Market Movement
OPEC's actions consistent with policy
OPEC has said repeatedly that its official policy is to manage its contribution to global oil supply in such a way as to maintain oil prices within its target price band of $22-28/bbl for the OPEC marker basket of crudes. And it's done a pretty effective job of accomplishing just that. Oil prices have swung within this band-albeit with some volatility-consistently since early last November, save for a brief dip for a few weeks below the band's floor early this year (see chart).
Despite all the hand-wringing over the effects on the global economy and (perhaps because of) the speculation over the role of tight US gasoline markets in the direction of oil prices, no one can convince OPEC that there is a compelling need to change its strategy right now.
Iraqi oil export saga
That isn't to say there won't be a compelling reason to do so sooner or later.
The sooner part comes with Iraq and last week's move by Baghdad to halt its oil exports under the oil-for-aid program this month as a consequence of its inevitable fit of pique over the US-UK proposal to introduce "smart" sanctions that minimize effects on Iraqi civilians but tighten the vise on Saddam Hussein's ability to build weapons of mass destruction.
The current and ninth phase of the oil-for-aid program expired June 3, the day before Iraq announced a halt to its exports in protest over the UN decision to extend the oil-for-aid program by only a month, vs. the usual 6-month extension (see related story, p. 28).
It is unlikely that OPEC will do much in immediate response-other than provide the usual assurances, mainly by Saudi Arabia, to make up any shortfall-thus holding off on any such option for an emergency ministerial meeting in July, at which time the group will review oil stock and price levels.
If it looks as if Iraqi oil exports will be taken off the market for a period of weeks or months, then it's just as likely that the Saudis will huddle with Venezuela, the UAE, and non-OPEC Mexico to consider a quick ramp up in production. An emergency meeting of OPEC ministers probably wouldn't accomplish as much to quell a panicked market, and the former would help stave off moves by the US and others to dip into strategic stocks. (But a quick whistlestop tour soon thereafter by OPEC Sec. Gen. Ali Rodriguez to line up the rest of OPEC will probably accommodate the political correctness needs of the moment.)
OPEC's oil price woes
While the OPEC guidelines call for consideration of an automatic output increase should the OPEC basket price exceed $28/bbl for at least 20 days, the organization has not been as sanguine about taking this step with prices on the way up as it has been with prices on the way down (where the post-floor trigger is pulled after only 10 days).
Still, the Saudis and others would prefer to see OPEC oil fill the supply void rather than US crude now stored in the Strategic Petroleum Reserve. And there is a bit of OPEC crude on the market in excess of official quota levels, although those exact volumes are difficult to ascertain.
After all, regardless of where OPEC compliance levels end up, there is still a bit of an overhang of crude stocks in the Atlantic Basin-a crucial debating point for OPEC responding to its critics. This overhang has been pegged at about 2 days of added forward demand cover beyond where the market was a year ago.
If OPEC doesn't boost supply in the coming month or so, it will certainly have to in the second half. A simple rollover of OPEC quotas July 3 will leave the market short of crude in the second half, even if Iraq plays nice for a change.
So the next scheduled OPEC ministerial meeting, on Sept. 26, will certainly mean another quota boost in that event, as the call on OPEC crude will be about 1 million b/d higher in the third quarter than where actual production is today.
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Industry Trends
RECORDS CONTINUE TO FALL IN THE DEEPWATER GULF OF MEXICO.
Oil and gas operators have set a world record for water depth in drilling and a record for the number of rigs drilling in the deepwater Gulf of Mexico, said MMS.
Since January 2000, the number of rigs drilling in the deepwater gulf-in 1,000 ft of water or greater-has risen to 45 from 26, an increase of 73%, said Gulf of Mexico Regional Director Chris Oynes.
According to MMS, Unocal has set a world record for drilling in deep water. On May 2, Unocal spudded an exploratory oil and natural gas well in 9,743 ft of water on Alaminos Canyon Block 903-4 miles from the US-Mexico boundary line, officials reported.
