Market Movement
Oil futures prices fall with increased US inventories
Despite continued uncertainty over oil supplies from Nigeria and Iraq, oil futures prices dipped last week after the US Department of Energy and the American Petroleum Institute reported increases in total US inventories of crude and primary petroleum products.
Traders on the New York Mercantile Exchange were reassured when the Nigerian Labor Congress called off a strike scheduled for Apr. 1 (OGJ Online, Apr. 2, 2003). Although that did not restore the previous loss of 40% of Nigeria's oil production, many saw it as a sign that a resolution could come soon. Fighting between ethnic groups in the Niger Delta prompted multinational oil companies to pull out employees weeks ago. Nigerian President Olusegun Obasanjo is expected to meet this week with representatives of the Ijaw and Itsekiri tribes in Abuja.
Meanwhile, US crude inventories "built substantially" during the week ended Mar. 28, with DOE reporting an increase of 6.8 million bbl to 280.7 million bbl, with higher imports "more than offsetting" a 400,000 b/d increase in refinery runs. "Although the API reported a more substantial build of 9 million bbl, the two reports essentially resulted in the same level of absolute stocks at 281 millon bbl," said Matthew Warburton with UBS Warburg LLC, New York.
Oil imports
Warburton reported US oil imports surged to a record level of 10.36 million b/d during the last week of March, primarily because of the arrival of cargoes from Saudi Arabia. The East Coast showed the largest increase in oil imports, but officials claimed a "recent recovery" in Gulf Coast imports of Venezuelan oil.
Warburton and other analysts noted that increased shipments of heavy, sour oil from Venezuela and Saudi Arabia can't offset interrupted supplies of light, sweet Nigerian crude. He said, "With steep price backwardation reasserting itself in the crude markets due to concerns over the progress of the war in Iraq, US refiners may once again become reluctant to commit to certain long-haul crude purchases."
Paul Horsnell, analyst for J.P. Morgan Securities Inc., London, noted, "Current arrivals of crude represent a time of loading when Nigeria and Iraq were at full (export) capacity. Given that, it is by no means clear that imports can be maintained above 10 million b/d throughout (the second quarter), once the cushion of extra oil in the supply chain over the next few weeks begins to abate."
Nigeria is needed
Horsnell said, "While the oil market fell sharply on the belief that the cancellation of a proposed general strike made a resolution of the standoff in the Niger Delta more likely, that is not the case. More Saudi oil would be a poor quality substitute for Nigerian supplies, especially given the current imperative for refineries to produce higher gasoline yields."
Warburton agreed, "Prolonged reduction in Nigerian export volumes could become increasingly critical to summer production, given its gasoline-rich composition." He noted that, in the latest reporting period, "Gasoline inventories increased by 1.7 million bbl, driven primarily by high imports and subdued demand, but most of the increase was in other finished gasoline and blending components offsetting a modest further fall in RFG (reformulated gasoline) inventories. As highlighted by the DOE, despite the 400,000 b/d increase in refining runs, gasoline production increased by only 24,000 b/d."
Warburton added, "Given (that) gasoline cracks remain the only positive element of the refining complex on the Gulf Coast and with the driving season approaching, the reluctance to increase gasoline yields is perplexing."
Horsnell noted, "The stubbornness of oil product deficits is of some concern. For the first time since the inventory deficit first opened up 9 months ago, more than half of that deficit is in oil products."
Therefore, he said, "It will not matter how fast crude oil piles up if the system is having difficulty refining it fast enough. We still believe that the US market will have difficulty in avoiding a significant gasoline price spike this summer, as the task of playing catch-up with inventory cover is one that the US refining system has recently proven extremely poor at achieving."
Meanwhile, Horsnell said, "Some traders seem to believe that $20/bbl is the inevitable and immediate result of an outcome in Iraq, and many are still expecting a magic spigot to sharply and swiftly increase Iraqi exports. Our position remains that the fundamentals do not support prices in the low $20s, that significant Iraqi exports are unlikely this quarter and in some doubt for next quarter, and that it would be a supreme achievement to merely stabilize Iraqi production over a 2-year period."
