OGJ Newsletter

Oct. 25, 2004
Energy futures prices rebounded to new highs on Oct. 20 after 2 days of profit-taking from the previous run-up on the New York Mercantile Exchange.

Market Movement

Energy futures prices rebound to new highs

Energy futures prices rebounded to new highs on Oct. 20 after 2 days of profit-taking from the previous run-up on the New York Mercantile Exchange.

On Oct. 15, the November contract for benchmark US light, sweet crudes hit a record $55/bbl in intraday trade before closing at a new high of $54.93/bbl on NYMEX. That contract lost a total of $1.64 over the next two trading sessions as speculators locked in profits, finally closing at $53.29/ bbl on Oct. 19 after dropping to $52.59/bbl in that session.

That same contract rebounded to close at $54.92/bbl on Oct. 20 after pushing past the $55 mark to $55.20/bbl in intraday trade on NYMEX. Heating oil for November delivery jumped by 5.19¢ to a record closing of $1.5604/gal after touching an all-time high of $1.565/gal that day. Natural gas for the same month continued to build on its gains from the previous two NYMEX sessions, soaring by 50¢ to $7.62/Mcf, "the highest settlement price in nearly 2 years," said analysts at Enerfax Daily.

Distillate stocks plummet

The spike in commodity prices was driven by an Energy Information Administration report that US distillate fuel stocks fell for the fifth week in a row, plummeting by 1.9 million bbl to 119 million bbl during the week ended Oct. 15. With Nov. 1 marking the official start of the winter heating season, distillate stocks remained at the lower end of the average range for this time of year.

"Distillate inventories are now 10.1% below last year and 9.5% below normal. Also, heating oil, or higher sulfur distillate fuel oil, inventories fell 515,000 bbl last week with inventories now 11% below last year and 23% below normal with the start of winter approaching," said Robert S. Morris, Banc of America Securities LLC, New York.

Commercial US crude inventories increased by 1.2 million bbl to 279.4 million bbl in the week ended Oct. 15, EIA reported, while gasoline stocks were up by 700,000 bbl to 199.9 million bbl. US refiners actually reduced production of heating oil "somewhat" during that period, EIA said.

Despite record high prices for distillate fuel, "production has not responded," said Paul Horsnell, Barclays Capital Inc., London. "The refining system [is] finding it impossible to achieve any catch-up after the reduction in output caused by Hurricane Ivan."

Crude input into US refineries increased by 280,000 b/d to nearly 14.8 million b/d in the latest reported period as some refineries returned to normal operations after routine maintenance, said EIA.

US gasoline production increased, averaging 8.7 million b/d, but imports of finished gasoline and blending components dropped sharply, averaging 720,000 b/d.

US imports of crude oil averaged 10.1 million b/d in the latest reported period, up by 43,000 b/d from the previous period. "It appears that the amount of imports from Mexico was particularly high again," said EIA officials. Distillate fuel imports averaged 344,000 b/d in the latest period.

EIA subsequently reported 64 bcf of natural gas was injected into US underground storage in the week ended Oct. 15.

Higher prices possible

Market fundamentals, especially for heating oil, "continue to argue for higher prices," said Horsnell. "Unlike in previous years, there is no potential exportable surplus of heating oil in Europe to help ameliorate the tightness in the US."

He also noted, "Retail fuel prices in the US, while still very modest indeed by European standards, have continued to set new records." The US Department of Energy reported that the retail price for regular unleaded gasoline in Los Angeles recently averaged $2.441/gal, the highest level ever recorded in the US. "The national average [retail gasoline price] has risen back above $2/gal and is now less than 3¢ below the peak hit in late May," Horsnell said. "While gasoline continues to be the main focus of attention because of its direct impact on discretionary consumer expenditure, the more extreme rise in diesel prices should not be overlooked."

Horsnell said, "Diesel prices have risen by 68¢/gal since the start of [this] year and currently show a year-over-year rise of 45%. The dramatically increased cost of road and rail freight has to be absorbed somewhere, whether in reduced profits along the supply chain or pressure on the prices charged to the final consumer. Recent movements in wholesale prices offer the prospect of some pressure coming off retail gasoline prices. By contrast, the heating oil price crisis means that the retail diesel prices are unlikely to gain sufficient relief very quickly."

Industry Scoreboard

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Industry Trends

WORLD OIL FIELD SPENDING is expected to hit a record this year, prompted by robust oil and natural gas prices.

