OGJ Newsletter

Aug. 2, 2004
US imports of crude oil averaged a record 11.3 million bbl during the week ended July 23, marking "the first time that crude imports have exceeded 11 million b/d. Imports jumped by a fairly staggering 1.4 million b/d from the previous week's level," said Paul Horsnell, Barclays Capital Inc., London.

Market Movement

US crude imports hit record high

US imports of crude oil averaged a record 11.3 million bbl during the week ended July 23, marking "the first time that crude imports have exceeded 11 million b/d. Imports jumped by a fairly staggering 1.4 million b/d from the previous week's level," said Paul Horsnell, Barclays Capital Inc., London.

"There was a veritable armada of crude oil tankers discharging at US facilities," Horsnell said. What's more, he reported, "Gasoline imports [in the same week] were put at 1.26 million b/d, which is only 32,000 b/d below the all-time high set in April.

"The total volume of crude oil imports across the week was 10 million bbl higher than in the previous week, yet inventories built only by a very modest 1.2 million bbl," said Horsnell. "The US is importing crude oil at a record rate, but it is also refining it at a record rate. Refinery runs hit a new record at 16.18 million b/d, bringing the utilization of refining capacity up to 97%" from 94.5% the prior week.

"If it takes more than 11 million b/d of imports to keep crude inventories roughly constant, then it is probably a bit early to get too bearish on crude oil," Horsnell observed. "Imports cannot be sustained above 11 million b/d, which means that the underlying trend for crude inventories is still very strongly downwards."

Current US crude inventories would provide just 18.6 days of supply at minimum operating requirements—"just 0.8 days more cover than last year and 1.2 days less than the 5-year average," said Horsnell.

"The overall impression is again one of a lot of straining within the US oil system. Import facilities are being strained to maximum and so are refining facilities, and yet with all that effort, not much is happening that is likely to create too much sustained downward traction on prices."

Crude demand strengthens

Meanwhile, US demand for crude and petroleum products increased by 3.1% in the second quarter, the strongest quarterly gain in more than 3 years, American Petroleum Institute said.

"Growth in gasoline deliveries (an indicator of demand) amounted to less than 0.5% when compared with a year ago," said API. In the first quarter, a strong US economy boosted gasoline demand more than 3%.

"But more recently, higher retail [gasoline] prices served to substantially slow that growth," they said.

Still, API reported, "Deliveries of jet fuel jumped more than 6% from lackluster levels a year ago as air travel demand recovered from particularly weak levels in early 2003." Demand for distillate fuel was up more than 6% in the second quarter, while use of residual fuel oil increased nearly 9% as industrial users and utilities switched from expensive natural gas.

US refineries set new production records for both gasoline and distillate fuel in the first half, with gasoline output up more than 3% to nearly 8.6 million b/d, and distillate production up more than 1% to 3.7 million b/d. "Strong refinery utilization in June of over 96% of capacity raised this year's first-half utilization to 91.7%, slightly ahead of the rate measured for the first half of 2003," API said.

"With growth in demand and a decline in domestic production, US petroleum imports continued to rise in the first halfU," said API. Combined crude and products imports increased 4.5% to 12.66 million b/d in the first half, or 62.3% of US demand.

Imports of finished gasoline and gasoline blending components during the first half were only 2% short of last year's record 933,000 b/d and "accounted for over 10% of domestic gasoline deliveries," said API.

NL BULLETIN

The Kremlin lifted a threat to a possible shutdown of production by Russia's largest oil company, legally beleaguered OAO Yukos, that sent crude oil futures prices spiraling past a record $43/bbl on the New York Mercantile Exchange.

Russian bailiffs July 28 ordered Yukos to stop sales from certain production units as part of a court-ordered assets freeze (see related story, p. 20). On July 29, Yukos said the Ministry of Justice recalled the ban it had imposed on its Yugansk- neftegaz, Tomskneft, and Samaraneftegaz units. Yukos produces 1.7 million b/d of oil. Government officials said they had no intention to disrupt Yukos's production.

