Market Movement
US exerts effort to build petroleum inventories
Energy futures prices retreated last week on midweek reports of large builds in US inventories of crude, gasoline, and distillates. But that build was achieved only through maximum effort, an analyst reported.
The American Petroleum Institute reported US crude stocks jumped by 1.99 million bbl to 288.4 million bbl during the week ended May 30, while gasoline inventories shot up by 3 million bbl to 209.7 million bbl, and distillate stocks increased by 2.1 million bbl to 105.3 million bbl. The US Energy Information Administration recorded an even bigger increase in US crude stocks for that period, up 2.8 million bbl to 289 million bbl. It reported US gasoline stocks jumped by 2.3 million to 207.3 million, with distillates up by 3 million to 104.5 million.
'Finally' normal
"US weekly data have finally shown a normal scale of seasonal build," noted Paul Horsnell, J.P. Morgan Securities Inc., London, in his June 5 oil market analysis. But the 9 million bbl increase in total US inventories reported by EIA "closed the deficit below the 5-year average by a slight 800,000 bbl, leaving it at a still-daunting 101 million bbl," he said.
The "main feature" of the latest EIA report was the rise in US refinery runs of crude, "which moved above 16 million b/d for the first time ever. This took refinery utilization rates to 98%, which in effect means that the refinery system is now running at its full potential and probably beyond its sustainable potential," said Horsnell.
Although that resulted in a normal build of oil and petroleum product stocks, he said, "This normality has only been achieved by running the system at full blast, and in a week of high crude oil imports.
"Put another way, there is at the moment absolutely no slack within the US oil system, and no margin for unscheduled refinery glitches or logistical problems."
Moreover, the latest rise in US gasoline stocks reported by EIA only partially offset a drop of 3.4 million bbl during the week ended May 23. That, said Horsnell, "leaves (US gasoline) inventories slightly lower than they were a month ago, a period over which there should have been rapid builds."
OPEC outlook
With oil markets still tight, Horsnell said, there is no need for members of the Organization of Petroleum Exporting Countries to cut production at their upcoming June 11 meeting in Doha, Qatar.
"For the third quarter at least, the current quota level for the OPEC 10 (excluding Iraq) does not seem to need any adjustment, and continued production above the ceiling will be necessary to help foster a normal (third quarter) inventory build," he said. "The risk adverse strategy would be for OPEC to prune a little, but with prices now in the upper half of the target band, the incentive to be overly proactive at this point does appear to be fairly limited."
He added, "Iraq does not appear to represent any sort of 'tipping point' for the market, or any force that is large enough to force prices substantially lower. While some exports out of storage will resume later this month, we believe that the market will continue to be surprised at the slowness of output recovery in Iraq and by the length of time before the security situation allows for a stabilization of Iraqi capacity."
Oil supplies remain "overstated out of Venezuela, delayed out of Iraq, and controlled out of Saudi Arabia," said Tyler Dann, an analyst in the Houston office of Banc of America Securities LLC.
"Venezuela still appears to be producing 500,000 b/d less than they are publicly advertising," said Dann in a recent report. "Furthermore, their refineries are unable to produce meaningful gasoline volumes because of (a) severe employee shortfall after Venezuelan President Hugo Chávez fired many skilled refinery workers following the general strike of late 2002-early 2003."
Dann also reported "further confirmation that looting has indeed impaired Iraqi productive capacity near term."
Thamir Ghadhban, Iraq's acting oil minister, earlier reported that Iraqi oil production would rise "within weeks" to 1.5 million b/d from 235,000 b/d currently.
Such production level would be enough to meet Iraq's domestic needs of about 500,000 b/d, leaving 1 million b/d to export.
Iraq's two main export terminals, Mina al-Bakr in the south and the Turkish port of Ceyhan, are operational and ready to resume exports. The first postwar exports of Iraqi oil are expected to start in mid-June from storage tanks in Ceyhan, where close to 9 million bbl of Iraqi oil is held.
Industry Scoreboard
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Industry Trends
JAPANESE OIL COMPANIES have accelerated their downstream investment plans to prepare for an anticipated 10 ppm gasoline sulfur standard by 2007-08. No such regulation has been approved there yet.
Refiners voluntarily are moving toward a 10 ppm standard to ensure their business survival. The type of investment required to meet such a standard provides no near-term returns, researcher Tomoko Hosoe said in a recent report issued by the Honolulu-based FACTS Inc.
