasoline prices through weekly inspections to make certain that marketers reflect decreases in oil prices, the economy ministry said. The country, known as having perhaps one of the most arduous tax systems for gasoline, has recently reduced the gasoline VAT to 19.6% from 20.6% in hopes of reducing prices. The government says marketers that had raised their prices when crude oil costs increased should conversely adjust prices once crude prices fall.

The regularly planned initial inspections would be followed by spot checks only on certain outlets, the ministry says.

Quick Takes

BP AMOCO
says it has found enough gas in its Shah Deniz discovery in the Caspian Sea off Azerbaijan to justify a pipeline to Turkey.

BP Amoco and partners late last month unveiled final test results from its SDX-2 ap- praisal well. Drilled to 5,892 m TD 6 km south of the SDX-1 discovery well and flow-constrained by equipment, it flowed 63 MMscfd of gas and 3,250 b/d of condensate through a 48/64-in. choke with 6,140 psia wellhead pressure from the Fasila Suite; a test of the Balakhany VII zone yielded 60 MMscfd of gas and 3,100 b/d of condensate through a 52/64-in. choke with 4,800 psia wellhead pressure-also equipment-constrained. Plans call for a second appraisal and possibly three more to follow in Shah Deniz, which lies in 50-600 m of water about 70 km south of Baku (see map).

Given such results, it's no wonder interest in Azeri Caspian hydrocarbon potential continues to simmer.

Azerbaijan's parliament has ratified the exploration, development, and production-sharing agreement for the Zafar-Mashal exploration block in the Caspian Sea, says ExxonMobil. The 640 sq km block lies 110 km southeast of Baku in 550-900 m of water. Zafar-Mashal was previously known as Blocks D-9 and D-38. The PSA for the block was signed in Washington, DC, during the April 1999 visit of Azerbaijan President Heydar Aliyev (OGJ, May 3, 1999, p. 46). State-owned SOCAR has a 50% stake, Exxon 30%, and Conoco 20%. Exxon Azerbaijan will operate.

IN OTHER ACTION
on the exploration front, Anschutz Overseas Corp. inked a 3-year accord to explore for oil and gas in Bulgaria. The focus will be on selected areas of the Balkan Mountains and near the towns Pleven, Lovech, and Montana. Anschutz will fund all exploration under the deal, which carries two 2-year extension options. x TransCanada PipeLines' Dutch unit has a nice gasser with its K12-13 wildcat in the Dutch North Sea. The well flowed 30 MMcfd on test; reserves are pegged at 150-375 bcf, and production start-up is slated for early 2002. Interests are operator TransCanada, 35%; Energie Beheer Nederland, 40%; EWE AG, 14.3%; Rosewood Exploration, 5.7%; and HPI Netherlands, 5%. x Norway has awarded 34 licenses for parts of or entire blocks on the Norwegian shelf to 13 firms in the nation's 16th licensing round. All companies that applied have received license offers. Those receiving offers of operatorship of entire or partial blocks are Norsk Hydro (3), BP Amoco (3), Statoil (2), Agip (1), Chevron (1), TotalFinaElf (1), ExxonMobil (1), and Royal Dutch/Shell (1). Receiving offers of participation were Conoco, Enterprise, Fortum, Phillips, and RWE-DEA (a complete list of licenses and licensees is available on the the free news site at www.ogjonline.com).

The dizzying pace at which TotalFinaElf continues to adding big deepwater strikes off Angola shows no sign of slacking. Partners in the prolific Block 17 off Angola unveiled yet another new oil discovery. On test, Jasmin 1, drilled in 4,239 ft of water, flowed 11,000 b/d of oil. Other finds in the area include Girassol, 1996; Dalia, 1997; Rosa and Lirio, 1998; and Tulipa, Orquidea, Cravo, and Camelia, 1999 (see map, OGJ, Oct. 18, 1999, p. 40). With these finds, TotalFinaElf has pegged reserves at about 3.5 billion bbl for the block.

Fletcher Challenge Energy spudded the first exploration well on Block BCD off Brunei. The BSA-1 wildcat will explore various targets at 1,360-3,700 m. The shallower horizons are thought to be potentially oil-bearing, while the deeper zones are likely to be gas and condensate-prone. Fletcher spudded Apr. 15 and expects TD in 33 days. Operator Fletcher Challenge and Unocal each holds a 26.95% stake, Brunei partners the rest. x Sarawak Shell and Petronas Carigali inked a PSC for Block SK312 off Sarawak. Shell will operate with a 70:30 equity split with Petronas Carigali. The block, about 200 km northwest of Bintulu and covering about 6,000 sq km in the Central Luconia gas province, comprises Block SK-8 relinquished acreage previously operated by another Shell unit. Plans call for shooting 1,500 line-km of new seismic, reprocessing 500 line-km of old seismic, and drilling at least one wildcat programmed to at least 1,500 m. x Spinnaker Exploration found more gas in the Gulf of Mexico off Texas. Its High Island A-7 No. 2 well, drilled to 14,475 ft TMD, found 63 ft of net gas pay in three Miocene Rob L sands. Spinnaker expects 20 MMcfd of gas production from the well. Another appraisal well is planned for the third or fourth quarter.