The Kremlin's stepdown pulled oil prices back, with NYMEX September crude closing at $42.90/bbl July 28, up $1.06 on the day. The contract earlier in the day had touched $43.05/bbl, the highest since the contract was launched in 1983.

Yuganskneftegaz, which accounts for 60% of Yukos's production, is being prepared for sale to help pay $3.4 billion in back taxes for 2000.

Industry Scoreboard

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Industry Trends

US REFINERS have enjoyed sustained favorable margins since early 2003 that could extend into 2005, said Standard & Poor's Ratings Services in a report entitled "Oil Refiners Pressured to Keep Pace With Demand Growth, Clean Fuels."

S&P credit analyst John Thieroff of New York said that industry consolidation has created "a handful of very large, well-capitalized players that dwarf the remaining independents."

He said continued consolidation is possible but at a slower pace than during the past decade while smaller independent refiners attempt to gain scale to compete with larger independents and integrated oil companies.

In addition, environmental regulations since the 1970s have rendered many smaller refineries economically marginal or uneconomical, Thieroff said. The number of US operating refineries has shrunk to 150 from more than 300 since the 1980s.

Strong demand growth since the 1990s has pressured refining capacity to keep pace, he said.

Capacity growth has been slight in recent years, expanding 0.7%/year during 1999-2003, primarily through capacity creep. Most recent downstream investment has financed refineries' efforts to meet clean-fuels requirements that are being phased in during 2004-10.

Ongoing efforts to meet low-sulfur gasoline and low-sulfur diesel regulations will drive the sector's capital spending into 2006, Thieroff said, adding that small independent refiners might consider plant closures.

"The likelihood of additional refinery closures grows as compliance deadlines draw near. If the capacity lost to shutdowns exceeds expected capacity creep, an already tight market could face considerable strain," he said.

Old Greenwich, Conn.-based Premcor Inc. closed its 70,000 b/d Hartford, Ill., refinery 2 years ago rather than reconfigure the plant to meet environmental standards (OGJ Online, Sept. 24, 2002).

Shell Oil Products US plans to close its 70,000 b/d Bakersfield, Calif., refinery in October.

PIPELINES accounted for nearly 68% of total US crude oil and petroleum product shipments in 2002, up from 66.24% in 2001.

The Washington, DC-based Association of Oil Pipe Lines reported that pipelines carried 586.2 billion ton miles in 2002, the most recent year for which data were available. The comparative figure for 2001 was 576.1 billion ton miles.

Total 2002 US shipments of crude and products carried by various modes of transportation were 864.6 billion ton miles of which pipelines carried 67.8%, water carriers 26.32%, trucks 3.54%, and railroads 2.34%. The 2002 numbers showed that the share of crude oil and refined products carried by pipelines was 21 percentage points higher in 2002 than in 1982. This trend confirmed a continuing, long-term shift from waterborne transportation to pipelines, AOPL said.

Water carriers accounted for 95.7 billion ton miles, or 24.9%, of the 2002 total US crude shipments compared with 98.1 billion ton miles, or 26%, in 2001. AOPL attributed this to a decrease in US coastwise shipments.

AOPL annually compiles the data reported by operators to federal government regulators. Each report looks back 20 years, comparing the volumes carried by pipelines, water carriers, trucks, and railroads. The amounts carried by trucks are estimated.

Government Developments

CALIFORNIA PUBLIC UTILITIES COMMISSION (CPUC) members voted unanimously to seek a review with the US Court of Appeals for the District of Columbia regarding the siting of a proposed Long Beach, Calif., LNG terminal.

CPUC expects to file a petition for review by early August. The July 8 CPUC decision concerns a jurisdictional dispute with the US Federal Energy Regulatory Commission. Sound Energy Solutions (SES), a wholly owned subsidiary of Japan's Mitsubishi Corp., applied in January for a FERC permit to site, build, and operate an LNG terminal at the Port of Long Beach.

