OGJ Newsletter

Nov. 20, 2000
Demise of single-hull, ocean-going oil tankers moved much closer last month when the UN's International Maritime Organization (IMO) took its "first, formal step" towards a global timetable for accelerated phase-out of the vessels.

Market Movement

This special analysis of the IEA's Oil Market Report and its effects on the international oil market was provided by Marilyn Radler, Economics Editor.

Global oil supply-demand balance tightening
How has the global supply-demand balance changed over the past few years? This is the focus of IEA's Nov. 9 Oil Market Report (OMR).

Despite raising quotas four times this year, OPEC's current production target is 600,000 b/d below its February 1998 output. Production restraint during the past 3 years has removed 1.9 billion bbl of OPEC crude from the market. Meanwhile, global oil demand has increased since 1997 by an average of 2 million b/d/year, or a total of more than 2.1 billion bbl. This has tightened the market by 4 billion bbl.

As a measure to improve market transparency during what could be a critical period, IEA member countries are now submitting to the agency estimates of crude and petroleum product demand as well as estimates of inventories. The first such survey has revealed that October demand in OECD countries averaged 48 million b/d, up 1.3% vs. a year earlier (see table).

As recent data has remained in line with expectations, little has changed in the demand forecast since the last OMR. This winter's demand pattern has changed, though, with fourth quarter 2000 demand now slightly lower and first quarter 2001 demand projected slightly higher than previously anticipated.

This has resulted in revisions to the call on OPEC crude. IEA's estimate of the OPEC call for 2001 has been lowered to 28 million b/d in response to an expected boost in non-OPEC supply led by the former Soviet Union, which should see strong up- stream sector investment for old fields in Russia and growing production from Tengiz field in Kazakhstan.

With the Northern Hemisphere heading into winter, IEA remains concerned about an interruption in production and exports, warning that Iraq is a focal point, as the current phase of the oil-for-food program will end on Dec. 5. If the transition to the next phase of the program leads to an interruption in exports, however, Saudi Arabia has pledged to use its spare capacity to make up for lost Iraqi exports.

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Industry Trends
US service companies' earnings have continued their upward trend in the third quarter.

According to financial service firm UBS Warburg, drilling and service companies' earnings for the third quarter have been "better than expected." UBS said that 15 of the 18 service firms in its universe of coverage reported higher-than-anticipated numbers (see related story, p. 26). Revenues for service firms rose 14.3% for the quarter, while drilling contractors' revenues grew by 51.6%.

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"We anticipate that future results from these companies will continue to show strong growth trends," UBS said. "We acknowledge that recent [earnings before income tax] and [earnings per share] growth rates are unsustainable, but significant margin upside still exists (see chart).

UBS noted, however, "Despite the surge this year in North American drilling, the majority of which is focused on gas drillingellipsegas production growth is nonexistent."

UBS also pointed out that major oil firms' capital spending remained relatively flat in the most recent quarter, rising just 6% on the quarter but down 13% on the year. However, UBS predicts, the majors will be "getting back into the game in a big way," which should help to bolster the service market even higher over the next 12 months.

US total greenhouse gas emissions rose 0.8% in 1999 to 1.833 billion tonnes of carbon equivalent (tce) vs. 1998 levels, according to government estimates.

EIA said the increase was slightly lower than the 1.1% average annual increase that characterized total US greenhouse gas emissions during the 1990s but significantly higher than the 0.1% growth during 1997-98.

By comparison, US real gross domestic product grew by 4.1% from 1998 to 1999. The agency attributed the relatively moderate increase in total estimated greenhouse gas emissions in 1999 to warmer-than-normal winter weather and to an increase in electricity generation from nuclear power plants.

However, estimated emissions of carbon dioxide, which account for more than 80% of total US greenhouse gas emissions, increased by 1.3% in 1999 to 1.527 billion tce in 1999. The EIA said the 1.3% growth in emissions in 1999 is more typical of the 1.4%/year average growth rate during the 1990s than the 0.1% growth experienced in 1998.

An analysis by EIA indicates that CO2 emissions in 1999 could have been higher by as much as 29 million tce if weather patterns during the year had been normal and if electricity generation from nuclear power plants had not been higher than in recent experience.

Government Developments

US oil companies should resist government intervention and promote energy conservation, said Daniel Yergin, chairman of Cam- bridge Energy Re- search Associates at API's annual meeting Nov. 13.

Yergin pointed to the residential sector of the electric power market, where prices this year have leaped, as the "point of friction" likely to trigger government activity.

He also called for efforts to "get beyond this dichotomy between energy and the environment." He recommended, for example, that the industry encourage policy-makers to "see natural gas as part of environmental policy."