An official sulfur reduction for Japanese gasoline to 50 ppm from the current limit of 100 ppm is slated for 2005.
Government spokesmen and the Japan Automobile Manufac- turers Association have said a 10 ppm sulfur standard for gasoline likely will be effective by 2007-08, FACTS said.
"We believe the majority of the refiners will be able to meet the anticipated timetableUconsidering the progress oil companies are already making in upgrading their refineries," FACTS said.
Some refiners already market a premium gasoline containing 10 ppm sulfur or less, particularly in Tokyo, Nagoya, and Osaka. Currently, most refineries produce regular gasoline with a 30-50 ppm sulfur content, FACTS said.
THE US REFINING industry appears to be poised for a rebound in earnings this year.
"With the exception of the West Coast markets, industry margins across the remainder of the country were at record levels in the first quarter," said Bryan Caviness, an analyst with Fitch Ratings Ltd. Overall, the US downstream sector experienced "unseasonably strong (first quarter) earnings for most refining and marketing companies. The cold winter, a heavy turnaround season, the general strike in Venezuela, and the looming war in Iraq factored into strong demand for gasoline and distillates, and a sharp drop in inventories," Caviness said.
As the US enters the summer driving season, refiners are running at more than 94% capacity and 15.8 million b/d of throughput to capture the historically strong summer margins, he said.
"The refining sector's ability to control production will again be the key issue to sustaining the strong margins seen in the first quarter," Caviness said.
The US imported nearly 460,000 b/d of distillates and a record 767,000 b/d of gasoline during the first quarter.
"Compared with full year 2002, Canada and the Netherlands showed the most notable increases in refined product exports to the US in January and February. Argentina, Norway, and the UAE have also significantly increased refined product sales into the US markets," he said.
In the short term, gasoline imports averaged more than 1 million b/d through April, a 23% increase compared with April 2002.
Fitch Ratings expects a significant drop in gasoline imports in 2004, Caviness said. A difficult 2002 margin environment taught US refiners that record earnings experienced during 2000-01 are not guaranteed and that paying too much for assets can strain a company's financial flexibility, he said.
"Fitch maintains a stable outlook for the downstream sector, although sharp volatility in margins will remain. The remainder of 2003 is expected to be a midcycle or better as refiners begin investing the capital to meet the low-sulfur gasoline regulations in 2004 and diesel regulations in 2006," Caviness said.
Government Developments
Peru has reduced its oil royalties to boost its sluggish exploration and production activity.
Peru President Alejandro Toledo approved a new law that will cut royalties to a minimum 5%. Previously, royalties were 13.8%, except for deepwater exploration on the continental shelf in 200-400 m of water. Under the new rules, contractors already exploring certain blocks also can benefit.
Companies now have two options:
- Selecting a royalty starting at 5% and producing as much as a registered 5,000 b/d of oil. Royalties in these cases will gradually increase up to a maximum of 20%, according to the volume of production.
- Selecting a fixed royalty of 5% until the contractor recovers its costs. The royalty will then vary from 0% to 20%, depending upon revenues generated and costs incurred during the previous year.
State oil agency Perupetro said the new system will accelerate negotiations for E&D contracts and will make it more economically feasible for companies to develop small discoveries.
Perupetro plans to outline the lower royalty regulations in Calgary June 9-11. The agency also plans similar events later for Houston and certain European cites.
China's state-owned Chinese Petroleum Corp. said it will miss a Dec. 31 deadline for total privatization.
CPC said the delay stemmed from the company's inability to reach an amicable agreement with unions representing 16,000 employees.
Union members strongly oppose the privatization, fearing wage cuts or job losses under private management. More than 2,000 CPC employees recently marched to protest privatization, claiming that it does not make sense for the government to give up control of one of its most profitable operations.
CPC has assets of $14.35 billion and generates more than $11.48 billion/year in revenue.
NEW MEXICO Gov. Bill Richardson has been elected as the incoming chairman of the Interstate Oil and Gas Compact Commission (IOGCC).
Richardson, former US secretary of energy and US ambassador to the United Nations, was elected to the position for 2003-04, along with the rest of the slate of officers during a midyear meeting in Williamsburg, Va., late last month.