ConocoPhillips has a nonbinding memorandum of understanding with SES to work jointly on the continuing development of the proposed terminal, which would have a sendout capacity of 700 MMcfd of natural gas and a peak capacity of 1 bcfd (OGJ Online, July 13, 2004). CPUC filed a notice of intervention in February, saying that SES needs a state permit under California law, and that FERC has no jurisdiction because the proposed facility would send natural gas only intrastate within California. In March, FERC said it has jurisdiction over the SES proposal.

"Any suit filed by CPUC is likely to move to the (US) Supreme Court and be drawn out, impeding financing and project development," said Washington, DC-based PFC Energy.

"Proposed legislation in the US Congress to clarify FERC's authorityUis unlikely to move forward until 2005 following the presidential elections. However, if federal laws were enacted that clearly delegated authority to FERC, the court case would likely be dropped," PFC added.

Regardless of the outcome, California has added to the complications of siting LNG terminals, PFC noted. California's pending legal challenge to FERC authority could have significant consequences for LNG terminal sitings across the US.

"If CPUC succeeds in asserting greater authority, it may force environmental requirements on LNG projects more stringent than federal guidelines, thus increasing project costs. Projects risk losing their commercial viability, and a regional regulatory agency could succeed as a champion for negative public opinion about LNG projects," PFC said.

In June, CPUC Pres. Michael Peevey said CPUC has tried to avoid conflict with FERC by offering to work cooperatively regarding LNG facilities.

THE EUROPEAN UNION'S emissions trading scheme (EU ETS) will not damage the competitiveness of the UK refining and fuel industries, said a report by London-based Carbon Trust.

The scheme is slated to commence Jan. 1, 2005, as one of the policies being introduced across Europe to tackle emissions of carbon dioxide and other greenhouse gases.

"Our overall conclusion is that the EU ETS is unlikely to reduce the profitability of most industrial sectors, providing that it is implemented in roughly equivalent ways across different EU countries," the report said. The study concluded that the UK refining and fuels industries have little to fear from the EU ETS because these sectors consume very little electric power from the grid.

Quick Takes

ENI SPA unit Agip KCO, operator of the North Caspian Sea production-sharing agreement with Kazakhstan's state-owned Kazmunaigas, made its fifth field discovery in the Kazakh sector of the Caspian Sea. The Kairan-1 exploration well, drilled to 3,850 m TD, encountered an oil pay zone with thickness exceeding 500 m, ENI said. The well flowed on test at 4,100 b/d of 44° gravity oil through a 22/64-in. choke. Additional appraisals are under way. Kairan, on the 1.4 million acre PSA area, follows the world-class Kashagan field, which has estimated reserves of 13 billion bbl of oil, and Kalamkas, Kashagan Southwest, and Aktote fields. ENI holds a 16.67% interest in the project. Partners are ExxonMobil Kazakhstan Inc., BG PLC, Royal Dutch/Shell Group, and Total SA, each with 16.67%, and ConocoPhillips and Tokyo-based Inpex Corp., each with 8.33%. CNOOC Ltd. reported a successful wildcat drilled on its wholly owned Huizhou (HZ) 26-3 prospect in the Pearl River Mouth basin of the South China Sea. The HZ 26-3-1 well, in the Huizhou trough in the eastern South China Sea, about 170 km southeast of Hong Kong, was drilled to 3,780 m TD in 110 m of water. Drill stem tests through a 7.94-mm choke flowed more than 1,400 b/d of 41-43° light gravity crude and nearly 2 MMcfd of natural gas. CNOOC said the find would help maintain the area as a core production basin for further exploration. Chevron Offshore (Thailand) Ltd. (COTL) has completed exploration and appraisal drilling on Block G4/43 in the northern Gulf of Thailand 125 miles south of Bangkok. Exploration well Lanta No.1, drilled to 10,358 ft MD, found 280 ft of oil and gas pay. Appraisal well Lanta No. 2, drilled to 10,040 ft MD, found 194 ft of oil and gas pay. Block G4/43 is in less than 250 ft of water and covers about 9,600 sq km. The block is adjacent Block B8/32, where COTL-operated production averages 46,000 b/d of oil and 230 MMscfd of gas from the Benchamas trend.

