OGJ Newsletter

Jan. 12, 2004
Energy futures prices were up sharply during the first trading sessions of 2004, with the February contract for benchmark US light, sweet crudes jumping by $1.26 to $33.78/bbl on the New York Mercantile Exchange and West Texas Intermediate at Cushing, Okla., bounding by $1.28 to $33.78/bbl on the US spot market on Jan. 5.

Market Movement

Energy prices rise in early 2004 trading

Energy futures prices were up sharply during the first trading sessions of 2004, with the February contract for benchmark US light, sweet crudes jumping by $1.26 to $33.78/bbl on the New York Mercantile Exchange and West Texas Intermediate at Cushing, Okla., bounding by $1.28 to $33.78/bbl on the US spot market on Jan. 5.

The February natural gas contract shot up by 63.8¢ to $6.83/Mcf on NYMEX during that exchange's first trading session of the new year, based on forecasts for weeks of cold weather in the Midwest and Northeast US. As of Jan. 7, February contracts for benchmark US crude and natural gas on NYMEX were at $33.62/bbl and $6.88/Mcf, respectively, while the spot market price for WTI had dipped to $33.63/bbl.

"For 2004, we are forecasting a broad continuation of last year's commodity price levels," said J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla.

"It is certainly no exaggeration to say that 2003 was an excellent year for the energy industry's fundamentals—one of the best ever," Adkins said. "Investors' growing recognition of commodity price sustainability supports the proposition that 2004 will be an even better year for energy investors."

OPEC maintaining prices

The intention of the Organization of Petroleum Exporting Countries to maintain oil prices "near or above the upper end of its targeted band is reflected by the fact that the organization has scheduled meetings ahead of time for 2 consecutive months—Feb. 10 and Mar. 31—for the first time ever," said Robert S. Morris at Banc of America Securities LLC, New York. And even though the basket price for crudes the organization monitors has exceed the upper end of its $22-28/bbl target range for more than 20 consecutive days, OPEC members have indicated that they are not likely to boost output by 500,000 b/d per their unofficial policy [to bring oil prices within that targeted band] ahead of the February summit in Algiers.

"In addition to arguing that the higher oil prices are justified as a result of the weaker US dollar, they remain concerned about the projected 2.4 million b/d seasonal drop in demand during the second quarter," Morris reported Jan 5.

He said, "We believe that the consensus outlook for oil and natural gas prices is much more likely to continue to rise near term than decline, even though winter temperatures are still a key variable."

Iraq also key variable

For oil, said Morris, "a key variable continues to be the outlook for exports from Iraq. We project that Iraq production (excluding reinjected volumes) will continue to ramp up throughout 2004 to 2.5 million b/d by yearend from just under 2 million b/d in December" 2003. He expects Iraqi oil exports to expand "to roughly 2.1 million b/d in the fourth quarter of 2004" from nearly 1.6 million b/d in December 2003.

However, Morris said, "Due to a lack of political stability, any real legal framework to attract foreign investment, and the persistence of security issues, we don't foresee Iraq production exceeding prewar levels until after 2004."

"WTI spot crude oil prices continued to ascend during the first half of December to reach their highest level since before the Iraq war," said Morris. "The continued strength in oil prices has been underscored by further tightening in US crude-plus-product inventories. In fact, the US inventory-regressed fair value price for WTI spot oil has increased about $4.75/bbl over the past 6 weeks to $33.66/bbl." He noted, "In the US, crude inventories ended December 13.4% below their 10-year average, vs. 11.4% below normal at the beginning of the month, and just above the 270 million bbl level considered by many to be the minimum safe operating level."

At Merrill Lynch Global Securities Research & Economics Group, New York, analysts said, "Natural gas prices are likely to remain high, although with greater volatility," through 2004. They expect an average price for the coming year of $4.75/Mcf at Henry Hub, La.