Richardson will succeed the current chairman, North Dakota Gov. John Hoeven, during the IOGCC's annual meeting in Reno, Nev., Oct. 19-21. IOGCC represents the governors and relevant agencies of 30 oil and natural gas producing states.
The slate includes Donald L. Mason of Ohio as vice-president and Randy Ruedrich of Alaska as second vice-chairman. Mason, a member of the Public Utilities Commission of Ohio, is IOGCC's current second vice-chairman. Ruedrich is a member of the Alaska Oil and Gas Conservation Commission.
Alaska Gov. Frank Murkowski was named chairman-elect and will serve as chairman in 2004-05, along with Ruedrich as vice-chairman and Don Likwartz of Wyoming as second vice-chairman. Likwartz is the Wyoming state oil and gas supervisor.
Wyoming Gov. Dave Freudenthal was tabbed to serve as chairman in 2005-06.
Quick Takes
RUSSIA'S OAO YUKOS and China National Petroleum Corp. (CNPC) signed a general agreement May 28 outlining principles for a contract to supply oil to China via a 2,400 km oil pipeline from the Siberian city of Angarsk to Daqing, China.
CNPC Pres. Ma Fucai said supplies would commence in 2005, with 20 million tonnes/year to be supplied for the first 5 years and 30 million tonnes/year for 25 years beginning in 2010.
Japan also has been lobbying Russia to build a pipeline from Angarsk to the port of Nakhodka in the Russian Far East on the Sea of Japan coast to reduce Japan's imports of Middle East oil (OGJ Online, Apr. 16, 2003). Russian Deputy Prime Minister Victor Khristenko in mid-May said his country's energy strategy to 2020 calls for the construction of the Angarsk-Nakhodka pipeline with a capacity of 50 million tonnes/year of oil. He said the project also involves construction of a spur of the pipeline to Daqing with capacity of 30 million tonnes/year.
Energy Minister Igor Yusufov told journalists May 29 that feasibility studies for the Angarsk-Nakhodka and the Angarsk-Daqing pipelines would both be put on a list of priority measures.
The Russians plan to build the Daqing spur before the mainline to Nakhodka, Russian news agency Interfax reported. "The timely implementation of the Angarsk-Daqing project will make it possible to start prospecting for new fields in the Far East and Eastern Siberia in 2005-07 and begin construction of the Angarsk-Nakhodka pipeline after 2015, if reserves exceed 2 billion tonnes," the agency said.
Indian Oil Corp. Ltd. has submitted a formal expression of interest to the Asian Development Bank (ADB) for participating in the proposed $2.5 billion Turkmenistan-Afghanistan-Pakistan natural gas pipeline project. State-owned Gas Authority of India Ltd. also said it plans to submit an expression of interest to ADB, the project's lead development partner. However, India has yet to take a position on participation in the project in which it has been invited to participate (OGJ Online, Feb. 27, 2003). In addition, politics between Pakistan and India remain delicate. The pipeline, estimated in various reports as 1,300-1,600 km long, would carry 20-30 billion cu m/year of natural gas and likely would be constructed to Pakistan's Sui field, from which existing infrastructure could be tapped to supply major local markets (OGJ, Oct. 7, 2002, p. 21).
CNPC subsidiary Sapet Development Corp. produced 3,012 b/d of oil off Peru and 1.35 MMcfd of associated natural gas during January-April, and plans to invest at least $11 million in a 3-year program to expand production from Talara's north coast Blocks VII/VI, the unit said.
Sapet will recondition existing wells, resume the drilling of new wells, and develop two water injection pilot projects, also aimed at increasing oil production. Sapet will continue to pay 40% royalties on existing production, but only 15% for new oil production and 5-10% for production from any new deepwater discoveries on the continental shelf, reducing its overall costs.
Imperial Oil Ltd., Calgary, this month marked the opening of its 170 Mw plant and field facilities—Phases 11-13 of the Mahkeses project, a $650 million (Can.) expansion of its heavy oil operations at Cold Lake, Alta. Imperial said in 2001 it plans to spend $1 billion on an expansion of oil sands operations there (OGJ Online, Feb. 20, 2001). The project includes plant and field facilities for steam generation, bitumen production, and cogeneration of electrical power. The facility uses natural gas to generate electricity and heat recovery units to generate steam for the bitumen recovery process. Mahkeses will add an average of 30,000 b/d of production over its estimated 25-year operating life.