Thailand awarded the concession to COTL, operator, with 85% interest, and PTTE Internationl Ltd. 15% in mid-2003 (OGJ Online, June 2, 2003). Newfield Exploration Co., Houston, has made a deep shelf discovery on West Cameron Block 77, about 10 miles off Louisiana in about 40 ft of water in the Gulf of Mexico. The West Cameron 77 No. 1 well encountered 120 ft of net gas pay in two zones at 16,800-17,600 ft. The well was deepened to 19,603 ft (18,500 ft TVD) and encountered an additional zone that appears to have possible pay over a large gross interval, Newfield said. This zone will be evaluated during the completion stage. Field operator Newfield expects first production from the field in early 2005. BHP Billiton Petroleum (Americas) Inc., Houston Exploration Co., and Ridgewood Energy Corp. are the other block shareholders.

Liberty Oil, an affiliate of Bahamas Oil Ltd., plans to conduct exploratory drilling northwest of Walker's Cay in the northwesternmost Bahamas to test for oil and gas. The area, in the Atlantic Ocean, 100 miles east of Port St. Lucie, Fla., is believed to have Cretaceous and Jurassic objectives. Operations are to be conducted using the Autumn Trader jack up, a lift boat, and barge owned by Bahamas Oil.

WOODSIDE ENERGY LTD. awarded a £93 million contract to London-based AMEC PLC and Fluor Corp. to provide detailed engineering, procurement, and construction management services for the 150,000 ton Enfield floating production, storage, and offloading vessel. The project is part of the $1.5 billion (Aus.) development of deepwater Enfield oil field on permit WA-271-P about 40 km off Western Australia (OGJ Online, Mar. 22, 2004). First production from Enfield, which has oil reserves assessed at 145 million bbl, is scheduled to begin in 2006. The FPSO will have a capacity to process 100,000 b/d of oil and store 1 million bbl. Its double hull, based on a newbuild Suezmax type of tanker, modified for deepwater operations, is under construction by Samsung Heavy Industries Ltd. in South Korea.

Dolphin Energy Ltd. has secured a 5 year, $1.36 billion loan from a consortium of 16 local, regional, and international banks to fund a portion of the construction and operating costs for its $3.5 billion Dolphin project. The project involves development of natural gas reserves, processing facilities at Ras Laffan Industrial City onshore, and export pipelines to transport as much as 3.2 bcfd of refined gas from North field off Qatar to the UAE (OGJ Online, Sept. 15, 2003). The project is scheduled to come on stream in 2006. The hull of Statoil ASA's Kristin platform arrived July 27 at the Aker Stord yard, just south of Bergen, after being hauled from South Korea. Measuring 82 m by 82 m and standing 41 m high, the structure left the fabrication yard June 13. Samsung Heavy Industries, Seoul, built the 14,450 ton hull. Work at Aker Stord will involve installation of topsides modules, including process and utility units, and the quarters module. The floater is due to be towed to the field next spring. Production from Kristin is slated to begin Oct. 1, 2005.