Spears & Associates Inc., a Tulsa-based market research company, said that worldwide spending on equipment and services is expected to increase to $110 billion in 2004 from $103 billion in 2003, Spears said (see related story, p. 41).

The conclusion comes in its annual Oilfield Market Report, which estimates sales for 200 public and private oil field equipment and service companies worldwide.

The strongest gains are in categories for oil country tubular goods, inspections, and drillbits, each of which is expected to grow more than 20% this year. Soaring steel prices contribute to the increases.

Out of 33 market segments, spending is expected to increase by 10-20% in 18 segments during 2004, including land contract drilling, pressure pumping services, directional drilling, completion equipment, and artificial lift.

Several market segments will decline this year, including offshore contract drilling, offshore construction, rig equipment, and supply vessels. One factor in the declines is improved drilling efficiencies delivered by rotary steerable drilling technologies (RST) and fixed cutter bits. Spears estimates that 10 million ft of hole will be drilled with RST in 2004.

THE MINISTRY OF NATURAL RESOURCES CANADA reaffirmed its commitment to the wind-power industry by helping finance a wind-power project.

Minister of Natural Resources Canada R. John Effort said his department invested $24.7 million (Can.) in the Summerview Wind Farm near Pincher Creek, Alta. He spoke during the Canadian Wind Energy Association of Canada Conference in Montréal Oct. 18.

"Wind power is part of our answer to climate change and represents significant opportunities for economic growth and new jobs. We want Canada to make the most of its tremendous potential to diversify its electricity generation," Effort said.

The Summerview Wind Farm, built by Calgary-based Vision Quest Windelectric Inc., has a 68.4 Mw capacity and represents the first phase of a 130-Mw project. Vision Quest Windelectric is an independent subsidiary of TransAlta Corp., Calgary.

Government Developments

FIVE US CONGRESSIONAL MEMBERS have written the US Environmental Protection Agency seeking investigation of the regulation of hydraulic fracturing, a request that an industry spokesman said was politically motivated.

"This appears to be pure politics," said Bill Whitsitt, president of the Domestic Petroleum Council, Washington, DC. "This is a nonissue about a nonproblem."

Halliburton Co. is one of three US companies that dominate the hydraulic fracturing market. US Vice-Pres. Dick Cheney spent 5 years as CEO and chairman of Halliburton.

In separate requests, four Democrats and one independent asked EPA Administrator Mike Leavitt to investigate the practice.

Reps. Mark Udall and Diana DeGette, both Democrats from Colorado, also called for congressional hearings. Sens. James M. Jeffords (I-Vt.) and Barbara Boxer (D-Calif.) asked Leavitt to explain why EPA was not monitoring fracturing under the Safe Drinking Water Act.

Rep. Henry A. Waxman (D-Calif.) questioned whether "political considerations improperly influenced" an EPA study completed in June which found that fracturing in coalbed methane fields did not threaten drinking water. Waxman and DeGette are on the House Energy and Commerce Committee.

Hydraulic fracturing involves pumping liquids underground at high pressure; some of the fluids remain in the subsurface. The lawmakers cited concerns that these liquids contain hazardous chemicals and could contaminate groundwater.

Previous investigations by EPA and others have found no environmental damage associated with hydraulic fracturing, Whitsitt said.

Currently, state governments regulate the practice through permitting programs. States also have underground injection control (UIC) programs to manage liquid wastes and the reinjection of produced waters.

The National Petroleum Council estimates that 60-80% of all gas wells drilled in the next decade will require fracturing. The American Society of Petroleum Geologists opposes strict federal environmental regulation of fracturing.

Hydraulic fracturing has been an issue for years, stemming from litigation that started in the mid-1990s when the Legal Environmental Assistance Foundation (LEAF) petitioned EPA to require Alabama to regulate hydraulic fracturing under the UIC program. EPA rejected LEAF, saying Congress never intended for UIC to cover hydraulic fracturing.

Fearing continued litigation, industry associations pushed for a legislative resolution of the issue. The House adopted a provision under comprehensive energy legislation to prevent hydraulic fracturing from being regulated under the EPA UIC program. The legislation has not been passed.

THE US FEDERAL ENERGY REGULATORY COMMISSON was the target of a letter-writing campaign from 35 House of Representative Democrats representing Western states.

They urged President George W. Bush to order FERC to refund billions of dollars to energy consumers in California and other Western states.

The group also wrote to FERC Chairman Pat Wood, calling for FERC "to stop abdicating its duty," said House Minority Leader Nancy Pelosi (D-Calif).

