Market Movement
IEA trims demand growth outlook
IEA again has slashed its projections for 2001 oil demand growth. Weakness in consumer demand and industrial output will limit growth of petroleum demand to less than 500,000 b/d this year. Demand growth is now expected to be just 460,000 b/d. IEA does, however, expect the US economy to stage a turnaround by the end of this year and estimates that demand for petroleum will grow next year by 800,000 b/d, most of which is expected to occur in the US, followed by China and the Middle East.
The agency warns that this figure is contingent on prices, though, as lower oil prices would both stimulate consumer demand and suppress fuel-switching away from oil by power generators. But in general, the boost that demand for oil gets from an economic recovery is likely to be offset by a reduction in power generation demand for oil caused by easing natural gas prices in the US.
Economic recovery in Europe is expected to take longer than in the US, but European oil demand should get a boost from the end of the heavy rainfalls that increased the use of hydroelectric power generation over oil-fueled generation in the first half of this year.
OECD stocks
Inventories of products and crude in the OECD have grown since February in line with weakening oil demand and expected seasonal patterns.
A May OECD crude stockbuild of 14 million bbl coincided with an increase in product stocks of 33.7 million bbl. Gasoline stocks accounted for 4.5 million bbl of this build in product inventories.
IEA suggests that a gasoline surplus is not out of the realm of possibilities and that, should one occur, refiners will be able to get a jump on middle distillate production even while gasoline is at peak demand during the third quarter.
Distillate stocks are currently at average levels and are already rising. OECD stocks of distillate rose 5.8 million bbl in May to exceed year-ago levels by 21.6 million bbl. Inventories are expected to reach comfortable positions going into the winter heating season, as gas oil and heating oil futures prices have been in contango recently, encouraging refiners to build stocks of these products. At presstime, the price of gas oil-the only product that did not experience a price collapse in June-was higher than the price of gasoline.
Refining developments
Weak demand for products is cutting into refiners' margins, which in turn is leading to reduced runs and smaller purchases of crude. This has put downward pressure on crude prices, but prices for products have fallen more steeply than for crude.
Cracking margins in the four major refining centers-Northwest Europe, the Mediterranean, the US Gulf Coast, and Singapore-were lower in June from a month earlier.
The largest decline in margins was felt on the US Gulf Coast, where while runs in June averaged the same as in May, throughputs fluctuated, falling sharply in the third week of the month, according to preliminary estimates. IEA speculates that this third week slowdown indicates that poor margins were already impacting refinery runs in the US at that time.
In an attempt to restore margins, refinery runs have reportedly been reduced in all of the main refining centers. The resulting decrease in output is expected to push product prices higher, possibly offsetting some of the downward pressure they have faced from weakening demand.
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Industry Trends
ORDERS FOR NEWBUILD RIGS COULD SPELL A TIGHT MARKET IN THE LONG TERM FOR CONTRACT DRILLERS.
Helmerich & Payne received commitments for two new self-moving platform rigs and has ordered 25 new land rigs to be delivered by March 2003.
"We only make these investments if we believe we will get the work," said George S. Dotson, H&P president, international drilling. "It's not about more rigs. It's about newer, more capable rigs that deliver better value to the customer. That's our strategy both onshore and offshore."
Shell Exploration & Production awarded H&P a contract to build and operate Rig 205 for use on both fixed and tension leg platforms in the Gulf of Mexico.
BP signed a letter of intent with H&P to build and operate Rig 206 for use on BP's Horn Mountain Spar in the Gulf of Mexico. H&P will invest $50 million in the two rigs, expected to be operating in spring 2002.
Although the land drilling market is flat, Dotson said H&P has developed mobile land rigs that are "recession-resistant."
On Mar. 15, H&P said it would construct 15 new mobile land rigs called FlexRigs. This month, the company increased that commitment to 25 new FlexRigs.
LOWER NATURAL GAS PRICES LIKELY WON'T HAVE A DRASTIC EFFECT ON US DRILLING ACTIVITY THIS YEAR
So says Lehman Bros. analyst James Crandell. Although lowering his natural gas price forecast, the analyst said that the effect on drilling from lower gas prices would be "small."