Industry Scoreboard
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Industry Trends
WORLDWIDE OIL AND NATURAL GAS property sales hit $40.7 billion in 2002.
The US market accounted for $10 billion, according to a review of merger, acquisition, and divestment (MA&D) transactions by Randall & Dewey Inc. of Houston.
The world total of 361 announced deals last year included $9.4 billion, or 23%, in Canadian reserves and $21.3 billion, or 52%, in transactions outside the US and Canada, Randall & Dewey's transaction database showed.
"Looking forward, the expectations for continued commodity price volatility may dampen the MA&D market, although expectations of greater deal volume than seen last year abound. History indicated that extreme price volatility—short-term swings on both the upside and the downside—will negatively impact both buyers and sellers as they weigh transaction decisions," said Randall & Dewey.
In the US market, MA&D upstream transactions in the fourth quarter of 2002 totaled $3.2 billion involving 37 deals. That raised the total US transaction volume for the year to $10 billion involving 168 announced transactions.
"The increase in fourth quarter MA&D activity (for the US) pushed the implied reserve value for the quarter to $6.90/boe, bringing the implied reserve value average for the year to $6.14/boe. Without the stronger fourth quarter, 2002 was the first year since 1996 that the average reserve value for US transactions would have been below $6/boe," Randall & Dewey said.
In the fourth quarter, Randall & Dewey reported nine US transactions greater than $100 million, with proved reserves totaling $2.4 billion for an implied reserve average value of $7.11/boe and a median value of $6.19/boe. That compared with 12 non-US transactions larger than $100 million in size totaling $5.2 billion with an average implied reserve value of $1.98/boe.
MORE START-UP PRIVATE Canadian oil and gas companies are going public. Of more than 50 Canadian oil and natural gas companies that started as private firms since the beginning of 2000, 7 have gone public within the last year in a move toward accessing cheaper equity financing. This trend is popular with management teams having successful previous track records with public companies, said Frank J.D. Sayer of Calgary-based Sayer Securities Ltd. He also believes that additional companies might be contemplating the same move.
On Mar. 3, Rise Energy Ltd., a small public company, and DT Energy announced a letter of intent to merge. The transaction probably will be a reverse takeover of Rise by DT Energy, Sayer said. A reverse merger is a means by which a private company goes public through a transaction with an existing public company.
Meanwhile, stock prices for small-capitalization pubic oil companies are performing well. "With recent high oil and gas prices, the stock market's demand for junior oil companies run by recognized management teams appears to be strong," Sayer said. "The recent trend suggests that more may be contemplating making the switch. However the number of public companies of the right size and with the proper assets for a reverse takeover is limited."
Government Developments
US ENERGY COMPANIES have filed comments regarding the US Federal Energy Regulatory Commission's report on gas price manipulation in western US gas markets during the period of October 2000 through June 2001 (see Editorial, p. 19).
The companies included Williams Cos. Inc., Tulsa; Southern California Edison (SCE), Rosemead, Calif.; Sempra Energy, San Diego; and Mirant Corp., Atlanta.
FERC's Mar. 26 report said the agency would decide whether to order additional refunds based on evidence gathered during 3 months of investigation by SCE and four prominent California entities into why that state's wholesale power costs skyrocketed during the California power crisis.
Williams noted that the FERC report "demonstrates good progress toward resolving issues" surrounding western energy markets during late 2000 and the first half of 2001.
SCE Chairman John Bryson said, "Today's action is another important step in the long battle to recover for California consumers the massive costs incurred during the 2000-01 energy crisis. I am pleased that the FERC staff report recognizes the pervasive and unlawful manipulation of the electric and gas markets and identifies those who profited from this abuse."
Sempra Energy, meanwhile, went so far as to call California's energy market "dysfunctional."
