OGJ Newsletter

The composite spot price for natural gas fell for the third consecutive week, dropping 5¢ to $2.76/Mcf for the week ending July 19. That was well below the projected spot price for July (see table).

Still, there remains the potential for isolated price spikes in response to the weather. On the last day of July, in response to hot weather in the US East, "traders sold a cash market as much as 10¢(/Mcf) higher than the NYMEX instead of putting volumes into storage. At the New York city gate, spot prices jumped over $10/MMbtu before averaging $7.94/MMbtu," Enerfax Daily reported. In addition, it said, "Look for prices to rebound somewhat in August due to more summer heat as well as the beginning of this year's active hurricane season."

On July 29, the NYMEX natural gas contract for August expired at $2.98/Mcf, finishing "in the middle of a $2.88-3.05(/Mcf) trading range it has held for the last couple of weeks," Enerfax Daily reported (OGJ On- line, July 30, 2002). The new near-month Sep- tember contract gained 1.4¢ to $2.91/Mcf that same day, fell by the same amount in the next trading session, and jumped by 6.3¢ to $2.95/Mcf on July 31.

Still, Enerfax Daily analysts said, "The market needs to close below $2.76(/Mcf), or above $3.10 (/Mcf) to break out of the trading range it has been stuck in."

Oil inventories increase

Last week, the American Petroleum Institute reported US inventories of crude increased by 873,000 bbl to 308.2 million bbl in the week ended July 26, rather than registering another substantial decline as expected.

However, US gasoline stocks dropped by 1.4 million bbl to 212.6 million bbl, and distillate inventories dipped by 32,000 bbl to 132.8 million bbl. The result overall was "relatively stable" after "a steep and partially unexplained decline" the previous week, said Matthew Warburton, also with UBS Warburg in New York (OGJ Online, Aug. 31, 2002).

US oil stocks increased "despite a small reduction in weekly crude imports (to 9.1 million b/d) and (an) uptick in US refinery demand" of 122,000 b/d to 15.8 million b/d, Warburton said. However, he noted that this stockbuild was concentrated in Petroleum Administration for Defense District 5, encompassing the US West Coast, Alaska, and Hawaii, and including Alaska North Slope crude in transit.

"As the remaining regions reported a 1.5 million b/d draw, we expect the market to remain focused on recent geopolitical uncertainty, (rising production from the Organization of Petroleum Exporting Countries excluding Iraq), Iraqi exports, and the extent of seasonal recovery in global crude demand," he said.

Industry Scoreboard

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Industry Trends

Oil and gas companies expect to increase upstream spending plans over the next few months, but the increases likely will be more significant outside the US and Canada, where 37% of respondents plan to increase drilling and only 13% expect to decrease activity, said UBS Warburg LLC in its fifth monthly PatchWork survey this year.

The survey responses underpin an index pegged to a weighted average ranging from 100 to -100. The size of a positive value indicates the relative sentiment for an increase in that price or activity, and the converse is true for the negative values. The survey also indicated that pricing expectations within the US and Canada have reversed from gains made last month but still remain in "positive territory."

UBS found that a majority of operators within the US and Canada plans to increase drilling activity levels in the next 60 days, but the percentage of those doing so was lower than last month.

However, "The 3-month trend remains solidly positive," UBS said. Of the US and Canadian respondents, 45% plan to increase drilling activity, 10% to decrease it.

Overall, UBS believes drilling activity should improve over the next few months, although the rate of increase may flatten relative to the last 2 months.

After 3 consecutive months of improvement, UBS said that product pricing expectations in the US and Canada also appear to be flattening over the next 2 months.

"In (the US and Canada), more respondents expect rig day rates to increase than any other category. Internationally, most respondents expect (logging while drilling and measurement while drilling) and directional drilling prices to rise," UBS said.

Respondents based budgets on an average oil price of $21.67/bbl and an average natural gas price of $2.90/Mcf, both higher than the previous month. UBS suspects that is due to an increase in US and Canadian survey respondents.

With a majority of respondents expecting to increase drilling activity and spending over the next few months, UBS expects oil field service companies to show higher third quarter earnings and revenues, with periods of rapid improvement mixed with periods of stagnation and consolidation.