Market pressures remain

Michael Rothman, first vice-president and senior energy market specialist, and Steven A. Pfeifer, first vice-president and senior integrated oils analyst at Merrill Lynch, last week forecast continued "pressure on physical heating oil and gasoline supplies, owing to a confluence of refining issues.

"With crude oil stocks having fallen below the 270 million [bbl] 'minimum operating level,' prospects emerged for US refiners to curtail operating rates, which translates directly into a reduction of product output."

Industry Scoreboard

Industry Trends

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US LAND RIG day rates have a promising outlook for 2004 even though they were slow to respond to an increased rig count last year.

Drilling contractors watched the land rig count rise more than 30% during 2003 while average day rates increased 5-10%.

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Raymond James & Associates Inc. analyst J. Marshall Adkins said that 2003 marked the first time in several decades that day rates failed to rise exponentially with the rig count.

Currently, the US land rig fleet is at 70% utilization so even a small boost in drilling activity could make rig availability "extremely tight," he noted.

Recent day rate increases are not nearly as robust as the industry experienced in 2000-01, Adkins said in a research note last month (see chart).

He said reasons for "the slower-than-usual pickup in pricing" include increased rig capacity, the fact that oil and gas companies are becoming more price-sensitive and return-driven, and the possibility that larger rig contractors are pushing a slower but steadier increase in pricing than in the past.

HELIUM EXPLORATION is likely in eastern Arizona, given the availability of good prospects and current high prices, said the Arizona Geological Survey, Tucson.

The only existing helium production in Arizona comes from wells in idle Dineh-bi-Keyah oil field in northern Apache County.

Mountain States Petroleum, Albuquerque, began producing gas with 4.8-5.6% helium last year from Devonian McCracken sandstone. The gas is sent to New Mexico.

Helium in natural gas is generally considered commercial if the concentration exceeds 0.3%, AGS said. The federally posted helium price is $54/Mcf for October 2003-September 2004.

All known helium occurrences in the state are adjacent to the Defiance uplift in northern Apache County, said a recent article in Arizona Geology by Steven L. Rauzi and Larry D. Fellows.

At least 16 wells have encountered helium-rich gas in the Four Corners area, and several other wells flowed nonflammable gas that wasn't analyzed.

Government Developments

AUSTRALIAN GOVERNMENT officials' efforts to develop a national long-term energy policy is "badly blurred by the current focus on retail-related matters," an oil and natural gas association representative said.

Barry Jones, executive director of the Australian Petroleum Production & Exploration Association (APPEA), spoke last month during a meeting of the Australian Institute of Energy in Brisbane.

His comments came days before meetings of the Common- wealth State Ministerial Council on Energy in Perth and the Commonwealth Cabinet's Energy Committee in Sydney.

"Delivering the prime minister's own call for a 'strategic plan for longer-term energy policy' is not a matter of merely micro- managing the retail and distribution sectors," Jones said referring to recent comments by Australian Prime Minister John Howard.

Government officials are taking "the wrong route," Jones said. "Instead, there are vital energy demand issues that must first be addressed and critical supply investments that need to be facilitated."

He said any strategic plan for longer-term energy policy must include an oil exploration and development strategy as well as a natural gas development strategy covering Australia's domestic and export markets.

"The unfortunate result is that we only have some of the pieces of the energy policy jigsaw puzzle," he said. "We seem to have lost the picture we are supposed to be building, and we also seem to have misplaced those pieces that relate to energy supply."

A strategic national energy policy should encompass a 20-year period while recognizing growing energy demand forecasts and rising energy commodity prices, he contends.

"Most importantly, it needs to be based on a clear understanding that without massive investments right across the sector, there is a high risk of energy supply disruptions in the not-too-distant future," Jones said.

He called for a national petroleum exploration strategy that helps attract public and private funding for frontier exploration while providing more-attractive fiscal terms for capital-raising efforts.

He also advocated effective approval processes.

