Market Movement
OECD oil stocks remain low
The International Energy Agency in Paris warned in a Sept. 10 report that industry oil inventories among members of the Organization for Economic Cooperation and Development, including the US, "are heading into the winter heating season at the bottom of their 5-year range. Despite a recent build in product stocks, crude oil stocks, especially those in OECD North America, are low."
IEA officials concluded, "We may need to rethink what were previously considered to be minimum operating levels, if industry is comfortable with lower stocks."
They noted, "A number of structural factors have contributed to lower inventory holdings. New information technologies enhance logistic and scheduling abilities; refining and tank farm consolidations diminish storage requirements; advances in metering and tank construction reduce deadstocks, etc."
Moreover, the agency said, "These developments are reinforced by the divestiture of integrated downstream assets; the lower credit and carrying positions of independent refiners; and the ability of Wall Street to pressure industry segments, based on indicators such as 'return on capital employed.'"
Still, IEA officials said, "Increased US [oil] import dependency (3.5 million b/d) and demand growth (2.9 million b/d) over the 1992-2003 period should generate pressure for larger inventory holdings."
Price outlook
Raymond James & Associates Inc., St. Petersburg, Fla.—among the more bullish industry analysts—last week jumped its 2004 price forecast to $28/bbl for oil from $26/bbl previously. However, the firm lowered its outlook for US natural gas prices to $5.50/Mcf from the previous $6/Mcf, based on destruction of US gas demand because of higher prices.
"With an improving global economy and numerous supply interruption wildcards (i.e. Iraq, Venezuela, and Nigeria), we believe the odds favor oil prices moving higher rather than lower over the next year," said J. Marshall Adkins in Raymond James's Houston office.
"The facts since 1999 support our view that [the Organization of Petroleum Exporting Countries] will do whatever it takes to support oil prices," he said. Since OPEC in April 1999 implemented the first in its recent round of production cuts, Adkins said, "US crude oil prices have averaged just over $27/bbl. In the past 12 months, US oil prices have averaged north of $30/bbl, well aboveU[Wall] Street and even our more aggressive forecast[s]."
Given seasonal swings in oil demand, Adkins said, OPEC would need to cut current production by only 1 million b/d during the first half of 2004 "to maintain high-$20[/bbl] oil prices." Even after such a cut, OPEC production "would still be well above pre-Iraq war levels," he said.
The proposed reduction of OPEC production early next year is based on assumptions that Chinese oil demand grows by only 7%, or 400,000 b/d; there are no supply disruptions from Nigeria, Venezuela, or others; and Iraqi oil production returns to near-full capacity by yearend. Even so, Adkins said, more-recent economic data suggest that growth in global demand for oil "could easily be double" Raymond James's current forecast of 900,000 b/d, or 1.1%.
US fuel inventories
On Sept. 10, the US Energy Information Administration reported US inventories of gasoline increased by 700,000 bbl to 192.6 million bbl during the week ended Sept. 5. US gasoline demand averaged 9.3 million b/d in a 4-week period through that date, up by 0.9% from the same period in 2002.
Total gasoline imports into the US averaged 921,000 b/d in the week ended Sept. 5, down from nearly 1.2 million b/d the previous week, which EIA had described as "the second highest weekly average ever (OGJ Online, Sept. 4, 2003)."
Commercial US inventories of crude plunged by 4.2 million bbl to 276.2 million bbl during the latest reported period, wiping out the previous week's 1.8 million bbl gain. Those stocks are now down by 5.7% from year-ago levels. US crude imports, including some from Iraq, averaged more than 9.6 million b/d the latest week, down by 478,000 b/d from the previous week.
US distillate stocks rose by 3.7 million bbl to 128.4 million bbl in the week ended Sept. 5, with most of the increase in diesel fuel. US demand was down by 4% for distillate fuel and 3.4% for jet fuel during the last 4 weeks through that date, compared with the same period last year.
The American Petroleum Institute reported a bigger drop in US oil stocks for the week ended Sept. 5, down by 6.6 million bbl to 278.3 million bbl. It said US gasoline inventories increased by 1.2 million bbl to 195.9 million bbl, while distillates were up by 3.7 million bbl to 126.4 million bbl.
US industry scoreboard
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Industry Trends
MERGER AND ACQUISTION activity remains on the decline in Canada.
