OGJ Newsletter

Oct. 1, 2001
NYMEX oil futures prices fell to 22-month lows Sept. 25 amid early hints from OPEC that it would not change production quotas.

NL BULLETIN

As expected, OPEC ministers in Vienna last week agreed not to defend oil prices with further quota cuts, despite a plunge in oil prices of more than $7/bbl since Sept. 17-more than half of that drop coming Sept. 24 alone. That puts the OPEC crude marker basket about 10% below the low end of its target range of $22-28/bbl. While careful not to be seen taking action that would weaken the global economy still further, OPEC left the door open for possible cuts at an early November meeting-apparently betting on a rebound in demand in the fourth quarter. In the interim, the group has called for reining in rampant cheating on quotas by members. The fact that NYMEX November crude jumped by 57¢/bbl at closing after the OPEC meeting suggests that the anticipation of OPEC's action had already taken its toll on crude prices. By simply adhering strictly to quotas, however, OPEC could take enough extra crude off the market to be tantamount to the cuts it normally undertakes in defense of price. The state of geopolitics being what it is today, quota discipline is not likely to rule the day.

Market Movement

Oil futures hit 22-month lows
NYMEX oil futures prices fell to 22-month lows Sept. 25 amid early hints from OPEC that it would not change production quotas.

The November contract for benchmark US sweet, light crude lost 20¢ to $21.81/bbl, and the December contract was down 23¢ to $22.21/bbl. The average price for OPEC's basket of seven crudes lost 64¢ to $19.87/bbl.

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The drop in US prices at presstime was relatively mild compared with the freefall Sept. 24, when those near-month contracts for US oil dropped nearly $4/bbl each in the biggest 1-day loss since the Desert Storm campaign against Iraq was launched in 1991 (OGJ Online, Sept. 25, 2001).

API reported that US oil inventories had declined by 256,000 bbl the week of Sept. 17 to 304.3 million bbl. Distillate stocks, including home heating oil, dropped 1.3 million bbl to 121.6 million bbl. But US gasoline stocks increased by 8.7 million bbl to 199.1 million.

Global oil demand uncertain

The anticipated worldwide campaign against terrorism is compounding the uncertainty in global oil markets.

The potential for supply disruptions arising from a campaign possibly broader than that now envisioned notwithstanding, the near-term consensus for world oil markets is decidedly negative.

The focus now is on oil demand. While millions of barrels of jet fuel are surplus due to massive aviation shutdowns following the Sept. 11 terrorist attacks on the US, the longer-term prospect is for slumping demand astride a global recession.

London-based Centre for Global Energy Studies estimates that jet fuel demand could drop by as much as 400,000 b/d during this winter, depending on military consumption. CGES puts the overall decline in global oil demand year-on-year at as much as 400,000 b/d if a recession materializes.

To avoid the appearance of profiteering, OPEC is unlikely to cut output even as demand continues to fall. Consequently, CGES pegs dated Brent at possibly $22/bbl in first half 2002 (see table).

Conversely, events of the coming months could just as easily propel oil prices to double those levels. Uncertainty will rule the oil market-perhaps for a long time to come.

Gas surplus burgeons

The US gas industry is poised to surpass 3.1 tcf in natural gas storage by Nov. 1, according to UBS Warburg. Plagued by typical bearish shoulder-month fundamentals, weak industrial demand, increasingly favorable inject now-sell forward arbitrage spreads, and incremental shutdowns resulting from the terrorism aftermath, the industry continues aggressively to direct substantial volumes of gas into storage.

According to AGA, 90 bcf of natural gas was stored during the week ended Sept. 14.This compares with 67 bcf last year and 78 bcf in 1999.

Despite a supportive fall temperature outlook, Warburg expects the incremental surplus expansion to continue throughout October.

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Industry Trends

AS REFINERIES EXPAND worldwide coking capacity, petroleum coke will become a major fuel option for power plants, says DRI-WEFA.

"Refinery coking capacity is set to skyrocket over the next 5 years as refiners work to get higher volumes of lighter distillates out of increasingly heavy crudes," said John Dean, consulting vice-president of the company and the study's author.

Petroleum coke is an option for power producers, Dean said, as it will be plentiful and cheaper than alternatives. Most coal-fired plants can switch to coke, he added.

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"Petroleum coke prices have peaked and will continue to slide from their recent highs (of about $23.75/tonne on the spot market for 4% sulfur coke) through 2005," said the study (see chart).

The increased coking capacity-resulting from increased demand for transportation fuels and other heavily cat-cracked products-will greatly increase petroleum coke supply. Also, crude feeds are getting heavier, he said. Venezuelan crude, for example, is very heavy and sour, producing a substantial amount of coke.