"Efforts by Minister [for Industry, Tourism, and Resources] Ian Macfarlane to address these issues in a comprehensive way are refreshing and welcome by the industry and need the strong support of state ministers and his national colleagues," Jones said.

Any energy policy also needs to address the economic, social, and political risks associated with a growing reliance on imported petroleum supplies, he added.

THE US GOVERNMENT is contemplating whether to provide monthly LNG storage reports, but no decision or timetable has been established, a spokeswoman with the US Energy Information Administration natural gas division told OGJ on Jan. 6.

EIA now provides monthly and weekly natural gas storage data.

Last year, the EIA invited public comment to help determine the interest in the proposed monthly LNG storage reports. Fewer than 12 comments were received, and the responses were wide-ranging regarding whether EIA should provide such reports, the spokeswoman said.

Currently, EIA is reviewing those public comments and assessing the budget issues that would be involved in issuing LNG monthly data, she said.

Quick Takes

ENCANA (UK) LTD. expects to produce first oil in late 2006 from Buzzard oil field, following UK approval Nov. 27 of the $2 billion field development plan. Gross production from the field is expected to peak at 180,000-190,000 b/d of oil in 2007. The largest field discovered in the North Sea in a decade, Buzzard has total reserves exceeding 400 MMboe.

The field, which straddles license areas P986 (Blocks 19/10 and 20/6) and P928S (Blocks 195a and 20/1S), is 100 km northeast of Aberdeen and 55 km off Peterhead.

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Development plans call for three bridge-linked, fixed platforms supporting facilities for drilling, production, utilities, and accommodations. Fabrication is slated to begin in the first quarter.

Buzzard will serve as a hub for other discoveries in the area, sending crude oil to the UK through the nearby Forties pipeline and natural gas through the Frigg pipeline. Installation will begin this summer on 28 km of 18-in. oil pipeline and 29 km of 10-in. gas line from the field to the mainlines.

The oil will be produced through 27 wells. Intrepid Energy North Sea Ltd., BG Group, and Edinburgh Oil & Gas PLC are partners of operator EnCana.

In other development activities, Occidental Petroleum Corp. unit Occidental Petroleum of Qatar Ltd. recently awarded UAE engineering firm National Petroleum Construction Co. a multimillion-dollar contract for development of Idd El Shargi North Dome natural gas field off Qatar. The contract involves engineering, procurement, fabrication, precommissioning, offshore transportation, installation, and commissioning of 4 wellhead platforms, 19 associated subsea pipelines, and 3 subsea multiservice umbilicals for the field. Work is expected to be complete by July 2005.

EL PASO CORP. has launched two separate open seasons—on the US and Bahamas sections—for its proposed 750 MMcfd Seafarer pipeline system, formerly called Bahama Cay pipeline, which will transport natural gas from the El Paso Global LNG terminal at Grand Bahama to West Palm Beach, Fla.

The open seasons will continue through Jan. 19. The 128 mile, 26-in. pipeline will transport 1 bcfd of gas to Florida, beginning in 2007 (OGJ, Apr. 1, 2002, p. 9).

In other pipeline news, the US Export-Import Bank has approved a $160 million long-term guarantee to support the export of US equipment and services for construction of the 1,094 mile Baku-Tbilisi-Ceyhan Pipeline project. The 1 million b/d pipeline will transport crude oil from the Sangachal terminal near Baku, Azerbaijan, through Azerbaijan, Georgia, and Turkey to a marine export terminal at Ceyhan, Turkey, on the Mediterranean. The pipeline will serve as the main export system for oil from the Azeri, Chirag, and Gunashli fields off Azerbaijan and other potential oil fields in the Caspian region. US-based service firms will supply engineering expertise, control systems, and pump systems for the project, the bank said.

BP EXPLORATION (ALASKA) INC. and technology partner, Davy Process Technology Ltd., London, said they have proven the new gas-to-liquids technologies tested at BP's $86 million demonstration plant at Nikiski, on Alaska's Kenai Peninsula (OGJ Online, Aug. 16, 2003).

