Market Movement
Bull markets evident for gas, oil
With natural gas futures prices touching $4/MMbtu and crude oil futures prices hovering near $30/bbl, the market bulls are in full stampede.
The fact that these high prices are coming at what would otherwise be a seasonally slack period for both commodities points to the strength of underlying market fundamentals-in other words, a tight supply-demand balance.
No one is yet predicting such lofty price levels will hold for the rest of the summer, but the stage is being set for both oil and gas markets to remain at least fairly robust well into 2001 and possibly see dramatic spikes in the fourth quarter.
Gas storage deficit supports $4/MMbtu in January
Even as natural gas storage injection rates increase, they remain fairly anemic and well below the levels needed to start off the heating season comfortably.
That fact alone is enough to boost NYMEX gas for January delivery to a contract life high of $4 before easing to close at $3.95/MMbtu May 17.
US gas storage now stands at a little over a third of the 3 tcf required for Nov. 1, and injection rates must top 75 bcf/week to reach that level. But the growing call on gas to fire power generation is hobbling injection, which is flattening the typical seasonal demand curve for gas. NYMEX gas for June is approached $3.70/MMbtu May 17, and while profit-taking is likely to deflate the futures strip through January of $3.70-3.95 just ahead of the kick-off of the cooling season, the current market fundamentals reflect what looks to be a floor price of about $3/MMbtu, certainly in the short term.
Crude oil prices easing but still high
On the oily side of the street, futures prices are backing off a bit after approaching the watershed $30/bbl market again-but they remain high.
Crude prices slipped in mixed trading on three futures exchanges May 17, led by the NYMEX June contract falling 60¢ by midweek after starting the week at just 8¢ shy of the $30/bbl mark.
Some pointed to technical corrections of an overheated market, but another factor may be evidence of a slowdown in demand for oil, as indicated by a slowing economy in Thailand (where the Asian economic downturn started a few years ago) and OPEC paring its estimate of global oil demand for 2000 by 400,000 b/d and hiking its estimate of non-OPEC supply by a fraction.
Still, low gasoline stocks in the US are making traders nervous, suggesting that some refinery outages-such as last week's report of a cat cracker's aborted restart in New Jersey-could spike gasoline futures, and along with them, crude oil prices.
US gasoline production at record high
Scrambling to avoid a shortfall of gasoline supplies this summer, US refiners are running their plants flat out.
US April gasoline production of 8.14 million b/d equaled a record set in 1998.
API said gasoline runs were up 1% from a year ago. Production of reformulated gasoline was especially strong, with more than 2.63 million b/d produced to meet the May 1 deadline for using summer Phase II RFG.
US RFG inventories increased 7.7%, or 3 million bbl, to 41.9 million bbl since March. Total gasoline stocks of 202.1 million bbl were down 6.5% vs. April 1999. April's 541,000 b/d of imported gasoline was the lowest for that month since 1995.
Gasoline deliveries to market were flat at 8.389 million b/d vs. April 1999. However, API says EIA data methodology and potential revisions could mean demand growth was actually about 1%.
Comparing average April prices with March, US retail gasoline prices declined more than 6¢/gal to $1.43/gal, roughly 30% higher than average pump prices in April 1999. "Retail prices so far this year have averaged about 40% higher compared with the unusually low prices of 1999. This has contributed to weaker gasoline demand growth," API said.
Deliveries of distillate fuel oil were up 6.8% at 3.644 million b/d, a record for April, when demand usually slackens due to warmer weather. April kerosine jet fuel deliveries were up 1.4% at 1.65 million b/d, and resid was up 5.6% at 680,000 b/d.
All petroleum stock levels were down in the US. Crude stocks were off 8.5% at 301.8 million bbl, kerosine 4.6% at 42.3 million bbl, distillates 21.3% at 98.6 million bbl, and resid 16.4% at 33.9 million bbl. Total stocks were 920 million bbl, down 11.8% from April 1999.
On the supply side, US crude oil production slipped 0.2% to 5.875 million b/d, and total oil imports dipped 0.8% to 11.133 million b/d. F
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Industry Trends
THE ENERGY INDUSTRY'S INTERNET STAMPEDE may have gotten a jolt from the recent "Love Bug" computer virus, but an energy industry consultant on computer security warns the worst may be yet to come.