Dean said petroleum coke supply and demand is more or less in balance, at 70 million tonnes/year. He said supply will grow substantially over the next 3-4 years to about 100 million tonnes/year, producing a glut on the market until about 2007, when supply and demand return to closer balance.

CHINA has decided to increase its ethylene production, despite decelerating global economies and falling petrochemical prices. In 2000, China produced 4.7 million tonnes of ethylene, with plans to increase production capacity to 9 million tonnes by 2005.

According to an advisory by Houston-based Industrial Information Resources, China's State Economic Trade Commission contends that domestic ethylene demand will rise 8.5%/year, reaching 15 million tonnes/year by 2005 (OGJ Online, June 27, 2001).

In order to achieve the goal of doubling production capacity, China will continue to expand and add new production units. Sinopec and PetroChina-which are responsible for 80% of the ethylene production in China-will complete nine expansion projects at existing complexes, totaling about 1.54 million tonnes/year in additional capacity. These expansions are scheduled to come on line during 2001-03.

In addition, China has recently opened its petrochemical market to foreign investors. BP, BASF, and Shell among others, have formed joint ventures with key Chinese chemical producers to construct three grassroots ethylene complexes producing over a combined 2.3 million tonnes/year. These foreign investors have received government approval and are expected to begin construction by mid-2002.

Government Developments

FUEL ETHANOL SUPPORTERS said they have filed a motion with the US Ninth Circuit Court of Appeals to intervene in the case of California Air Resources Board vs. the US EPA.

Two groups-the Renewable Fuels Association and the National Corn Growers Association-said they support the federal government's position to maintain an oxygenate standard in reformulated gasoline.

RFA represents fuel ethanol producers; NCGA speaks for corn farmers, who supply about 95% of the feedstock used to make fuel-grade ethanol in the US.

California officials say they need more flexibility meeting clean fuel rules in light of their decision to ban the use of methyl tertiary butyl ether by 2003. MTBE and fuel ethanol are the most commercially available fuel additives used to meet the 2 wt % oxygen standard for RFG.

MTBE is easier for refiners to use, because of its greater fungibility and onsite production capability. Ethanol, although subsidized, is often more expensive and less plentiful because it must be shipped by rail car long distances from production centers in the Midwest, refiners say.

Ethanol supporters say their industry is prepared to meet demand in California and other states considering an MTBE ban.

In June, EPA denied California's request for a waiver from the federal oxygen standard of the Clean Air Act. The state argued that ethanol could not replace MTBE. EPA found that California failed to prove that maintaining the standard through use of ethanol would be detrimental to the state's achievement of national ambient air quality standards. Such a finding is necessary by law before a waiver can be granted, RFA maintains.

MEANWHILE, the Senate Committee on Environment and Public Works early last week approved a controversial bill that would require EPA to ban MTBE in 4 years.

The chemical compound has contaminated groundwater supplies in California and some other states.

MTBE producers and refiners say the chemical does not pose a health threat and the solution is not to ban it but to prevent leaks of gasoline containing it.

API said, "The debate over the reformulated gasoline oxygen mandate and the phasedown of MTBE must be resolved to provideellipseindustry with the flexibility and certainty it needs to provide adequate supplies of affordable fuels now and in the future."

It said the Senate bill "would be a significant step toward helping US refiners provide adequate supplies of clean, environmentally acceptable gasoline to consumers. Without federal legislation, states are moving forward with their own efforts to address the oxygen mandate and MTBE issues. They are creating more boutique fuels that can contribute to tightened supplies and distribution problemsellipse."

Prospects for the bill are uncertain, because the Midwest congressmen who support ethanol use want lawmakers to amend the bill to include a renewable oxygen standard for RFG.

Quick Takes

REPSOL-YPF has discovered oil on its Tridente prospect off Spain, south of Barcelona in the Mediterranean Sea.

On test, Necora-1 and Bocarte-1 wells each flowed about 5,000 b/d of crude. Repsol-YPF plans to drill a third well before yearend, after which it will evaluate production possibilities.

If development is approved, Repsol will tie back the wells about 12 km to the Casablanca platform, which is producing 7,500 b/d of oil from Chipiron, Casablanca, Rodaballo, Boqueron, and Barracuda fields. From Casablanca, production would be transported through the existing pipeline to Repsol-YPF's Tarragona refinery.

In other exploration news, Spinnaker Exploration announced a discovery at its Resolute prospect on High Island Block 197 off Texas. High Island 197 No. 1, in 48 ft of water and 35 miles southeast of Galveston, was drilled to 13,956 ft TVD and found 140 ft of hydrocarbon-bearing zones in two intervals in the Miocene Robulus sequence. The well has been completed. Spinnaker and its partners plan additional drilling around Resolute in the fourth quarter. Platform engineering and production facility design is under way. Operator Spinnaker holds a 50% working interest in the block, while Continental Land & Fur and Westport Resources hold 25% each.

