Market Movement
February registers near-record oil price
February racked up a near-record price in the oil futures market, based on a combination of Middle East war worries, Venezuela's strike, the first sustained cold US winter of the decade, and low US inventories of oil and petroleum products, officials at Oil Price Information Service (OPIS), Lakewood, NJ, reported last week.
In Feb. 27 trading on the New York Mercantile Exchange, the April contract for benchmark US light, sweet crudes briefly touched $39.99/bbl, the highest price level since October 1990 when oil futures hit a record $41.15/bbl after Iraq invaded Kuwait.
But oil closed at lower prices in that and the next two trading sessions as traders tried to divine whether US-led troops will soon move against Saddam Hussein.
Prices rebounded Mar. 4 as more US troops were ordered to the Middle East, and US officials reasserted intentions to act against Iraq without a new United Nations resolution, if necessary. But the market declined again the next day as Germany, Russia, and France declared their determination to delay hostilities.
"Oil prices continue to gain support from near 28-year low US crude oil (and) product inventories, which have also been impacted by the colder-than-normal winter, along with the prospect of war with Iraq," said Robert Morris in a Mar. 4 report issued by Salomon Smith Barney Inc., New York.
However, he said prices will likely subside "with the elimination of the current 'war premium' and the emergence of crude and product stocks that have been 'hoarded' in anticipation of a war with Iraq, at the same time that (the Organization of Petroleum Exporting Countries) is likely to seek to curtail output."
"There are all types of predictions for what may occur in world oil markets in the next 40 days, with both wartime and peace scenarios suggesting that crude oil could trade anywhere from $15/bbl lower to $20/bbl higher before spring is over," said OPIS officials in a Mar. 3 report.
However, they predicted, "Consumers and end-users may pay 30-35¢/gal more for some oil products than they did about 30 days ago." They said US nationwide average retail prices for gasoline could "soon surpass $1.70/gal," while retail diesel prices "could approach $1.85-1.90/gal" before mid-March. "Wholesale prices have calmed in recent weeks, but there are fears that new pricing updrafts will come as US suppliers make their switch from winter to springtime blends," OPIS reported. That switch already is in progress in California, where wholesale prices increased more than 32¢/gal during February, pushing some California pump prices "well above $2/gal," it said.
Inventories
The US Department of Energy reported US crude inventories increased by 1.7 million bbl to 273.6 million bbl during the week ended Feb. 28, with US gasoline stocks down by 2 million bbl to 206.1 million bbl and US distillates losing 2.6 million bbl to 96.5 million bbl.
For the same period, the American Petroleum Institute reported a drop of 2.5 million bbl in US oil inventories to 268.8 million bbl. It said US gasoline stocks declined by 2.3 million bbl to 207.6 million bbl, while distillates fell by 3.5 million bbl to 100.4 million bbl.
"Of the two inventory reports, the DOE crude estimate of a build of 1.7 million bbl is more credible, given its estimate of a reduction in refinery runs of 275,000 b/d and increased imports of 354,000 b/d as Venezuelan import volumes returned to prestrike levels," said Matthew Warburton, UBS Warburg LLC, New York, in a Mar. 6 report. Despite a "sizable" difference between DOE and API estimates of US crude inventories, he said, "Continuing draws (on) product inventories will further reinforce the recovery in refining margins witnessed in February."
Warburton noted that US heating oil inventories continued to fall, "despite a 256,000 b/d (weekly) increase, given strong implied demand growth (+18% year-over-year), resulting in heating oil futures reaching all-time highs in New York Harbor." He said, "With a 35¢ price differential between April and August (heating oil contracts), we expect refiners to continue to practice just-in-time production and avoid any increase in near-term inventories and leaving the marginal supply to imports."
Warburton said, "Given current prices and with (US East Coast) heating oil inventories 16% less than year-ago levels, it is possible that calls may emerge soon to release the 2 million bbl heating oil reserve in the Northeast to moderate prices."
So far, the Bush administration has been reluctant to release any strategic reserves of oil or refined products, pending the start of military action against Iraq.
Industry Scoreboard
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Industry Trends
THE DISCONNECT between strong oil prices and the US integrated oil sector's stock performance that was witnessed last year could become a lasting trend.