On other subjects, Yergin predicted continued pressure on oil company managers from institutional shareholders, who will persistently ask, "Show me why I should own this business" and shift their attention-and investment funds-from industry to industry.

Among other global tends, Yergin expects no major return to nationalization but possibly an intensification of regulation by governments. The regulation likely will be based more on markets than before and will accommodate growing company scale.

And he noted, "People don't get what a technology-based industry this is."

A UK windfall tax will not pose a threat to oil companies.

Oil companies operating in the UK North Sea breathed a sigh of relief following UK Chancellor Gordon Brown's assurance that overheated crude prices would not spur him to impose a windfall tax on the industry.

The last 2 months have seen Britain's transport hauliers and farmers lobbying hard for a hike in the petroleum revenue tax borne by UK North Sea oil producers. They contend that proceeds from such a rise could be converted into a cut to duties presently paid by businesses and consumers on diesel and gasoline.

Delivering his prebudget autumn statement this month, Brown turned aside suggestions that oil companies should be subject to "special taxes" at a time when they were "earning higher profits from higher oil prices," instead placing the emphasis on the long-term outlook for the industry.

"I am determined not to make short-term decisions based on short-term factors," he said. "The key issue is the level of long-term investment in the North Sea. And this will be the approach that will guide budget decisions in future."

Indonesia's House of Represen- tatives again has proposed a draft law to end the monopoly of Pertamina.

Lawmakers designed the bill to both liberalize the energy industry and peg local fuel prices to international benchmarks, removing subsidies costly to the government.

The move could save the government as much as $4.8 billion/year, said an official.

If the law passes, the government will also create a hydrocarbons managing agency. Kardaya Warnika, the energy ministry's exploration and production director, said the goal is to foster a modern oil and gas industry that can compete with private companies, as well as promote transparency and accountability in monopoly activities.

Quick Takes

BHP Petroleum claims a new deepwater drilling record in the Gulf of Mexico.

Global Marine's C.R. Luigs drillship.
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MMS announced that a unit of Australia's BHP Petroleum broke a Gulf of Mexico deepwater drilling record Oct. 22 when it spudded an ex- ploratory well in 8,835 ft of water-with Global Marine's C.R. Luigs drillship-on Walker Ridge Block 425 (see photo).

BHP broke a previous record set by Marathon Oil in February 1999 when it drilled a well in 7,997 ft of water on Walker Ridge Block 165. The BHP well is surpassed only by a well drilled off Brazil in 9,111 ft of water. MMS, which defines deep water as deeper than 1,000 ft, said other current deepwater drilling activity has also reached new records. In July, a record 34 wells were being drilled in the deepwater Gulf of Mexico, up from the previous high of 33 in August 1999.

That record was broken the week of Oct. 16, when 36 deepwater wells were being drilled.

AMG OIL SPUDDED THE ARCADIA-1 WELL NOV. 12 TO TEST A LARGE STRUCTURE IN NEW ZEALAND that it claims could contain an oil and gas trap encompassing more than 15,000 acres.

The well is expected to reach TD of 6,000 ft in 2 weeks. The Arcadia is in the northern portion of the 1.3 million-acre permit 100 miles from the recently drilled Ealing-1 well.

AMG is assigning a 20% interest in the northern area of its onshore Canterbury basin Permit 38256 to Durum Consolidated Energy in exchange for $400,000. Durum will reimburse AMG a portion of past exploration costs and contribute 40% to the cost of drilling of the Arcadia-1.

When Durum and AMG complete funding on the Arcadia-1 well, AMG Oil will have a 50% interest in the permit, with other interests held by Durum Consolidated Energy, 20%; Indo-Pacific Energy, 20%; and Orion Exploration, 10%.

In other exploration action, Texaco China signed production-sharing contracts with China United Coalbed Methane in Beijing Nov. 8 to explore for coalbed methane in northwestern China. Texaco will explore three blocks, which cover 6,897 sq km, over a 5-year period. With these contracts, Texaco has signed eight PSCs with China United. Officials claim the three blocks, in the Zhungeer region in Inner Mongolia, Shengfu region in Shaanxi Province, and Debao region in Shanxi Province, contain an estimated 1 trillion cu m of methane. The contract provides for an exploration period to be followed, if resources are commercial, by phased development and production periods. Texaco will assume all risks and expenses connected with the exploration. If a commercial discovery is made, Texaco will take a 63% stake in the field and China United will take the rest.