The demonstration plant tested two proprietary technologies: a compact reformer to manufacture synthesis gas (syngas) and a converter catalyst that produces a waxy hydrocarbon product from the syngas. In the third stage, products—including syncrude—can be made from the paraffins, using standard hydrocracking.

Since July 27 when operations began, the BP plant has produced about 4,100 bbl of syncrude.

CITGO PETROLEUM CORP., Tulsa, has commissioned a hydrogen plant at its Lemont, Ill., refinery. The plant, installed by BOC Group, Murray Hill, NJ, will enable the refinery to produce gasoline that meets or exceeds the US Environmental Protection Agency's Tier 2 clean fuels standard. BOC also recently commissioned an oxygen supply system at the Lemont refinery that is used in Citgo's Claus sulfur recovery unit to convert hydrogen sulfide to elemental sulfur, decreasing sulfur dioxide emissions from Citgo's automotive fuel products.

NOBLE ENERGY INC. has begun natural gas production from giant Mari-B field in the Mediterranean Sea, 15 miles off Israel. Production is expected to increase to 100 MMcfd by the end of March 2004, with ultimate gross production expected to reach 170 MMcfd. Operator Noble Energy estimates that total reserves in the Mari-B field exceed 1 tcf.

Noble Energy holds a 47.06% working interest. Partners are Avner Oil Exploration LP 23%, Delek Drilling LP 25.5%, and Delek Investments & Properties Ltd. 4.44%. Noble Energy's undeveloped Noa discovery, estimated to contain over 200 bcf of gas, also is scheduled for production through a subsea tieback to Mari-B's platform.

In other production news, Shell Exploration & Production Co., operator of Princess field on Mississippi Canyon Blocks 765 and 766 in the Gulf of Mexico, reported the start-up of oil and gas production Dec. 17, 2003. Three wells tied back to Shell's Ursa tension leg platform less than 4 miles away and one well drilled from Ursa in November 2002 are producing 9,000 b/d of oil and 15 MMcfd of gas, Shell said. Princess lies in 3,650 ft of water in the Mars basin about 140 miles southeast of New Orleans. Peak production in the initial development phase is expected to be 55,000 b/d of oil and 110 MMcfd of gas. Interest holders in Princess are Shell 45%, BP PLC 23%, and ConocoPhillips and ExxonMobil Corp. 16% each. Kestrel Energy Inc., Denver, has farmed out its 30,000 acre Green River basin coalbed methane acreage in Wyoming to Sun Delta Inc., operator, and Victoria Petroleum USA Inc. The joint venture will invest as much as $3 million over the next 4 years in development, including a pilot program to commercialize gas reserves within the acreage's 25-35 ft thick Big Red Coal formation. The first well is scheduled to be drilled before April. Kestrel's existing 8 MMscfd pipeline and completed 24 sq mile 3D seismic survey will aid in speedy production.

LONDON ARRAY LTD.—a consortium owned in equal part by Powergen Renewables, Shell WindEnergy Ltd., and CORE Ltd.—plans to construct a 1,000 Mw wind farm in the outer Thames Estuary, 20 km off Essex and Kent.

The wind farm would provide the equivalent of as much as a quarter of London's electric power requirements, London Array said.

About 300 turbines are to be installed in four phases, with the first—300 Mw—to be commissioned in 2007. Additional, smaller numbers of units would be commissioned in 2008-10. The consortium will conduct technical and environmental feasibility studies in 2004 and gather public input while awaiting regulatory permits.

EMERGENCY CLEANUP operations are continuing in South China's Pearl River mouth after a tanker carrying 1,989 tonnes of fuel oil collided with a container ship Dec. 29 near Lingding Island. The collision damaged two compartments in the tanker, spilling 300 tonnes of fuel oil into the water.

Guangzhou Maritime Safety Administration is investigating the incident.