UBS Warburg LLC said the situation stems from a combination of factors, including market expectations that oil prices will fall sharply after resolution of the US-Iraqi dispute.
Analyst Matthew Warburton said the sector's stock price "disconnect with oil prices" also stemmed in part from the exclusion of Royal Dutch Petroleum Co. of the Netherlands from Standard & Poor's benchmark S&P 500 index (OGJ, July 22, 2002, p. 7).
Consequently, US portfolio managers who were benchmarked against the S&P 500 found themselves having to reduce energy holdings to avoid becoming overweight on that sector.
And, contrary to the popular view, US integrated oil sector performance has not been closely correlated to oil prices during the last several years, he added. "With oil companies and investors apparently refusing to increase their long-term oil price views despite the (Organization of Petroleum Exporting Countries') continued success in maintaining prices, we continue to believe that it is highly unlikely that sector valuations will ever fully incorporate current oil prices," Warburton said.
The operational structure of the integrated oil sector also could be influencing investor sentiment, he said, noting a common perception that rising oil prices result in poor refining and marketing margins. "Therefore, given the very weak downstream earnings for the integrated sector in 2002, investors may be incorporating an expectation of continued (refining and marketing) weakness in 2003 to offset current high oil prices," Warburton said.
UBS Warburg analysis shows that oil investors do not incorporate above-average or below-average oil prices into their decisions on whether to own oil equities.
"In other words, until the broader equity market and/or oil company community raises its current consensus view of around $20/bbl (WTI), the impact of higher-than-normal oil prices will always be viewed as temporary and therefore not incorporated into equity market valuations," Warburton said.
HYDROGEN will become increasingly important in coming years as more-stringent fuel regulations are enforced and later as hydrogen vehicles gain acceptance.
Norwalk, Conn.-based Business Communications Co. Inc. said total US hydrogen demand would increase to 14.45 tcf in 2007 from 10.96 tcf in 2002. This will amount to an average annual growth rate of 5.7%.
"High-purity transportation fuels will become mandatory, and harmful chemical emissions will be drastically cut. Hydrogen will offer petroleum refiners, specialty chemical manufacturers, and automakers the flexibility they need to meet international agreements for cleaner products," BCC said in its report, "Hydrogen as a Chemical Constituent and as an Energy Source."
The US Environmental Protection Agency has proposed reducing the sulfur content in gasoline to 30 ppm by 2004, with diesel to follow. Refineries increasingly will turn to merchant hydrogen suppliers for peak shaving, production trials, and plant start-up procedures.
BCC forecast that more than 1 million hydrogen vehicles will operate in the US in 2007, increasing hydrogen's share of the energy market.
Government Developments
PRICE GOUGING allegations in US energy markets may be based on frustration, not facts, Senate Energy Chairman Pete Domenici (R-NM) said late last month.
Natural gas, heating oil, and crude oil prices have soared in the past few weeks, the lawmaker acknowledged, but the sudden increases likely are market-related, Domenici said.
"We've been down this road before. We were here 2 years ago. Prices were just as high, driven by rising demand and tight supply," he said, adding that he believes market forces are at work again.
Some legislators from New York and California voiced concerns that fuel suppliers may be taking advantage of a jittery market spooked by geopolitical events.
Sen. Charles Schumer (D-NY) wants the Federal Trade Commission to investigate whether consumers are being gouged for their purchases of heating fuels and gasoline. He also called on the White House to release oil from the Strategic Petroleum Reserve to help bring prices down.
THE US GOVERNMENT would authorize a release from the Strategic Petroleum Reserve only after consulting with its allies, said Sec. of Energy Spencer Abraham.
"We will make any decision only in consultation with our (International Energy Agency) partners," he told the Senate Energy and Natural Resources Committee while testifying on his agency's fiscal year 2004 budget request.
Responding to lawmakers' questions, Abraham reiterated that the White House's policy concerning the 600 million bbl stockpile is that it should only be used for a "severe" supply disruption, not to control prices.
Similarly, he said the department had no immediate plans to order withdrawals from the 2 million bbl Northeast Home Heating Oil Reserve. Some East Coast lawmakers and heating oil dealers have urged the Department of Energy to draw down stocks. But Abraham said conditions do not warrant a release at this time.