"The FERC staff and commissioners also acknowledged that underlying supply-demand imbalance and flawed market design were major contributors to California's market problems. In its actionsUFERC said it will issue orders to 37 market participants identified in a Jan. 6, 2003, report by the California Independent System Operator (Cal-ISO) to 'show cause' that their activities in the California market during 2000 and 2001 complied with tariffs of the Cal-ISO and California Power Exchange," Sempra Energy said.
Mirant Senior Vice-Pres. and General Council Doug Miller, meanwhile, said, "While FERC has left some important work undone, it has made progress toward resolving important issues for our industry."
He added that, "Regarding the California refund proceeding, Mirant is disappointed that FERC altered the gas price methodology to arrive at revised gas prices for use in the refund methodology. However, even under the new gas calculations, we believe that the net effect is that Mirant will still be owed a substantial amount of money by the California Power Exchange and the California Independent System Operator."
THE EUROPEAN COMMISSON has stepped up pressure on Algeria to drop destination clauses from its natural gas contracts, saying they are illegal and could nullify existing agreements under legal challenge.
"Destination clauses in gas take-or-pay contracts are illegal under community law, as they are territorial restrictions," EC spokesman Gilles Gantelet told OGJ. "The commission has no choice but to take action against them," he added.
Gantelet said, "It is important that destination clauses are removed, because otherwise the whole contract would be in permanent risk of being declared void by a judge in a national court in any EU member state."
He underlined the threat to Algeria, saying that, "to avoid legal proceedings," state-run Sonatrach should enter into "rapid and constructive discussions with the commission."
Quick Takes
BG GROUP PLC and partners have delivered first natural gas to Egypt from the Burullus Gas Co.-operated West Delta Deep Marine concession containing Scarab-Saffron fields off the Nile Delta. Burullus is a joint venture of BG-Egypt SA 25%, Edison International SPA 25%, and Egyptian General Petroleum Co. 50%.
The Scarab-Saffron development 120 km north of Alexandria is the largest gas field development in Egypt and the first subsea completion in the region—with one of the longest tiebacks in the world (OGJ, Feb. 10, 2003, p. 45).
By 2006 BG expects to deliver as much as 40% of Egypt's total domestic production from its area fields, BG said.
Scarab-Saffron development includes an offshore gathering network with dual 36-in. and 24-in. pipelines supporting both Scarab and Saffron production. The lines will transport gas sufficient for two 3.6 million tonne/year trains of Egyptian LNG.
The offshore facilities form the backbone for development of Simian and Sienna fields, which will be the initial supply for Egyptian LNG Train 1 and the proposed development of Sapphire field, initial supply for the second train, BG said. Meanwhile, Train 1 production is slated for start-up in third quarter 2005, with Train 2 due to follow in mid-2006, the company added.
OMAN LNG LLC this week expects to announce its shortlist of two or three preferred bidders for a contract to supply two LNG carriers for output from the country's new LNG Train III project. The contract also will have the option of providing an additional two vessels.
The competitors are Japan's Mitsubishi Heavy Industries Ltd. and Kawasaki Shipbuilding Corp. in a joint bid; South Korean firms Samsung Heavy Industries Co. Ltd., Hyundai Heavy Industries Co. Ltd., and Daewoo Shipbuilding & Marine Engineering Co. Ltd.; and European firms Izar Construcciones Navales SA of Spain, Kværner Masa of Finland, and France's Chantiers de l'Atlantique SA.
Bidders quoted a base unit price of $151-190 million on a 138,000 cu m capacity vessel and a range of price options for different vessel capacities. Japan's Mitsui OSK Line, retained by Oman as consultant for the LNG carrier supply contract earlier conducted technical evaluations.
Delivery of the first vessel is slated for December 2005, to coincide with the planned commencement of LNG exports from the Train III project in first quarter 2006. Delivery of the second carrier is scheduled 6 months later.
Development of Train III, adjacent to two existing trains at Qalhat in the Wilayat of Sur, will boost the plant's capacity to more than 10 million tonnes/year of LNG. Chiyoda-Foster Wheeler Co. LLC has the engineering, procurement, and construction (EPC) contract for Train III.