PetroTech Alaska's Gary J. Green warns that, as one of the biggest corporate users of computers, the oil and gas industry is particularly at risk from malcontents, terrorists, and hostile nations. That risk grows as the industry embraces the technology of smart valves, intelligent well completions, and e-commerce. Just one internet connection exposes a corporate computer system to outside intervention risk. So it becomes increasingly critical to establish in-house computer defense expertise and systems. And, unlike Y2K, this problem can't be resolved with a one-time fix, Green contends: It's more like a Cold War arms race, with each side struggling to surpass the other with expertise and technology.
If the Love Bug hackers, allegedly from a Filipino trade school, could trash millions of computers worldwide, resulting in a potential $10 billion worth of lost man-hours, what might be accomplished by "hostile government agents, with plenty of time and lots of resources," Green wonders.
Such an attack would likely be harder to detect, he said-reducing production here, delaying transportation there, bottlenecking operations, and slowing down the system so that energy supplies can't reach markets at critical times.
National Security Council officials report more than 100 countries now are developing "cyberwarfare" capabilities. Unable to challenge US military power directly, some nations are looking to the use of computers to sabotage key economic, military, and social institutions.
THAT OMINOUS WARNING notwithstanding, NYMEX is putting together a wholly owned e-commerce venture, eNYMEX, that officials claim will become "the premier global exchange" for OTC forward trading of a range of standardized physical commodity contracts, starting with petroleum and electricity. NYMEX officials expect to have the system up and running for OTC electronic trading in October. Eventually, eNYMEX will provide a single internet hook-up to both the OTC and the exchange futures markets by routing orders to terminals on the trading floor and through the NYMEX Access electronic trading system.
The range of OTC products to be offered will focus initially on swap contracts for oil, petroleum products, natural gas, and electricity, with some spot cash market products also offered in North America, officials said. Later, it will be expanded to precious and base metals and coal.
Other potential trading offerings include bandwidth, emissions, and weather in the form of heating and cooling days, one of the latest hedges against energy costs. Contracts also will likely be offered for some European and Asian locations.
AND INTERNET PERMITTING has become a reality (see story, p. 28). The Texas Railroad Commission and US DOE have launched a digital well permitting system. Energy Sec. Bill Richardson says the electronic system "can save the industry and its regulators millions of dollars and countless hours of labor." Well permits now can be confirmed by TRC within minutes vs. the usual days or even weeks to process.
DOE is funding a third of the $2.1 million to develop and test TRC's Electronic Compliance and Approval Process (ECAP) system (OGJ, Feb. 22, 1999, p. 24). The pilot focused on electronic filing, review, and approval of simple well permits; TRC plans to expand ECAP to include more-complex drilling permits, additional attachments, and reporting capabilities. By September 2001, TRC plans to integrate the system with existing geographic information and other mainframe computer systems, ultimately adapting the paperless process to the entire regulatory life cycle of Texas oil and gas wells.
Government Developments
GOVERNMENT ENERGY POLICIES-or the lack thereof-are getting blasted by petroleum industry officials.
About $25 billion (Aus.) worth of Australian petroleum projects are in jeopardy because of federal government inaction on taxation and greenhouse gas issues, says the Australian Petroleum Production & Exploration Association. Speaking at the close of the APPEA conference in Brisbane last week, APPEA Associate Director Barry Jones accused federal Environment Minister Robert Hill and Energy Minister Nick Minchin of neglecting the petroleum industry by failing to deliver legislative reforms vital to industry's future.
Several major projects are thought to be in jeopardy as a result of uncertainty over Canberra's stance on these issues, among them the North West Shelf gas expansion, the Gorgon gas field development, the Bayu-Undan gas and NGL development, and the Papua New Guinea-to-Queensland gas pipeline project.
Unless details of the government's new tax legislation relating to depreciation rates for these new projects are specified quickly, says Jones, most of the planned developments will be delayed or possibly scrapped altogether.
There is also widespread concern over Canberra's moves on trading carbon emissions credits under the Kyoto accord. Jones called on Minchin to reassure the industry within 4 weeks that local carbon emissions trading will not move forward unless an international trading scheme takes shape.
GOVERNMENT BUREAUCRACY AND HIGH TAXES are putting Canadian petroleum industry development at risk, says Alberta Energy Co. Pres. Gwyn Morgan: "The issues causing greatest concern throughout our industry involve access-access to resources, access to markets, and access to capital."
Morgan says governments must work with industry to find a way to honor existing commitments and compensate companies for investments where industry's operations are curtailed. He expressed special concern over the prospect of renewed factional fighting over a revived proposal to transport Canadian arctic gas to market: "It's not often projects get a second chance," Morgan said. "We'd better not blow it this time."