Government Developments

The Competition Directorate General of the European Commission has reached an amicable agreement with Norwegian North Sea producers Statoil ASA and Norsk Hydro AS, settling their part of the long-standing "GFU (Gas Negotiation Committee) case."

The case stemmed from charges that Norwegian offshore natural gas producers were competing unfairly with European Union nations through Norway's now-defunct GFU, which, until June 2001, negotiated gas sales contracts on behalf of the country's offshore producers.

Norway is not a full member of the EU.

Under terms of the settlements, during June 1, 2001-Sept. 30, 2005, Statoil will offer a total of 13 billion cu m and Norsk Hydro will offer 2.2 billion cu m of natural gas for sale on commercially competitive terms to new customers within the European Economic Area (EEA) that were not long-term customers prior to 2001.

Because the sales are retroactive to June 1, 2001, a portion of this gross volume has already been sold to new customers. The companies will attempt to distribute the balance evenly over the period.

Statoil and Norsk Hydro agreed to the sales without any admission that their marketing or GFU gas marketing activities constituted an infringement of EC or EEA competition rules.

US LAWMAKERS declined to include in final antiterrorism legislation a controversial Senate proposal directed at Occidental Petroleum Corp.'s crude oil export pipeline in Colombia.

President George W. Bush is expected this week to sign emergency spending bill HR 4775, designed to combat terrorism aimed at US interests.

An earlier Senate bill, sponsored by Sen. Patrick Leahy (D-Vt.), would have provided $3.5 million in US aid to Colombia specifically for improving the security of the Caño Limon export pipeline if Oxy and its partner, Repsol-YPF SA, would provide written agreement to reimburse the US government for helping to protect shipments (OGJ, June 17, 2002, p. 34).

A Leahy spokesman said the provision was needed to protect "taxpayers from having to pay security for a private oil company."

Oxy strenuously objected, saying Leahy's bill could set "dangerous" public policy precedents, including the casting of US armed forces, which would provide training, in the role of mercenaries for hire to private companies, including non-US multinationals.

The Colombian government owns 50% of the 483 mile pipeline that connects the Caño Limon area fields to an export terminal on the Caribbean Sea; Oxy holds 44%, and Respol-YPF 6%.

Congress ultimately reverted to a House version of the bill, earmarking $6 million to the Colombian military for pipeline protection but not requiring Oxy or Repsol-YPF to pledge funds.

Quick Takes

EXXONMOBIL CORP. and China's Guangzhou Petrochem- ical Corp. are expected to sign by yearend a $3.24 billion contract by which they will jointly expand capacity at Guangzhou Petrochemical's Guangzhou, China, refinery.

The 50:50 joint venture will expand the refinery's capacity to 10 million tonnes/year by 2005 from 7.5 million tonnes/year. A larger plan calls for expanding the refinery to 18 million tonnes after 2005.

The JV will complete a feasibility study on the expansion plan in the third quarter.

The companies also are in talks to expand Guangzhou Petrochemical's ethylene cracker capacity to 300,000 tonnes/year by 2005 from 200,000 tonnes/year. After 2005, a further expansion would give the crackers a capacity of 800,000-1 million tonnes/year.

The JV follows the signing of a strategic partnership agreement between ExxonMobil and Guangzhou's parent company, China's state-owned China Petroleum & Chemical Corp. (Sinopec), in which ExxonMobil paid $650 million for 19% in Sinopec's $3.46 billion initial public offering in 2000.

PTT EXPLORATION & PRODUCTION PLC (PTTEP) has applied to local Thai authorities for a license to produce gas from the 4,000 sq km Arthit structure off Thailand, one of the major gas discoveries in the Gulf of Thailand.

PTTEP Pres. Chitrapongse Kwangsuksith said the firm sought the production license after being assured of Arthit's commerciality. Twenty of 21 exploration and appraisal wells drilled on the prospect have yielded gas, and reserves are estimated at 1.5 tcf, Chitrapongse said (OGJ Online, Oct. 12, 2001, and Feb. 5, 2001).

Thailand's incremental demand for natural gas-surfacing earlier than expected because of uncertainties surrounding two controversial coal-fired power projects in southern Thailand-also spurred the decision to put Arthit into production.

Concerns about pollution from coal-fired power stations is leading the nation to switch to gas-fired power projects to meet its rising electricity demand expected over the next 5 years.

