OGJ Newsletter

May 3, 2004
Energy futures prices have tracked a bumpy course while continuing to trend up lately, pushed by continued terrorist acts in the Middle East...

Market Movement

Energy futures prices climb rocky path

Energy futures prices have tracked a bumpy course while continuing to trend up lately, pushed by continued terrorist acts in the Middle East, worldwide political unrest, market speculation, and growing demand for gasoline in the US.

Although crude prices dipped slightly in trading Apr. 28, the expiring May gasoline contract hit a new record settlement of $1.2268/gal, up by 2.01¢ for the day after touching a record trading high of $1.242/gal on the New York Mercantile Exchange.

It marked the fourth record-high closing price for that contract in five consecutive trading sessions, starting Apr. 22 when the soaring gasoline market fueled a rally among energy commodities on NYMEX (OGJ Online, Apr. 23, 2004).

In March, the near-month contract for benchmark US crude hit a 13-year closing high above $38/bbl on NYMEX (OGJ Online, Mar. 18, 2004).

But prices tumbled Apr. 23 as traders took profits from the previous rally. Although there was no major change in market fundamentals, analysts said, the bigger commodity funds were reluctant to hold over weekend market positions that obligated them to take delivery. After suicide bombers attacked an offshore platform and barely missed the loading facilities at the Basra export terminal in Iraq on Apr. 24, the upward momentum of energy prices picked up when markets reopened Apr. 26 (see related story, p. 32).

There was no damage to the loading facilities, although power supply was disrupted, and the export of Iraqi crude through the Basra terminal resumed Apr. 25. However, it marked the first time that terrorists or insurgents had targeted oil export facilities in Iraq, and that escalated concerns among traders about possible supply disruptions.

OPEC price band

Markets also were stimulated by various remarks by Purnomo Yusgiantoro, president of the Organization of Petroleum Exporting Countries and Indonesia's energy minister. Purnomo said he expects the average price of OPEC's basket of seven benchmark crudes to fall back into the group's price band of $22-28/bbl before members next meet in June in Beirut. OPEC has a mechanism intended to keep its basket price within that range by either raising or curtailing production, respectively, if prices remain above or below the targeted price band for 20 consecutive trading days. However, prices have remained significantly above OPEC's price since Dec. 5, 2003, without the group taking corrective action.

Purnomo also confirmed recent speculation that OPEC members were discussing raising the target price band for their crude. Venezuelan Oil Minister Rafael Ramirez had proposed that target prices be raised by $2 to $24-30/bbl, while Nigeria suggested a higher price band of $25-32/bbl (OGJ Online, Apr. 27, 2004). The current price band was set in 2000.

Other OPEC officials subsequently disavowed that move. Addressing an Apr. 27 seminar on Saudi-American relations in New York, Ali al-Naimi, Saudi Arabia's minister of petroleum and mineral resources, said his country is following a moderate policy based on maintaining crude prices near $25/bbl. He said there is no shortage of crude supplies for world markets and that prices have been driven up by speculators and by political unrest in the Middle East, as well as Africa and Venezuela (see related story, p. 30). In an interview in Algiers, Chakib Khelil, Algeria's energy minister, told reporters that current crude prices include a premium of $4-5/bbl because of the conflict in Iraq. Prices are unlikely to fall, he said, as long as Iraq remains politically unstable.

Energy prices continued to climb Apr. 27, spurred by remarks by US Federal Reserve Bank Chairman Alan Greenspan that the era of low crude prices may be over, at least for the next few years. Traders also reacted to remarks by US Deputy Sec. of Energy Kyle McSlarrow that the Bush administration might not be able to alleviate the recent rise in US gasoline prices. McSlarrow said no gasoline shortages are expected this summer, however.

Meanwhile, legislation recently was approved by the US Senate judiciary committee to make OPEC subject to US antitrust laws. Legislation sponsored by Sen. Mike DeWine (R-Ohio) and Sen. Herbert Kohl (D-Wis.) would subject OPEC to legal action by the US Department of Justice and the Federal Trade Commission for setting crude production levels and prices among OPEC members. However, US courts previously have held that OPEC is immune to such prosecution because its actions are "governmental" rather than "commercial."

