OGJ Newsletter

Oct. 29, 2001
Government officials from Azerbaijan and Georgia signed an agreement late last month in Baku that signals another important step toward construction of a gas export pipeline into Turkey.

Market Movement

OPEC faces dilemma
The outlook is getting gloomier for oil markets as demand continues to sag in the wake of the Sept. 11 terrorist attacks on the US.

The IEA again trimmed its forecast for global oil demand, ratcheting its estimate of incremental demand growth this year down to 120,000 b/d (OGJ, Oct. 22, 2001, Newsletter, p. 5). In addition, IEA cut its prediction of oil demand growth next year to 600,000 b/d.

But the projected 0.5% growth in world oil demand for 2002 may be too optimistic, Dain Rauscher Wessels said.

The recent spate of bioterrorism attacks in the US involving anthrax may slow the recovery in consumer confidence and hence oil demand, Dain Rauscher suggests.

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Meanwhile, OPEC is faced with a ticklish dilemma. Growing signs of an even worse outlook for demand create pressure for the group to consider cutting production to avoid a price collapse.

OPEC-and especially Saudi Arabia-must decide whether to risk a price collapse or to risk the umbrage of the consuming countries with what might be perceived as profiteering in the wake of the worst terrorist act in history.

This dilemma is complicated by concerns over the effect of high oil prices on an already staggering world economy.

Dain Rauscher said OPEC-together with Mexico and perhaps other exporters-might cobble together a 1 million b/d production cut that it also believes will be initially inadequate: "Assuming a normal winter and barring oil supply disruptions, we expect a declining oil price trend until OPEC reduces its production from the current 27 million b/d, down toellipse25 million b/d. We expect this to happen, but it may take a few months."

So Dain Rauscher reckons this 1 million b/d cut will come in the next few weeks, with a second cut needed by January-perhaps seeing oil prices (WTI) dip below $20/bbl along the way.

If that cut comes in the form of simply adhering to existing quotas, OPEC will benefit from the minimal political fallout. There is certainly a lot of wiggle room there, as the group overshot its collective quota by almost 1 million b/d in August. Given the 1 million b/d cut that took effect in September, DRI-WEFA calculates that OPEC overproduced by as much as 1.5 million b/d in September.

"This situation presents a significant opportunity to reduce output without officially announcing production cuts," DRI-WEFA said.

Non-OPEC producers react

Western Europe's top oil producer Norway said it plans to attend the Oct. 29 meeting in Vienna of OPEC and major non-OPEC oil producers to discuss the decline in world oil prices.

Norway has attended past OPEC ministerial meetings as an observer. Meanwhile, the UK-which maintains its arms-length relationship with no official link to the exporters organization-said it would not attend.

Non-OPEC producers Russia, Mexico, Oman, and Kazakhstan have indicated that they will join the 11 OPEC members at the meeting.

OPEC wants an agreement from non-member exporters to help move prices back into its $22-28/bbl target range for its reference basket of crudes. The basket price dropped to a new 2-year low of $18.54/bbl this month.

Saudi Arabia and Iran are believed to have called for the Oct. 29 meeting and are suggesting that a freeze on non-OPEC output would be the price of OPEC's continued discipline.

Kuwait has said it will support any moves to raise world oil prices, but only to the lower half of the cartel's $22-28/bbl range.

Kuwait, which holds 10% of the world's oil reserves, has had an OPEC quota of 1.861 million b/d since Sept. 1 as part of efforts to raise prices to the $22-28/bbl band. That country's crudes recently traded in the $15.45-18.75/bbl range after averaging $23/bbl in the first half of the year.

Venezuelan President Hugo Chavez met his Russian counterpart Vladimir Putin last week for negotiations focusing on Russia's role in stabilizing energy prices.

Chavez has vowed to support oil prices that fell sharply in response to a drop in energy consumption following the Sept. 11 attacks.

Russia depends on energy exports for a large portion of annual state revenues. It has so far rejected OPEC suggestions that it could meet OPEC's criteria for membership.

Putin told Chavez that a sharp fall in energy prices and increased oil production ran counter to Russian national interests. He said Russia has consistently favored a just oil price and its representatives at the OPEC meeting in September reiterated that view.

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Industry Trends

NORTH AMERICAN drilling activity is expected to continue dropping through early next year and then rebound after the first quarter. That word comes from Raymond James & Associates, which revised its drilling forecast downward because of deteriorating natural gas prices.

However, RJA is optimistic about long-term drilling activity and oil service company fundamentals based upon anticipated higher commodity prices next year (see table).

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The offshore rig market has led the drilling slump, declining nearly 25% since April. "While the onshore drilling market has held up better than the offshore, it has recently started to fall precipitously. We had originally anticipated a 200-rig decline (15%) from the near-1,300 mark in July. Now, we expect the US rig count to decline by 350 rigs (or nearly 27%) to a February/March low of 950 rigs," RJA said in a research note.