Natural gas already plays a dominant role in the Thai power supply, about 70% of which is generated by indigenous natural gas along with two fields in Myanmar's Gulf of Martaban.

About 77% of Thailand's 2 bcfd of offshore gas is dedicated to the Electricity Generating Authority of Thailand, independent power producers, and small power producers.

PTTEP now sees additional domestic gas demand emerging in 2006, when it plans to put Arthit on stream-likely at the initial rate of 250 MMcfd.

Costs for developing Arthit, which is 250 km east of Songkhla, would be $200-300 million for first-phase production. PTTEP intends to move Arthit into production itself and is not actively seeking additional partners to share costs. PTTEP owns 80% interest in Arthit, with the remaining 16% owned by Unocal Thailand and 4% by Moeco Thailand Co, an affiliate of Japan's Mitsui Oil Exploration Co.

Arthit gas will be piped to the country's central plains through a third trunk line planned in the Gulf of Thailand by the partially privatized PTT PLC, parent of PTTEP.

The proposed trunk line will extend northward, splitting into two spurs to reach Petchaburi on the western side and Rayong on the eastern seaboard.

Arthit's structure and reservoir behavior are similar to those of Bongkot, which is producing 550 MMcfd of gas and 13,000 b/d of condensate and crude oil. Consequently, the field is likely to be developed in the same manner.

Germany's BASF AG and Sinopec have let contracts for the $2.9 billion natural gas-fired power plant at their planned world-scale, grassroots, integrated petrochemical complex at Nanjing, Jiangsu Province, China.

Construction is under way on the project, which will produce 600,000 tonnes/year of ethylene, plus derivatives.

Daelim Industrial Co. Ltd. of Seoul, South Korea, will construct the combined-cycle power plant, and GE Power Systems received a $38 million euro contract to supply three GE MS6001B gas turbine-generators for the power plant, which will provide 175 Mw of power to the petrochemical facility. The GE contract also includes technical advisory services and training. The gas turbines initially will use natural gas as the primary fuel, with naphtha as a backup. The turbines will be manufactured in Essen, Germany, and shipped to the site in April 2003.

Commercial operation is set for July 2004.

OMAN'S MINISTRY OF OIL and GAS has awarded an oil and gas exploration license in Oman to PTTEP Middle East Co. Ltd., a subsidiary of Thailand's PTT Exploration & Production PLC, marking PTTEP's first entry into Middle East exploration.

The license is for Block 44, about 300 km west of Muscat. It covers an area of 1,162 sq km near Safah field, which is producting 30,000-40,000 b/d of oil.

PTTEP will operate Block 44, which it owns entirely under the production-sharing contract with Oman. PTTEP Middle East plans to spend at least $9 million to explore the tract over the next 3 years. A 2D seismic survey is expected to begin by yearend, with drilling of an exploration well planned in the third year.

PTTEP has been pursuing upstream interests in Oman, Iran, and Bahrain in order to expand its portfolio beyond Southeast Asia (OGJ Online, July 16, 2002). Oman was the second largest source of crude oil for Thailand last year, accounting for 22% of the kingdom's imported crude.

In another type of exploration activity, Thunder Energy Inc., Calgary, has entered into a joint venture with Houston-based Burlington Resources Inc. to assess coalbed methane resources on Thunder Energy's existing properties, which cover 14 townships in central Alberta. "Commercial CBM production has been established in a number of basins in the US and is currently providing 7% of total US gas supply," Thunder Energy said. "Based on this proven technology, the joint venture will be evaluating an estimated 120 sections (75,000 acres) of CBM rights held by Thunder with identified coal accumulations of up to 10 m in total thickness." Burlington will front the cost of the exploration wells, with Thunder Energy maintaining an option to participate in subsequent pilot wells. Following completion of the exploration and pilot phase, Burlington will earn 50% of Thunder Energy's CBM interests.

A proposal to auction Block 56, adjacent the Camisea natural gas fields in Peru, remains on hold while the Camisea consortium decides whether to begin negotiations with Perupetro SA, the state oil agency. Formal talks depend on a written proposal from the consortium. Perupetro has said it would auction concessions to four companies for Blocks 56, 57, and 58, all adjacent the Camisea fields. Hunt Oil Co., Dallas, represents the Camisea consortium in that prospective bidding process. The other companies-TotalFinaElf SA, Repsol-YPF SA, and Occidental Petroleum Corp.-also declared their interest in the blocks last year (OGJ Online, Nov. 9, 2001).