During the first 6 months of 2003, the enterprise value of Canadian oil industry mergers and acquisitions fell to $5 billion (Can.) compared with $21 billion for the same period last year. That word comes in a recent report from Sayer Securities Ltd., Calgary, an investment firm specializing in M&A activity.
Total enterprise value is measured by total equity, plus long-term debt and other liabilities, said Frank J.D. Sayer, founder and president of the firm. The decrease stems from a lack of available M&A packages worth more than $1 billion and from less interest by non-Canadian buyers, he said.
Although overall M&A activity was down, the median acquisition price was up compared with the first 6 months of 2002. From January through June, the median price of reserves rose 18% to $8.94/boe compared with $7.60/boe last year.
"This corresponds with the increase in commodity prices in the first half of this year compared to the same time period a year ago," Sayer said.
"With commodity prices remaining relatively highUand acquisition prices following suit, it would stand that more companies that made major purchases in the past will review their assets with the intention of selling. We may well see more activity in the second half of 2003," he said. US buyers virtually have disappeared from the Canadian M&A market. In the first half of 2003, US buyers accounted for $200 million, or only 4% of total enterprise value. That held steady with the first 6 months of 2002.
In contrast, the US buyer total was $16 billion, 61% of the M&A market, in 2001, and $3.9 billion, 24%, in 2000.
This year, most US companies are not out shopping but rather reviewing their asset bases and deciding what noncore assets to put on the market, Sayer said.
For instance, ChevronTexaco Corp. has said that it plans to sell up to $2 billion in nonstrategic assets each year during the "next few years" (OGJ, Aug. 18, 2002, p. 36).
US INDEPENDENTS are increasing their drilling expenditures.
US exploration and production companies' spending has increased dramatically and is expected to continue to rise throughout this year, said analyst Wayne Andrews with Raymond James & Associates Inc., St. Petersburg, Fla.
For its 30-company E&P universe, RJA forecasts cash flow from operations of $19 billion, up 70% from $11.2 billion in 2002, Andrews said in an Aug. 25 research note. Current budgets imply a 33% increase in US drilling expenditures for 2003, he said.
RJA noted that its spending survey represented 18% of US production. The majors, which represent 28% of US production, are unaccounted for and have yet to meaningfully increase exploration activity in the US. "That being said, the other 54% of production is comprised of other public-private E&P companies outside our coverage universe, which we believe act more like independents and have accounted for a large portion of the increased drilling activity," Andrews noted.
Government Developments
DELAYED COKER UNITS (DCUs) are the subject of a safety bulletin issued by the US Department of Labor's Occupational Safety and Health Administration in association with the US Environmental Protection Agency.
The two agencies said on Aug. 29 that the bulletin supplements "active industry efforts" to exchange fire and safety technology and to increase awareness of environmental and occupational hazards associated with DCU operations. "It is important that workers, employers, and emergency responders understand the fundamental hazards and risks," associated with DCUs, said OSHA Administrator John Henshaw. "This bulletin provides practical advice on how to identify common hazards and how to minimize risk when working with this equipment."
OSHA and EPA said that the patch portion of DCU operations (drum switching and coke cutting) creates "unique hazards, resulting in relatively frequent and serious accidents."
According to government data, one out of every three refineries has a DCU. Currently, 53 DCUs are operating in the US. Regulators noted that the increasingly limited supply of higher quality crude oil means that refiners must rely on more-intensive—and frequently more-dangerous—processing techniques.
The bulletin also includes information on controlling hazards, modifying operations to control risk, actively maintaining an effective emergency response program, and familiarizing workers with risks and emergency procedures to help reduce serious incidents.
CALIFORNIA ENERGY COMMISSIONERS unanimously adopted a feasibility study that recommended against the state becoming financially involved with any refined products pipelines that might be built to link California markets to Texas refineries.
The 16-page study determined Texas refineries do not produce enough of the type of gasoline used in California to merit construction of such a pipeline.
Longhorn Partners Pipeline LP is developing a 700 mile, 18-in. pipeline system to transport refined products across Texas to a gateway market in El Paso. From there, products could be distributed throughout New Mexico and Arizona via other pipelines (OGJ, Dec. 11, 2000, p. 72).