IEA officials have said they are monitoring market conditions and might call on members to release stocks if they feel that oil producers cannot keep up with demand. But price levels alone won't trigger a response, they stressed.
The IEA charter calls on member countries to release their stocks if oil supplies are cut by more than 7%, but the agency said it has the authority to act below those levels if market conditions compel it to take action.
As part of its emergency contingency planning, IEA also calls on member countries to hold oil stocks equivalent to 90 days of net imports from the previous year. The US SPR currently holds 54 days of what DOE calls "import protection." But when combined with private stocks, the inventory available to US consumers is about 150 days of net import demand, according to DOE.
On Feb. 20, IEA said combined publicly and privately held stocks among its members equaled about 115 days of total net imports, about 25 million b/d. The stocks, held as both crude and product, are near IEA members' refineries and distribution points and "can be made available rapidly to markets," the agency said.
Quick Takes
THE STEERING COMMITTEE for the proposed 1,300 km Turkmenistan-Afghanistan-Pakistan natural gas pipeline agreed Feb. 22 in Islamabad to invite India to join the $3.2 billion project. The committee expects to extend a formal invitation to New Delhi before its next meeting Apr. 8 in Manila.
Turkmenistan's Deputy Prime Minister Yully Qurbanmuradova, Afghan Petroleum and Mines Minister Juma Mohammad Mohammadi, and Pakistan's Petroleum Minister Nauraiz Shakoor led their countries' delegations.
The pipeline would carry as much as 20 billion cu m/year (bcmy) of gas. It likely would include a spur to Pakistan's Sui field, from which existing infrastructure could be tapped to supply major local markets (OGJ, Oct. 7, 2002, p. 21).
Shakoor said the viability of the project depends on the pipeline's extension to India.
The committee also prepared to form a consortium, approving a prequalification document, the first draft of which would be completed by Mar. 30.
The draft will be issued to oil and gas companies, which would submit their qualifications by July 31. The committee agreed to complete a short list of qualifying parties by August.
State concerns in Turkmenistan also plan a variety of natural gas pipeline projects this year to help the country boost production and transportation capacity, said the Ministry of Oil and Gas Industry and Mineral Resources in Ashgabat. State companies outlined several gas projects on tap for 2003: Turkmengaz plans to construct a 45 km pipeline from its pilot production at Gazyldepe (Gagarina) field, scheduled to start up this year. It also plans to build and commission a gas dehydration unit at the Deryalyk compressor station. Turkmenneft plans to build a 2 bcmy compressor station at Korpedje field for associated gas. Other projects are a 16 Mw gas turbine compressor station at Goturdepe, a gas pipeline between Khazar and the Goturdepe compressor station, and tie-in development wells at Korpedje field. Turkmenneftegaz will rebuild the Belek compressor station with a 8.3 bcmy capacity and will complete a pipeline crossing under Garabogaz Bay on the Bekdash-Europe pipeline. In 2002, Turkmenistan exported a total of 39.3 bcm, up 5% on the year.
TURKMENISTAN also plans to increase drilling to realize its 2003 production program, which calls for boosting oil and condensate production by 50% to 13.5 million tonnes and gas output by 26% to 67.6 bcm, the ministry said.
Crude and condensate production exceeded 9 million tonnes in 2002, up 12.4% from 2001, and gas production was up last year by 4% to 53.5 bcm.
State company Turkmenneft is to produce 10 million tonnes of oil and condensate, including 574,000 tonnes from Yashyldepe (Kokdumalak) field. Foreign companies operating under production-sharing agreements will turn out 2.6 million tonnes (OGJ, Oct. 21, 2002, p. 49). State concerns Turkmengaz and Turkmen- geologiya will produce 200,000 tonnes and 100,000 tonnes of condensate, respectively.
The state companies plan to appraise oil deposits in Mesozoic sediments in Cheleken, Gundogar (East) Cheleken, Akpatlavuk, and Goturdepe fields, which the ministry said will serve as core development areas for hydrocarbon production (see map, OGJ, Oct. 14, 2002, p. 43).