More BOHAI BAY PRODUCTION off China is coming on stream, from two projects. Kerr-McGee China Petroleum Ltd. has reached first production from four wells at its CFD 11-1 and CFD 11-2 field development on Block 04/36. The company expects to have 10 wells on line by Aug. 1 and estimates that production from the wells will be 15,000-20,000 b/d. Additional wells will bring peak production to 40,000-45,000 b/d by mid-2005. Kerr-McGee, with 40% interest, is operator. Partners are CNOOC 51% and Ultra Petroleum Corp. unit Sino American Energy Corp. 9%. Production is through the Hai Yang Shi You 112 Kerr-McGee Global Producer VIII FPSO. In addition, CNOOC reported that its wholly owned Qikou (QK) 18-2 oil field in western Bohai Bay is on stream, producing more than 2,800 b/d of oil from five wells through a production platform and subsea pipeline. QK18-2, about 6 km southwest of producing field QK 18-1, is part of the Boxi oil fields, sharing some production facilities with them.

Calgary-based Husky Energy Inc. said it is proceeding with its $500 million Tucker oil sands project 30 km northwest of Cold Lake, Alta., after receiving approval from the Alberta Energy and Utilities Board. The lease is estimated to hold 1.27 billion bbl of original bitumen in place. The project is expected to recover about 350 million bbl of oil over 35 years. Construction will begin next year and is slated for completion in 2006, with commissioning in third quarter 2006. Oil production will begin within 3-6 months of commissioning, with expected peak oil production rates of 30,000-35,000 b/d. Peru's Camisea consortium is preparing to inaugurate its 250 MMcfd natural gas complex in early August as it continues testing operations for the official event. The first event will be held Aug. 5 at the Malvinas natural gas fields on the eastern slopes of the Andes. A second event will be at the Lurin city gate outside Lima, and a third in Pisco on the south coast at the consortium's terminal and fractionation plant. The consortium is headed by Argentina's Pluspetrol SA, the upstream operator, and includes Hunt Oil Corp., South Korea's SK Corp., and Algeria's Sonatrach. Camisea began line fill of gas along the 730 km pipeline at the beginning of June and filled it by early August. Sales are expected to begin at a rate of 80 MMcfd of gas, mainly for generating electric power, starting with a natural gas-fired plant operated by Spain's Etevensa and a small group of industrial users. Camisea partners won the contract in a tender in December 2000 against France's Total SA, the only other bidder.

FPL GROUP RESOURCES LLC (FPLGR), a unit of FPL Group Inc., Juno Beach, Fla., is planning to construct an LNG terminal and regasification facility at South Riding Point on Grand Bahama Island. The company has inked a heads of agreement with Ras Laffan LNG Co. Ltd. II for supply of Qatari LNG for the project. Under terms of the HOA, RasGas II—a joint venture of Qatar Petroleum and ExxonMobil RasGas Inc.—and a FPLGR affiliate expect to sign an LNG sales and purchase agreement for about 6 million tonnes/year to be delivered over 25 years beginning in mid-2008. The feed gas will come from Qatar's North field; FPLGR plans to sell gas from LNG deliveries to wholesale customers throughout Florida via subsea pipeline. Tangguh LNG partners have awarded GE Energy a contract to supply a second compressor train for its LNG project in Bintuni Bay regency, Papua province, Indonesia. Last year, GE was selected to supply the first compressor train for the project. When both trains are completed, the new BP Tangguh LNG Indonesia facility will have a gas liquefaction capacity of at least 7 million tonnes/year. GE Energy's Florence, Italy-based oil and gas unit will supply the two main refrigerant turbocompressor strings for the second compressor train. The mixed-refrigerant string will include a low-pressure axial compressor and a medium-pressure centrifugal compressor. The propane string will include one low-pressure and one high-pressure barrel centrifugal compressor. The turbocompressor strings are slated for shipment in 2005.

CHINA has approved the construction of two refineries on the country's east coast. The refineries, costing more than $3 billion total, will help China meet a 10-15%/year increase in demand for petroleum products. Sinopec Group will build a $1.2 billion refinery having a capacity of 205,500 b/d at Qingdao in Shandong province, and CNOOC Group plans a $2.1 billion oil complex at Huizhou in southern Guangdong province. CNOOC's refinery will have a capacity of 246,600 b/d. When completed by 2007-08, the two projects would represent about 7% of the country's total refining capacity, currently put at 6.2 million b/d.