The California feasibility study recommends that the state encourage completion and operation of the Longhorn pipeline.
The state should encourage increased pipeline capacity from El Paso to Arizona and Nevada, "although California's financial participation in this project is not recommended or seen as needed," the study said.
Additional capacity to those cities would allow refined products markets now dependent on California to receive supplies from Texas, the report said. Such a move indirectly could increase California's gasoline supplies.
"Today, Arizona gets nearly 70% of its gasoline from California," said Energy Commissioner James Boyd. "By increasing the pipeline from El Paso to Phoenix, we can decrease Arizona's dependence on West Coast refineries and use our state's refinery capacity to make more California gasoline."
California's demand for gasoline is expected to grow 1.3-3%/year for 10 years. Meanwhile, California refinery production is expected to grow 1%/year or less, the report said.
California is a net exporter of motor fuels, with the state's refineries supplying gasoline, diesel, and jet fuel to growing markets in Nevada and Arizona.
Quick Takes
WESTERN AUSTRALIA state officials have approved the giant Gorgon natural gas field development and LNG project off Western Australia, project partners said.
ChevronTexaco Corp., with four-sevenths ownership interest in the project, confirmed the approval-in-principle from Western Australia for restricted use of the internationally recognized nature reserve Barrow Island—between the Gorgon gas fields and the Australian mainland—for development of a key LNG facility. Gorgon project partners now will prepare detailed plans to protect the island's environment, ChevronTexaco said. The partners also will continue to pursue marketing opportunities and will progress with engineering and design studies.
Other Gorgon partners are Royal Dutch/Shell Group with a two-sevenths interest, and ExxonMobil Corp. with one seventh.
In other development news, Petrobras has selected the Fels Setal-Technip Coflexip consortium to perform construction and integration of the hull and topsides utilities for its planned P-52 offshore platform. Bidders for P-52—the Construtora Norberto Odebrecht-Saipem SPA consortium and Samsung Heavy Industries Co. Ltd.—both tendered bids exceeding $1 billion, which Petrobras considered excessive, and it is conducting direct negotiations with them for the P-51 construction. Petrobras also is negotiating with companies whose bids also were considered excessive for providing the gas compression modules and the electricity generation modules. The semisubmersible platforms, each with an oil production capacity of 180,000 b/d, will be positioned in the deepwater Campos basin, P-51 in Marlim Sul field and P-52 in Roncador field. Total E&P USA has selected Weatherford International Ltd. to install 13 chrome alloy and vacuum-insulated production tubing and accessories for its Matterhorn field development project in the Gulf of Mexico's Mississippi Canyon area. Matterhorn, on Block 243 in 2,816 ft of water, will be developed with the nine-slot, monocolumn Sea Star tension leg platform initially supporting seven dry-tree surface completions (Illustration, OGJ, Sept. 23, 2002, p. 69). Total expects to start the Matterhorn completion program this summer.
ROWAN COS. INC., Houston, Aug. 18 took delivery of Bob Palmer, the drilling firm's newest jack up. Initially, the rig will be used in the Gulf of Mexico to drill a 25,000 ft well, which should start in 30 days, Rowan said.
The Bob Palmer jack up is an "enhanced version" of Rowan's Super Gorilla class jack ups, designated as a Super Gorilla XL. The rig is outfitted with 713 ft of leg, 139 ft more than Gorillas V, VI, or VII, and has 30% larger spud cans, enabling operation in 550 ft of water, the company said.
The Bob Palmer will be able to operate in 400 ft of water in hostile environments, such as that off eastern Canada and in the North Sea.
UNOCAL CORP. was asked Sept. 3 by California Treasurer Phil Angelides and New York Comptroller Alan G. Hevesi to consider withdrawing from the controversial Yadana project in Myanmar (OGJ Online, Sept. 9, 2003), but Unocal it has done due diligence evaluating the risks associated with the project and that withdrawal is not under consideration. The company did agree, however, to consider a request to provide "an analysis of staying in the Yadana project."
Unocal's subsidiary Unocal Myanmar Offshore Co. Ltd. holds a 28.26% interest in Yadana field in the Gulf of Martaban and a 411 mile pipeline from the field to an onshore power station in Ratchaburi Province, Thailand.