Norway's DNO has agreed to farm into First Calgary Petroleum's Block 43 in Yemen. DNO, which will assume operatorship, will fund second-phase exploration work through either declaration of a commercial discovery or the expenditure of $7.5 million. The commitment includes the drilling of two wells and acquisition of 500 km of seismic data. DNO also will pay lease bonuses of $600,000/year until earning obligations are met. FCP will retain 11.7% of the foreign contractors' interest in the block. Yemen Oil Ministry has granted preliminary approval of the farmout. FCP said final approval was expected shortly. The tract is near Masilla Block 14, which is producing more than 220,000 b/d of oil. DNO operates Block 32 immediately north of Block 43 and holds an interest in Block 53 to the west. FCP said both Blocks 32 and 53 are under development.

Ivanhoe Energy and Unocal have agreed to explore for oil and gas in East Texas in a 50:50 venture. They plan to drill Bossier sand prospects on 37,000 net acres in Henderson, Anderson, and Freestone counties. Unocal will be operator and will fund the first several exploration wells to offset Ivanhoe's $10 million in leasehold and seismic expenses. Thereafter, they will share costs equally. The first well will be spudded in November. Ivanhoe said the Bossier sand trend consists of multiple fields and multiple pay zones. Typical Bossier wells produce 2-4 MMcfd from about 12,000 ft.

LNG DEVELOPMENTS worldwide are picking up.

Statoil and its partners have filed a formal development plan for Sn hvit field, the first offshore gas field found in the Barents Sea and the supply for Europe's first LNG export project.

The Sn hvit project calls for the drilling of 21 production wells and one carbon dioxide injection well. The subsea production facilities will be connected to a 160 km pipeline, the longest multiphase transport line of any Norwegian offshore development.

Sn hvit will be the first subsea development in which all field functions will be remotely controlled from a land-based facility.

Gas will be piped from the subsea installations to an LNG terminal to be built at Melkopya, near Hammerfest, with associated export facilities. CO2 removed during gas processing will be piped back for injection. The expected life of the project is until 2030.

The Norwegian government has a 30% direct financial interest in the project. Statoil, as operator, has 22.29%, TotalFinaElf 18.4%, Gaz de France 12%, Norsk Hydro 10%, Amerada Hess Norge 3.26%, RWE DEA Norge 2.81%, and Svenska Petroleum Exploration 1.24%.

The project will involve an investment of 46 billion kroner, including 15 billion kroner for the land-based facilities and 5 billion kroner for a fleet of four large dedicated LNG carriers.

Customers for Sn hvit gas will be disclosed next month, after contract negotiations between producers and customers are completed. The LNG carriers will be designed for offloading at existing LNG regasification terminals in southern Europe and the US.

BG Group, Edison International, and Egyptian General Petroleum have awarded the front-end engineering design (feed) contract for their proposed $900 million Egyptian LNG export project to Bechtel Group.

This is the first contract awarded for the project. It covers engineering and design of the liquefaction plant, storage tanks, and marine facilities.

The Idku plant, 50 km east of Alexandria, will be designed along the lines of the Atlantic LNG plant in Trinidad and Tobago, in which BG owns an interest (OGJ Online, Apr. 9, 2001). That plant's capacity is 3 million tonnes/year, soon to triple with the completion of two trains under production. JV company Egyptian LNG will build, own, and operate the plant. The first Idku LNG train will have a capacity of 3.6 million tonnes/year.

The FEED contract is expected to be complete in first quarter 2002. An engineering, procurement, and construction contract for the project will follow completion of the FEED. BG said Egyptian companies would have significant participation. The gas sales agreements for the first train are expected to be in place by conclusion of the FEED work, BG said.

UNOCAL has awarded the Clough Group contracts worth $80 million for work on Indonesia's first deepwater oil field development.

Work is to start immediately on West Seno field in the Makassar Strait between Kalimantan and Sulawesi, with production start-up expected in first quarter 2003.

West Seno field is in 1,050 m of water, 200 km northeast of Balikpapan off the central Kalimantan coast. The field will have two platforms and 48-52 wells, with planned production of 60,000 b/d of oil.

The field development project is worth $344 million and includes a 12,000 tonne floating production unit and a 6,000 tonne tension leg platform, anchored to the seabed, plus associated offshore and onshore production facilities.

Clough's offshore division has contracts for engineering, procurement, and installation of the pipelines and other installation work. Two 62 km lines will deliver the oil and gas to onshore facilities at Santan on Kalimantan.