Lehman Bros. expects third quarter gas prices to reach $3.27/Mcf and $3.43/Mcf for the fourth quarter. This compares with original projections of higher than $4/Mcf for both periods. The analyst lowered the 2002 forecast to $3.20/Mcf from $4.00/ Mcf and the 2003 estimate to $3.00/Mcf from $3.50/Mcf.
Crandell expects a 5% decline in US E&P expenditures in 2002 but he foresees a 20-25% increase in non-US E&P outlays this year and a 15% increase for 2002-03.
"We see the international recovery as just beginning to blossomellipse. Rig moves into the international waters should help to tighten the Gulf of Mexico market," Crandell wrote.
Government Developments
SUPPORTERS OF EASTERN GULF OF MEXICO LEASE SALE 181 IN THE US SENATE predict Congress will send President George W. Bush a final bill that would allow the sale to proceed.
The Senate passed a spending bill that retained the controversial lease sale slated for December. Any final version of the bill must be a compromise between the House and Senate versions.
The House version would postpone the sale until April, effectively delaying it longer because it would be included in the next 5-year lease sale plan.
Before the Senate vote, Interior Sec. Gale Norton deleted 75% of the tracts originally slated for Sale 181 (see map). The revision came in deference to concerns by Florida officials, including the president's brother Gov. Jeb. Bush (R).
The Senate version of the Interior ap- propriations bill blocks new energy leases in designated national monuments. It also includes ex- panded federal funding for oil and gas re- search programs and a continuation of the decades-old ban against drilling on most of the federal offshore, excluding the central and western Gulf of Mexico and parts of Alaska. The House version of the bill also includes the offshore drilling ban, a new ban on national monument drilling, and more oil research funds.
Late last month, the White House said it opposed the Sale 181 ban and other drilling restrictions.
A US SENATE PANEL APPROVED A 5-YEAR EXTENSION OF IRAN-LIBYA SANCTIONS.
At presstime, it was uncertain when either the full Senate or the House would vote.
The Senate Committee on Banking reported a version of the bill duplicating a provision in the House bill, which also calls for a 5-year extension. Both the Senate and the House versions give Congress the ability to review and repeal the law after 18 months.
The Iran-Libya Sanctions Act of 1996 expires Aug. 5. President Bush had sought only a 2-year extension. He could veto a bill with a longer extension.
THE EUROPEAN COMMISSON WILL ESTABLISH AN ENERGY AND TRANSPORT FORUM to advise it on restructuring the energy sector and security of supply within member states.
The Transport Council had requested formation of a group to replace the Energy Consultative Committee, whose mandate expired in February.
The forum will consist of 34 members covering a broad range of disciplines in the fields of energy and transport.
Quick Takes
PHILLIPS PETROLEUM'S FIRST MILLENNIUM CLASS TANKER SAILED INTO THE PORT OF VALDEZ, ALASKA, ON JULY 11.
The Polar Endeavour-which is operated by Phillips unit Polar Tankers- loaded its first cargo of North Slope crude at the port.
Phillips now has three 125,000-dwt Millennium Class tankers under construction at Northrop Grum- man Litton Avondale Industries' shipyard in New Orleans. At a cost of more than $200 million each, the double-hulled vessels are the first carriers built specifically for the Alaskan trade under the Federal Oil Pollution Act of 1990.
The second tanker will be delivered in early 2002, the third in 2003, and the fourth in 2004.
Meanwhile, Dain Rauscher Wessels analyst Sam Albright forecast a "somewhat less robust tanker market" during the second half of 2001 and early part of 2002. The projection is based on slowing global oil demand coupled with a slight net increase in tanker supply.
Albright sees the long-term outlook as favorable, however: "We continue to project a prolonged tanker cycle until at least 2005 based on rising scrappage of a rapidly aging fleet."
CALIFORNIA SOON COULD BE ON THE RECEIVING END OF SOME ADDITIONAL-AND MUCH-NEEDED- NATRUAL GAS.
El Paso Corp. unit El Paso Natural Gas began a binding open season through Aug. 2 for 320 MMcfd of pipeline capacity from West Texas to the California border. The open season follows a nonbinding open season held in March.
El Paso plans to add compression to its Line 2000 from the Keystone and Waha areas of the Permian basin near McCamey, Tex., to the border near Ehrenberg, Ariz.
The delivery points will be SoCalGas and PG&E's proposed North Baja pipeline; El Paso's bidirectional lateral, Line 1903; any future incremental capacity into the SoCalGas system; and any upstream points on El Paso's south mainline system with excess capacity.