The state companies plan to drill 38 wells and place 46 wells on production. Exploration drilling is slated at Korpedje, Gunorta (South) Gamyshlyja, Akpatlavuk, and Goturdepe fields.
"To implement these objectives, there are plans to increase the number of drilling rigs, hire new drilling and geophysical crews, and involve foreign service companies," the ministry said.
Turkmengaz intends to complete its gas infrastructure, start up pilot production at Gazyldepe and Balguyi fields, drill 25 development wells, tie in 22 wells at the producing Dovletabad, Garashsyzlygyn 10 yillygy, Malay, Yelguyi, and Chartak fields, and enhance gas production at Gundogar (East) and Gunbatar (West) Shatlyk fields.
Turkmenneft gas projects include tying in more development wells at Korpedje field and implementing the investment program for exploration, commercial development, and field infrastructure construction at Keymir, Akpatlavuk, and Chekichler gas-condensate fields. x‡ In other production activities, ExxonMobil Corp. in late February reported the start of first natural gas production at Bintang field, in the South China Sea 137 miles off Terengganu, Malaysia. The field is expected to peak at production of 355 MMcfd and to produce a total of about 1 tcf. ExxonMobil's Malaysian unit ExxonMobil Exploration & Production Malaysia Inc. has spent about $80 million, excluding drilling costs, to develop Bintang (see map, OGJ, Apr. 1, 2002, p. 8). The company said it plans to drill a total of 10 wells this year. Bintang production will flow from two platforms, A and B, via 7 miles of new pipeline to Lawit A for processing. From there, gas will be transported via existing pipelines to shore, ExxonMobil said. Bintang is the second field to be developed under a gas production-sharing contract with Malaysia's state-owned Petronas Carigali Sdn. Bhd. ExxonMobil is operator for the 50:50 joint venture. Petroleo Brasileiro SA (Petrobras) has awarded Weatherford International Ltd.'s completion systems division (WCS) a 2-year contract valued at more than $34 million for supply of expandable sand screens (ESS) in Brazil. Petrobras already is using the technology in an offshore production well in Marlim field in the Campos basin. The 51/2-in. ESS initially will be installed in an 8?-in., openhole horizontal well, where it will replace the standard gravel pack solution. Marlim Sul and Roncador fields in the Campos Basin are producing via semisubmersible platforms from in deepwater wells in more than 1,000 m of water, with 81/2-in. horizontal sections 500-800 m long. "Characteristically ESS can double the inflow area per foot and reduce flowback pressures by over 60%," WCS Pres. Stuart Ferguson said.
Anadarko Petroleum Corp. has drilled a Devonian natural gas discovery in the Peace River arch of Alberta, expanding proven and probable reserves from a multizone play to 130 bcf of gas from 90 bcf. The 100% Anadarko-owned Saddle Hills 15-34-75-7w6 discovery well flowed 15.9 MMcfd of gas. With this well on stream, Anadarko's total production from Saddle Hills increased to 73 MMcfd from a total of nine wells, from 2 MMcfd in early 2002. "We will continue to further define the Devonian potential this year, with two more exploratory wells and three development wells planned," said Bob Daniels, president of Anadarko Canada Corp. Anadarko has allotted $68 million (Can.) to development drilling, seismic surveys, and midstream activities to extend the play. An additional five exploratory and nine development wells are planned for other zones in the same play. In addition, Anadarko said it is looking for ways to expand pipeline and processing infrastructure in the Saddle Hills area where the company holds 35,000 net acres. F Meanwhile, Occidental Petroleum Corp. announced the "first significant discovery on the Matador arch in more than 40 years." Discovered by reprocessing existing 3D seismic data of the deeper structure, the discovery lies in the Wolfcamp formation in Oxy's Anton-Irish Clearfork field 15 miles northwest of Lubbock in Hale and Lamb counties, Tex. The Snead 1 discovery well was drilled to 6,780 ft TD in Hale County. Current production is 3,000 b/d of 38-42° gravity oil. The sulfur content is 0.25-0.30%. Oxy estimates potential reserves of 12 million bbl for the structure. The company has drilled 18 development wells and plans up to 10 wells this year.