Canadian oil service companies also are experiencing a dampening effect on drilling activity. RJA is modeling a 12% decline in Canadian drilling levels because most of the drilling occurs in the first few months of the year.

"Specifically, we expect to see about 17,000 wells drilled in Canada this year, falling to about 15,000 wells next year. Because of some capacity additions to the Canadian rig fleet, we expect to see rig utilization fall by about 15% in 2002," RJA said.

US OIL industry executives remain bullish that commodity prices will rise and that drilling activity will rebound in early 2002.

That was the conclusion reached by a panel of corporate executives speaking at a recent oil field breakfast forum sponsored by Resource Marketing International and Randal Morton International.

Raoul Restucci, president and CEO of Shell Exploration & Production, said he expects "some pretty weak gas prices" for the next 6 months. "But we're very bullish beyond that-2005, 2010, we're pretty bullish about gas opportunities in terms of costs and prices."

Despite recent plummeting drilling activity in the gas-prone US Gulf of Mexico, Robert Rose, chairman, president and CEO of Global Marine, is optimistic about 2002.

"We'll start seeing things take off next year. The fourth quarter of this year will be the nadir," he said.

Government Developments

SENATE REPUBLICAN LEADERS last week were expected to introduce a streamlined energy security bill that includes a provision to lease a portion of the Arctic National Wildlife Refuge coastal plain.

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The Homeland Energy Security Act of 2001 includes several portions of an earlier bill sponsored by Sen. Frank Murkowski (R-Alas.) last spring when he was chairman of the Senate Committee on Energy and Natural Resources. His Democratic counterpart, Jeff Bingaman (D-NM), now the committee chairman, also proposed energy legislation although it did not include ANWR leasing.

It is uncertain how many of the proposals will be come legislation. Congress is expected to remain in session through mid-November to pass budget bills and an economic stimulus package.

The House passed a comprehensive energy bill last August that includes an ANWR leasing provision. That bill also seeks to streamline pipeline permitting and royalty collections and would grant $8 billion in new tax incentives for marginal producers.

Both Senate bills seek to encourage domestic production and encourage renewable energy.

The streamlined bill would also waive certain antitrust rules so industry could share information about the security of critical infrastructures, including refineries, pipelines, and power plants. A National Petroleum Council study in June recommended the government amend the laws.

The Republican plan also would authorize more government fossil energy research and give more money to state energy programs. Those provisions are likely to be supported by most Democrats.

The Republican draft does not include any special tax treatment or incentives for a proposed pipeline to move Alaskan North Slope gas to Lower 48 markets.

Separately, Murkowski announced last week he intends to run for governor of Alaska. He is a 21-year Senate veteran.

UK ENERGY MINISTER Brian Wilson said his department is considering seven new development projects under the "fallow fields program."

Among the most significant developments under the program is BP's Clair field, discovered in the early 1970s and now in the development stage. Wilson announced the seven potential developments while chairing a meeting of PILOT, the industry-government forum for the offshore sector.

"The potential west of Shetland has been known for some time, and further development of the province is eagerly awaited," Wilson said. Department of Trade and Industry (DTI) officials are working with UK fabrication yards and other suppliers interested in the field development work.

Since last June's Fallow Review, DTI has approved four developments and received a further six plans for approval. DTI also is aware of plans for seven more fallow discoveries that could be submitted early next year.

PILOT's Stimulating Exploration workgroup is working toward a systematic reduction of fallow blocks, ensuring that licenses are in the hands of operators willing to invest in them.

Quick Takes

ITALY'S ENI confirmed what it is calling the "first significant discovery" of oil in the Norwegian Barents Sea. Well 7122/7-1 was drilled on ENI's Goliath field, which lies in 318 m of water 85 km north of Hammerfest.

Tests performed on the well by ENI's Norwegian unit Norsk Agip confirmed a 70 m oil column. On test, the well-which was drilled last October to 1,500 m TD in license PL229-flowed 4,300 b/d of 33° gravity oil. ENI will continue appraisal of the discovery.

Unofficial estimates suggest that Goliath field could contain 175-300 million boe with recoverable reserves of 35-40 million boe.

All previous exploration wells in the Barents Sea encountered gas, and the only existing production in the area is from the Statoil-operated Sn hvit field, 50 km south of Goliath, which has led to Europe's first LNG export project (OGJ, Oct. 1, 2001, Newsletter, p. 8).

Norsk Agip is the operator of Goliath, with 25% of the project. The other partners are the Norwegian Petroleum Directorate 25%, Phillips Petroleum 20%, Enterprise Oil 15%, and Fortum 15%.

John Crowle, general manager in Norway for Enterprise Oil said, "[This find] has the potential to open up a brand new oil province. We now expect the industry to renew interest in the area."