The US Energy Information Administration reported a jump of 3.2 million bbl to 298.8 million bbl in US crude inventories the week ended Apr. 23. Gasoline stocks increased by 900,000 bbl to 200 million bbl in the same period, while distillate stocks were up by 200,000 bbl to 104.8 million bbl.

Industry Scoreboard

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Industry Trends

WITH OIL PRICES at a 13-year high and US natural gas prices not far behind, "for the first time in a generation, energy commodities have the price wind at their backs and will trade substantially higher in the future," Foresight Research Solutions LLC, New York, forecasts.

"The oil price shock of the [1970s] enabled development of then high-cost petroleum resources in Alaska and the North Sea. Similarly, high energy prices in the present decade will allow development of our own era's high-cost energy resourcesUoil sands, liquefied natural gas, gas-to-liquids technologies, and others," said Foresight CEO Daniel Nicholas. Those additional resources will be needed to meet accelerating energy demand and replace "cheap and politically secure oil and gas," he noted in a recent report.

Although it may take a few quarters for crude prices to drop from current levels in excess of $35/bbl (OGJ Online, Apr. 13, 2004), Nicholas said, "We believe that oil will settle in the $22-27/bbl range—a big step up from its old range of $15-20/bbl. That should give producers cash to boost capacity."

He expects energy companies' share prices to rise as investors "come to accept that the price of oil has truly moved to higher ground."

Regarding natural gas, Nicholas said, "The North American natural gas basin has its needle moving towards empty. Only LNG imports or continued demand destruction can balance US supply with demand.

"LNG will set the floor price of natural gas around $4/Mcf," he said.

US EXPLORATION AND PRODUCTION capital spending will climb again this year, reflecting continued optimism for industry fundamentals, reported St. Petersburg, Fla.-based Raymond James & Associates Inc.

"Capital expenditures by our E&P coverage universe in 2003 totaled $19.8 billion, an increase of 32% over 2002. In particular, exploration and development spending was 68% of the total and posted 34% growth. For 2004, we are projecting that our universe's E&D spending will grow a further 26%," said RJA analyst Wayne Andrews, Houston.

RJA's coverage universe involves 31 companies, representing 18% of US production, and the spending analysis is not necessarily representative of the entire industry, Andrews noted.

"These 31 companies unquestionably pursue among the most aggressive drilling programs in the industry," he said. "Finally, we note that in addition to their aggressive capex spending, our universe repaid $570 million of debt during the year [2003]."

US TRUCKING FLEET OWNERS are apt to see wholesale diesel prices spiral in the next few weeks along with rising gasoline prices.

The wholesale diesel price advances have yet to be passed down to the retail pump. But distillate demand has been phenomenal at a time when it should be waning, said Ben Brockwell, senior analyst at Oil Price Information Service, Lakewood, NJ.

"We're coming off of a winter of record consumption. Part of the problem stems from sky-high natural gas prices," Brockwell said. "It was more economical for utilities to switch to diesel, and that put a giant dent in distillate inventories."

Government Developments

MEXICAN PRESIDENT VICENTE FOX and the National Action Party (PAN) have overcome a major challenge to the multiple service contracts (MSCs) that are being implemented by state oil company Petroleos Mexicanos (OGJ Online, Oct. 16, 2003).

Pemex describes the MSCs as field life contractor agreements in which the contractor is paid a "unitized price for services and work performed," (OGJ Online, Nov. 6, 2002). Opponents claim the MSCs are a thinly disguised form of privatization.

On Apr. 20, the Lower House of Congress plenary session sustained a committee vote not to present the leftist Democratic Revolution Party's (PRD) three-pronged MSC challenge to the Supreme Court for review, said Houston-based George Baker, princicpal of the Mexico Energy Intelligence information service.

The committee rejected the proposal 2-1 despite PRD members' contentions that the MSCs violate Article 27 of Mexico's Constitution and Article 6 of the Petroleum Act of 1958. Among other things, PRD members argued that the MSCs amount to exploration and production activities.