"The oil and gas industry has achieved an all-time high level of activity in the gulf," said Oynes.
Currently, there are 10 wells being drilled in 5,000 ft of water or greater, which the MMS deems "ultradeep" (see table).
OVERBUILDING MAY CAUSE FLAT ETHYLENE PROFITS THROUGH 2005.
Short-term ethylene margins will remain volatile, but in the long term, they will be flat for many years, says UBS Warburg.
The next big ethylene earnings cycle, said the financial services company, is clearly beyond 2003.
In the base case, 5-year outlook, UBS Warburg assumed 4.1%/year compounded demand growth, which tracks historical trends. Supply, however, will grow faster than demand- 4.8%/year through 2005.
North American ethylene capacity will grow by 1.9%/year. Latin American capacity will grow by about 6%/year, but that is starting from a smaller base. The Middle East and Africa will add 17.8%/year of capacity during 2000-05 (with much of that region's output headed for Asia), and Asia will add 6.1%/year.
Iran will contribute a significant amount of capacity by 2005, and Saudi Arabia will build at least two more world-scale plants before 2006.
UBS Warburg said these numbers translate to overbuilding in Asia: "The Asian crisis did not last long enough to discipline this industry from overbuilding-as it has always done in the past."
Outside of the Middle East, emerging economies, such as China, India, Malaysia, Singapore, and Latin America, are the targets of new ethylene production.
China, said the analyst, has reported annual GDP growth of 8% in the past 5 years, and this is expected to continue at more than 7%. It said that such emerging economies will determine the rate of future global demand growth.
Government Developments
THE PROSPECT OF AN INTEGRATED NORTH AMERICAN ENERGY GRID CONTINUES TO GATHER MOMENTUM.
Alaska Gov. Tony Knowles visited Ottawa last month for 2 days of meetings to promote marketing of Alaskan North Slope gas and to brief officials on how a proposed Alaska Highway-route pipeline could benefit Canada.
"Arctic natural gas from Alaska and Canada can meet our nations' growing energy needs with the clean-burning fuel of the 21st century and contribute significantly to Canadian and American economic prosperity," Knowles said.
The debate has been revived regarding where, when, and if a pipeline to move Arctic gas reserves to southern markets would be built. Knowles said North American gas demand justifies two pipeline routes, one across Alaska and one from the Mackenzie Delta in Canada.
A pipeline following the Alaska Highway route would parallel the Trans-Alaska Pipeline System from Prudhoe Bay to Fairbanks and then the Alaska Highway from Fairbanks to pipeline connections near Fort St. John, BC (OGJ, Aug. 7, 2000, p. 68).
The proposed Mackenzie Valley pipeline route would move as-yet-untapped gas reserves from the Northwest Territories to market. This pipeline route could be a stand-alone project, or it also could transport Alaskan gas (OGJ Online, Apr. 3, 2001).
Knowles said the Alaska Highway pipeline "can begin quickest and be completed soonest," because US and Canadian officials approved much of the route years ago.
He said, "The Alaska Highway pipeline will be an enormous economic shot in the arm to both Alaska and Canada. Construc- tion alone will last 3-5 years, creating up to direct 6,000 construction jobs in Alaska and Canada."
Knowles was slated to meet with members of Prime Minister Jean Chretien's natural gas development working group, individual ministers, US Ambassador Paul Cellucci, and the Canadian media.
MEANWHILE, MEXICAN PRESIDENT VICENTE FOX PLANS TO DISCUSS ENERGY WITH CANADIAN ENERGY COMPANIES.
President Vicente Fox has invited the chief executives of senior Canadian energy companies to a meeting at his ranch for private talks on how Canada can play a larger role in Mexican energy.
The meeting, tentatively set for June 23, was confirmed by the Mexican Embassy in Ottawa. The invitations were extended to senior industry executives after Fox was forced by time constraints to cancel a visit to Calgary in April.