Perhaps the chief worry is the inadequacy of Canada's capital markets, he notes: "In order to retain our Canadian investors and attract international investors, we need fair, consistent, competitive government policies," said Morgan.
WHILE ANOTHER OMNIBUS US ENERGY BILL is deemed little more than feel-good election-year posturing (see story, p. 27, and Watching Washington, p. 28), at least one new piece of conservation legislation isn't getting blasted by the industry-mainly because it's seen as benefiting efforts to gain access to federal offshore acreage.
The House voted last week to earmark $3.025 billion/year of federal OCS oil and gas revenues for conservation programs. The bill now goes to the Senate for consideration.
Sen. Frank Murkowski (R-Alas.), energy committee chairman, says his panel will mark up a similar bill by Sen. Mary Landrieu (D-La.) in June. The Clinton administration supports the legislation.
Quick Takes
THE CASPIAN OIL EXPORT PIPELINE race has heated up again. Azerbaijan, Turkey, and Georgia have approved terms for the 1 million b/d Baku-Ceyhan pipeline to export Caspian Sea oil.
The hotly disputed question of which are the best alternatives for delivering potentially vast volumes of Caspian oil to market was complicated still further last week with the perhaps premature announcement of another supergiant oil field discovery off Kazakhstan (see related Quick Take, this page).
The pipeline would begin moving oil from Azerbaijan and the eastern Caspian to the Turkish Mediterranean port beginning in 2004-05.
Baku agreed with Ankara and Tbilisi on the legal, commercial, and regulatory formula for the Baku-Tbilisi-Ceyhan project. Next, a "sponsor's group" of governments, oil companies, and international lending institutions will be formed to arrange project financing-and that won't be easy. Parties have to agree to reasonable tariff rates to secure throughput commitments and thus financing details. x
In other transportation news, Koch Energy Trading is buying the 50% of IMD Storage, Transportation & Asset Management Co. (IMDST) it doesn't already own from Inventory Management & Distribution. IMDST manages more than 100 bcf of gas storage and about 1 bcfd of pipeline capacity. The company's assets include storage in the US Northeast plus interests in the Gulf Coast and Chicago areas. x CMS Energy marketing unit CMS Marketing, Services, and Trading has agreed to buy 10 cargoes of LNG, totaling 24 bcf, for delivery from Qatar to the CMS Trunkline facility at Lake Charles, La. CMS-MST will buy 3 cargoes of LNG from the Qatargas project and 7 cargoes from the RasGas project for delivery during June through April 2001.
LNG LOOMS LARGE in processing news this week as well.
The aforementioned Qatargas let a $50 million contract to Technip to revamp and expand two sulfur-recovery units at its LNG plant. The project includes adding two new third-stage Claus units and revamping the degassing system in the existing sulfur-recovery units. Two new acid-gas enrichment units also will be installed, as will two tail-gas incinerators. The turnkey contract includes basic and detail engineering, procurement, construction, and commissioning. Work is scheduled for completion in mid-2002. x Oman LNG says its second liquefaction train is ready for start-up following the successful loading and export of the first LNG cargo to South Korea in April (OGJ, Apr. 17, 2000, p. 42). The second train is ready 2 weeks ahead of schedule, but start of production will be delayed several weeks to allow the train to be cooled down to the liquefaction point of -161
VAM, PE, and PET comprise the petrochemical alphabet soup this week.
DuPont will license its technology for and participate with new Saudi firm Saudi International Petrochemical Co. and others in a JV for a 275,000 tonne/year vinyl acetate monomer plant at Jubail, Saudi Arabia. It will tie into other plants at the site, where SIPC plans other JVs for VAM, maleic anhydride, butanediol, methanol, and acetic acid. x Japan Polyolefins, a JV of Showa Denko 65% and Nippon Petrochemicals 35%, plans to invest 1 billion yen this year to upgrade its polyethylene plant at Oiwa, Japan, hiking the JV's capacity to 352,000 tonnes/year. x UOP has acquired Sinco Engineering's polyethylene terephthalate resin solid-state polymerization technology supply business for an undisclosed amount.
ROUNDING OUT PROCESSING ACTION is a clutch of refinery developments.