The unexpected but winning argument by the committee was that a Lower House petition for a Supreme Court review can be exercised only if the matter concerns presidential action. The MSCs involve action by Pemex, so it was decided that there is no basis for Congress to act, Baker said.

While Pemex's E&P unit and the companies that won MSC tenders may be relieved at this outcome, there still may be some reason for discomfiture, Baker said.

"It is little comfort to know that the MSCs passed an important policy and legal test on the grounds of a technicality that has nothing to do with energy policy in Mexico.

"The question that is still open—unanswered by the vote in the Congress—is, 'Does Mexico want the expertise, capital, and technology of international oil companies or not?'"

FRANCE'S ENERGY REGULATION COMMISSION (CRE) asked Gaz de France and Total SA to help open the southern France gas market by releasing portions of long-term gas contracts so that other producers can obtain spot gas contracts.

The new contracts are slated to become effective Jan. 1, 2005, and will remain in effect for 1-3 years.

They are to be arranged by mutual agreement between the companies involved or by auction.

In addition, CRE will determine the volume that a producer will be allowed to take. GDF and Total will not be allowed to participate in these new spot gas contracts.

Although France opened its gas market 2 years ago, only the northern part of the country has been supplied with spot gas. BP PLC has lobbied to improve flexibility in third-party access to the gas pipeline grid, LNG terminals, and gas storage facilities (OGJ Online, Apr. 12, 2004).

Frank Tiravy, BP vice-president, Northern Europe & Power, told OGJ, "The goodwill of Gaz de France will be measured by the sales price of the gas released from their long-term contracts and by the flexibility introduced, namely as relates to storage facilities."

Quick Takes

TOTAL EXPLORATION & PRODUCTION ANGOLA (BLOCK 32) LTD. has made a second oil discovery on deepwater Block 32 off Angola, 15 km southeast of first discovery Gindungo-1. The Canela-1 well, 140 km off Angola in 1,540 m of water, tested at 6,800 b/d of oil from one reservoir. Operator Total plans to drill a third well by midyear. Angola-owned oil company Sonangol is concessionaire, holding a 20% interest. Total and Marathon International Petroleum Angola Block 32 Ltd. each hold 30%, Esso Exploration & Production Angola (Overseas) Ltd. holds 15%, and Portugal's Petrogal Exploraçâo 5%. Exploraçâo Global Energy Development PLC, international unit of Harken Energy Corp., Houston, reported that its Estero 4 well on the Alcaravan association contract in Colombia confirmed a third zone in Palo Blanco field in the Llanos basin east of giant Cusiana and Cupiagua oil and gas fields (OGJ Online, Feb. 14, 2003). Global perforated and tested at 8,352-71 ft the Massive Ubaque zone, which contained 14 ft of producible hydrocarbon thickness. The well, which tested 16° gravity oil at 960 b/d gross, was expected to be on stream by Apr. 30. The already productive Upper Mirador and Upper Ubaque zones also had hydrocarbon shows during the Estero 4 drilling. BHP Billiton Ltd. discovered oil with its Puncheon 1 exploration well on Block 3a off eastern Trinidad. The well exposed a 60 ft net oil column and tested at 4,443 b/d of oil through a 40/64-in. choke. Puncheon 1 is the third in a six-well exploration program on Block 3a. BHP is operator with 30% interest; partners are BG PLC, Total SA, and Talisman Energy Inc. Block 3a is north of BHP's Angostura field, from which it expects to start producing 80,000 b/d of oil at yearend. BHP and partners recently bid on the five blocks that surround the existing BHP-operated acreage. Bid results are expected early this month. ChevronTexaco JDZ Ltd., a ChevronTexaco affiliate, bid $123 million to win rights to conduct exploration activities on deepwater Block 1 in the Joint Development Zone in the Gulf of Guinea off Sâo Tomé and Príncipe and Nigeria. ChevronTexaco will be operator with 51% interest in the block, 190 miles north of Sâo Tomé in 5,700 ft of water. ExxonMobil holds 40% and Norwegian firm Equity Energy Resources 9%.