Murphy Oil Corp. said its West Patricia oil field on Block SK 308, about 40 km off Bintulu, Sarawak, Malaysia, has come on stream 16 months after original project sanction. Initial development included a single production platform in 130 ft of water and a floating, storage, and offloading facility. Later Murphy will install additional production platforms and drill more development wells. Initial gross production is expected to ramp up quickly to 15,000 b/d of oil. Murphy Sarawak Oil Co. Ltd. with 85% interest operates the block (OGJ, Mar. 11, 2002, p. 9). Petronas Carigali Sdn. Bhd., the production division of state-owned Petronas, holds 15% interest.
DRILLING on the BP PLC-operated Thunder Horse field on Mississippi Canyon Block 822 remained suspended at presstime last week as Transocean Inc. continued repairs to its Discoverer Enterprise drillship. A drilling riser separated on the rig in late May, no injuries were reported, and no hydrocarbons were released, Transocean reported May 23.
"A visual inspection of the wellhead with a remote operated vehicle showed no wellhead damage," Transocean said at that time. It estimated at least 2-3 weeks would be needed for repairs and a full investigation of the accident. Transocean said June 4 that the company was on schedule with repairs, having pulled up the riser at the forward rotary table, and it expected to finish the balance of the riser work June 5.
THAILAND has awarded three exploration blocks and amended terms proposed 3 years ago to now include additional benefits to the government and an increase in the stake-holding option for PTT Exploration & Production PLC, the largely state-owned concern. (OGJ Online, Oct. 2, 2002). Chevron Offshore (Thailand), local subsidiary of ChevronTexaco Corp., will prospect the 9,686 sq km Block G4/43, an oil and gas-prone area in the Gulf of Thailand off Prachuab Khiri Khan. It is thought to be an extension of Chevron's Block B8/32 that produces about 60,000 b/d of oil and 240 MMcfd of gas. PTTEP also has a 15% interest in G4/43 with an option for another 15%, PTTEP officials said.
Thai Shell Exploration & Production Co. a unit of Royal Dutch/Shell Group, was granted rights to explore onshore Block L22/43, an oil-prone area of 3,632 sq km adjacent the S1 acreage in the northern provinces of Pitsanulok and Pichit, where the firm has been producing nearly 20,000 b/d of oil (OGJ Online, Mar. 10, 2003). Thai Shell has a 65% stake in the new tract, with PTTEP holding a 35% share, up from the 25% originally offered.
PTTEP has rights to explore Block G9/43, a 2,619 sq km gas and condensate-prone tract in the disputed overlapping area between Thailand and Cambodia in the Gulf of Thailand, which PTTEP cannot explore until the territorial dispute is settled.
In other exploration action, Oklahoma City-based oil and natural gas independent Devon Energy Corp. has signed a $17 million production-sharing agreement to explore for oil and natural gas in Syria.
Devon and its partner, Gulfsands Petroleum Ltd. of Houston, entered into the agreement with the Syrian government and Syrian Petroleum Co. (SPC) for Block 26 covering more than 11,000 sq km in northeastern Syria. Devon is operator of the block, with 80% interest, and Gulfsands holds 20%.
Under terms of the PSA, Devon and Gulfsands are obligated to pay a signature bonus of $1 million. In addition, during the initial 4-year term of the contract, Devon and Gulfsands are committed to conduct geologic and geophysical studies, acquire seismic data, and drill four exploration wells. Devon and Gulfsands' total financial obligation includes the signature bonus. The agreement excludes SPC's existing fields—which lie within the outer perimeter of the block and produce more than 120,000 b/d of oil. These will continue to be SPC-owned and operated.
Devon said that the newly formed partnership would enhance its presence in the Middle East. "The Syrian partnership focuses on exploration around areas with proven reserves," said James T. Hackett, president and chief operating officer of Devon. He added, "It could, over time, expand to include cooperation between (SPC) and Devon on additional development and production enhancement projects in the area."
PETROLEUM EXPLORATION (PVT.) LTD. (PEL) on June 1 assumed operatorship of Block 22 in Sindh and Balochistan provinces, Pakistan, from Pakistan Petroleum Ltd. (PPL). PEL will oversee development and production of the Sadiq X-1 well on Lease No. 155/PAK/2003, the Khanpur X-1 well on Lease 156/PAK/2003, and the Hasan X-1 well on 157/PAK/2003.