PDVSA let a $190 million turnkey contract to Jantech, a JV of Technip Italy 99% and Venezuela's Jantesa 1%. Work will include upgrade of the hydrogen unit, mild hydrocracker, sulfur recovery unit, and propane-propylene treater and installation of a new asphalt-fueled generator. The refinery's control system will be upgraded as well, as will offsites and utilities. Jantech is responsible for detailed engineering, procurement, construction, and precommissioning. The project is slated for completion by 2002. x Indian Oil Corp. awarded a UOP Indian unit a process licensing and design contract for a pressure swing adsorption unit. The PSA plant will provide 99.99% pure hydrogen for IOC's new residue desulfurization and diesel hydrotreating projects. The two PSA units of the project will produce 212,000 cu m/hr of hydrogen from syngas feeds. UOP will deliver the project 56 weeks after receipt of clearance for hardware supplies. F Phillips is now licensing its proprietary MaxCat coke-reduction technology to other companies. The technology increases octane-barrel yield from existing semiregenerative catalytic reformer units by reducing coke buildup on catalyst. By doing so, it increases unit run lengths or unit throughput, or both, Phillips says; at one refinery, the technology improved product octane by 1.5 RON over previous runs. Capital costs are as low as $20,000 for most refinery applications, says the firm. x Ukraine's state property fund is to launch a tender this month for a 67% stake in the Lysychansk-based LyNOS refinery. The fund failed in several earlier attempts to sell LyNOS, Ukraine's second-largest oil refinery. The winner will have to supply LyNOS with 4.5 million tonnes/year of crude. A shortage of crude to process has recently kept many of the country's oil refineries idle for months. Ukraine now gets most of its crude oil from Russia. Russia's Tyumen Oil (TNK) is thought to have an edge in the bidding. The buyer will have to pay off $250 million in debt and fulfill other obligations. The fund also will sell a 30% stake in the smaller Halychyna refinery via tender by yearend. x Conoco Ltd. has joined up with US-based Kwikpower International to evaluate and develop Kwikpower's proprietary fuel technologies. The companies seek to commercialize Kwikpower's proprietary products and processes, including gasoline and diesel formulations that incorporate renewable fuel components, fuel stabilization technology, and a process for converting waste lubricating oils to high-quality diesel and fuel oils. F Clark R&M signed a long-term contract with Reliant Energy to supply as much as 43.8 bcf/year of natural gas to its Port Arthur, Tex., refinery.
IS THE CASPIAN'S OIL POTENTIAL starting to live up to its hype? If that's the case, then the latest exploration news from that region offers a lot of hype to live up to.
Sounding wildly overoptimistic on the basis of results from one wildcat, reports from the Kazakh sector of the Caspian about the OKIOC group's apparent Kashagan discovery suggest original oil in place of 8-50 billion bbl, which would make it the biggest discovery in decades. The group of multinationals last fall spudded the Kashagan East well, programmed to 5,000 m in the northeastern Caspian 75 km south of Atyrau, with the world's only arctic-class barge rig, Sunkar Rig 257, owned by Parker Drilling (OGJ, Sept. 20, 1999, p. 90). ExxonMobil and the rest of the OKIOC group are keeping the well extra tight.
The Washington Post quoted an unidentified US administration official as saying the new field may hold 32 billion bbl of oil or more of OOIP. "The immediate political impact of the new Kazakh oil discovery is likely to be an acceleration of the competition between the United States and Russia for control over the pipelines that are being built, or planned, to transport growing volumes of Caspian oil to markets in Europe,'' the paper reported. That competition was simmering nicely when Russia's Lukoil reported its own recent giant oil field strike in the northern Caspian in March (OGJ, Apr. 3, 2000, p. 32).
Meanwhile, exploration is heating up in other former and currently communist lands. TNK snared two exploration licenses in East Siberia from the Russian Ministry of Natural Resources Commission. TNK will drill for gas on the Khanda and Yuzhno-Ust-Kut blocks, in Irkutsk near the Chinese border. The 5-year exploration term covers wells and seismic on acreage adjacent giant Kovykta gas field being developed by Rusia Petroleum, a group led by BP Amoco. TNK plans to approach BP Amoco to work out a possible strategic cooperative agreement on joint development if its search is successful. x A Shell unit has signed a contract with CNOOC to explore for oil in the South China Sea on a 1,895 sq km block in the Pearl River Mouth basin near the Xijiang oil fields, where the two firms and Phillips are producing more than 90,000 b/d of oil. Shell is to drill one wildcat on Block 15/12 during the initial 27-month period, with options for three more wells during two subsequent 2-year optional terms. Shell shot a 100 sq km, 3D seismic survey on the block last year. x CNOOC found more oil and natural gas in northern China's Bohai Bay. On test, Qikou 18-2-1 wildcat flowed 2,445 b/d of light oil and 84,601 cu m/day of gas. The discovery is only 5 km from CNOOC 's earlier discoveries of Qikou 18-1 and Qikou 17-2. CNOOC will start commercial production in June at Qikou 17-2; production is pegged at 20,000 b/d from 31 wells.
