OGJ Newsletter

Sept. 6, 2004
From a then-record closing price of $48.70/bbl on the New York Mercantile Exchange Aug. 19, near-month contract prices for benchmark US light, sweet crudes plunged to $42.12/bbl Aug. 31 as speculators locked in profits, only to rebound to $44/bbl Sept. 1 on reports of a large drop in US crude inventories.

Market Movement

Speculation triggers volatile price changes

From a then-record closing price of $48.70/bbl on the New York Mercantile Exchange Aug. 19, near-month contract prices for benchmark US light, sweet crudes plunged to $42.12/bbl Aug. 31 as speculators locked in profits, only to rebound to $44/bbl Sept. 1 on reports of a large drop in US crude inventories.

"Despite the recent slide in prices, little has changed in the fundamentals of the oil market, and the [latest] US weekly [inventory] data should help to curtail speculative selling. It does not appear that global inventories are yet building fast enough, with global oil demand continuing to accelerate," said Paul Horsnell, Barclays Capital Inc., London.

With one of Iraq's southern pipelines closed because of insurgent threats and its Basra export terminal on the Persian Gulf operating at half capacity, NYMEX crude futures prices seemed as of Aug. 19 to be on a relentless march toward $50/bbl. But after touching an all-time high of $49.40/bbl, crude futures prices fell in profit-taking Aug. 20 as speculators pulled out of a market that some said appeared overheated, with a high-risk premium built into prices as a result of violence in Iraq vs. a perceived lower risk of an actual disruption of supplies.

Meanwhile, the US Energy Information Administration reported Sept. 1 that US crude inventories fell by 4.2 million bbl to 287.1 million bbl during the week ended Aug. 27, the lowest level since mid-March. It marked the fifth decline in US crude stocks in as many weeks.

Iraqi exports rise

Prices continued falling as Iraq resumed transporting crude via pipeline from its northern Kirkuk field to the Mediterranean port of Ceyhan, Turkey. Starting Aug. 21, workers soon were moving 400,000-450,000 b/d through that repaired pipeline, down from a prewar capacity of 800,000 b/d. Iraq also reactivated a southern pipeline that had been shut down for 2 weeks because of threats from insurgents, increasing exports to 1.8 million b/d from 1 million b/d previously.

That increase triggered an avalanche of sales orders in crude futures markets on Aug. 24. NYMEX crude futures prices rebounded slightly Aug. 27, following the first in a series of attacks by insurgents against oil field facilities in Iraq. On Aug. 28, insurgents blew up a pipeline 90 miles north of Basra. That was followed by strikes against five pipelines linked to the southern Rumaila oil fields that shut down a pumping station, forcing officials to use reserves from storage tanks to keep exports flowing for several hours. The reserves ran out Aug. 29, and crude exports from Basra were halted.

Energy prices resumed their downward spiral Aug. 30, wiping out small gains from the rebound, with the approaching end of the US summer driving season effective Sept. 6, the US Labor Day holiday. That is likely to signal a major decrease in US gasoline demand, with refineries switching production to heating oil for the winter season, analysts said. Moreover, Raymond James & Associates Inc., St. Petersburg, Fla., reported Iraq's crude exports were back near normal levels following repairs to the pipeline damaged in a weekend attack. Those repairs were completed 3 days earlier than officials originally estimated.

Raymond James analysts reported crude was flowing to Iraq's southern export terminals at a rate of 1.7 million b/d, up from 1.4 million b/d Aug. 29. They reported the first shipment of oil from Iraq's northern oil fields in 3 months was loaded Aug. 31 at Ceyhan. "The main northern export pipeline had been shut in, with rare exceptions, for over a year," analysts said.

Alternative energy era

Despite the recent price slippage, however, Bernard J. Picchi, senior managing director of Foresight Research Solutions LLC, New York, warned that crude prices "are very unlikely to return to $17-20/bbl." Like many others, he predicted prices would escalate in the next "inevitable" Middle East crisis.

"Even if oil were to hit $50/bbl, it wouldn't tank the US economy," Picchi reported. "Gasoline would have to rise to $5.75/gal to have the same impact today as it did on the more energy-intensive economy of 1980."

Meanwhile, he said, consumers "cannot depend on either [the Oganization of Petroleum Exporting Countries] or Russia to restore a margin of spare production capacity to soothe the jangled nerves of the West's oil buyers." Instead, the world must seek other energy sources, Picchi said: "This will be the decade of alternative energy development. LNG, gas-to-liquids, tar sands, wind power, biomass, and other alternative energies will be to the present era what Alaska and the North Sea were to the '70s and '80s: a major new source of energy that will eventually loosen the grip of OPEC and high oil prices. This will not happen overnight."