Oman will supply Spain's Union Fenosa SA with 1.65 million tonnes/year of the new train's total capacity of 3.7 million tonnes/year.
BURRUP FERTILIZERS PTY. LTD. awarded a $300 million, EPC contract to Montreal-based SNC-Lavalin Inc.'s Australian subsidiary SNC-Lavalin (SA) Inc. for a 2,200 tonne/day, single-train, anhydrous ammonia plant to be built on the Burrup Peninsula in Karratha, Western Australia. The project includes the production plant, utilities, and associated production support facilities.
Project management and engineering coordination will be based at SNC-Lavalin's Perth office, the company said. Engineering work is under way, and the company expects plant construction to be completed within 30 months.
KBR (Kellogg Brown & Root), Houston, the engineering and construction subsidiary of Halliburton Co., is providing KBR's purifier process technology package, basic engineering—currently under way at KBR's Houston headquarters—and technical advisory services during the plant's erection and commissioning phases.
COLONIAL PIPELINE CO., Alpharetta, Ga., will pay a $34 million fine and another $30 million in environmental upgrades to resolve charges of spilling 1.45 million gal of petroleum products from its 5,500 mile system in five southern states. US Department of Justice officials said pipeline corrosion, mechanical damage, and operator error contributed to the spills. US officials said the fine is the largest civil penalty a company has paid in EPA history.
Payment will go to the US Oil Spill Liability Trust Fund that underwrites oil spill cleanup activities nationwide.
Colonial transports more than 2 million b/d of gasoline, heating oil, jet fuel, defense fuels, and other refined products, about 20% of all petroleum products delivered nationwide.
Colonial earlier this year pled guilty to criminal charges in connection with a 1996 spill at Reedy River, SC, and was ordered to pay a $7 million fine and serve a 5-year probation.
Under terms of the settlement, Colonial's entire pipeline system is designated as potentially affecting "high consequence areas" subjected to Department of Transportation's Office of Pipeline Safety integrity regulations. Colonial must inspect its corrosion-prevention system along the entire pipeline every 5 years, repair corrosion to meet National Association of Corrosion Engineers standards, maintain its rights-of-way, have personnel on site when excavation occurs within 5 ft of the pipeline, and survey and inspect the pipeline where it crosses water and where the pipeline is exposed or insufficiently buried.
Finally, Colonial must pay for an independent, EPA-approved monitoring contractor to ensure compliance.
ANADARKO PETROLEUM CORP. awarded Weatherford International Ltd. a six-well contract to provide permanent downhole optical pressure and temperature, and distributed temperature-sensing systems (DTS) for the Marco Polo deepwater development in the Gulf of Mexico. Marco Polo is set to start up in early 2004 (OGJ Online, Feb. 28, 2003).
Tieback and completion operations are expected to begin on the six-well completion program later this year. The wells, in 4,287 ft of water, will be completed with 95/8-in. casing to TD.
Weatherford's optical gauges will be installed immediately above the gravel pack packer. A full optical surface acquisition unit will be installed on the TLP.
Calgary-based Ridgeway Petroleum Corp., operator of St. Johns gas field in Apache County, Ariz., and Catron County, NM, has signed a 15-year take-or-pay contract under which Air Liquide America LP, Houston, will purchase liquid helium at the market price from the field as early as 2006. Ridgeway said detailed design and engineering are under way for a $125 million plant with a capacity of 1 bcf/year to separate and liquefy helium from produced gas from the field. A 1999 independent engineering report estimated the field has 14.8 tcf of OGIP. Ridgeway plans to drill more wells in St. Johns field this year and said that overall field development could take 30-50 years.
ANADARKO ALGERIA.CO., Algeria's state-owned Sonatrach, and partners Maersk Olie Algeriet AS—a unit of Denmark's Mærsk Olie & Gas AS—and ENI SPA unit Lasmo Oil (Algeria) Ltd., reported another oil discovery on Block 404 in the Berkine basin in Algeria.
