OGJ Newsletter

Feb. 24, 2003
Substantially reduced output and cold weather in the Northern Hemisphere have exacerbated the effects of tight supplies of oil and products, but the International Energy Agency reported that worldwide oil output increased in January after a steep decline in December.

Market Movement

Cold weather exacerbates tight oil, products supplies
Substantially reduced output and cold weather in the Northern Hemisphere have exacerbated the effects of tight supplies of oil and products, but the International Energy Agency reported that worldwide oil output increased in January after a steep decline in December.

Supply

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Measured as deliveries from refineries and primary stocks; comprises inland deliveries, international marine bunkers, and refinery fuel and includes crude for direct burning, oil from nonconventional sources and other sources of supply. 2Net of volumetric gains and losses in the refining process (excludes net gain or loss in the former USSR, China, and non-OECD Europe) and marine transportation losses. 3Comprises crude oil, condensates, NGL, oil from nonconventional sources and other sources of supply. 4Equals total demand minus total non-OPEC supply minus OPEC NGL and thus includes "Miscellaneous to balance" for historical time periods. Source: International Energy Agency

In its latest Oil Market Report, the Paris-base agency estimated that January's worldwide output averaged 77.58 million b/d; this is up by 1.19 million b/d following a 2.22 million b/d decline in December. Led by gains in Saudi Arabia, Iraq, the UAE, and Nigeria to cover losses in Venezuelan production, output by members of the Organization of Petroleum Exporting Countries rose 890,000 b/d last month.

Venezuelan output rebounded to more than 1 million b/d towards the end of January from lows at the beginning of the month. IEA estimates that production in the strike-plagued country averaged 574,000 b/d in January and climbed to 1.3 million b/d in early February. Gains in light crude production in the eastern part of the country account for this rise in production. IEA noted that, although there exists the risk that wells and other production facilities could have been damaged by such a rapid increase in output, production in the east could potentially be boosted by an additional 200,000-300,000 b/d from the 800,000 b/d achieved in early February. Increases in the production of heavier crudes in western areas around Lake Maracaibo could be more difficult, the agency added.

IEA credits Saudi Arabia with the bulk of OPEC's January production growth. Average output was reportedly up more than 500,000 b/d from December to 8.5 million b/d. Much of the incremental supply is thought to have been Arab Heavy, the closest Saudi substitute for lost Venezuelan volumes. The Saudis stated last month that sustainable capacity of 10.5 million b/d would require 90 days to achieve, but that they could attain capacity of 10 million b/d within 2 weeks. "Regardless of the veracity of the latter, demothballing is believed to have been well under way in January," IEA said.

Stocks, demand

Industry oil stocks in member countries of the Organization for Economic Cooperation and Development fell by 41 million bbl in December to 107 million bbl below year-ago levels. This put forward-demand cover—which declined 5 days during 2002—at only 51 days.

December's OECD crude draw of 10 million bbl was confined to North America, where US stocks declined 13 million bbl in the wake of lost Venezuelan supply. OECD crude stocks gained 2 million bbl in Europe and 1 million bbl in the Pacific. Most of the 20 million bbl decline in OECD product inventories came in unfinished products in the US, where refiners drew on these inventories to sustain product output in the face of lower crude availability.

IEA forecasts 2003 global oil demand growth at 1.12 million b/d. A surge in North American demand in January spanned all products except jet fuel and LPG. The recent pick-up in oil deliveries comes as a response not to healthier economic conditions, however, but to colder-than-normal temperatures in key US markets in contrast to warmer-than-normal conditions a year earlier, and this weather factor influence on oil prices is further compounded by higher natural gas prices.

Price forecast raised

The London office of UBS Warburg LLC last week hiked its average 2003 oil price forecast to $26.50/bbl for Brent oil and $28/bbl for West Texas Intermediate crude.

"This year promises to be another year of high energy prices, driven by the unresolved disruption of production and exports in Venezuela, low industry stocks, and anticipation of war," said UBS Warburg LLC analysts.

However, they said, "The main reason for the upgrade to our price forecasts is the crawling pace of recovery in Venezuelan oil production and exports. The general strike may be over, but normalization of the oil industry is apparently a distant prospect."

The analysts added, "It now seems likely that Venezuelan crude production will not return to the prestrike level of 2.9 million b/d before the fourth quarter of 2003 and may be delayed beyond that. We believe this will tend to keep markets for both sour crude and gasoline in the Atlantic Basin in the first half of 2003 firmer than we expected just 2 months ago."