Sections of the onshore line have been bombed three times this year by political extremists opposed to Myanmar's military government, which the rebels claim used forced labor and committed other human rights violations during its construction (OGJ Online, Apr. 28, 2003). Rebels accusepipeline partners with complicity in that pursuit.
A human-rights abuse lawsuit, filed in US District Court in 1996 against Unocal, has been dismissed, appealed, reinstated, and is still undergoing legal evaluation.
In June 2002, Los Angeles Superior Court Judge Victoria Chaney denied Unocal's motion for dismissal of the human rights violations case filed in California (OGJ Online, June 13, 2002). The trial is scheduled for Dec. 3.
In other pipeline news, Kinder Morgan Energy Partners LP restarted its Tucson-Phoenix, Ariz., pipeline Aug. 24, restoring the line and increasing service to 183,000 b/d from 175,000 b/d of gasoline, jet fuel, and diesel fuel. The 8-in. pipeline, shut down for repairs following a rupture July 30 (OGJ Online, Aug. 22, 2003), started back up at reduced pressure Aug. 1 but shut down again Aug. 8, when initial tests showed a pipe defect. KMP then reversed the flow on a 6-in. Phoenix-Tucson pipeline and connected a section of that line to bypass a 4 mile section on the 8-in. line. The bypass provided KMP with the capacity to transport 35,000 b/d of fuel from Tucson to Phoenix. Fuel supplies to Tucson will be supplied by shippers on other KMP pipelines from the El Paso area.
BRAZIL might have to sweeten its exploration fiscal terms or live with state oil firm Petroleos Brasileiro SA (Petrobras) as the only significant, long-term player, a speaker told American Association of Petroleum Geologists Prospect & Property Expo attendees in Houston Sept. 9.
Michael J. Dyer, director of the Americas, IHS Energy Group, Houston, said Petrobras has announced natural gas discoveries in the Santos basin that could be large enough to change the country's natural gas supply and price dynamics (see related story, p. 38). Winning bids in Brazil's licensing rounds have declined from $3,800/sq km in the mid-1990s to $400/sq km in the most recent round, he said, attributing the falloff to noncompetitive fiscal, tax, and royalty regimes as well as environmental barriers to seismic acquisition and drilling.
Industry has spent $4.5 billion since the acreage opening with almost no oil discovered, said Dyer. He said Petrobras, Houston-based El Paso Corp., and a Royal Dutch/Shell subsidiary separately have announced Santos basin gas successes, with Petrobras claiming the discovery of as much as 14.8 tcf off Sâo Paolo (OGJ Online, Sept. 8, 2003).
The discovery on Block BS-400 would require an 8-year lead time to production via a 200 km pipeline to shore. OGJ attributed 8 tcf of gas reserves to Brazil as of Jan. 1 (OGJ, Dec. 23, 2002, p. 115).
Another speaker, Kurt Neher, chief geologist, Occidental Oil & Gas Corp., said that, although his company generally avoids new entry into the most highly competitive exploration areas, it is now taking a hard look at Brazil. He said Oxy is looking "throughout the continent" but did not specify which basin or basins.
Latin America, the Middle East, and the US are currently core areas for Oxy, which reorganized its company risk profile in the late 1990s.
In other exploration news, China National Offshore Oil Corp., China Petrochemical Corp. (Sinopec), Shell, and Unocal have agreed to explore, develop, and market natural gas, oil, and condensate in the East China Sea. The agreement covers three exploration and two development contract areas covering 22,000 sq km in the Xihu trough about 450 km southeast of Shanghai. With 500-800 billion cu m of proven natural gas reserves, Xihu trough contains the Chunxiao, Tianwaitian, and Duangiao gas discoveries and Canxue oil and gas discovery (OGJ Apr. 1, 2002, p. 41). The Chunxiao development area, expected to come on stream in mid-2005, will be developed first. CNOOC, operator of all five areas, will build four platforms, and plans to drill four to six exploration wells at a combined cost of $200 million (OGJ Online, Dec. 27, 2001). Production will be transported to Zhejiang Province via subsea pipeline. CNOOC and Sinopec each have a 30% interest in the project, and Shell and Unocal each holds 20%. The Indonesian government awarded Australia's Santos Ltd. additional exploration acreage in the East Java basin. The new production sharing contract (PSC) area, North Bali 1, is east of Java and north of Bali. The block covers 3,449 sq km in water 100-970 m deep. Several oil and natural gas fields have been discovered near the North Bali 1 PSC, Santos said. The work program for the PSC includes the acquisition of 2D seismic data and the drilling of one exploration well within 12 months. Operator Santos has 100% interest in the permit.