TIDELANDS OIL & GAS CORP. subsidiary Reef International LLC received a presidential permit from the US Department of State for its proposed natural gas and dual propane-butane international pipelines between Eagle Pass, Tex., and Piedras Negras, Mexico.

Reef has finalized several transportation and sales delivery agreements in Mexico for both the liquids and the gas (OGJ Online, Oct. 11, 2001).

The company was to begin directional drilling of the 12-in. gas pipeline and bilateral 6-in. liquids crossings-5 ft apart-under the Rio Grande last week, according to a company spokesman, and it expects to complete the crossing in early November. Work on a terminal in Eagle Pass also was expected to begin last week. Tidelands and third parties will deliver gas, via the crossing, from Tideland's existing system in Texas to a 4 mile, 12-in. connecting line on the Mexican side that it will extend to interconnections with Mexico's Conagas (Cia. Nacional de Gas SA de CV) system in Piedras Negras.

Tidelands also plans another international pipeline crossing, a 30-in. natural gas trunkline at El Paso that will deliver gas to Juarez, Mexico (OGJ Online, May 22, 2002). Permitting will begin soon for that line, which Reef hopes to start constructing at yearend.

Tanknology-NDE International Inc. of Austin, Tex., will have to pay a $2 million fine and serve 5 years probation for giving fraudulent underground storage tank (UST) tests to federal environmental regulators, the US Department of Justice and the US Environmental Protection Agency said July 24.

Tanknology, the largest UST testing company in the US, plead guilty to 10 felony counts of presenting false claims and making false statements to federal agencies.

"Tanknology was prosecuted and has been held responsible for fraudulent practices that could cause a risk of significant environmental harm at federal facilities," said Tom Sansonetti, assistant attorney general of DOJ's Environment and Natural Resources Division.

The company admitted in a plea agreement that from January 1997 to December 1999, Tanknology testers performed false tests at federal facilities across the country.

The tests ranged from failing to follow required test protocols to "drive-by" tests, where a Tanknology tester was videotaped driving up to a federal facility, driving away after a few minutes, and then submitting false data.

In agreeing to plead guilty, Tanknology admitted that the investigation of the corporation produced evidence of a number of improper or fraudulent practices carried out by employees:

• Setting of unreasonable schedules for testers that caused some to fail to conduct valid tests, yet remain on schedule.
• A corporate bonus system that rewarded testers for the number of tests performed, resulting in testers knowingly reporting test results when none had been performed.
• Inadequate training and failure to implement quality assurance.

FINANCING and other conditions affecting the start of construction of the world's largest grassroots fertilizer complex in Oman have now been met, enabling Oman-India Fertilizer Co. (Omifco) to proceed with the project. Completion of the complex is slated for July 2005.

A $780 million, lump sum turnkey contract was awarded in April to a 50:50 joint venture of Technip-Coflexip, Paris, and Snamprogetti SPA, Milan, to design and construct the complex at Sur, Oman, 150 km south of Muscat (OGJ Online, Apr. 23, 2002). Subcontractor Consolidated Contractors International will carry out the major portion of the construction.In addition to funding from Omfico shareholders-Oman Oil Co. (50%), Krishak Bharati Cooperative Ltd. (25%), and Indian Farmers Fertilizers Cooperative Ltd. (25%)-financing was supplemented by Italian and French export credits and from BNP Paribas, Arab Banking Corp., and Australia & New Zealand Banking Group.

All of the plant's urea production and any ammonia production surplus to domestic needs will be exported to India.

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The Polar Resolution, one of the newest Millennium-class, double-hulled tankers to join the Polar tanker fleet in Alaska, loaded its first shipment of Alaska North Slope crude July 24. The vessel, operated by Phillips Petroleum Co. unit Polar Tankers Inc. of Long Beach, Calif., is the second of the five 140,000 dwt oil tankers that the Phillips unit will add to its fleet through 2005. Each is valued at more than $200 million. The Polar Discovery, the company's third completed vessel, was christened earlier this year in New Orleans and will join the fleet in 2003 (OGJ, Apr. 22, 2002, p. 8). At maximum capacity, each ship will carry 1 million bbl of oil. Photo courtesy of Phillips.