The Norwegian Petroleum Directorate also said that it was encouraged by this discovery and believes there will be further opportunities in the Barents Sea.

Elsewhere on the exploration front, Offshore Kazakhstan International Operation Co. (OKIOC) partners drilled the Kashagan East 2 well in the North Caspian Sea to 4,142 m. On a constrained test, the well flowed 7,400 b/d of oil, said production-sharing agreement partner TotalFinaElf. This is the third well drilled on the Kashagan structure and the first appraisal well since last year's discovery, Kashagan East 1 (OGJ, Aug. 7, 2000, Newsletter, p. 8). The second well, Kashagan West 1, brought proved field reserves to 10 billion bbl OOIP (OGJ Online, May 4, 2001). Kashagan East 2 is 75 km south of Atyrau. Following completion of Kashagan East 2, the Sunkar drilling rig will continue appraisal drilling on Kashagan East 1. OKIOC partners are ENI, TotalFinaElf, Royal Dutch/Shell, BG, ExxonMobil, Phillips Petroleum, and Inpex Masela. The 11 blocks operated by the consortium cover a total 5,500 sq km, with a maximum water depth of 10 m. Estimates of Kashagan reserves range as high as 50 billion bbl OOIP.

Kerr-McGee made a gas-condensate discovery at its Red Hawk prospect in the deepwater Gulf of Mexico. The 23,500 ft wildcat, which was drilled in more than 5,300 ft of water on Garden Banks Block 877, encountered more than 135 ft of gas and gas condensate pay in two zones. A successful updip appraisal sidetrack to the discovery found 175 ft of gas and gas condensate pay. Luke R. Corbett, Kerr-McGee chairman and CEO, said, "Located south of the Baldpate and Conger developments in an area where we currently hold 21 blocks, this discovery continues our long-term strategy of developing core areas in high-potential trends." Kerr-McGee, which operates Red Hawk, estimates the prospect to hold 300-500 bcf of gas reserves. It plans to drill an appraisal well south of the discovery to further evaluate the field. Development options are being evaluated. Kerr-McGee holds equal interest in Red Hawk with Ocean Energy. Before yearend, the two independents expect to drill another deepwater gulf prospect, South Titan on Walker Ridge Block 313.

Conoco made another oil discovery off Viet Nam. The Sutu Vang (Golden Lion) discovery well was drilled on Block 15-1 in the shallow waters of Viet Nam's Cuu Long basin 120 miles southeast of Ho Chi Minh City. The Sutu Vang 1X well tested a stabilized rate of 11,388 b/d of 37° gravity oil through a 48/64-in. choke. Conoco said Sutu Vang's gross future production could be 100-400 million bbl, with 24-95 million net to Conoco. The discovery is 4 miles southwest of Sutu Den (Black Lion), Block 15-1's original discovery made last year, and believed to be one of the largest oil finds to date in Southeast Asia. Both discoveries produce from fractured basement. Conoco and its partners declared Sutu Den commercial in August, with estimated future gross production of at least 200 million bbl and potential to exceed 400 million bbl (OGJ, Aug. 27, 2001, Newsletter, p. 9). A third prospect in the block, Sutu Trang (White Lion), will be drilled in 2002. Conoco holds a 23.25% interest in Block 15-1, which is operated by the Cuu Long Joint Operating Co.

Vintage Petroleum's Carapal Ridge No. 1 wildcat on Trinidad's onshore Central Block. Photo courtesy of Vintage.
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Vintage Petroleum said its Carapal Ridge No. 1 wildcat drilled on Trinidad's onshore Central Block flowed more than 50 MMcfd of gas and 1,500 b/d of condensate. The flow was from five separately tested intervals totaling 1,000 ft in the Miocene Herrera. Vintage said it would connect the well to a gas pipeline so that a multi-month production test could confirm that reserves justify development. It also will determine if a long-term market exists for the gas. Operator Vintage holds a 65% working interest in the well, while state oil firm Petrotrin holds the remainder. Vintage applied to the government to allow it to assign 38.5% of its interest to Aventura Energy (Trinidad). Venture said the completion rig at Carapal Ridge was being moved to a second wildcat, Corosan No. 1, to begin completion and testing operations.

TotalFinaElf plans to develop Carina and Aries gas fields off Tierra del Fuego at a cost of $400 million.

TotalFinaElf Austral is operator of the Cuenca Marina Austral 1 consortium, with a 37.5% interest. Partners are Wintershall Energia 37.5% and Pan American Energy 25%. Development will include installation of a platform on each field and drilling of seven extended-reach wells.

The two platforms, in 60 m and 80 m of water, will be produced through an 80 km multiphase pipeline from the Carina platform to the onshore Rio Cullen plant, which will be expanded.