US PRODUCERS
are getting more association help in their battle with MMS over its controversial royalty oil valuation rule. API has sued the agency in US federal court to overturn the rule, following on the heels of the suit IPAA filed last month (OGJ, Apr. 17, 2000, p. 34). MMS issued the lengthy rule Mar. 15, detailing how producers must calculate the royalties they owe the federal government for oil production from leases on federal lands.

Elsewhere on the drilling-production front, Petrobras UK and partners intend to enter into a risk-sharing or performance-incentive contract with one or more contractors to evaluate and develop Blane field in the UK North Sea. The field lies in 74 m of water and contains reserves of 15-40 million bbl of 42 degrees gravity oil, which will be developed with 2-5 wells. A 1-3 year oil production rate of 15,000-25,000 b/d is forecast together with 6-10 MMscfd of associated gas. The field will require water injection and artificial lift and has a projected field life of 3-8 years. Production is slated for early 2002. Partners in Blane include operator Petrobras, 30.5%; Bow Valley, 15.2%; MOC Exploration, 17.1%; Agip, 17.0%; Roc Oil, 15.2%; and Lasmo, 5.0%. x The consortium developing Karachaganak oil, gas, and condensate field in western Kazakhstan reaffirmed its pledge to invest $2.5 billion in the project by 2002. Speaking with parliamentary deputies at a conference in Astana, Karachaganak's General Director John Morrow said a further $2 billion would likely be invested during 2002-06. Partners in the Karachaganak project are BG, Agip, Texaco, and Lukoil. The group signed a 40-year PSA with the Kazakhstan government in 1997. Production is forecast at 80,000 boe/d this year, vs. 66,000 boe/d last year. The planned outlays will fund infrastructure improvements and allow production to reach nearly 300,000 b/d of liquids and 70 million cu m/day of natural gas in 2006. About $350 million of the investment will be spent to complete by early 2002 a 635-km pipeline spur connecting Karachaganak to the Caspian Pipeline Consortium's Tengiz-Novorossiisk pipeline, currently under construction (OGJ, Apr. 17, 2000, p. 42). BG, Agip, and Lukoil are also shareholders in CPC. Karachaganak proven reserves are 1.2 billion tonnes of oil and condensate and 1.35 billion cu m of gas.

A SINO-RUSSIAN PIPELINE
megaproject is making progress.

Yukos says its plans to build a $1.7 billion pipeline to China are moving forward. Russia's No. 2 oil company has teamed up with state oil pipeline monopoly Transneft and China's state-owned Chinaoil, to construct a pipeline designed to transport ultimately as much as 600,000 b/d of Russian crude oil to China. China and Russia have provisionally agreed to start building the line in 2003, start-up is expected in 2005, ramping up to the design throughput capacity by 2010. The pipeline agreement was signed by Russian Minister of Fuel and Energy Victor Kalyuzhnyi and Zeng Peiyan, minister for China's State Planning Development Commission, during the former's recent visit to China. A due diligence report and financing matters will be sorted out by first half 2001. Financing prospects look good, but a sticking point might be the route, with Moscow wanting to cut costs by extending the line through Mongolia, which has Beijing wary for security reasons.