The SFSW-1 (Sif Fatima South West) discovery well is 10 miles south of the recent discovery at Hassi Berkine North East (OGJ Online, Feb. 7, 2003), 7 miles east of the producing Hassi Berkine South East field, and north-northeast of Sonatrach's discovery at Sif Fatima.
Field operator Anadarko said the well was drilled to 10,637 ft TD and encountered 36 ft of net oil pay in the TAGI reservoir. The well on test flowed 2,689 b/d of 47° gravity oil and 4.72 MMcfd of natural gas and had a flowing tubing pressure of 1,414 psi.
Anadarko is interpreting 1,031 km of 2D seismic data acquired or reprocessed during the past 2 years. In January, the company announced a $98 million capital-spending program for 2003 in Algeria that will focus on exploration and development drilling. In addition to exploration wells planned on Blocks 404 and 208, Anadarko expects to drill or participate in 41 development wells in Algeria this year.
ConocoPhillips Indonesia, a subsidiary of ConocoPhillips, reported the successful test of its Suban-8 delineation well on the southwest flank of Suban natural gas field on the Corridor block production-sharing contract in South Sumatra, Indonesia.
Suban-8 successfully tested a separate fault block adjacent to and southwest of Suban field. The step-out was spudded Oct. 3, 2002, and reached 3,147 m TD on Nov. 23. The well encountered a gross pay section more than 400 m thick and was tested at a maximum rate of 35 MMscfd of natural gas and 163 b/d of condensate through a 52/64-in. choke. ConocoPhillips Indonesia evolved from then-Conoco Inc.'s purchase in 2001 of Gulf Canada Resources Ltd., which owned a 72% interest in Jakarta-based Gulf Indonesia Resources Ltd., the original discoverer of Suban field (OGJ Online, May 29, 2001). Gulf Indonesia said Suban field could contain 4 tcf or more. Gas from Suban currently is sold to Pertamina for the Duri steamflood project operated by Caltex Petroleum Corp. in central Sumatra. (OGJ Online, Dec. 22, 2001). ConocoPhillips is Suban field operator and holds a 54% ownership interest; Talisman (Corridor) Ltd., a wholly owned, indirect subsidiary of Talisman Energy Inc., has 35%; and Pertamina 10%. x‡ Elsewhere in exploration, the US Minerals Management Service Mar. 31 issued a proposed notice of Sale 187, covering oil and gas leases in the western planning area of the Gulf of Mexico slated for Aug. 20 in New Orleans. The proposed sale includes 3,985 blocks encompassing 21.7 million acres in the western GOM Outer Continental Shelf planning area off Texas and in deeper waters off Louisiana. The blocks lie 14-357 km offshore in 8-3,000 m of water. The proposed sale could result in an estimated production of 136-262 million bbl of oil and 0.81-1.44 tcf of gas, MMS said.
Dominion's dry-tree spar hull loaded for delivery to Devils Tower field
Dominion Exploration & Production Inc., operator of Devils Tower field in the Gulf of Mexico, and partner Pioneer Natural Resources USA Inc. are preparing to receive what fabricator PT McDermott Indonesia (PTMI) calls the "world's deepest dry-tree spar hull." The hull is en route from PTMI's Southeast Asia yard at Batam Island in Indonesia where it was fabricated—a distance of 22,600 km.
The 11,700 ton, 179 m, truss-spar hull was loaded onto a fast transportation vessel in a 10 hr operation during which the structure was pulled along two load-out skidways by tensioned strand jacks with pulling cables.
J. Ray McDermott's Gulf of Mexico DB50 derrick barge will install the hull in 5,610 ft of water in the field on Mississippi Canyon Block 773 and prepare the structure to receive the topsides, which currently are under fabrication at McDermott's Harbor Island yard.
PTMI and J. Ray McDermott Inc. are subsidiaries of McDermott International Inc. Photo courtesy of J. Ray McDermott.