OGJ Newsletter

Feb. 21, 2000
The hottest industry talk continues to circulate around the steady rise in oil prices and speculation over what OPEC members will do about their production curtailments after meeting Mar. 27 in Vienna.
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The hottest industry talk continues to circulate around the steady rise in oil prices and speculation over what OPEC members will do about their production curtailments after meeting Mar. 27 in Vienna.

Oil prices have topped the crucial psychological watershed of $30/bbl-a level maintained for 3 consecutive days last week, with NYMEX closing at $30.05/bbl Feb. 16, down 1¢ on the day and 20¢ from Feb. 14. At OGJ presstime last week, Brent crude for April delivery had settled up 24¢ at $27.37/bbl, a threefold increase vs. a year ago. Driving the surge, say analysts, has been concern over supplies and the accelerated stock drawdowns.

Due largely to a hike in Iraqi production, supplies rose by 610,000 b/d in January, bringing total OPEC output up to 26.18 million b/d, while non-OPEC production stayed flat at 45.55 million b/d. OPEC compliance with pledged cuts reached 76% in January, down from 78% the previous month, IEA said.

OPEC should "exercise caution" when considering possibly increasing production, says Rilwanu Lukman, OPEC secretary general and special adviser to Nigerian President Olusegun Obasanjo. During a recent round table discussion in Nigeria, Lukman said OPEC should use this "handle-with-care" approach to prevent the destabilization of the market.

Lukman went on to say that Nigeria is planning to boost its oil reserves to 50 billion bbl from 20 billion bbl by 2010, most of which would come from increased deepwater E&P. Under the same timeframe, Nigeria intends to jump its oil production to 5 million b/d from 2 million b/d, he said.

Meanwhile, reports about a possible decision by OPEC to increase its oil production were discounted by Kuwaiti Oil Minister Sheikh Saud Nasser Al-Sabah. "We are not backing down on the agreement. Our position is clearellipsethere is no change in the position of OPEC members concerning extending the production-cut agreement [beyond March]."

Despite the recent outcry against higher oil prices in the US, in historical terms, however, the rise in oil prices cannot be viewed as excessive and will most likely not impair growth of the economy, IEA says in a recent report. Compared with 1972 prices, the agency notes, the 1999 average of $17.88/bbl Brent would be worth only $5.25 after being adjusted for 1972 values. And even with a $25.65/bbl price tag, says IEA, the adjusted 1972 price would be $7.52.

The agency adds that taxes imposed on end-users in certain countries need to be considered in ultimately calculating oil prices. "Some producers have suggested that, since a large share of prices that many end-users see is taxes, consuming governments should lower taxes rather than pressure producers," IEA noted. Also, IEA says that no adverse affects on economic development in IEA member countries could be substantiated at present.

The agency says that oil imports account for only 4% of total import values in IEA countries, while this figure reached 13% in the early 1980s.

Nevertheless the flap over the spike in heating oil prices in the US Northeast has turned the price of oil into a political football again (see editorial, p. 19).

President Clinton has not ruled out use of the US Strategic Petroleum Reserve to moderate oil prices. Last week, he said, "I think we have to watch this over the next few days. There are going to be some important meetings of the oil producing countries in the next few days. We'll know more about this in a week or 10 days about what the trends are going to be."

Clinton says the main problem has been with home heating oil, and the administration has responded with heating oil assistance funds. "We can release more. That eases the burden on the poorest of our citizens. Now there are a lot of people on modest incomes who are just getting killed by this because of their reliance on home heating oil."

Clinton said, "I have not closed off any options. I am monitoring this on a daily basis. And it's a deeply troubling thing."

White House spokesman Joe Lockhart says federal law allows the president to release SPR only if a severe supply disruption has caused a crisis. He said that, while this is not the case at present, "ellipsethis is one that bears watching, and the context may change."