The general strike against Venezuelan President Hugo Chávez eliminated exports of 70 million bbl of crude during January and February, which were only partially replaced by increased sales from Saudi Arabia and other members of OPEC, said UBS Warburg analysts.

Moreover, they said, "The continuing refusal....to reinstate the sacked workers of PDVSA (Petroleos de Venezuela SA), the national oil company means that the industry lacks the technical expertise and the funds to restore operations quickly." Chávez fired and called for criminal prosecution of 9,000 PDVSA managers and technicians for their participation in the general strike aimed at forcing him out of office (OGJ Online, Feb. 10, 2003). Although workers have since returned to jobs in other industries, many PDVSA workers are still holding out.

"Even if all PDVSA staff are reinstated, we should expect the cuts in PDVSA's expenditure in 2003 to bring about a decline in conventional crude production and renewed (capital expenditure) delays by foreign operators," UBS Warburg analysts said.

Meanwhile, the draw-down of OECD petroleum inventories for 3 consecutive quarters to current historical lows "will not be quickly corrected," analysts said. "We estimate that OECD stock cover at the end of January was 51.5 days, only marginally above the record low of 50.8 days seen at the end of 1999."

Scoreboard

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The outlook for OECD stocks during first half 2003 is "now very similar" to that in first half 2000, "when Brent averaged $27/bbl—it certainly tends to support crude prices at $25/bbl at least until the end of (next quarter), even without a conflict in the Middle East," analysts said.

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Due to a holiday in the US, data for this week's Industry Scoreboard are not available.

Industry Trends

AMPLE PRIVATE CAPITAL is available for the energy industry, but private capital providers appear more interested in midstream, transportation, and power assets than in exploration and production projects.

That word came from energy finance representatives speaking on a Feb. 11 panel during Cambridge Energy Research Associates' conference in Houston.

Oil and gas producers say the availability of public equity is taking a back seat to the availability of private equity. Joseph Stanislaw, CERA president and CEO, said billions of dollars in private equity funds are unspent worldwide. He questioned how much of that funding could be obtained by the energy sector.

Given overall market conditions, capital providers are taking a disciplined approach and are seeking projects promising "a real return on capital," the panelists responded.

A "tremendous amount of capital" is available, said Randall Kob, managing director of Prudential Capital Group.

"I talk to private equity sponsors and managers. The challenge isn't the absence of capital, but I think it's the opportunity. I think the same exists on the debt capital side as well.

"What we see is that a lot of private equity firms are branching out from what is traditionally more of an E&P emphasis to midstream or transmission assetsUI think you are starting to see some private equity firms branch off to renewable energy. And also, many people are waiting on the sidelines to buy some merchant power assets that are expected to be sold as distress funds," Kob said.

Chris L. Fong, managing director of RBC Capital Markets, said he sees "a lot of capital, but you are talking power now. If you look at E&P separately for private equity, I think there is an appetite. But frankly, E&P has not had a great return. They have tended to be smaller investments by smaller firmsUand that's not where I think there is really going to be a focus."

Fong forecast that private equity would focus on power generation and pipeline assets.

"I think this year you are going to see a lot of private equity—some large funds and some large deals—on the infrastructure side," he said.

Thomas R. Langford, managing director of Morgan Stanley, acknowledged that the upstream side is going through a financing transition period. Morgan Stanley recently acquired some mezzanine debt portfolios, he said.

In the past, independent producers frequently turned to mezzanine debt financing for capital, but that vehicle largely has dried up in the last couple of years. Many companies that set up producer financing divisions, such as Shell Capital Inc. and Aquila Energy Capital, have closed those divisions.

"I would assure you that for us to buy those types of portfolios, we assume there is a tremendous amount of underlying asset value," Langford said.

Government Developments

THE BRAZILIAN GOVERNMENT plans to offer low-priced credit, subsidies, and other incentives to allow local contractors to bid competitively on offshore oil platforms and other Petroleo Brasileiro SA (Petrobras)-led projects, both offshore and on land.

Mines and Energy Minister Dilma Rousseff said, "This government is interested in strengthening the national industry. We need to develop an industrial policy, such as in the US and France, that implements policies of governmental purchase."

During a news conference, she said that Petrobras, Brazil's largest industrial company, serves a "double function: of a state-owned company that cooperates to meet the needs of the nation, and the role of a private company, which must be profitable and efficient."

President Luiz Inácio Lula da Silva said during the presidential campaign that he wanted all of Petrobras's offshore platforms to be built in Brazil as a way to generate jobs and revenues. But that proposal has triggered controversy as to whether there are enough Brazilian shipyards with enough capacity to build all the platforms needed.