CHINA NATIONAL OFFSHORE OIL CORP. LTD. (CNOOC Ltd.) has awarded a $900,000 contract to Sofregaz—a 66:34 joint venture of Montedison Group unit Tecnimont and Gaz de France, respectively—for front-end engineering and design of the Fujian LNG terminal in Fujian province, near the coastal city of Putian, China.
Design work is expected to take 8 months.
The terminal will have a production capacity of 2.6 million tonnes/year of gas in 2006 and will be designed for an ultimate capacity of 5 million tonnes/year in 2012. CNOOC Ltd. has signed an agreement to purchase, from Indonesia's Tangguh LNG project, as much as 2.6 million tonnes/year of LNG, which will be delivered to the LNG terminal beginning in 2007 (OGJ Online, Oct. 2, 2002).
PRESIDENT SAPARMURAD NIYAZOV of Turkmenistan met in Ashgabat Feb. 18 with Igor Makarov, head of international gas company Itera Group, to discuss cooperation in the oil and gas sector, Caspian News Agency reported.
The parties confirmed their interest in implementing a project to develop Turkmen hydrocarbon resources, along with 100% Russian state-owned companies OAO Rosneft and Zarubezhneft.
Earlier accounts indicated Itera, Rosneft, and Zarubezhneft had accepted Niyazov's proposal to join the development of Turkmen oil and gas fields and have established Zarit, a joint venture, in Moscow (OGJ, Oct. 7, 2002, p. 20).
Rosneft and Itera subsidiary Gazkhiminvest each hold 37% in Zarit, and Zarubezhneft holds 26%. It is expected that Zarit will be allotted several blocks on the Caspian shelf and on the right bank of the Amudarya River.
Unocal Corp.'s Thai unit Unocal Thailand Ltd. and its partners said they have earmarked nearly $300 million for natural gas development in the Gulf of Thailand in 2003. The Unocal-led consortium plans to drill about 140 wells, supporting the efforts of PTT Exploration & Production PLC (PTTEP) to develop the Arthit gas field and raising crude oil production from its own offshore tracts, according to Randy Howard, Unocal Thailand president. Unocal has a 16% stake in Arthit, he said.
This year, the group aims to maintain its offshore gas delivery at levels reaching those of last year—about 1.07 bcfd of gas and 35,000 b/d of condensate. The group also expects to raise crude oil output to 20,000 b/d from the 12,000 b/d produced last year. Production comes from 14 fields. The group's gas production represents more than 30% of the total gas supply to Thailand.
PTTEP plans to start Arthit gas production flowing in 2006 into its third gas trunk line in the Gulf of Thailand to Rayong on the eastern coast.
HOUSTON-BASED Atofina Petrochemicals Inc. said Feb. 25 that it would modernize and expand its jointly owned Cos-Mar styrene monomer facility near Carville, La. Atofina expects that the upgrade, which will increase styrene capacity to 1.15 million tonnes/year, will be completed in third quarter 2004
The project includes upgrading ethylbenzene and styrene technologies licensed from Washington Group International Inc.
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Washington Group and CDI Engineering Group Inc. will provide detailed engineering and procurement services, and Harmony LLC will be the primary contractor. .
Atofina, the chemical branch of TotalFinaElf SA, operates Cos-Mar on behalf of its 50:50 joint venture partner General Electric Petrochemicals, a wholly owned subsidiary of General Electric and a division of its GE Plastics business.
Atofina's share of the new capacity will be used by a wholly owned polystyrene plant adjacent the Cos-Mar facility.
Petrobras is moving forward with plans to expand its largest refinery, at Paulinia (Replan) in the Sâo Paulo area.
In mid-February Petrobras awarded a $7 million contract to Emerson Process Management, Austin, to provide engineering and improved automation at the plant. The project will expand and upgrade all the Replan instrumentation and controls.
With the new instrumentation, Petrobras expects to increase throughput capacity at the refinery by 7% above its current 352,000 b/d level.
Emerson also will upgrade instrumentation at Petrobras's 151,000 b/d Regap refinery, also in the Sâo Paulo area, converting existing distributed control systems and programmable logic controllers.
The Emerson's contract includes engineering and project management services.