Gas separated from the liquids will be sent to the Canadon Alfa plant before transportation to Argentina's market via the San Martin gas pipeline. Carina and Aries should start production in second half 2003 and plateau at 12 million cu m/day.

SABOTAGE to an oil pipeline early last week has caused the closure of the Warri refinery, said Jackson Gaius Obaseki, group managing director of Nigerian state oil firm NNPC.

Obaseki said the Kaduna refinery and petrochemical complex would close sometime this week.

The Warri plant has a capacity of 118,750 b/d and the Kaduna refinery, 110,000 b/d.

Obaseki said saboteurs bombed a section of the pipeline near Escravos in Delta state. Repairs will take about a week.

He said the shutdown would not affect consumers, since NNPC has adequate petroleum stocks to meet demand for 27 days.

In other refining news, Lukoil won two auctions for stakes in the Nizhni Novgorod (Norsi-Oil) refinery. The Russian company now holds 85.36% of the refinery after paying $26 million for the plant and assuming 1.5 billion rubles ($50.8 million) in debt. Lukoil is also expected to invest heavily in the modernization of the plant. Sibneft also bid for the 40% and 45.36% stakes in the refinery; the starting price was $21.8 million. Lukoil said it is a major crude supplier for the refinery and has worked closely with it for 5 years. "By purchasing Nizhni-Novgorod refinery we continue to carry the policy of achieving high competitive position on the world market," said Lukoil Vice-Pres. Leonid Fedun. He said Norsi-Oil would become one of the leading enterprises of the Russian oil industry after the modernization.

RENTECH said it has begun full feasibility study work with Indonesia's Pertamina on a potential 15,000 b/d gas-to-liquids plant in that nation.

The small-scale project would use Rentech's proprietary technology to convert Pertamina's stranded gas into sulfur and aromatic-free fuels, naphtha, waxes, and other high value products.

Rentech said last December that it and Pertamina would study the project, but work was delayed because the government-owned oil company targeted a specific site that required further definition in the scope of work.

If the study, which will take 4-6 months, indicates the project is viable, the two companies will enter discussions for a licensing agreement to implement the Rentech technology.

Dennis L. Yakobson, Rentech president and CEO, said, "We believe that the study will show that applications of GTL on stranded-gas reserves of 1-2 tcf make economic sense and provide an answer to monetizing many of the world's approximately 1,300 natural gas fields of this size."

Rentech is the developer and licensor of a patented and proprietary Fischer-Tropsch GTL process for the conversion of synthesis gas into fuels, products, and chemicals.

CNOOC brought Qinhuangdao field on stream in Bohai Bay.

Qinhuangdao 32-6 field is scheduled to be in full production at a rate of 65,000 b/d by the middle of next year. Current output is near 20,000 b/d.

The field is in north central Bohai Bay, 130 km from the city of Tianjin. Reserves are 103 million bbl.

Development includes six wellhead platforms, with the stage now in production consisting of platforms A and B, a single point mooring buoy, and an floating production, storage, and offloading vessel.

CNOOC, as operator, holds 51% interest in the field. Other partners are BP 24.5% and ChevronTexaco 24.5%.

Zhou Shouwei, CNOOC executive vice-president, said that firm has brought into production all development projects due for completion this year, ensuring that it would meet this year's production target.

In other production news, Suncor Energy said Oct. 18 mechanical problems have forced a 10-day shutdown of its northern Alberta Project Millennium oil sands development. Suncor will repair the fractionator and perform routine maintenance during the period. It noted the base plant, which had been averaging about 115,000 b/d, will not be producing oil while the maintenance occurs. The shutdown will affect the yearend production target, said Suncor. Details will be made available with the company's third quarter financial results Oct. 24. However, Suncor said the ongoing $2.8 billion (Can.) expansion project-which will increase the production capacity of the plant to 225,000 b/d by 2002-would not be affected. Commissioning of the new facilities is proceeding on schedule, and the hydrogen plant recently went into production. Suncor has started up the Millennium cokers and is generating some oil from the new plant.

Abu Dhabi Marine Operations Co. (ADMA-OPCO) awarded a major gas injection project to expand the output of Zakum oil field, the primary Abu Dhabi offshore field. Gas will be moved from giant Umm Shaif field to the Zakum West complex for injection. ADMA-OPCO said, "It is one of the largest offshore operations in the history of the company." It said a 200 MMcfd compressor would be installed at the gas injection platform. "The operation is challenging, and the compressor itself is one of a kind, due to its huge capacity," said Project Manager Ayman al Makawi. He said gas from Umm Shaif would be compressed and delivered to an existing wellhead tower for injection. The multimillion dollar project, due for completion by 2004, includes a year of engineering, design, and procurement. The UAE has spent more than $15 billion over the past 10 years to increase oil production capacity, according to OPECNA news agency. UAE reserves are estimated at 98 billion bbl.