OCCIDENTAL PETROLEUM CORP. has agreed with Colombia's national oil company Ecopetrol to extend Oxy's interest in the Cravo Norte association contract for operation of Colombia's second largest oil field, Cano Limón. The contract will extend through the economic life of the field, estimated to 2018. Oxy will remain operator of the field, which produces 95,000 b/d. Oxy's net share is about 33,000 b/d. Ecopetrol will continue to operate the Cano Limón-Covenas export pipeline. In 2004-07, Oxy will drill 40 additional development wells, shoot a 3D seismic survey, and expand water-handling facilities and new power generation facilities at Cano Limón. Oxy also agreed to invest in new exploration projects through 2007. Apache Corp., Houston, has field development, final engineering design, and tendering operations under way for 90 miles of new pipelines and other facilities on its Khalda concession in Egypt's Western Desert. The government granted a 95 sq mile development lease for facilities, permitting the most efficient use of existing gas processing capacity near Apache's Qasr discovery. "The Qasr-1X discovery was completed in July 2003," said G. Steven Farris, Apache president, CEO, and chief operating officer (OGJ Online, Dec. 04, 2003). "Two appraisal wells—the Qasr-2X and Qasr-3X—add to our confidence regarding the ultimate size of the structure," Farris added.

ENTERPRISE PRODUCTS PARTNERS LP has completed construction and final testing of a 4.5 Mw Ormat Energy Converter (OEC) at its Neptune gas processing plant in Louisiana. Ormat International Inc., Sparks, NV, designed, installed, and tested the unit. The project utilizes previously wasted hot exhaust from two gas turbines driving gas recompression units to generate electricity with near-zero emissions. The OEC provides most of the plant's electrical requirements, and, by self-certifying the facility as a "qualified facility" under Public Utility Regulatory Policies Act legislation, Enterprise can sell surplus power to the local electric utility when the processing plant runs at reduced capacity.

Enterprise Products Partners LP's Ormat Energy Converter at its Neptune gas processing plant. Photo courtesy of Ormat International Inc.
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SEMPRA ENERGY LNG, San Diego, plans to construct a $600 million LNG receiving terminal along the Port Arthur Ship Canal near Port Arthur, Tex. The plant would be capable of processing 1.5 bcfd of natural gas. On Apr. 21 Sempra submitted a prefiling notification to the US Federal Energy Regulatory Commission, beginning the process required to secure FERC approval. If approved, construction of the Port Arthur LNG project is expected to begin in 2006, with start-up slated for 2009. The proposed facility would feature three 160,000 cu m full-containment storage tanks and two unloading berths. The design envisions doubling the plant's capacity in the future. BG Group PLC said it would exercise its options with South Korean firm Samsung Heavy Industries Co. Ltd. for the delivery during 2007-08 of four 145,000 cu m, newbuild LNG vessels. The four-ship contract is valued at $620 million. Samsung will build, equip, launch, and deliver the ships, which will be used for BG's Atlantic Basin LNG business. BG currently owns two LNG ships and charters five others from Bermuda-based Golar LNG Ltd. In addition, BG will take delivery of a new LNG ship, Methane Kari Elin, in mid-2004 and three new ships in second half 2006.

A TOTAL-LED CONSORTIUM has begun producing nonassociated gas in western Venezuela on Yucal Placer Norte and Yucal Placer Sur blocks, which cover 900 sq km in the Guarico subbasin, said partner Repsol YPF SA. Initial production from the two blocks was 60 MMcfd, which is expected to increase to 106 MMcfd in the fourth quarter. A second production phase of 300 MMcfd is anticipated in 2007. Total holds 69.5% interest, Repsol-YPF 15%, and Venezuelan companies Inelectra SA 10.3%, and Otepi Consultores 5.3%. The award is part of Venezuela's effort to open the gas sector to private investment (OGJ, July 16, 2001, p. 44). x‡ Crediting new technology, Statoil ASA reported it will extend production from Lufeng field in the South China Sea until 2008 rather than shutting down in February as planned. Statoil will keep the field on stream until August, when the Munin production ship moves to another assignment. While it is away, Statoil and its 25% partner, China National Offshore Oil Corp., will drill three sidetrack wells. Lufeng currently produces about 6,000 b/d of oil. When the sidetracks are drilled, output should exceed 10,000 b/d. More than 32 million bbl of oil have been recovered from the field to date—7 million bbl more than forecast. The Masjed Soleiman Oil & Gas Exploration Co. venture announced that Kaboud oil field in Iran, discovered in 1971, has gone on stream, OPEC News Agency reported. The field, 110 km from Andimeshk, in Khuzestan province, has a production capacity of 4,000 b/d, but initial production rates were not disclosed. The company believes that gas injection could increase the field's production capacity by up to 10,000 b/d. The venture, of Calgary's Sheer Energy Inc. and an Iranian firm, is developing the field under a buy-back contract (OGJ, Mar. 4, 2002, p. 44).