Ras Laffan Liquefied Natural Gas (II), a joint venture of ExxonMobil and Qatar Petroleum, has awarded ABB Group a contract for surface wellheads for the latest development phase of North field off Qatar. ABB will deliver eight systems over 2 years. The requirement may rise to 40 systems over 4 years. The value of the contract was not disclosed.

CITGO PETROLEUM tops refinery news with updates on the status of its two fire-damaged refineries.

A Unicracking unit, which made jet fuel, was damaged in a Sept. 21 blaze at the 320,000 b/d refinery at Lake Charles, La. The fire was extinguished the following day. The other refinery units not affected by the fire continued to operate at reduced rates, Citgo said.

Citgo said it was having no difficulty meeting demand for refined products, which has been reduced by decreased airline traffic.

The company was investigating the cause of the fire and the extent of the damage. Three people were treated and released from the hospital for minor injuries.

Meanwhile, Citgo has begun systematically restarting units at its Lemont, Ill., refinery that have been out of service since an Aug. 14 fire in the crude unit.

Citgo operates the 158,650 b/d refinery for PDV Midwest Refining.

Adolph Lechtenberger, Citgo senior vice-president, refining and petrochemicals, said, "Although the crude unit is an integral part of refinery operations, we have devised ways of operating other process units without the crude unit. The catalytic cracking, alkylation, and reformer units are operational and, with the exception of the crude unit, we expect to bring other units up soon. Nothing has changed on the timetable for repairing the crude unit and bringing it back on stream."

No injuries resulted from that fire (OGJ Online, Aug. 28, 2001).

PETROCHINA completed construction of a major natural gas pipeline in northwestern China in early September.

The construction started in March of 2000. The $310 million pipeline is rated at a capacity of 2 billion cu m/year.

The first section of the 660 mm line, from PetroChina's Qinghai oil and gas field to Xining City in Qinghai province, was completed in May (OGJ Online, May 23, 2001).

The second section extends from Xining to Lanzhou, the capital of Gansu Province.

The gas will be used as feedstock or for industries and households in Xining and Lanzhou.

Elsewhere in pipeline news, Colonial Pipeline plans to expand its delivery system to Knoxville and Chattanooga, Tenn., boosting fuel supplies 10-15% for those metropolitan areas. The pipeline company said the improved service, which amounts to 630,000 gal/day, was prompted by growth in the eastern Tennessee, southeastern Kentucky, and western North Carolina markets. Dave Lemmon, Colonial president and CEO, said, "As the demand in Knoxville grows beyond this increase in service, we have the ability to further expand our delivery system." The expansion complements previously announced plans to increase service to northern Alabama and central Tennessee. Colonial said the Knoxville upgrade would involve installation of larger pumps in Atlanta, where the Knoxville line originates, and at a booster station in Rome, Ga. Colonial delivers 83 million gal/day of petroleum products. The pipeline originates in Houston and terminates at the New York Harbor.

BRITISH COLUMBIA'S Ministry of Water, Land, and Air Protection has approved an oil spill cleanup completed by Pembina Pipeline involving a pipeline break and spill in the upper Pine River.

Water quality monitoring and ecosystem rehabilitation will continue. The pipeline rupture at Milepost 102.5 of Pembina's Federated Western Pipe Line spilled crude into the river on Aug. 1, 2000. The site is about 100 km upstream from Chetwynd, BC.

Pembina said it has conducted "an intensive reclamation program with the guidance of a team of scientists and various government agencies."

Bob Michaleski, president and CEO, said, "Our sampling has indicated for some time the river water meets or exceeds government standards. We now await a decision from health officials as to water quality for domestic use."

Pembina, a wholly owned subsidiary of Pembina Pipeline Income Fund, transports crude, condensate, and NGL in western Canada.

PetroChina unit DAQING OIL expects its oil output to fall by 1.5-2 million tonnes/year until 2005.

This year, Daqing oil field complex-China's largest-will produce 51.5 million tonnes, down 1.5 million tonnes produced from last year. Production has hovered above 50 million tonnes/year for the last 10 years.

At Daqing, production is getting increasingly expensive, with water cuts as high as 85%, Daqing Oil said. The operator plans to explore and develop marginal prospects outlying Daqing's main production blocks during the next 5 years.

It expects to identify 300 million tonnes of probable crude reserves with the goal of recovering 54 million tonnes. It said gas resources could be 23 billion cu m, of which 16 billion may be recoverable. Daqing Oil, China's major crude exporter, plans to ship 3 million tonnes to Japan this year.

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Norwegian North Sea production record
As of Sept. 17, the Statoil-operated Statfjord C platform had produced for 231 days without stopping, which set a production record on the Norwegian continental shelf. The Statfjord North and Statfjord East satellites are tied back to the C platform. Shown is the Statfjord complex. Photo courtesy of Statoil.