Companies expected to participate in the meeting include Alberta Energy, Canadian Hunter Exploration, Enbridge, Export Development, Nexen, PanCanadian Petroleum, Paramount Resources, Petro-Canada, Precision Drilling, Talisman Energy, TransAlta, SNC-Lavalin, Westcoast Energy, and Westcoast Energy International.
The Mexican ambassador to Canada, Ezequiel Padilla, and Canada's ambassador to Mexico, Keith Christie, are also expected to attend the meeting at San Cristobal, Guanajuato, 217 miles north of Mexico City.
Westcoast Energy CEO Michael Phelps said the invitations underscore within Mexico the importance of foreign investment as a driver of that economy and the desire to continue to build personal relationships with the Canadian energy sector.
Quick Takes
WOODSIDE ENERGY, OPERATOR OF THE NORTH WEST LNG EXPORT PROJECT, HAS AWARDED $485 MILLION (AUS.) IN CONTRACTS for a fourth LNG train at the gas plant on the Burrup Peninsula, Australia.
Additional contracts will be awarded during the next 6 months, including contracts for civil engineering work, said Woodside.
The $1.6 billion (Aus.), 4.2 million tonne/year train will be the largest LNG train in the world, said Woodside (OGJ Online, Apr. 2, 2001). First production is expected to begin in mid-2004.
Most of the contracts have been awarded to companies with Australian and Western Australian interests, including an engineering, procurement, and construction contract to the Kellogg JV led by Halliburton Australia.
A 42-in. pipeline connecting the plant and the Woodside-led North West Shelf group's gas fields is also expected to be constructed.
In other gas processing news, Gaz de France (GdF) and Sonatrach have formed a 50-50 joint venture called Med LNG & Gas to market LNG in the Mediterranean and North America. The JV falls under a cooperation agreement signed between GdF and Sonatrach on June 8, 2000, to bolster their commercial collaboration and widen it to the development of gas reserves and sales. As part of that agreement, a production-sharing contract was signed in January by GdF, Malaysia's Petronas, and Sonatrach to explore for 3 years a 17,000 sq km area in the Ahnet basin south of In Salah in Algeria's Sahara Desert.
Westcoast Energy said its subsidiary, Westcoast Gas Services, has sold three gas processing plants and gathering lines to JJH Equipment Trust for $201 million and entered into an operating lease agreement. The lease provides operating control of JJH Equipment to Westcoast Gas Services, which can reacquire the equipment on certain dates or at the end of the lease agreement. Proceeds from the transaction will be used to retire existing debt.
A BUSY MAINTENANCE SEASON OFF NORWAY IS MARKED BY A FLURRY OF PRODUCTION PLATFORM RESTARTS.
Natural gas production at the Åsgard B platform in the Norwegian Sea had been shut in to permit the first turnaround since the platform came on stream last October, Statoil said.
Platform manager Anton Osenbroch reported that the 14-day turnaround accounted for 11,000 work-hr. The turnaround program included commissioning and work outstanding following the development project. Equipment, such as gas separators and liquid separators, had also been modified.
Work was also performed to link Mikkel field to the platform. Mikkel is slated to come on stream in 2003. On June 2,
Meanwhile, Statoil's Gullfaks C platform in the North Sea is back on production after a 17-day turnaround.
About half of the 59,000 work-hr spent during the turnaround were related to the Gullfaks satellites' second-phase project. Some alterations were made to the platform, and two gas processing modules are now in place.
Gas flow from Gullfaks South and Rimfaks satellite fields is to start in the fourth quarter (OGJ Online, Mar. 19, 2001). This is the last of four turnarounds required to commission the project. Production from Gullfaks C restarted May 30.
And Phillips Norway has resumed production of 25,000 b/d at two of its North Sea platforms following a week of repairs to their fire protection systems.
Production was halted May 28 on platforms Eldfisk Alpha and Embla. The shutdown was self-imposed, Phillips said.