US Department of State's James Rubin says US diplomats are discussing world oil prices with major exporters: "In these discussions, we will note the impact on the US and the global economy of the higher oil prices brought about by coordinated oil production cuts. Our position has been and will continue to be that we do not believe cartels should be coordinating production levels among producers to set oil prices."

Another watershed joins OPEC on the late-March calendar, as US District Judge Susan Illston set the last 2 weeks of March for hearing the Federal Trade Commission's arguments against the proposed merger of oil giants BP Amoco and ARCO. This is a change from the originally slated Mar. 10 court date. Illston also plans to begin hearing Feb. 22 testimony on whether to include cases filed by California, Oregon, and Washington against the merger.

US consumption of natural gas could jump more than 60% to 35 quads by 2020, with residential and commercial markets accounting for nearly half of that increase, says American Gas Foundation.

Homeowners and businesses will use gas to generate electricity on-site with fuel cells, microturbines, and reciprocating engines, accounting for about 20% of all new power generation, AGF said in a new study.

Producers also will use new technology to find and develop new North American gas reserves to supply that growing demand despite rapid depletion of current reserves, says University of Texas geology Prof. William Fisher. AGF's "accelerated" market forecast for 2020 exceeds current predictions of more than 29 quads and actual consumption of 21.9 quads in 1998; it is based on assumptions that energy markets will be free and competitive and that natural gas utilities will be allowed "to compete fairly in these markets," the study said.

Some dreams die hard, as Foothills Pipe Lines has reactivated a 20-year-old plan to bring North Slope natural gas via an Alaska Highway pipeline to southern markets.

Foothills is discussing with partners the possibility of linking an LNG project fed by Alaskan North Slope gas with the pipeline venture.

John Ellwood, Foothills vice-president of engineering and operations, says the proposed 1,678-mile Alaska Highway line is 3 years ahead of any competing proposal, because it already has gained both US and Canadian regulatory approvals. The project, formerly the Alaska Natural Gas Transportation System, was shelved in 1982 because of poor economics.

Foothills also is part of a group working on a scheme to ship LNG from the North Slope to East Asia. That project would include an 800-mile high-pressure line from Prudhoe to tidewater at Valdez or Cook Inlet on Alaska's southern coast; partners include BP Amoco, Phillips, ARCO, and Marubeni (OGJ, Aug. 24, 1998, Newsletter). The line is expected to take 5 years to build, cost about $6 billion, and move about 2 bcfd of gas. There have been some world-class gas finds in the Fort Liard region of the Northwest Territories, just north of the Alberta border, that have revived interest in far-north gas and pipeline development.

Rig utilization in Western Canada has hit a record 95%, with 568 of 597 available rigs active, says Canadian Association of Oilwell Drilling Contractors. At the same time a year ago, only 64%, or 379 rigs, were working. Industry forecasts call for up to 17,000 wells to be drilled in 2000, compared with 10,600 in 1999. That would top a previous record of 16,500 wells in 1997.

Texaco plans to concentrate its upstream operations in three major deltaic plays: off Nigeria, Brazil, and in the Gulf of Mexico, reducing its refining exposure and selling off less-profitable properties to finance those operations, says Peter I. Bijur, chairman and CEO. "All of these areas have the potential to deliver high-impact reserves, which we define as at least 100 million bbl of recoverable reserves and significant production of 50,000-100,000 b/d."

To help fund that scope of E&D, Texaco expects to garner more than $700 million from sale of underperforming assets, representing more than 100,000 b/d of production and 250 million bbl of reserves, by the third quarter.

In addition, Bijur said, "We continue to rationalize underperforming assets in the downstream part of the business." Texaco's 1999 earnings fell short of expectations primarily because of weak refining margins as crude prices soared past $28/bbl from $12/bbl at the start of last year.

Although Texaco bases its current operational plans on a conservative price of $19/bbl, Bijur said actual oil prices will probably average $25/bbl this year before declining to more-historical levels of $18-21/bbl in 2001 and beyond.