US AND MEXICAN GOVERNMENT AGENCIES Apr. 20 initiated a 3 day, $2.5 million, marine oil spill exercise that simulated an oil tanker explosion off Long Beach, Calif., as well as a vessel collision near San Diego. No oil actually was spread in coastal waters during the drill, but the latest cleanup technology was deployed. Command posts were set up in San Diego, Los Angeles, and Los Alamitos and Ensenada, Mexico. Officials called it the largest multiagency oil spill exercise in US history. Participating agencies included the US Coast Guard, the US Department of Homeland Security's Initial Response Team, and the Mexican government.

PLAINS PIPELINE LP, Houston, plans to construct, own, and operate 100 miles of 16-in. pipeline to transport crude oil from parent company Plains All America Pipeline LP's terminal in Cushing, Okla., to the Broom station in Caney, Kan. There the $33 million pipeline will connect to an existing pipeline that will transport the crude to the Coffeyville Resources Refining & Marketing LLC refinery in Coffeyville, Kan. Under a 5 year transportation service agreement that the two companies recently signed, all oil shipments will originate from the Cushing terminal, currently undergoing Phase IV expansion. A bomb destroyed about 15 ft of pipeline on Sui Southern Gas Co.'s Sui-Shikarpur natural gas main pipeline Apr. 26, disrupting service to Karachi and several other cities in Sindh and Punjab provinces, Pakistan. The blast caused the loss of millions of rupees' worth of leaked gas, officials said. Sui Southern said some service was restored in 5 hr, using an alternative line, and mainline repairs were scheduled for completion within 40 hr. Local authorities described it as the latest in a series of disruptions by local tribes attempting to extort more incentives and royalties from the government. TEPPCO Partners LP, Houston, plans to expand by 8,000-10,000 b/d its delivery capacity for LPG to northeastern US markets by October. The Phase II expansion includes construction of three pump stations between Coshocton and Greensburg, Pa., and two stations from Greensburg to Watkins Glen, NY. Additional work on a Greensburg-Philadelphia pipeline segment will increase the efficiency of delivery to Philadelphia. TEPPCO also plans improvements at terminals in Dubois and Eagle, Pa., including addition of automated loading systems at Dubois and addition of 180,000 gal of propane storage and backup loading systems at Eagle to ensure two-bay operations.

Dominion surpasses production goal for Sonora field
Dominion Exploration & Production Inc. recently surpassed its production target of 200 MMcfd in Sonora field in West Texas. This year, the company plans to drill more than 500 wells in the field, known as Sawyer (Canyon) in Texas Railroad Commission nomenclature. Dominion expects to drill more than 500 wells there next year. The field, discovered in 1967, is among the top producing fields in Texas. Photo courtesy of Dominion.
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US DRILLING ACTIVITY dipped by 4 units to 1,146 rotary rigs working the week ended Apr. 23, down from the highest rig count since Sept. 28, 2001, as reported the previous week, Baker Hughes Inc. officials said. There were 986 rigs active during the same period a year ago. Land operations registered the only losses, down by 15 units to 1,028 working. Offshore drilling increased by 4 rigs to 93 in the Gulf of Mexico and 95 in overall US waters. Drilling in inland waters escalated by 7 units to 23 rigs.

In Canada, the rig count dipped by 7 units to 130.