The two platforms together produce 25,000 b/d of oil, which is 5% of Phillips's production in the area. Both are in the Greater Ekofisk area. Embla field, 5 km south of Eldfisk Alpha platform, was the first on the Norwegian continental shelf to produce from deeper than 13,000 ft. Embla is connected to the Eldfisk platform by a 3.2-mile pipeline. Eldfisk platform controls and processes oil from Embla.
TOPPING PETROLEUM NEWS, Fina Antwerp Olefins has awarded M.W. Kellogg an engineering, procurement, and construction contract for the upgrade and expansion of its NC2 ethylene plant in Antwerp.
The contract was awarded after the completion of a competitive bidding process.
The contract calls for M.W. Kellogg to install a new pyrolysis furnace and modify the recovery section of the facility.
The planned upgrade will improve the plant's energy efficiency, said M.W. Kellogg. Completion is scheduled for fourth quarter 2002.
GULFSTREAM PARTNERS BROKE GROUND AT PORT MANATEE, FLA., FOR CONSTRUCTION OF THE 753-MILE PIPELINE that will be the first natural gas transportation system built to serve Florida in more than 40 years.
Slated for completion by June 2002, the $1.6 billion Gulfstream system will have 1.1 bcfd of capacity. It will run from Mississippi and Alabama across the Gulf of Mexico to Florida.
Gulfstream said, "This is the largest pipeline project under way in North America."
It is designed primarily to serve Florida utilities and power generation facilities.
Preparation for pipelaying started 2 months ago and will continue through June. Offshore pipelaying is scheduled to begin in early July. The construction vessels used to place the offshore pipe can lay as much as 4 miles/day.
Onshore pipelaying is due to begin in mid-July in Polk County, Fla. More than 93 miles of pipe weighing 188,000 tons has been shipped from pipe mills in Florida, France, and Germany to yards in Alabama and Florida.
In other pipeline news, US FERC has made a preliminary determination of approval for Iroquois Pipeline Operating Co. to extend a pipeline 32 miles to supply 230 MMcfd of natural gas into New York City. The Eastchester Extension project will cost $173 million, said Iroquois. Projected in-service date is November 2002.
CANARGO ENERGY HAS PROPOSED A REFINERY EXPANSION PROJECT IN CENTRAL GEORGIA.
Canargo Energy reported an agreement with the Georgian government for Canargo to formally progress with plans to expand its 4,000 b/d refinery near Tbilisi, the Georgian capital, to a capacity of 25,000-30,000 b/d.
The expanded capacity is designed to supply light petroleum products in the Tbilisi and central Caucasus market.
Canargo expects the Georgian state oil company, Georgian Oil, and others to participate in the expansion.
Rounding out refining news, Phillips Petroleum has begun offering a sulfur credits clearinghouse to refiners, the company reported. US EPA has issued regulations that require refiners to begin production of ultralow-sulfur gasoline by 2004. The phase-in program allows refiners some flexibility in gasoline sulfur production levels. Refiners already producing low-sulfur gasoline can generate early credits for internal use or external sale. Later on, producing gasoline below established standards will also generate credits.
Tosco has agreed to acquire a refinery and storage terminal in Ireland from state-owned Irish National Petroleum Corp. for $100 million plus additional consideration for operating oil stocks. The sale includes the acquisition of Irish Refining and Bantry Terminals and certain other assets of INPC to Tosco on a debt-free basis. The proposed deal was first announced last year (OGJ Online, July 31, 2000). Tosco has agreed to operate the refinery and the terminal for at least 15 years. The 71,250 b/d Whitegate, County Cork, refinery is the only one in Ireland, said Tosco. Whiddy Island Oil Storage terminal is at Bantry Bay.
NATURAL GAS FINDS IN EGYPT TAKE CENTER STAGE THIS WEEK IN EXPLORATION.
BP Egypt made a second natural gas discovery in the North Alexandria concession off the Nile Delta.
BP found hydrocarbons in the concession with the Taurus-1 well in late 2000, the company said.