Exxon Azerbaijan Operating, operator of the Zafar-Mashal production-sharing agreement, awarded a contract to perform a 3D seismic survey to Caspian Geophysical, a JV between Schlumberger Oilfield Services and SOCAR. The PSA contains the Zafar and Mashal structures, in deep water 110 km southeast of Baku in the South Caspian Sea. Partners are SOCAR, 50%; operator Exxon E&P Caspian Sea, 30%; and Conoco UK, 20%. Caspian Geophysical's multipurpose vessel Gilavar began the survey of the 850-sq km area Sept. 22. Work will take 3 months to complete.

Thailand has issued a license to produce gas and condensate from North Jarmjuree field in the Gulf of Thailand.

The field is about 125 miles off Bangkok in 250 ft of water and is the fourth in the Chevron-operated Block B8/32 concession.

Developing the field is expected to cost more than $200 million, including up to 8 platforms and 60 wells, said Jay Pryor, managing director of Chevron Offshore Thailand.

The Thai Department of Mineral Resources will allow Chevron Offshore Thailand to produce 500 MMcfed of hydrocarbons from North Jarmjuree field for Thai domestic use. Chevron will bring the field on stream at 50 MMcfd of gas in early 2003, ramping up to 190 MMcfd plus 6,000 b/d of condensate in 2005.

Partners with Chevron in the B8/32 concession are Thaipo, a unit of Pogo Producing, which holds 46.34%; and Palang Sophon, 2%. Chevron holds 51.66% interest in the block, which it acquired as a result of its purchase of Rutherford Moran Oil last year.

China's Petrochemical boom shows little sign of slacking.

China National Offshore Oil Corp. (CNOOC) on Nov. 6 issued tenders to four foreign engineering companies for construction of a major natural gas-fed fertilizer plant in southern China.

The four companies are Krupp Uhde, a subsidiary of ThyssenKrupp Engineering; Toyo Engineering; Snamprogetti; and Kellogg Brown & Root, a unit of Halliburton.

They will bid to design and engineer a fertilizer plant to be built in Hainan Province. CNOOC will announce the tender result early next year. Construction may begin by March 2001 and should be complete by September 2003.

The 3 billion-yuan plant, to be located in Dongfang City on Hainan Island, will be designed to process 450,000 tonnes/year of ammonia and 800,000 tonnes/year of urea. CNOOC estimates gas consumption at 800 million cu m/year.

The gas will come from Dongfang gas field in the South China Sea, where CNOOC and other operators have found substantial volumes of natural gas in recent years and have sought markets for the gas. The field, which CNOOC is developing, will flow at an initial rate of 1.6 billion cu m/year, expandable to 2.4 billion cu m later. Commercial production is expected to begin in September 2003 (OGJ Online, Sept. 18, 2000).

BP broke ground last week on a purified terephthalic acid (PTA) plant at Zhuhai in China's Guandong Province. Construction of the 350,000 tonne/year PTA facility is set for completion in December 2002. The plant, which will use BP's proprietary PTA technology, will be owned and operated by Amoco Zhuhai Chemical, a 3-year-old JV among BP, with 80% interest; the Fuhua Group, with 15%; and China National Chemical Fiber, with 5%.

China's Jilin Chemical Industry, a subsidiary of PetroChina, will expand its ethylene cracking capacity in Jilin province. The company will raise the capacity of one of its two ethylene crackers to 600,000 tonnes/year from 300,000 tonnes/year. The 600 million yuan expansion is in the planning stage. The company expects work to begin next year, with completion scheduled for 2002. The expansion will also involve building polyethylene units.

In other petrochemical news, Marun Petrochemical, a subsidiary of Iran's National Petrochemical, awarded a contract to Krupp Uhde to build a 200 million deutschemark, 300,000 tonne/year polyethylene plant that Krupp says will be the largest of its kind in the world. The plant will be built in the Marun Petrochemical complex in the Bandar Imam free zone on the Persian Gulf. Completion is expected within 30 months. The Iranian firm Sazeh Consultants will perform detailed engineering of the plant and will acquire locally built equipment. An international consortium will finance the project. Marun Petrochemical and Basell Polyolefine GMBH also signed a separate agreement for Marun to use Basell's Hostalen technology in the plant. The technology will be used to produce plastic pellets that will be further processed into pipes, film, and moldings.

A couple of world-class natural gas pipelines are in the offing for Australia.

Duke Energy plans to build a $380 million (Aus.) natural gas pipeline from Australia's Victoria state across the Bass Strait to Tasmania.

The gas will come from Esso-BHP's Bass Strait fields and be processed at the Longford plant. Construction of the line is slated to begin in mid-2001 and be completed in the first half of 2002. The 305-km line will have landfall at Bell Bay on the north coast, where the 240-Mw Bell Bay power station will be reconfigured to operate on gas.