Less prospective now is the proposed Trans-Caspian gas pipeline. Turkmenistan President Niyazov reportedly acknowledged there is little hope that construction of the project will begin soon. Niyazov's admission follows just weeks after a March pact that reportedly split capacity between Turkmenistan and Azerbaijan about 85-15 (OGJ, Mar. 27, 2000, Newsletter). According to the present timetable, work is to start in early 2001 and conclude 2 years later, but the Turkmen leader told Shell representatives that unless the project receives more international support, it will not be carried out at all. Transportadora de Gas de Mercosur will start moving gas through its 440-km pipeline from Parana, Argentina, to Uruguaiana, Brazil, on schedule in June (OGJ, Aug. 9, 1999, p. 34). The line will deliver 2.8 million cu m/day to a 600-Mw power plant in Uruguaiana. TGM will eventually tie into the Transportadora Sur Brasileira de Gas (TSB) pipeline in Brazil, thus linking Uruguaiana and Porto Alegre in southern Brazil. The 24-in. TGM line's throughput will ramp up to 10-12 million cu m/day in the next 3-4 years, when the TSB pipeline is completed. Westcoast Energy may build a 140-mile natural gas pipeline from southern British Columbia to northwest Washington state by 2004. Westcoast would be lead developer in the Orca Natural Gas Pipeline project if it wins regulatory approvals. Other partners would be Cascade Natural Gas and Puget Sound Energy. The line would carry Canadian gas south from a border point at Sumas, Wash., to expanding markets in northwest Washington. El Paso Energy and Enron are teaming up to lay a large-diameter gas pipeline from Savannah, Ga., to a link with a Florida Gas Transmission line in Jacksonville, Fla. Their JV Cypress Natural Gas plans to hold an open season for pipeline capacity May 1-June 30 and will apply to FERC in January 2001 to build and operate the line. If all goes well, construction should begin in third quarter 2002, and the pipeline should be in service in April 2003. And there's an LNG twist: El Paso affiliate Southern LNG Co. was recently authorized by FERC to reactivate its LNG terminal near Savannah. The regasified LNG will be the primary supply source for the new pipeline, with additional gas supplied by El Paso unit Sonat and Florida Gas. Owned by Enron and El Paso, Florida Gas also plans an open season at the same time for an expansion of its system to meet a growing power load in central and southern Florida.

AN LNG PROJECT
also tops processing news this week. Pertamina and ARCO let a front-end engineering design (FEED) contract for the Tangguh LNG plant to a combine of Chiyoda and Mitsubishi as part of a multiple-FEED strategy to promote competition and to achieve a competitive project cost. The two-train plant is to be built at Berau Bay in Irian Jaya and have capacity for 6 million tonnes/year of LNG, joining Arun and Bontang as the third LNG hub in Indonesia-already the world's No. 1 LNG exporter. The gas will come from an ARCO group's offshore Tangguh area gas fields, which hold 18.3 tcf of proved and probable reserves, with another 5.4 tcf possible. Additional exploration is slated for surrounding PSCs to boost that reserves total. Project cost is put at more than $1.5 billion, with additional investment required to develop offshore gas production facilities.

The world's largest Morphylane plant-with a maximum capacity of about 700,000 tonnes/year of aromatics-started up the Jubail, Saudi Arabia, complex owned by a JV of Chevron and Saudi Arabia's Sabic, reports process developer Krupp Uhde. The plant produces high-purity benzene from reformate in three process steps: prefractionation, selective hydrogenation of the reformate, and extractive distillation via Krupp Uhde's Morphylane process. The plant currently produces 500,000 tonnes/year with a purity of up to 99.997%. The extractive distillation is designed for a maximum production of almost 700,000 tonnes/year of aromatics, with a view to the additional production of pure toluene in a later phase. Chevron already operates a Morphylane plant using the Krupp Uhde process at Pascagoula, Miss. These two plants alone will produce over 1 million tonnes/year of high-purity benzene, says Krupp Uhde. On the refining-marketing side of the downstream business, India's Oil Ministry is seeking the support of Oman Oil Corp. for the 70 billion rupee Bina refinery at Madhya Pradesh and assures OOC all permits are in hand for the project. OOC, which had evinced interest earlier to pick up a 26% stake in the project, had recently expressed its unwillingness to support the project because of delays exceeding 5 years over obtaining various clearances. The ministry, in a letter to OOC, said the project got a final green light from the Ministry of Environment and Forest, which will allow it to be completed within the next 5 years. Bharat Petroleum also would hold a 26% stake in the refinery project, while remaining equity would be held by financial institutions and the public. Lukoil unit Luk Sintez Oil purchased a 25% stake in Ukraine's Odessa refinery through a stock swap valued at $2.5 million, bringing its shareholding up to 76.9%. Last year, Luk Sintez paid about $6 million for a 51.9% stake in the refinery, promising to revamp the 56,000 b/d capacity refinery and supply it with 48,000 b/d of crude oil. The German marketer Aral will invest about 500 million deutschemarks by 2002 and open over 70 new service stations in Poland, says Aral Polska Director General Ingo Paap. Aral wants to ultimately own a network of 200 stations and control 10% of Poland's fuel sales market-it has invested 300 million deutschemarks in Poland since 1996. Paap says Aral is also interested in the privatization of oil refining company Rafineria Gdanska and refined products distributor Dyrekcja Ekspoloatacji Cystern.