Pakistan's director general of petroleum concessions approved the development plan in April. Hasan X-1 currently produces 19 MMscfd of gas on a long-term basis. The development plan has three phases: the Hasan X-1 extended well test, a tie-in of Sadiq-1 and Khanpur-1 to the existing processing facility and enhanced production from 14 MMscfd to 20-22 MMscfd, and drilling and completion of well Hasan-2 on structure D along with implementation of an aggressive exploration policy. PEL has a working interest of 23.68% and PPL 35.5%. Other Block 22 partners are Government Holdings (Pvt.) Ltd. 25% and Canada's Pyramid Energy International Inc. 15.78%. The owners have invested $16.9 million on the block to March of this year.
EXXONMOBIL CORP. has been exempted from an Indonesian decree initiated May 30 banning all foreign ships from the 12 mile territorial waters of Aceh, an oil and natural gas-rich province in northern Sumatra adjacent the Strait of Malacca. Martial law has been declared and will last for 6 months but may be extended.
Ships belonging to energy companies in Aceh—including ExxonMobil and PT Arun NGL—were not affected by the policy. Across the Strait of Malacca from Aceh, Malaysian police have stepped up land patrols at coastal borders in a move to prevent illegal entry of rebels or illegal immigrants fleeing unrest in the Indonesian province, a senior security official said.
The Indonesian army, meanwhile, has increased security around ExxonMobil's LNG plant in Lhokseumawe after rebel commanders threatened to attack "strategic installations." The plant, which ExxonMobil operates for Indonesian national oil company Pertamina, supplies LNG to steel mills and municipal power plants in Japan. Despite the imposition of martial law, ExxonMobil has continued operating in Aceh as usual, according to Iin Arifin Takhyan, a senior official of Indonesia's Energy and Mineral Resources Ministry.
A RUPTURE that occurred May 20 on a 30-in. natural gas pipeline owned and operated by Houston-based Houston Pipe Line Co. caused a fire and shut down Sunoco Logistics's Nederland, Tex., terminal. No injuries were reported, and the cause of the incident remains under investigation.
Sunoco, a unit of Philadelphia-based Sunoco Inc., said that it is not yet known when the 12.5 million bbl terminal would resume full operations.
The terminal lies on about 1,000 acres along the Neches River between Beaumont and Port Arthur on the Texas Gulf Coast.
CSPC, a joint venture of CNOOC Ltd. and Shell Petrochemicals Co. Ltd., has awarded an engineering, procurement, and construction (EPC) contract to BSF—a consortium of Bechtel Petroleum & Chemical, Sinopec Engineering Inc., and Foster Wheeler Energy Ltd.—for a world-scale, $4.3 billion petrochemicals complex to be built in China's Guangdong province.
The Nanhai petrochemicals complex involves construction of an 800,000 tonne/year ethylene cracker and other processing units, power generation, utilities, and infrastructure. Slated to start up by yearend 2005, the complex is being designed to produce 2.3 million tonnes/year of products.
BSF will oversee management of the implementation phase of the project, including all site integration and interfaces, and performing the EPC of a significant part of the general facilities, offsites, and utilities.
Depletion of Lacq gas field will require Total SA to shut down its Lacq steam cracker in southwestern France in 2005 and move its polyethylene EVA (vinyl acetate) production from Atofina's Mont unit. The shutdown was first announced last December within the framework of Total Exploration & Production France's restructuring. Total will transfer the PEVA production to Balan, north of Lyon, which produces polyvinyl chloride and polyethylene and is supplied with ethylene via pipeline. About 46 million euros will be spent to adapt the Balan site to the new production. Remaining at Mont will be two other production units—the Rilsan polymer and Lactame units.
CORRECTION
Transocean Inc. reported that private transportation companies, not the Nigerian navy, safely evacuated everyone—including 100 expatriate employees and 100 striking local workers—from four Transocean rigs off Nigeria in early May after the Nigerian Labor Congress directed all workers to leave the rigs (OGJ, June 2, 2003, p. 46). Another 170 local workers did not participate in that strike, said company officials. Three of the rigs were employed by subsidiaries of Royal Dutch/Shell Group, while the other worked for Total SA.