The lawmakers said the US Court of Appeals for the 9th Circuit found in September that FERC unfairly denied billions in potential refunds for price manipulation in natural gas markets during October 2000 through June 2001 (OGJ Online, Apr. 2, 2003).

"Enron [Corp.] and other energy companies manipulated the market in the West. Consumers in California, Nevada, Oregon, and Washington who have been harmed by the unscrupulous activities of energy suppliers deserve the refunds that FERC has so far denied," the letter said.

California lawmakers said Californians deserve nearly $9 billion in refunds.

Quick Takes

CHEVRONTEXACO CORP. reported that a test of its Tahiti discovery well, Green Canyon 640 No. 1 in the Gulf of Mexico, indicates that production could be as much as 30,000 b/d of oil, exceeding pretest estimates of 25,000 b/d. The well's peak rate during the production test reached 15,000 b/d. "The well test was successfully completed in early September in 4,100 ft of water and at 25,812 ft subsea," said Kathleen Arthur, vice-president of ChevronTexaco's Gulf of Mexico deepwater unit. "This makes it the deepest successful well test in the history of the Gulf of Mexico, which is even more significant because it is in a high-pressure environment." Tahiti was announced as a significant discovery in 2002, with a net pay zone of more than 400 ft (OGJ Online, Apr. 3, 2002). Subsequent appraisal resulted in one of the most significant net pay accumulations in the history of the Gulf of Mexico, with one well encountering more than 1,000 ft of net pay in high-quality sandstone. ChevronTexaco earlier announced major engineering contracts for development of Tahiti's subsea systems and floating production facility (OGJ Online, Apr. 15, 2004). ChevronTexaco is the operator of the Tahiti Project with a 58% working interest. Tahiti partners are EnCana Gulf of Mexico LLC 25% and Shell Gulf of Mexico Inc. 17%.

Premier Oil PLC reported the successful appraisal of Gajah Baru field on West Natuna Block A in the West Natuna Sea off Indonesia. The Gajah Baru-2 appraisal well proved gas in stacked reservoirs in the Arang formation, which the Gajah Baru-1 discovery well found in 2000. Premier estimates that recoverable volumes in Gajah Baru field have increased to 325 bcf or 54 million boe. Gajah Baru-2 was drilled to 9,010 ft TD, encountering gas-bearing Miocene reservoirs (Arang formation) and Oligocene sands (Gabus formation). Premier used the casing-while-drilling technique, drilling the top section of the well to 2,214 ft with 133/8-in. casing. Premier is operator, and partners are Kufpec (Indonesia) Ltd., Amerada Hess International Ltd., and Petróleo Brasileiro SA.

Dallas-based Harken Energy Corp. subsidiary Global Energy Development PLC has begun drilling the Estero No.5 development well in Palo Blanco field in Colombia's Llanos basin. Global is drilling Estero No. 5 to 9,000 ft, targeting the Traditional Ubaque, Massive Ubaque, and Mirador formations. The company expects to complete the well by Nov. 30. Estero No. 5 is the first of nine wells scheduled to be drilled or completed within the next 12 months in Global's Palo Blanco field and its new Rio Verde contract acreage.

Nexen Inc., Calgary, said it will participate in several deep shelf exploratory tests in the Gulf of Mexico by yearend. Newfield Exploration Co., Houston, operator of Main Pass Block 240, will resume drilling a deep shelf test well this month with a new rig. The well was approaching TD when Hurricane Ivan damaged the first rig last month. The prospect, in which Nexen holds a 45% interest, is 55 miles east of Venice, La., in 175 ft of water. Results are expected by yearend. Following completion of that well, Newfield will spud a well on Main Pass 273, about 50 miles east of Venice in 200 ft of water. Nexen holds 30% interest. Devon Energy Corp., Oklahoma City, expects to spud a well at the Big Bend prospect on Mustang Island A-110 about 50 miles off Port Aransas in 300 ft of water. Devon and Nexen are 50:50 partners. Gryphon Exploration Co., an affiliate of Houston-based Cheniere Energy Inc. and operator of the Wind River prospect on West Cameron 335, is to start drilling on the block in 75 ft of water 50 miles off Louisiana. Gryphon and Nexen are 50:50 partners. Santos Ltd. has made an oil and natural gas discovery with its Jeruk 2 ST-2 well on the Sampang production-sharing contract area in the Madura Strait off East Java. During an open-hole drillstem test over an 18 m interval at 5,134-52 m MD, the well flowed 7,488 b/d of oil and 2.21 MMcfd of gas through a 1/2-in. choke with 2,762 psi flowing tubing pressure during a 51/2-hr flow period. The flow rae was constrained by the throughput capacity of surface production test facilities, Santos said. Following the flow test, the well was shut in for measurement of pressure build-up. Jeruk 2 will be deepened to evaluate the extent of the hydrocarbon column. Drilling of the Jeruk 2 well followed that of the Jeruk 1, which was finished early this year about 1.6 km to the west of Jeruk 2(OGJ Online, Apr. 30, 2004). Santos and PT Medco Sampang each hold 50% interest in the area.