Market specialists report that Petrobras is considering at least six tenders collectively worth $3 billion for building platforms this year. All those platforms are to be installed in the Campos basin, off Rio de Janeiro state, responsible for 80% of the country's crude production.

Rousseff said reduction of Brazil's high interest rates, which amounted to 25% at yearend, and improved financing conditions are necessary to promote construction of platforms in Brazil.

Petrobras last month announced the second postponement to February from January for bids to be submitted for semisubmersible production platforms P-51 and P-52. The platforms will be used in the Campos basin.

THE US ENVIRONMENTAL PROTECTION AGENCY has extended the comment period on a proposed rule to provide a regulatory definition of "routine maintenance, repair, and replacement" for the New Source Review program.

Comments originally were due Mar. 3, but interested parties now may file comments through May 2. The agency will hold five simultaneous regional public hearings.

EPA said its proposed rule gives power generators, refiners, and other industrial operators greater flexibility to improve and modernize operations in ways that reduce energy use and air pollution. The agency also issued a final rule effective Mar. 3 that changes the way the agency tracks stationary source emissions.

In its latest action, EPA is allowing additional opportunity for comment and participation on the proposed rule, but the final rule will move forward as scheduled.

Earlier this month, 10 Northeast states asked the US Court of Appeals for the District of Columbia Circuit to stop federal regulators' plans to streamline certain clean air rules for refinery and power plant emissions (OGJ, Feb. 17, 2003, p. 7).

THE US DEPARTMENT OF LABOR granted $2.1 million to San Juan College in Farmington, NM, to train oil

The Interstate Oil and Gas Compact Commission previously organized a Petroleum Professionals Blue Ribbon Task Force, which is studying the industry's workforce issues and making recommendations.

Meanwhile, DOE said that overall employment in the oil and gas extraction industry is expected to decline 17% through 2008 even though worldwide demand for oil and gas is expected to remain strong.

Quick Takes

INDIA'S government-owned Oil and Natural Gas Corp. (ONGC) found oil and gas reserves west of its gigantic Vasai gas field off the Mumbai coast, but the government is not yet ready to release official reserves data.

"Two wells drilled west of Vasai gas field showed the presence of several hydrocarbon-bearing zones that are estimated to hold around 48 million tonnes of oil and oil-equivalent gas," an ONGC source reported. "This is additional to the 97 million tonnes of oil discovered earlier in East Vasai."

Petroleum Minister Ram Naik, however, was more conservative about the size of the discovery. "We are currently going through the process of certification, in which official agencies will estimate the size of the find. Only then would weUmake an announcement," he said.

Senior ONGC officials said the find "seemed to be medium large," but exact details are unavailable.

Oil analyst Karthik Ramakrishnan of Sunidhi Consultancy said the find could help reduce India's demand-supply gap. "The country currently has a deficit of 70 million standard cu m/day (MMscmd) of gas," he said. India produces 69-70 MMscmd of gas, while demand is about 140 MMscmd.

The recent find of >7 tcf of original gas in place in the Krishna-Godavari basin by Mumbai–based Reliance Industries Ltd. (OGJ Online, Nov. 7, 2002) would not meet rising demand, expected to total 230-235 MMscmd in 5 years.

Gas production from Vasai field, currently 32 MMscmd, will decline starting next year by as much as 3 MMscmd.

East Vasai holds nearly 3.5 tcf of gas reserves and a quantity of crude oil. Estimated production from the field would be 700,000 tonnes/year of oil and 3.4 MMscmd of gas.

"We will lay a submarine pipeline grid of 8-10 km to bring gas from the east and west to the existing Vasai platform for processing and further transportation to our Uran gas plant," said the ONGC source.

Anadarko Petroleum Corp., on behalf of Algerian state-owned Sonatrach, and partners Maersk Olie Algeriet AS and Italy's ENI SPA unit Lasmo Oil (Algeria) Ltd., Feb. 7 reported an oil discovery at the Hassi Berkine North East prospect on Block 404 in Algeria's Berkine basin. The exploration well, HBNE-1, was drilled to a 3,300 m TD 5 km east of Hassi Berkine field. The well found 16 m of net oil pay in the TAGI reservoir and tested at 4,092 b/d of oil and 6.7 MMcfd of natural gas through a 36/64-in. choke with 2,201 psi flowing tubing pressure. The discovery is near Anadarko's existing infrastructure in its core Hassi Berkine area, said Rex Alman, managing director, Anadarko Algeria Co.