Industry Scoreboard

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Industry Trends

OFFSHORE DRILLING fundamentals continue to improve, driven by strong energy commodity prices and increased upstream investment in offshore markets worldwide, Merrill Lynch Global Securities Research & Economics Group said.

"After lagging the large and mid[capitalization] oil service stocks thus far in the industry recovery, we believe the relative performance of offshore drilling stocks will likely improve in 2005 as earnings begin to grow more consistently," analyst Mark Urness said in an Aug. 31 research note.

Worldwide offshore rig utilization is estimated to improve to 87% in 2005 from 83% in 2004. Oil and gas companies are expected to continue increasing capital spending to offset declining production volumes and to increase their reserves, he said.

He noted that the primary risk to Merrill Lynch's investment thesis is the future potential for global economic weakness, which would adversely impact oil and natural gas demand and lead to lower commodity prices.

The jack up drilling market is the strongest, with a current utilization of 88%, compared with deepwater rig (semisubmersibles and drillships) utilization of 76%.

"Day rates should begin to move up more sharply as the worldwide utilization level begins to exceed 85% on a sustained basis. Beginning in 2006, we expect global utilization will exceed 90%, pushing day rates and earnings up sharply for offshore drilling companies," Urness said.

With higher utilization, day rates are expected to rise 10-20% on average during 2005, compared with relatively flat day rates during 2004.

"However, we estimate day rates next year will average less than 60% of replacement day rates, leaving substantial remaining upside in 2006-07," he said.

Merrill Lynch said the deepwater market remains a growth opportunity, although overcapacity following the late-1990s building boom persists. Rigs capable of drilling in waters deeper than 5,000 ft particularly are in strong demand.

ENERGY CATALYST demand is growing worldwide. The world energy catalyst market is estimated at $2.9 billion this year and is forecast to grow to $3.86 billion in 2009. That would represent an average annual growth rate of 5.7%, said Business Communications Co. Inc. of Norwalk, Conn.

The petroleum industry is the largest single user of catalysts, especially in producing refined products such as gasoline and diesel fuel, BCC said in a recently updated report entitled, "Catalysts for Environmental and Energy Applications."

Catalysts help increase the petroleum supply by making it commercially possible to produce oil from sources such as tar sands and heavy oil.

"They also are being used to produce increasing quantities of synthetic oil and gas from coal and oil shale. Also, catalysts are in the forefront of technologies being developed to replace conventional fossil fuels," BCC said.

The refining industry accounted for nearly 90% of the energy catalyst market in 2002-04, but the refining industry is forecast to lose market share during 2004-09 because other energy applications, particularly synthetic fuels, are expected to consume increasing amounts of catalysts.

Government Developments

JAMAICA IS NEGOTIATING with Trinidad and Tobago to supply LNG to Jamaica, although price is an issue of contention.

Anthony Hilton, special adviser to Jamaican Prime Minister P.J. Patterson, said the negotiations would not preclude Jamaica's trying to force the Trinidad-based Atlantic LNG complex to sell LNG to Jamaica at a "Caribbean price." The two Caribbean nations long have argued over the price, with Trinidad and Tobago contending that Jamaica must pay the US Henry Hub natural gas price.

Meanwhile, Jamaica argues that, as both are members of the Caribbean Single Market and Economy, Atlantic LNG must sell Jamaica LNG at the same price as gas sold in Trinidad and Tobago, with only shipping charges added.

In response, Jamaica turned to Qatar as a possible supplier (OGJ, Aug. 25, 2003, p. 46).

Hilton said Jamaica now is negotiating privately with Trinidad and Tobago, "out of the public glare." He has assured Trinidad and Tobago that Jamaica has the capacity to support a world scale LNG regasification plant. Skeptics who suggest Jamaica might not have the energy demand to support an LNG regasification terminal are "absolutely incorrect," Hilton said.

"Demand is greater than we had initially anticipated, because of developments in the bauxite industry," he told OGJ. "We can now say that the entire industry is willing to convert to natural gas, and in so doing we estimate that the demand will be 1.5-2 million tonnes/year." Jamaica is committed to a regasification facility coming on stream by 2007, Hilton said.

INDUSTRY LEADERS are urging Taiwan government officials to relax a ban against Taiwanese companies from investing in refining and petrochemical manufacturing activities in China.