Total SA, Paris, and Tecpetrol SA, Buenos Aires, reported the first discovery on the Ipati Block in southeastern Bolivia. The Incahuasi X1 exploratory well flowed more than 35 MMcfd of gas through a 44/64 in. choke from an undisclosed interval. TD is 5,150 m. The discovery is in the Chaco basin 300 km south of Santa Cruz and about 165 km north of the border with Argentina. Total 80% and Tecpetrol 20% are partners in the Ipati and adjacent Aquio blocks. Total said the discovery strengthens its position as a gas operator in Bolivia. Present in the country since 1996, the group discovered Itau gas field in 1999 on the XX Block, which it operates with a 45% interest. Total also has a 15% interest in San Alberto and San Antonio fields, which have supplied gas to Brazil since 1999 and to Argentina since 2004. Repsol YPF SA has signed a $27 million contract with National Iranian Oil Co. (NIOC) to explore the Mehr and Forooz blocks in the south of the Persian Gulf for 21/2 years. The agreement covers exploration operations, including geological and geophysical studies, and the drilling of two wells in the blocks, which have an overall surface area of 14,600 sq km. The contract forms part of Repsol YPF's strategy to strengthen its exploration portfolio in high potential areas for petroleum and increase operations in the Middle East. In addition, Repsol YPF and Royal Dutch/Shell recently signed an agreement with NIOC to explore for natural gas in Iran.

IMPERIAL OIL LTD., Toronto, will invest $500 million (Can.) during the next 2 years at its four refineries in Canada to produce ultralow-sulfur diesel fuel for on-road vehicles. New 2007 model diesel vehicles will have engines designed for ultralow-sulfur diesel. Work to reduce sulfur levels by almost 95%—to 15 ppm by June 1, 2006—has begun at Imperial's Strathcona refinery in Alberta, its Sarnia and Nanticoke refineries in Ontario, and its Dartmouth refinery in Nova Scotia. Imperial Oil already has reduced the sulfur content of its gasoline by more than 90%, to 30 ppm, it said.

THE BOARDS of Adelaide-based Santos Ltd., Australia Worldwide Exploration Ltd. (AWE), and Japan's Mitsui & Co. Ltd. approved the $200 million development of Casino natural gas field on VIC/P44 in the Otway basin off western Victoria. Casino field, the first commercial development within VIC/P44, is 29 km off Port Campbell in water 70 m deep. The consortium expects shortly to spud its first exploration well, Martha 1. Field construction activities are slated for first quarter 2005. Raw gas will be transported to Victoria from the field through a pipeline to the Iona processing facilities of SPI Electricity Pty. Ltd.—trading as TXU Australia—which has concluded a new, larger gas sales contract with the consortium. First production is anticipated in first quarter 2006, with Casino's gas production projected to plateau at 35 petajoules (PJ)/year (33 trillion btu/year). VIC P/44 participants are Santos, the operator with a 50% interest, AWE subsidiary Peedamulla Petroleum Pty. Ltd. 25%, and Mitsui unit Mittwell Energy Resources Pty. Ltd. 25%.

US DRILLING ACTIVITY dipped slightly the week ended Oct. 15, down by 5 units with 1,225 rotary rigs working, compared with 1,115 during the same period last year, said Baker Hughes Inc. Offshore operations accounted for the bulk of the decline, down by 4 units to 87 in the Gulf of Mexico and 92 in US waters overall. Land drilling dipped by 1 unit to 1,115 rigs working. Inland waters operations were unchanged with 18 rigs. Canada's rig count increased by 5 to 410 rotary rigs working, up from 391 a year ago.