GREENLAND AND DENMARK plan to open a licensing round for four areas in the Davis Strait off West Greenland with meetings in Copenhagen Apr. 1 and Houston Apr. 6. Deadline for licensing applications is Oct. 1.

A total of 11,000 km of seismic data has been acquired off western and southern Greenland since mid-2001, confirming "a much more widespread distribution of connected deep basins," the governments said.

In other exploration news, Algerian oil and gas company Sonatrach—in a bid to double its oil production capacity by 2005—has awarded five exploration tracts covering 47,000 sq km in Algeria's southwestern region to international oil firms in the country's fourth international open tender. Sonatrach signed production-sharing contracts totaling $100 million with China National Petroleum Corp.; Calgary-based PetroCanada; a consortium of Madrid-based Repsol-YPF SA, Hamburg-based RWE-DEA, and Edison International SPA of Italy; and a joint venture of Spain's CEPSA SA and Total SA of France. Part of BP PLC-operated Production License 261 west of Norne field in the Norwegian Sea has been separated into a new license designated PL 261B, in which ChevronTexaco will take a 65% interest and will operate. Statoil ASA will hold a 10% interest in PL 261B, RWE DEA 15%, and BP 10%. The PL 261B partners plan to drill an exploration well on this acreage this year. Interests in the remaining PL 261 license remain unchanged, with BP holding 50%, RWE DEA 30%, and Statoil 20%. CNOOC Ltd. reported two oil and gas discoveries in the South China Sea off China. The Weizhou 11-1N-1 wildcat was drilled on the WZ 11-1N structure near Weizhou field in the Beibu Gulf (OGJ Online, Oct. 17, 2003). Well logging data revealed 164 ft of oil zone. Songtao 24-1-1, also a wildcat, was drilled on the ST 24-1 structure and encountered "oil and gas shows of geological significance," CNOOC said. The company also had three oil and gas discoveries on the West Madura PSC area off East Java. Well KE 38-1 encountered 54.5 ft of oil pay and 642.5 ft of gas pay in the Kujung I carbonate. It was drill-stem tested to flow 935 b/d of oil and 0.34 MMcfd of gas. Well logs confirmed that wells KE 54-1 and KE 32-1 also contained substantial oil and gas pays in the Kujung I carbonate.

CNOOC holds 100% interest in both new discoveries off China and a 25% interest in both of the three discoveries off East Java. Pakistan on Dec. 20 granted a petroleum exploration license to Petroleum Exploration (Pri- vate) Ltd. (PEL) for Block 2769-13 (Salam) in Zone-III. The area covers more than 200 sq km in Ghotki and Jacobabad districts of Sindh Province. PEL will invest $425,000 in an exploration program, including the review of geological and geophysical data and the acquisition of 30 line-km of 2D seismic data during the first 2 years of the license. EnCana Corp., Calgary, has withdrawn its original Deep Panuke natural gas field development applications filed in March 2002 with Canada's National Energy Board and is initiating a new plan for developing the field 250 km off Halifax, NS. EnCana has held discussions with Sable Offshore Energy Project group about using existing infrastructure, and it recently drilled two successful Deep Panuke wells—Margaree, which flowed gas at more than 53 MMcfd during test, and MarCoh, which encountered 100 m of gas-bearing reservoir. Both extended the known gas-bearing reservoir.

BP PLC is joining refiner SK Corp. of South Korea in ownership of a 1,074 Mw natural gas-fired, combined cycle power plant under construction in Gwangyang, South Korea—the first privately owned power generation facility being developed in the country's liberalized electricity generation industry. It is slated to start up in 2006.

BP will acquire a 35% interest in SK Power, which is constructing the $600 million plant, and SK Corp. will retain 65%.

The plant will use more than 600,000 tonnes/year of LNG to be supplied by Tangguh LNG in Indonesia to an adjacent LNG receiving terminal that steel maker POSCO is developing. (OGJ Online, Dec. 5, 2003).