Industry representatives argue that companies in other industries are allowed to invest in China. The ban against refining and petrochemical companies weakens their position against rivals in Japan and South Korea, they said.

Numerous Taiwanese companies and groups have developed investment plans for China pending Taiwan government approval. The Petrochemical Industry Association of Taiwan is advocating the establishment of a naphtha steam cracker to produce 1 million tonnes/year of ethylene.

Formosa Petrochemical Corp. also is contemplating construction of a steam cracker in China. Formosa has submitted project applications to the Taiwan Ministry of Economic Affairs and the Mainland Affairs Council but has not received a response from either body.

THE WORLD BANK GROUP formally reaffirmed its intention to continue investing in developing nations' oil and natural gas projects.

Earlier this summer, the World Bank said that it plans to dramatically change its lending practices to developing nations that request money to expand their oil, gas, and mineral production.

But bank officials last month rejected suggestions by some environmentalists, human rights groups, and an independent auditor that the World Bank stop financing oil projects by 2008.

Although oil project financings will continue, World Bank officials also said that they will focus more on gas projects and will consider expanding an existing alternate fuel portfolio to include more solar and wind projects (OGJ, June 28, 2004, p. 30).

Quick Takes

FUJIAN PETROCHEMICAL CO. LTD. (FPCL) 50%, ExxonMobil China Petroleum & Petrochemical Co. Ltd. 25%, and Aramco Overseas Co. BV 25% have agreed to begin front-end loading design for a $3.5 billion refining and chemicals complex in Fujian Province, China. The group would expand an existing refinery at Quangang, Quanzhou City, near Meizhou Bay to 240,000 b/d from 80,000 b/d, upgrade it to refine sour Arabian crude, and add a chemical complex containing an 800,000 tonne/year ethylene steam cracker, polyethylene and polypropylene units, and a 700,000 tonne/year paraxylene unit. Completion is envisioned for first half 2008. FPCL is a 50-50 joint venture of China Petroleum & Chemical Corp. and the Fujian government. In addition, Sinopec 55%, ExxonMobil 22.5%, and Saudi Aramco 22.5% will establish a fuels marketing system of more than 600 service stations throughout Fujian Province. Taiwan's Council for Economic Planning and Development has approved a $1.25 billion, 6 year expansion plan for Chinese Petroleum Corp.'s third naphtha cracker in the Kaohsiung Linyuan petrochemical industrial zone. A key component of the expansion will be installation of a 1 million tonne/year production line for ethylene. A company spokesman said Taiwan currently experiences an annual shortage of 170,000 tonnes of ethylene and that the annual shortfall is expected to reach 900,000 tonnes before the company's expansion project is completed in 2011. An explosion Aug. 31 that killed at least five people and injured many others at the Sasol Polymers ethylene plant in Secunda, South Africa, is under investigation by Sasol Ltd., Johannesburg, and South Africa's Department of Labor. Initial information indicates that the blast was caused by a gas leak that ignited. The ethylene plant, part of Sasol Polymers' chemicals production facility, currently is undergoing planned maintenance, and several contracting firms were on site. Fuel production was not affected by the explosion or fire, Sasol said.

US DRILLING ACTIVITY increased slightly the week ended Aug. 27 to the highest level in 3 years, up by 9 units to 1,239 rotary rigs working, Baker Hughes Inc. reported. That's the highest rig count since early September 2001 when 1,252 rigs were drilling. Land operations accounted for the week's increase, up by 12 rigs to 1,127 working. Drilling in inland waters declined by 1 to 19. Offshore drilling operations dropped by 2 rigs to 93 for the US as a whole, including the Gulf of Mexico. Canada's rig count plummeted by 112 to 279 that week, down from 407 a year ago.

Hindustan Petroleum Corp. Ltd., Mumbai, India, selected technology from UOP LLC Des Plaines, Ill., to revamp existing fluid catalytic cracking units at its Mumbai and Vishakapatnam (Vizag) refineries to maximize LPG production. Hindustan Petroleum will install a new reactor and high-efficiency combustor regenerator to reduce nitrogen oxides emissions at its Mumbai location. Basic engineering was completed earlier this year for the 31,000 b/d FCCU at Mumbai and the 21,000 b/d FCCU at Vizag. LG-Caltex Oil Corp., part of South Korea's LG Group , awarded Haldor Topsøe AS, Lyngby, Denmark, a contract to convert two hydrotreating units at its LG Caltex 650,000 b/d refinery in Yosu, South Korea, to produce ultralow-sulfur diesel. It is the country's second-largest refinery, providing 30% of the nation's refined products supply. When revamped, the 60,000 b/d and 70,000 b/d units will produce a product containing less than 8 ppm of sulfur. Topsøe will provide supervisory services and supply the license, basic engineering, and reactor internals and catalysts.