The expansion capacity will be sold at El Paso's existing maximum California tariff rate, and the fuel charge is estimated to be 5%.
The projected in-service date of the expansion facilities is mid-2003, subject to regulatory approval.
In other pipeline news, Kinder Morgan Energy agreed to buy Occidental Petroleum's residual interest in Occidental Texas Pipeline for $360 million. The pipeline was originally part of Oxy's former natural gas transmission unit, MidCon, which was acquired in 1998 by Kinder Morgan. Oxy also agreed to purchase gas from the pipeline at market prices for use in its chemical operations. The deal is expected to close by yearend, and Oxy will use the proceeds to pay down debt, it said.
OCP Ecuador started construction of the $1.2 billion Oleoducto de Crudos Pesados (OCP) pipeline in Ecuador, said project partner Alberta Energy. Techint International Construction, an affiliate of another OCP partner, Techint, has a fixed-price engineering, procurement, and construction contract to build the line. Work began July 5 on the 450,000 b/d, 500 km line, which will follow the route of the existing SOTE pipeline, except for a 100 km deviation north of Quito. Final regulatory approval was granted last month (OGJ Online, June 29, 2001). Techint has 25 months from that approval to build the line. OCP will double the country's oil transport capacity and allow development of fields that have not been able to begin production because of lack of capacity on the existing line (OGJ Online, Apr. 12, 2001).
TotalFinaElf's Canyon Express pipeline project in the US Gulf of Mexico has moved ahead with the completion of the flowlines prelay survey, subsea contractor Sonsub said. Using the HOS Innovator vessel and Innovator 9 ROV spread, Sonsub conducted a bathymetric survey of the proposed pipeline routes, grid surveys of the proposed sled laydown areas between the Canyon Station platform at Main Pass 261 to a termination point in Mississippi Canyon Block 348, as well as recording ROV survey fixes of existing wellhead locations. Sonsub, the subsea specialist division of Italian contractor Saipem, has a contract for Canyon Express that includes design of subsea intervention equipment and offshore installation of pipeline jumpers. The company's next task will be the installation of pipeline crossings at four locations.
A REFINERY FIRE AND SULFUR SPILL TOP REFINING NEWS.
Workers had to use soda ash injections in an effort to neutralize a sulfuric acid spill resulting from a storage tank fire that occurred July 17 at the Motiva Enterprises refinery in Delaware City, Del.
Motiva is a joint venture of Texaco, Royal Dutch/Shell, and Star Enterprises. Once the acid was neutralized, a certified hazardous materials team began searching for a maintenance worker who has been missing since the accident, officials said.
The sulfuric acid, used in the gasoline refining process, spilled from a tank during a 40-minute fire. Workers constructed earthen barriers to contain the spill, which created a small cloud of toxic gas at the time of that accident.
Eight people, including two firefighters, were treated at a local hospital for varying injuries following the incident. Two people were admitted to the hospital, while the other six were released after treatment, company officials said July 18.
At presstime, the cause of the fire was still under investigation, according to company officials.
In other refining news, ExxonMobil said it welcomed commitments to phase out leaded gasoline in sub-Saharan Africa. It said participants representing 25 sub-Saharan African countries committed to accelerate programs to phase out leaded gasoline, with a target date for full phase-out of 2005.
TOTALFINAELF HAS EXPANDED ITS ITALIAN RETAIL MARKETING HOLDINGS.
The Franco-Belgian company is buying 40 Agip and IP-branded service stations in Italy from ENI to add to the 1,300 Fina stations it already operates in the southern European country.
The new retail stations-which will be Total-branded by yearend-will contribute additional motor fuel sales amounting to nearly 240,000 cu m/year to TotalFinaElf's current sales of 2 million cu m/year.
The agreement, which has been approved by Italy's competition authorities, will make Total- FinaElf one of the largest players in Italy's motor fuel market.
At the same time, TotalFinaElf is about to conclude an agreement with Agip Française through which it plans to sell 74 Elf and Total-branded service stations located in eastern and southeastern France. Three of these outlets are on highways and account for a sales volume of 200,000 cu m/year, equivalent to 0.5% of the French retail motor fuels market. TotalFinaElf currently has a refining capacity in excess of 100 million tonnes/year and a service station network of 13,300 outlets.