CONOCOPHILLIPS reported Feb. 13 that it would shut down its new "Cevolution" carbon fibers facility at Ponca City, Okla., saying that the decision was the "result of the cumulative effect of market, operating, and technology uncertainties.

"Collectively (these factors) painted a picture that the business opportunity has not proven to be as strong as originally perceived," said Jim Nokes, ConocoPhillips executive vice-president, refining, marketing, supply, and transportation.

Then-Conoco Inc. had launched the idea for the 8 million lb/year carbon fiber venture in mid-May 2000 (OGJ Online, May 18, 2000).

After shutting down the plant, the company will take a $125 million writedown, ConocoPhillips said.

BRAZIL'S NEW GOVERNMENT, which took office in January, is mulling the construction of a new refinery, probably in partnership with private investment interests. The government is under heavy pressure to select a site, particularly by the state governments of Rio de Janeiro and the northern state of Ceara, each of which wants the refinery built in its own state. Rio de Janeiro, which produces 80% of the country's crude oil output (from the Campos basin) and has a larger population of consumers, is seen as the logical choice for the location.

Petroleo Brasileiro SA (Petrobras) owns 11 of the country's 13 refineries, dominating Brazil's refining industry, and 98% of the country's installed refining capacity of nearly 2 million b/d.

The discovery of large reserves of light crude in Brazil (OGJ Online, Feb. 11, 2003) could open new perspectives for Brazil's refining industry, analysts say. Crude oil produced in Brazil to date—with the exception of Roncador field in the offshore Campos basin—is heavy, raising production costs while lowering the commodity's market value.

Currently there is insufficient complex refining capacity to process the rising volume of heavy crude oil, forcing Petrobras to import light crude, mainly from the Middle East.

ENCANA CORP. is reviewing its Deep Panuke natural gas project and has asked Canada's National Energy Board and the Canada-Nova Scotia Offshore Petroleum Board for a "time out" in the regulatory approval process.

EnCana requested an adjournment of the regulatory process, saying it expects to be able to update regulators as to its progress on the Deep Panuke project review by the end of 2003.

Deep Panuke, which underlies Panuke-Cohasset oil field, is the second major gas development on the Scotian shelf, following the Sable Island area gas fields development that went on stream in late 1999. Deep Panuke, 250 km east of Halifax, NS, is estimated to hold 1 tcf of gas (OGJ, Mar. 18, 2002, p. 8).

EnCana Pres. and CEO Gwyn Morgan said, "Many things have changed since we first designed the Deep Panuke project. The East Coast natural gas industry is young and evolving, with promising new opportunities emerging, such as the potential to utilize existing transportation capacity on the established pipeline and to serve expanding gas markets."

"The Deep Panuke project will require all stakeholders to work together to find ways to help ensure its feasibility."

In other development news, the Petroleum Development Oman (PDO) joint venture awarded Dutch engineering consultant Tebodin BV a 4-year contract to provide design-engineering services for PDO oil and gas developments. "Tebodin's contract primarily covers the gas plants and the oil and gas pipeline infrastructure part of PDO's operations," said Managing Director Hans Hegger. The Hague-based Tebodin will execute the contract through Tebodin & Partner LLC, a joint venture of Tebodin Middle East LLC and Middle East Engineering Consultancy LLC, an Omani firm. It will provide design-engineering services for a variety of developments, including the 250 km, 48-in. natural gas pipeline from the Saih Nihayda gas plant to the government's third LNG train at Qalhat. The gas plant is being built under a $100 million contract awarded in July 2002 to a joint venture of SNC Lavalin of Canada and Al Hassan Engineering Co. of Oman. Tebodin also will undertake the engineering design for the second phase of the Yibal depletion compression project, which is expected to boost gas recovery by 30%. PDO, which is responsible for about 95% of Omani oil production, is a joint venture of the Oman government 60%, Royal Dutch/Shell Group 34%, TotalFinaElf SA 4%, and Partex Oil & Gas (Holdings) Corp. 2%. BP PLC has authorized McDermott International Inc. subsidiary J. Ray McDermott SA to fabricate topsides for Atlantis field's semisubmersible production facility. McDermott said work on the 15,450 tonne topsides will begin in August at its yard in Morgan City, La. Completion is scheduled for May 2005. Atlantis field, a deepwater development in the Gulf of Mexico, lies 125 miles south of New Orleans in the vicinity of Green Canyon Block 743 in 6,500 ft of water (OGJ Online, Feb. 11, 2003). The field will be developed using the moored semisubmersible, which will have a gross design capacity of 150,000 b/d of oil and 180 MMcfd of natural gas. The Atlantis topsides are the fourth in a series of topsides that McDermott is fabricating for BP under a $600 million contract giving BP exclusive use of McDermott's Morgan City facility during a significant portion of the construction period. McDermott recently performed fabrication on BP's Holstein, Thunder Horse, and Mad Dog topsides. BP holds a 56% ownership interest in Atlantis, and Melbourne-based BHP Billiton Ltd. holds the other 44%.