VAALCO ENERGY INC. has completed the ET-5H development well in Etame field off Gabon. About 6,400 b/d of oil flowed on test through a 48/64-in. choke to the floating production, storage, and offloading facility, Vaalco said. ET-5H is the fourth producing well in Etame field. Vaalco plans to raise the production level until total field production exceeds 21,000 b/d of oil. Consortium partners are PanAfrican Energy Gabon Corp., Vaalco Energy, Sasol Petroleum West Africa (Ltd.), Energy Africa Gabon, Sojitz Etame Ltd., and PetroEnergy Resources Corp.

THE US MINERALS MANAGEMENT SERVICE will extend the terms of some exploration leases, propsective for deep gas, in the Gulf of Mexico shelf area so that lessees can conduct geophysical evaluations to find a drillable target. To be eligible, MMS said, the lease must have been in its primary term on or before Aug. 1, 2002; the potential target must be below 25,000 ft TVD subsea; the operator must have acquired and interpreted full 3D depth-migrated geophysical data beneath the salt sheet and over the entire lease area before the end of the fifth year of the primary term; and the operator must submit a reasonable schedule of work leading to the commencement of drilling. ExxonMobil Exploration Colombia Ltd., Colombia's Ecopetrol, and Brazil's Petróleo Brasileiro SA (Petrobras), have signed the first exploration and production contract with Colombia's National Hydrocarbon Agency to begin exploration activities in the Caribbean Sea off northern Colombia. The agreement covers the 11 million acre Tayrona block. ExxonMobil and Petrobras each hold a 40% interest in the block, with Ecopetrol holding 20%. During the program's initial 18 months, the companies will reprocess 2D seismic and acquire and analyze 3D seismic data.

ExxonMobil also will employ its proprietary electromagnetic survey technique, Remote Reservoir Resistivity Mapping. ChevronTexaco Australia Pty. Ltd. and Texaco Australia Pty. Ltd. reported a "significant" natural gas discovery at their 100% held Wheatstone field on retention lease WA-17-R off Western Australia. The Wheatstone-1 well, drilled 110 miles west-northwest of Dampier, flowed 54 MMcfd on test while constrained by rig equipment. The Transocean Sedco 703 semisubmersible spudded the well July 23 and drilled to 11,096 ft TVD in 700 ft of water. The well encountered 175 ft of net gas sands in the objective Jurassic Tithonian and Triassic Mungaroo AA sands within a 413 ft hydrocarbon column. Westech Energy New Zealand, a subsidiary of Denver-based Energy Corp. of America (ECA), has entredino a joint venture agreement with a Tap Oil Ltd. unit for an exploratory well off eastern New Zealand. Tap (New Zealand) Pty. Ltd., the operator, planned to spud Tawatawa-1 on Permit 38333, off southeastern North Island in late August. The well, 20 km off Wairarapa in water 200 m deep, will be a 1,500 m test of the Miocene. The 40 sq km prospect targets reserves greater than 1 tcfe of gas. ECA holds 50%, Tap 35%, and Claire Energy (Australia) Pty. Ltd. 15%. Apache Corp.'s latest two discoveries in Egypt's Western Desert tested at a combined rate of 70 MMcfd of natural gas and 2,330 b/d of condensate from prolific deep Jurassic sands. The Mihos-1X discovery on the Matruh concession logged 191 ft of net pay in the Alam El Bueb Cretaceous and Jurassic Upper and Lower Safa horizons at 12,350-15,700 ft. The Mihos discovery proves up a 1,500 acre trap in the Lower Safa reservoir with a gross hydrocarbon column exceeding 250 ft. Production is expected in early September. The Imhotep-1X discovery on the Khalda Offset concession is now on production. It flow-tested at 28.4 MMcfd of gas and 911 b/d of condensate following hydraulic-fracture stimulation. Apache operates both discoveries with a 100% contractor interest.

THE NEWLY CREATED Compressed Energy Technology (CETech) is developing a new concept for transporting compressed natural gas (CNG) from offshore fields (OGJ Online, May 4, 2004). Gas would be moved on vessels with large horizontal pipes carrying the gas under high pressure, with the largest ships capable of loading 20,000 tonnes of CNG. Statoil ASA, Canadian-owned Teekay Shipping Corp., and Norway's Leif Höegh & Co. are equal owners of CETech. The project has been under study with Det Norske Veritas, the Norwegian shipping and classification bureau, since 2002. CETech said the most relevant application in the short term would be from traditional gas field developments that are uneconomic because of production size—500,000-3 billion standard cu m/year—and location, 300-2,000 nautical miles.