GROWING CROSS-BORDER ENERGY SALES tops power news this week, as speculation grows that more natural gas-fired power planned in the US could be headed south of the border.
Mexico's CFE selected a bid by El Paso Electric to provide firm capacity and associated energy sales for the peak summer months in 2000-01. EPE has had contracts in the past with CFE for up to 200 Mw, and the last contract expired in 1998. The bid is for sales of up to 80 Mw of power in 2000, increasing to 100 Mw in 2001. Sales are scheduled to begin June 1, 2000, and end Aug. 31. They will resume May 1, 2001, and continue through Sept. 30 of that year. In addition to its retail base in the Rio Grande Valley of West Texas and southern New Mexico, the El Paso utility also provides wholesale power to those areas and to California and Mexico's Chihuahua state. x
In other gas-and-power news, Kinder Morgan Power and Southern Energy plan to build a 550-Mw gas-fired electric power plant in Pulaski County, Ark., southeast of Little Rock. Construction is to begin this summer on the $250 million plant, and operations start-up is scheduled for Apr. 1, 2002. The plant will mostly operate during daily intermediate and peak-demand periods to provide wholesale electricity to other utilities grappling with rolling brownouts and blackouts.x Southern Energy also plans to build an 830-Mw, gas-fired power plant in Zeeland, Mich., with an eye to wholesale power sales in the Upper Midwest. Construction of the plant is set to begin this month. The plant will begin commercial operation in June 2001 with 300 Mw of capacity; an additional 530 Mw will begin commercial operation by June 2003. x Saudi Arabia has begun constructing a $1.7 billion gas-fired power plant at Al Shuaiba, 150 km south of Jeddah. The three-phase plant, due to be completed by 2002, will produce 4,000 Mw of electric power to supply Mecca Province. ABB reportedly provided $1.5 billion in loans to finance a seawater cooling system for the plant. Other domestic and Japanese firms provided capital for additional works.
GAS-FIRED POWER, NGL, AND PETROCHEMICALS figure into the rationale for yet another development project in Qatar's supergiant North gas field.
ExxonMobil and Qatar General Petroleum signed a development and PSC accord for an enhanced gas utilization (EGU) project involving North reserves. The accord follows the signing of a heads of agreement for the project in December 1998. The EGU project will produce 1.75 bcfd of gas from North field to supply domestic demand plus export to regional markets. The project will also produce condensate, butane, and propane for export, as well as ethane for use as feedstock in future petrochemical plants.
It is the fourth major development project launched in North, on the heels of two world-class LNG export projects (see related NL Quick Take, p. 8) and a local gas supply project.
Another big gas field development project supporting LNG sales tops other drilling-production activity this week.
Nippon Oil let the first contract in a $440 million development project, its first Malaysian gas development. Nippon Oil awarded a $30 million platform substructure contract to Malaysia Shipyard & Engineering for development of Helang field, on Block SK-10 off Sarawak. Delivery of the 10,000-tonne substructure is expected next year. Nippon soon will call for tenders for the topsides, which is to be ready for installation by third quarter 2003. First gas from Helang is expected in fourth quarter 2003, and peak output is put at 250 MMcfd. Partners in Block SK-10 are Nippon Oil Malaysia, 75%, and a Petronas unit, 25%. Helang is one of several fields being developed off Borneo that will supply gas to Malaysia LNG Tiga's complex at Bintulu, Sarawak. Helang field is expected to supply 2 tcf of gas over a 20-year period. MLNG Tiga is increasing capacity of the LNG complex to 24 million tonnes/year (OGJ, Feb. 21, 2000, p. 26). x Soekor E&P has started up Oryx oil field off South Africa at a rate of 10,500 b/d of oil. The $32.4 million Oryx development was completed in 8 months-3 weeks ahead of schedule and within budget. Oil is flowing from two wells through a 5.5-km pipeline to the Orca floater 140 km southwest of Mossel Bay. Oryx oil is comingled with Oribi field output and loaded onto a shuttle tanker and transported to Cape Town. Adding Oryx extends the Oribi project life to 2003-04. x Pluspetrol has taken over Occidental's service contract on Block 1AB, the main producing block in Peru's northern jungle. Oxy is maintaining an office in Lima and is reportedly discussing new exploration ventures with Perupetro.