PETRO-CANADA, Calgary, plans to shut down its Oakville, Ont., refining operations, expand its existing Oakville terminal facilities, and consolidate eastern Canada refining operations at its Montreal refinery to comply with 30 ppm sulfur gasoline legislation effective Jan.1, 2005.
Petro-Canada will boost capacity at the Montreal refinery during the next 16 months to provide additional gasoline, distillate, and asphalt production and to ensure continued feedstock supply to its lubricants business.
The Montreal refinery will supply the Ontario market previously covered by the Oakville refinery. Product will be delivered to Ontario through a reversed, expanded Trans-Northern Pipeline. Petro-Canada has launched a full investigation into the cause of a hydrogen explosion and fire Aug. 21 at its Mississauga, Ont., lubricants plant, about 35 km west of Toronto. No one was injured, and flames were brought under control within 30 min, Petro-Canada reported. InterOil Corp., Toronto, has received the final major shipments of equipment for the refinery it is constructing in Papua New Guinea. The shipments consist of the main crude column, reactors, the balance of the major processing equipment, and refinery power generators. All major components are now on site. Mechanical completion is slated for March 2004 (OGJ Online, Aug. 29, 2003). BP Singapore will provide all the crude oil to the refinery, and Shell Overseas Holdings Ltd. will purchase most of the facility's product.
PAKISTAN'S fourth largest petroleum products marketing company, Total-Parco Pakistan Ltd., has captured 4.5% of the market share in that country in the first year of its launch into the retail marketing sector. Total-Parco is a joint venture of Pak-Arab Refinery Co. (Parco) and Total SA.
Parco said it established 36 retail outlets dispensing Total products in the country during the first year.
The company plans to invest $100 million in the next decade to set up about 500 stations across the country, it said.
Similarly, another joint venture, Pearl Gas of Pak-Arab Refinery Co. (Ltd.), which was launched 2 years ago, has secured 15% of Pakistan's total domestic LPG market.
The company currently markets "Pearl Gas" in association with the Dutch firm Energy.
URANIUM POWER CORP. (UPC), Vancouver, BC, reported that a 3-4 tonne bulk sample of Athabasca tar sand was processed successfully with new catalyst technology Aug. 30 at Earth Energy Resources Inc.'s 500 tonne/day separation plant in Grande Prairie, Alta.
In the initial test, the plant rapidly separated tar from the sand, UPC said, leaving oil, clean sand, and the catalyst slurry in separate holding tanks. A visual record of the test is available at the web site www.apioil.net.
Maxxam Analytics Inc., an independent laboratory with expertise in Athabasca tar sand analysis, supervised the test and collected a variety of samples for analysis. The samples will determine the percentage of oil recovered and the quality of the extracted oil. Final analysis is expected this week.
Previous Maxxam laboratory analysis of a Utah tar sands sample, however, confirmed a 99.8 wt % recovery of hydrocarbons by weight and the upgrading of the Utah crude oil to 25.6° gravity from 10°.
Subject to analytical results, the company will move the separation plant to Fort McMurray, Alta., "in about 30 days" to process a 2,000 tonne sample of Athabasca tar sands, using the Earth Energy process to complete a feasibility study, UPC said.
UPC said it has an exclusive license agreement with Earth Energy to commercialize the catalyst technology both in Canada and in Central and South America.
Green Mountain Energy Co., Austin, along with Columbus, Ohio-based American Municipal Power-Ohio and the city of Bowling Green, Ohio, are beginning construction of two 1.8 Mw wind turbines west of Bowling Green.
The wind farm—the first utility-size wind farm in the state—is expected to be completed and generating power by yearend. The two turbines will be tied in to the electric grid through a Bowling Green Municipal Utilities substation. Combined they will generate 6.9 million kw-hr/year of electricity.
Bowling Green Utility Director Daryl Stockburger said Green Energy Ohio shared the wind testing data it had collected for several years in the Bowling Green area, enabling construction of the wind farm at least a year earlier than otherwise would have been possible.