Other major customers will be the Tasmanian electricity utility, Hydro Tasmanian, and Australian Bulk Minerals, which operates an iron ore pellet plant near Stanley on the northwest coast. The pipeline will have an initial capacity of 38 bcf/year.

In addition, Australia granted major project facilitation status to Epic Energy's proposed $1 billion (Aus.) natural gas project to transport Timor Sea gas through onshore Australia.

Epic Energy plans to construct a high-pressure line from Darwin to the Moomba gas hub in South Australia. The proposed pipeline would be linked to the first commercialization of Timor Sea gas, local officials said.

The project, which is in the predevelopment phase, is expected to start deliveries in early 2004.

Elsewhere on the pipeline front, Emirates National Oil Co. (ENOC) plans to become a major player in the regional bunkering business within 12-18 months. ENOC's Hussain Sultan said the company plans to invest $10.3 million to build three pipelines connecting its existing Emirates Petroleum Products terminal, the Vopak ENOC Fujairah terminal, and the Fujairah refinery to a jetty. Work will be completed by January 2001. Sultan said that, within 3 months, Fujairah would have storage capacity of 800,000 cu m. Salem Abdo Khalil, technical adviser to the Fujairah government, said plans for the Vopak ENOC Fujairah terminal, which enlarged its capacity to more than 720,000 cu m from 510,000 cu m in less than 2 years after starting operations, now include the addition of six extra tanks that would further increase capacity by 200,000 cu m.

Alliance Pipeline crossing the Mississippi River.
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Alliance Pipeline again has pushed back its in-service date, this time to the end of November (see photo). Debris in the line caused the delay. Initially, Alliance expected to bring the pipeline, which stretches from northeastern British Columbia to the Chicago area, online by Oct. 31. That deadline was pushed to Nov. 13 because of delays in commissioning activity (OGJ Online, Oct. 23, 2000).

Westcoast Energy will buy Coastal's 50% interest in the Empire State Pipeline system for $75 million. The 156-mile, 24-in. pipeline runs from the Canada-US border near Niagara, NY, to an interconnection point with other systems near Syracuse, NY. It has capacity to carry 525 MMcfd of gas. The deal, which is subject to regulatory approval and completion of the El Paso Energy-Coastal merger, is expected to close in first quarter 2001.

Columbia Gulf Transmission will build a new 37-mile pipeline lateral off its interstate system to serve two gas-fired power plants in Warren County, Miss. The $20 million pipeline will provide firm gas transportation for the 1,300-Mw baseload Baxter Wilson plant owned by Entergy Mississippi and a 300-Mw peaking plant under construction by an unregulated wholesale affiliate of Entergy. Columbia will provide up to 285 MMcfd of gas to the two power plants. Total throughput on the Columbia interstate system is 2.1 bcfd. The new 20-in. diameter pipeline will run from Columbia's mainline system near Delhi, La., to the plants south of Vicksburg, Miss. The pipeline is expected to be in service by May 2001.
Canada's National Energy Board will hold a public hearing Dec. 6 to review an application by Ricks Nova Scotia to construct and operate the 7.5-mile Ladyfern pipeline at the British Columbia-Alberta border, northeast of Fort St. John. The $3 million (Can.), 10-in. natural gas pipeline extends from northeastern British Columbia to Nova Gas Transmission's Owl Lake South meter station in Alberta.

CNOOC will soon close bidding for China's first LNG terminal.

A Chinese consortium led by CNOOC will close bidding Nov. 24 for proposals to build China's first LNG terminal.

In late October, the Chinese invited BP and three industry consortia to bid on the Guangdong Province terminal. The consortia are China Australia Terminal-Korea Gas, ExxonMobil-Hong Kong China Light Power-Chubu Electric Power, and Royal/Dutch Shell-Marubeni-Osaka Gas.

Early next year, the winning bidder and the CNOOC consortium will start an 18-month feasibility study of the $600 million LNG project. The timetable calls for construction to begin in 2002 and end in 2005.

NL Bulletin

NYMEX has agreed to license Platts price assessments and benchmarks for forward contracts traded and cleared on an internet exchange scheduled for launch in first quarter 2001.

The contracts cover crude oil, oil products, natural gas, electricity, and metals. The internet trading system has the proprietary name "enymex."

NYMEX planned to convert on Nov. 15 to a for-profit structure in a process called demutualization. On Oct. 24, it received notice from the IRS that demutualization would have no tax consequences for it or any of its members.

The name was to change to New York Mercantile Exchange Inc. when the organization became a for-profit membership corporation under Delaware law. A new stock-holding company called NYMEX Holdings Inc. was to own all economic interests and most of the voting control in NYMEX Inc.F