Elsewhere in retail marketing, the Australian Woolworths supermarket chain acquired the independent Liberty Group's 69 service stations. They are in New South Wales, Queensland, Victoria, South Australia, and Western Australia. By the end of the first half of 2002, Woolworths expects to own a total of 260 retail gasoline outlets in Australia, about 8% of the Australian retail market.
TOTALFINAELF E&P USA BEGAN DEVELOPMENT WORK ON MATTERHORN OIL FIELD ON MISSISSIPPI CANYON BLOCK 243 IN THE US GULF OF MEXICO.
The field, in 850 m of water, is 170 km southeast of New Orleans. TotalFinaElf owns 100% interest in the field.
Matterhorn will be developed with a floating structure, said TotalFinaElf, but it did not specify what type. It will have throughput capacity of 33,000 b/d of oil and more than 55 MMcfd of gas.
The field will come on stream in the second half of 2003 and should reach 40,000 boe/d by yearend. Production will be brought to shore through connections with the existing subsea pipeline network, the company said.
In other development action, CanBaikal Resources awarded a letter of intent to Schlumberger Oilfield Services for an integrated project management program on its 400-sq km Untegey Block in Russia. The proposed project is a reservoir optimization program that includes risk-sharing development of the Kulun pool in western Siberia. CanBaikal anticipates the project will begin in midsummer with an optimization plan for the Kulun pool, followed by drilling three wells in the 2001-02 winter season. The companies plan to establish a relationship for the development of other fields in the block, said CanBaikal.
STATOIL FAERØYENE SPUDDED A WILDCAT TO TEST THE DEEPWATER LONGAN PROSPECT OFF THE FAROES, THE FIRST WELL OFF THE SELF-GOVERNING DANISH ISLANDS.
The well is in 941 m of water on License 003 in the Atlantic Margin near the UK continental shelf (see map). Transocean Sedco Forex's semisubmersible Sovereign Explorer will take 2-3 months to drill the hole.
Rolf Magne Larsen, Statoil's senior vice-president for international exploration, said, "This is an important development for the Faroes and its people."
Faroes Minister of Petroleum Eydun Eltt r said, "I am convinced that petroleum production will bring more op-portunities than dangers to the Faroe Islands."
But Elttør stressed that "challenging times" lay ahead. "We must however not forget that the activities this summer are the first wells in an exploration phase, and that our petroleum-producing neighbors saw many exploration wells before commercial finds were made." In the first licensing round on the Faroe Shelf, launched in February 2000, the Ministry of Petroleum received 22 applications from 17 oil companies. Last August it issued 7 exploration and production licenses to 12 companies.
Statoil Faerøyene operates the Longan prospect with a 35% stake in License 003.
Meanwhile, in other exploration news, Mariner Energy made a discovery on the Yosemite prospect on Green Canyon 516 in the Gulf of Mexico that it plans to tie back 16 miles to the Allegheny development. The discovery well, in 3,900 ft of water, reached 11,745 ft TD and found multiple hydrocarbon-bearing zones. Mariner, with partners Agip Petroleum and Noble Drilling Exploration, has temporarily suspended the well. The partners' proposed plan includes development with Mariner-Agip's King Kong field, on Green Canyon blocks 472, 473, and 517, as revealed earlier this year (OGJ Online, June 19, 2001). The fields will be tied back to Agip's Allegheny mini-tension leg platform on Green Canyon 254. Though a development plan has not been finalized, Yosemite well and the two King Kong wells are expected to come on stream by Dec. 31 at a combined initial rate of 150 MMcfd.
BP made its fifth gas find in 2 years in the western Nile Delta with the Libra K-1x well in the North Alexandrian concession area off the north coast of Egypt. The well, in 450 m of water, discovered gas in five separate zones, one of which was tested at a rate of 22.3 MMscfd with a gas-condensate ratio of 7.6 bbl/MMscf. BP noted that the flow rate was constrained by testing equipment. First estimates are that the well encountered around 50 m of conventional pay, proving combined reserves of 500 bcf. BP's five gas finds off the delta have proved reserves of more than 2 tcf. The concession partners-BP with 60% and Germany's RWE-DEA with 40%-plan to drill at least another three wells in the western Nile Delta over the next year, including a first well in the West Mediterranean deepwater concession area later this year.
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.