Fayoum (L-1x) well, in 400 m of water 35 km from the northern coast of Egypt, flowed on test 21 MMcfd of gas from the main target zone and 6 MMcfd from a secondary zone with more silt.
The company estimates that the well proved reserves of 600 bcf. BP has plugged the well and moved the rig 45 km northeast to drill the Libra-1 well, also on the North Alexandria concession. BP operates the concession with 60% interest, and RWE-DEA owns 40%.
Meanwhile, Apache Corp. has made one discovery in Egypt and is drilling another well on a nearby concession, said concession partner Novus Petroleum.
Ras El Hekma 2X well, on Ras El Hekma concession in the Western Desert, flowed at a stabilized rate of 11.5 MMcfd of gas and 2,120 b/d of condensate from two zones in the Lower Cretaceous AEB 5B formation.
The discovery is 8.5 km from Tarek North East gas field.
Apache and Novus plan to submit a development plan proposing a tieback to the Tarek NE well on the Khalda concession, then transportation through the Tarek processing facility to Ameriya through the Northern Pipeline.
The partners have also spudded the East Neith exploration well on the adjoining Khalda Offset concession. It has reached 12,246 ft and is drilling ahead to a planned TD of 14,700 ft. East Neith is 3.3 km northeast of the 1,170 b/d Neith South 3X appraisal, which confirmed the 2,634 b/d 1X discovery well.
The partners have submitted a development plan for Neith that involves a tieback to facilities on the South Umbarka concession, 13.2 km from Neith South 1X. First production is expected this month.
Elsewhere on the exploration front, Lundin Oil said a Sudan appraisal drilled 3.1 km from the Thar Jath-1 discovery established 100 m of net pay. Lundin Sudan is operator with a 40.4% interest in Block 5A. Petronas Carigali has 28.5%, OMV (Sudan) Exploration has 26.1%, and Sudapet has 5%. The appraisal well flowed 2,000 b/d from separate tests in the Bentiu and the Aradeiba sands. The Thar Jath-1 had flowed 4,260 b/d (OGJ Online, Mar. 5, 2001).
Swift Energy has tested one exploration well and is continuing work on four others in South Texas, company officials said. The Vaughn No. 1 well, on the company's Rome Prospect in Willacy County, tested at an initial rate of 12.5 MMcfd of natural gas and 160 b/d of condensate through a 17/64-in. choke with 8,900 psi flowing tubing pressure. That discovery should be producing by the end of June, following construction of a gas gathering line, said Swift Energy. Meanwhile, the Kinnally No. 1 wildcat was drilling below 10,900 ft, targeting the Wilcox sands on the Falcon Ridge prospect in Zapata County. The Mallet No. 1 was at 12,600 ft, targeting deeper Frio sands in the Sienna Prospect in Willacy County. Swift is setting a liner at 15,800 ft in the Foster Minerals No. 1 well on the Lion Prospect in San Jacinto County. The firm will drill another 300-500 ft before initiating additional testing, officials said. The Post No. 1 well on the Nita No. 1 Prospect in Goliad County has been drilled to 14,937 ft TD.
Triton Energy has made another discovery on Block G off Equatorial Guinea. The G-5 well, named Okume-1, found gross oil pay of 407 ft, with 200 net ft of oil-bearing pay in one pool, said Triton. Okume cost $5.5 million to drill to 7,064 ft TD in 1,604 ft of water. It is 18 miles off Equatorial Guinea. Triton said Okume found reservoirs similar to those of La Ceiba field on the same block, with average porosity of 28%. The oil is 37° gravity. The 45,000 b/d La Ceiba field was brought on stream in November 2000, less than 14 months after discovery. La Ceiba will produce 80,000-90,000 b/d by early 2002.
BP has inked a $5 million drilling contract with Norway's Smedvig for a one-well program off the Faroe Islands using the fifth-generation deepwater West Navion drillship. Drilling operations, in 1,100 m of water, are scheduled to start up in mid-August and last less than a month. The contract has an option for a second well.