SHELL UK LTD., on behalf of coventurers Esso Exploration & Production UK Ltd, Paladin Resources PLC, and Centrica Energy PLC, reported the start of production from Goldeneye gas-condensate field in the Outer Moray Firth, 100 km north of St. Fergus, Scotland. The $650 million project will fill about 3% of the UK's gas needs as the country becomes a net gas importer. Plateau gas production is estimated to be 300 MMscfd of gas and associated liquids, Shell said. Goldeneye field, discovered in 1996 and initially regarded as economically marginal, transfers gas and condensate at reservoir pressure via a 105-km pipeline from an unmanned platform to the Shell-Esso onshore processing facility at St. Fergus. BlackRock Ventures Inc., Calgary, has received environmental and Alberta Energy and Utilities Board approvals to develop the company's 20,000 b/d Orion steam-assisted gravity drainage property as a commercial oil sands project at Hilda Lake in Alberta. BlackRock, 100% owner of the property, has recovered 1.2 million bbl of oil operating a pilot at Hilda Lake for more than 7 years. Orion has the potential to recover as much as 190 million bbl of oil during a 25-year project life, BlackRock said. The company will seek board of directors approval in November to begin the $10 million detailed engineering for the commercial project. Phase I is expected to cost $150 million and produce 10,000 b/d of oil.

SUNOCO LOGISTICS PARTNERS LP, Philadelphia, has signed an agreement with West Texas Gulf Pipe Line Co. to become its operator Jan. 1, 2005. Sunoco holds 43.8% interest in West Texas Gulf, a joint venture that owns a 579-mile common carrier crude oil pipeline from Colorado City, in West Texas, to the Nederland, Tex., crude oil import terminal and to Longview, Tex. There it connects to several pipelines, including the Mid-Valley Pipeline, which is 55% owned by Sunoco Inc. Sunoco Logistics was formed to acquire, own, and operate all of Sunoco's refined products and crude oil pipelines and terminal facilities. Houston-based Kinder Morgan Inc. is planning a $20 million capacity increase on its 300-mile TransColorado interstate natural gas pipeline delivering gas from the Piceance basin in western Colorado to the Blanco Hub in northwest New Mexico. KMI in August completed a $33 million expansion project that increased long-haul southbound capacity to 425 MMcfd from 300 MMcfd. The new expansion will add 300 MMcfd of capacity, enabling gas on the northern portion of the system to flow both north and south. The additional capacity is expected to be available in January 2006. The expanded system also will connect with the Wyoming Interstate Co. pipeline at the Greasewood Hub. Lukoil Overseas Holding Ltd. has put into operation a 100 km export pipeline connecting Khurghada, Egypt, to General Petroleum Co.'s Ras El Bikhar terminal and the Geisum terminal at Gebel Az Zeit on the country's western Red Sea coast. The $8 million pipeline is designed to transport as much as 24,000 b/d of oil from the West Esh El-Mallaha (WEEM) block, which produced 545,200 tonnes of oil in 2003. Construction of a refinery and additional drilling operations are scheduled for 2005. Lukoil Overseas holds 50% of the concession, which was discovered in January 1998.

THREE INDIAN SHIPOWNERS—state-owned Shipping Corp. of India (SCI), and private-sector firms Great Eastern Shipping Co. Ltd. and Varun Shipping Co. Ltd., both of Mumbai—have proposed the formation of a joint venture to ship LNG to the $650 million LNG terminal being built by Royal Dutch/Shell Group at Hazira on the Gujarat coast. The terminal, which will have an initial capacity of 2.5 million tonnes/year of LNG, is one of the largest foreign direct-investment projects in the country. It is slated to produce commercial gas by early 2005. Present guidelines for LNG shipping projects in India require that long-term charters signed by any LNG importer be with a company that has minimum Indian shareholding of 26%. This is the case of a joint venture floated for the terminal being developed by state-run Petronet LNG. Thus far, this standard has been applied case by case but is likely to be formalized in the LNG shipping policy to be released soon. One of the two vessels is already in use, while the other is to be delivered by January 2005. Officials indicated that the Shell terminal would require one monthly voyage from an LNG vessel with a minimum capacity of 140,000 cu m. Running a single vessel on the job would be possible if the gas came from western Asia. However, a second vessel would prove necessary if Shell chose a more distant source.

ENBRIDGE ENERGY PARTNERS LP's wholly owned subsidiary Enbridge Pipelines (Ozark) LLC reported that it will build 2.3 million bbl of crude oil tankage at its Cushing, Okla., storage terminal. Construction of four 575,000-bbl tanks and associated facilities makes up the company's $28 million Cushing Terminal expansion project, which is to begin later this year. The tanks and facilities are expected to be in service by yearend 2005. The Cushing terminal is part of the company's Midcontinent Liquids System. Enbridge completed its acquisition of the crude oil system in March.