Air Products & Chemicals Inc., Allentown, Pa., plans to construct and operate a 110 MMscfd hydrogen production plant at Motiva Enterprises LLC's 225,000 b/d Convent, La., refinery. Motiva is a joint venture of Shell Oil Co. and Saudi Refining Inc. The natural gas-based steam methane reformer is expected to be on stream in November 2005. In addition to supplying Motiva, Air Products will supply hydrogen to Marathon Ashland Petroleum LLC's 255,000 b/d Garyville, La., refinery and other customers on Air Products' 90 mile Baton Rouge-Norco, La., pipeline. The hydrogen will be used to reduce sulfur content in gasoline and diesel. Air Products' Canadian affiliate Air Products Canada Ltd. plans to construct, own, and operate an 80 MMscfd hydrogen production plant to supply hydrogen to the Suncor Energy Products Inc. 85,000 b/d refinery and the Shell Canada Products 76,000 b/d refinery, both in Sarnia, Ont. The hydrogen plant is expected to be operational in May 2006. The Air Products natural gas-based steam methane reformer, to be located on a part of the Shell Manufacturing Center land, will help the refineries produce low-sulfur transportation fuels and other petroleum products. The hydrogen will be delivered by pipeline to Suncor. Repairs to the crude oil plant at the Mongstad refinery near Bergen—necessitated by a fire July 12 (OGJ Online, July 12, 2004)—are nearing completion, and full prouct on is expected by the end of July, Statoil reported. Following the fire, production had been reduced to roughly half of the normal 180,000 b/d output. Some minor follow-up tasks will continue during the next few weeks, Statoil added, and financial consequences will be announced the beginning of August. Although the cause of the fire was not announced, an investigative report is expected in mid-August.

ZAO ARMROSGAZPROM, operator of the planned $210-220 million Iran-Armenia natural gas pipeline, has begun construction on the 100 km Iranian section (OGJ, Feb. 3, 2003, p. 62), Russia's Interfax news agency reported. Armrosgazprom is a consortium of Russia's OAO Gazprom 45%, Armenia's Energy Ministry 45%, and Russia's Itera 10%. The planned $140 million Armenian section will extend another 41 km from the Iranian border to Kajaran, 320 km from Yerevan in southeastern Armenia and will include rehabilitation of the existing Kajaran-Yerevan gas pipeline. The 700-mm pipeline will deliver 1.1-2.3 billion cu m/year of gas to Armenia for 20-25 years. The gas, slated for first delivery in January 2007, will be used in Armenian electric power plants, which will export power to Iran and Georgia. China Petroleum Engineering & Construction Group Corp. has selected Telvent to supply supervisory control and data acquisition (SCADA) services for the 817 km White Oil pipeline project in Pakistan. Telvent is a unit of Abengoa's Information Technology, Madrid. Pak-Arab Refinery Ltd. (Parco), Karachi, formed a joint venture, Pak-Arab Pipeline Co., in which Parco has 51% equity interest, with 49% shared by oil marketing companies in Pakistan (OGJ, Apr. 15, 2002, p. 67). Parco said the $480 million, 26-in. pipeline and related facilities will move 12 million tonnes/year of products from Karachi to Mahmood Kot.

The US rig count continued to creep up the week ended July 23 with 1,216 rotary rigs working, 5 more than the previous week and up from 1,091 during the same period a year ago, Baker Hughes Inc. reported. US land drilling increased by 3 rigs to 1,097, while offshore activity was up by 2 units to 94 in the Gulf of Mexico and 99 in US waters as a whole. Inland water activity was unchanged at 20 units. Canada's rig count jumped by 139 units to 380 active rigs, down from 424 a year ago.