CETech is planning ships that can carry gas in pipes under high pressure. Artist's rendition courtesy of Statoil ASA.
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Aminex PLC, London, and Australia-based Liquefied Natural Gas Ltd. (LNGL) have signed a memorandum of understanding to cooperate in natural gas exploration, development, liquefaction, and transportation projects in and off East Africa initially and possibly other African areas later. Aminex will source, develop, and produce stranded gas reserves, and LNGL will liquefy the gas and market and transport the LNG. LNGL plans to build a number of 100-1,000 tonne/day LNG plants with easy access to the gas reserves and deliver the LNG to international energy markets that cannot economically be supplied by pipeline or that are too small for the major international LNG suppliers.

EGYPT'S PETROLEUM MINISTER Sameh Fahmy has ordered the destruction of the Temsah natural gas production platform in deep water off Egypt, according to Agence France-Presse (AFP). The burning platform was severely damaged when an explosion and fire sank an adjacent drilling rig Aug. 10 and spread to the platform (OGJ Online, Aug. 11 and 12, 2004). After the platform's demolition, the site will be cleared and new wells drilled nearby, AFP reported. The platform normally produced 150-180 MMcfd of gas from Temsah field, one of Egypt's largest gas deposits. It had been shut down for maintenance since early August. The field is operated by Petrobel and owned by ENI SPA, BP PLC, and Egypt's General Petroleum Corp. In early August, Suncor Energy Inc. shut down bitumen production from its Firebag in situ operation in the Fort McMurray, Alta., area for unplanned maintenance of steam generators at the facility. Consequently, Suncor reduced its targeted annual bitumen production from Firebag to an average 13,000 b/d from its previous target of 15,000 b/d. Suncor estimated the work would be completed in early September. ChevronTexaco Corp. announced completion of the Hamaca upgrade at the Jose Industrial Complex to process extra-heavy crude from Venezuela's eastern Orinoco belt (OGJ Online, Aug. 9, 2004). During the fourth quarter, production is expected to ramp up from current production of 120,000 b/d. The Hamaca upgrader can process 190,000 b/d of extra-heavy crude and transform it into 180,000 b/d of high-quality synthetic crude. The facility constitutes the core infrastructure of the $3.8 billion Hamaca project, ChevronTexaco said. ChevronTexaco has 30% interest in the Hamaca project, ConocoPhillips owns 40% interest, and Venezuela's state oil company Petróleos de Venezuela SA holds 30%.

A PIPELINE LEAK leading to a natural gas pipeline explosion in southwestern Belgium July 31 in which 16 persons were killed and 115 injured likely was caused by construction workers building a road over the pipeline some weeks earlier, an official said. Deep symmetrical gouges were found etched into the pipe at the site, severely reducing pipe thickness. Fluxys NV, operator of the pipeline between Zebrugge and the French border, had increased pressure in the line that morning, following completion of normal maintenance procedures at Zebrugge. Fluxys, owned jointly by Royal Dutch/Shell Group, French utility Suez Group, and a group of municipalities, said disruptions to France's gas supply were minor. Vector Pipeline LP Sept. 1 initiated a 30-day open season for firm capacity on a 2006 mainline expansion of its gas transmission system. The pipeline transports 1 bcfd of gas, which can be increased to 1.5 bcfd by adding compressor stations. Vector supplies gas from the Chicago Hub at Joliet, Ill., to storage at Dawn, Ont., as well as to Wisconsin, Illinois, Indiana, Michigan, and Southwest Ontario. The 349 mile Vector pipeline system addition could be available as early as Nov. 1, 2006, Vector said. Vector is a joint venture of Calgary-based Enbridge Inc. and Detroit-based DTE Energy Co.

A WEEK-LONG FIRE at Duke Energy Gas Transmission's Moss Bluff natural gas storage cavern No. 1 in Liberty County, Tex., burned itself out Aug. 25. Duke began installation of a new valve assembly the following afternoon. The fire, which began with an explosion at the facility Aug. 19, followed by a second explosion Aug. 20, consumed an estimated 6 bcf of gas (OGJ Online, Aug. 20, 2004). Duke said undamaged Caverns 2 and 3 would remain closed until the cause of the original explosion was determined.