CROSSTEX ENERGY LP, Dallas, and RLAC Gathering Group LP have formed a 50:50 joint venture called Crosstex DC Gathering Co., to construct and operate a new natural gas gathering system for Barnett shale gas production in Denton County, Tex.

Initially, the $3 million system will consist of 12 miles of 4-12-in. pipeline connecting 17 RL Adkins Corp. wells. Initial flow is expected in April.

The Barnett shale producing horizon has a commercially productive area of 60 sq miles in Wise, Denton, and Tarrant counties. In the immediate area of the new system, the reservoir is found at a depth of 8,500 ft with an average gross reservoir thickness of 900 ft.

A UNIT OF China National Petroleum Corp. Ltd. plans to invest $80 million to rehabilitate Kursangi oil field 100 km southwest of Baku, according to Zhang Xiyun, the Chinese ambassador to Azerbaijan, as reported by Caspian News Agency.

CNPC is expanding its initial investment after becoming a member in the rehabilitation project after last year purchasing a 30% holding in Kursangi and Karabagli fields from the European Bank for Reconstruction and Development (OGJ, Feb. 18, 2002, p. 31).

From Delta Hess Inc., CNPC also acquired a 50% share in CNPC's Salyan Oil Ltd. in Azerbaijan. The State Oil Co. of the Azerbaijan Republic owns the other 50%. Delta Hess is a joint venture of Delta Oil Central Asia Ltd. and Amerada Hess Corp. CNPC already has reached a preliminary agreement with the Azerbaijani government, and the parties currently are awaiting a presidential decree on joint venture terms.

Suncor Energy Inc. has awarded Ondeo Nalco Co., a unit of Suez Environment Industrial Services, an 8 year, $10 million contract to provide oil and water treatment services at Suncor's Firebag in situ oil sands project in northwestern Alberta. A steam assisted gravity drainage (SAGD) oil extraction project, Firebag is 25 miles north of the company's existing Fort McMurray oil sands operation on leases covering more than 620 sq miles. It contains an estimated 9.6 billion bbl of bitumen (OGJ, June 10, 2002, p. 24). Ondeo Nalco will develop oil and water treatment programs and provide chemical and onsite expertise for the oil sands project, which is expected to supply an additional 140,000 b/d of bitumen by the end of the decade. The contract contains a provision for contract extension as Suncor develops production expansion plans. Using the SAGD method will reduce Suncor's total cost of operations while enhancing environmental benefits, the company said. Firebag is a four-phase project, with each phase adding 35,000 b/d to production for a total of 140,000 b/d. Phase 1, now under construction, will increase Suncor production to 260,000 b/d by 2005. Suncor also would add a vacuum tower complex and upgrading capacity to handle additional production. Suncor's current production capacity for oil sands operation is 225,000 b/d of oil, with plans to increase total production to 550,000 b/d over the next decade.

GERMAN ENERGY firm EnBW Energie Baden-Wurttemberg AG has begun operation of a direct fuel cell (DFC) power plant at a Michelin tire plant in Karlsruhe, Germany.

The plant, which will supply both electricity and process steam for tire vulcanization at the site, was built by DaimlerChrysler AG subsidiary MTU CFC Solutions GMBH.

DFCs currently generate electricity at a number of commercial and industrial facilities in Europe, MTU officials noted, saying that other DCF "hot modules" are used to power various facilities in Munich, Magdeburg, Essen, and Bad Neustadt-Saa, Germany, and Cartagena, Spain.

Fuel cell power plants address such energy issues as "pollution, grid congestion, and the ability to site power plants closer to user demand," said Jerry D. Leitman, president and CEO of Danbury, Conn.-based FuelCell Energy Inc., which manufactured the fuel cells incorporated into the Karlsruhe power plant.

FuelCell Energy said that DFCs internally generate hydrogen from natural gas and other fuels and are like "large, continuously operating batteries that generate electricity as long as fuel, such as natural gas, is supplied. The fuel is not burned, (so) there is no pollution commonly associated with the combustion of fossil fuels," it said.