OGJ Newsletter

Nov. 8, 2004
As US voters went to the polls Nov. 2, the near-month crude contract dropped below $50/bbl on the New York Mercantile Exchange for the first time in 4 weeks, with benchmark US light, sweet crudes for December delivery down by 51¢ to $49.62/bbl.

Market Movement

NYMEX reacts to US presidential election

As US voters went to the polls Nov. 2, the near-month crude contract dropped below $50/bbl on the New York Mercantile Exchange for the first time in 4 weeks, with benchmark US light, sweet crudes for December delivery down by 51¢ to $49.62/bbl.

Some analysts said weakening economies and growing confidence that energy supplies would be adequate this winter were reasons for the price drop, which started Nov. 1 as many speculators pulled out of the energy market. But there also was talk that the possibility that Democratic challenger John Kerry might win the US presidential election contributed to the sell-off because he might have done something to lower energy prices.

Crude futures prices rebounded early in the Nov. 3 NYMEX session as it became evident that President George W. Bush would win reelection. The December crude contract shot up by $1.26 to $50.99/bbl on the supposition that increased Republican strength in the US Congress signaled more of the same for the next 4 years.

Middle East tensions remain

That likely means the Bush administration will maintain previous policies in Iraq and with other troublesome Middle Eastern states, with the resulting continued threat of disruptions of crude supplies. "Iraq oil exports from the northern fields in Kirkuk are expected to be reduced for at least 10 days due to attacks on three oil pipelines," said Robert S. Morris, Banc of America Securities LLC, New York, in a Nov. 3 report. "We estimate that total Iraqi crude oil exports in October averaged roughly 1.8-1.9 million b/d, including just under 300,000 b/d to the north, vs. 1.7 million b/d in September."

Moreover, in his first term, Bush aggressively tried to fill the Strategic Petroleum Reserve to its 700 million bbl capacity. Workers added 40 million bbl to the reserve this year, raising it to its highest level ever of 670 million bbl.

"There were of course a few other significant elections this week. In Venezuela, supporters of President [Hugo] Chávez did well in elections for regional governors, further confirming that the popularity of the Venezuelan administration remains robust," said Paul Horsnell, Barclays Capital Inc., London. "However, it was the Bush-Kerry race [that] proved capable of bouncing the oil market around in a way that previous US elections have not," he reported Nov. 4.

Erosion of energy prices because of an expected Kerry victory "was somewhat unusual," Horsnell noted. However, he said, "Our belief is that speculative money has not really needed very firm platforms to launch waves of selling from in recent months. In that sense, the expectation of a Kerry victory was no worse a pretext to sell off than the [recent] quarter-point rise in Chinese interest rates had been."

Speculators seek signs

Speculators have been looking all year for the rise in oil prices to top out. But that signal will come from market fundamentals "when enough demand weakness has occurred to restore some modicum of supply flexibility and hence stop the upwards trend," Horsnell said. "However, those fundamental signs will by their nature be observed late and with the usual error and statistical noise." Meanwhile, he said, "Those wishing to get ahead of the game may have to jump into the void on the basis of what are at best half-signals."

This year, there have been three "significant downward moves" in crude futures prices "associated with heavy noncommercial [speculative] selling," he noted. "However, each time it turned out that speculative money jumped too quickly. So the question is whether the current weakness at the front of the curve is really the turning of the wheel or if it is simply the fourth of these premature cycles down. So far, the evidence still suggests that it is the latter."

In what was sure to be a sign to some, the US Energy Information Administration said Nov. 3 that US commercial crude inventories jumped by 6.3 million bbl to 289.7 million bbl during the week ended Oct. 29. Traders generally have bid down crude futures prices on the basis of smaller recent increases in crude stocks.

However, EIA officials also reported a continued fall in US distillate stocks, down by 900,000 bbl to 115.7 million bbl during the same period just prior to the start of the winter heating season on Nov. 1. "Beyond the crude oil build, there are still few signs of real adjustment in the distillate market," Horsnell said. "We had thought that a seasonal increase in heating oil inventories was possible in each of the past 4 weeks, and each time the situation has tightened further."

Industry Scoreboard

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Industry Trends

THE US OIL AND NATURAL GAS well stimulation materials market is expected to grow 7.7% through 2008 and reach $1.4 billion/year, according to a study by Freedonia Group Inc., Cleveland, Ohio.

The analyst said that an increasing need to stimulate production from mature oil and natural gas fields is driving the demand for hydraulic fracturing fluids, proppants, and gelling and foaming agents.

"In addition, more complex wells and a continued move towards exploitation of reserves in harsher offshore and deepwater environments at deeper drilling depths will boost demand for higher performance ceramic proppants, organo-metallic crosslinking agents, and other specialty materials," Freedonia said.

Robust oil and gas prices also are expected to continue to encourage exploration and drilling activity, which will spur demand for well stimulation, Freedonia said.

"Well stimulation is not immune to the potential effects of environmental concerns that are impacting the nation's ability to tap new oil and gas deposits," the analyst noted. "Drilling and development moratoria and strong opposition to drilling in environmentally sensitive areas—such as the Arctic National Wildlife Refuge and the southern portion of the California coast—will continue to limit new well completions."

Concern about ground water and surface ecology is changing the methods and materials used in hydraulic fracturing of coalbed methane wells in Wyoming's Powder River basin, the analyst said.

Five members of Congress have written the US Environmental Protection Agency seeking investigation of the regulation of hydraulic fracturing (OGJ Online, Oct. 18, 2004).

Meanwhile, the study said that the single largest materials category, proppants, is forecast to see the strongest gains, growing 9.5%/year to reach $550 million in 2008. Demand is expected to be driven largely by the increasing use of more expensive proppants in place of sand for deeper wells with harsher conditions.

Of the base fluid materials, foaming agents are forecast to grow faster than most other materials due to their ability to reduce the total amount of hydraulic fracturing fluids required for each fracturing job.

Although the markets are relatively small, higher value products—including organo-metallic crosslinking agents—also represent strong growth opportunities, Freedonia said.

US REFINING MARGINS experienced a stronger than expected third quarter, which an analyst attributed at least partially to Hurricane Ivan's disruption of Gulf Coast refining operations.

Consequently, Prudential Equity Group LLC, New York, raised its 2004 average US refining margin forecast to $8.85/bbl from $8.75/bbl.

Analyst Andrew Rosenfeld said the US refining margin averaged $8.85/bbl in the third quarter, up 14% from the same quarter last year for companies that Prudential follows.

Rosenfeld expects margins will decline as the industry heads into a seasonally weaker fourth quarter and as product inventories rebuild following the hurricane.

Prudential's 2005 US refining margin forecast of $6.85/bbl is under review given record margins recorded so far this year, low gasoline inventories, and concern over US and European distillate supply.

Government Developments

MEXICAN STATE OIL COMPANY Petróleos Mexicanos Dir. Gen. Raul Munoz Leos resigned Nov. 1 amid allegations of scandals, and Mexico President Vicente Fox named Luis Ramirez Corzo to succeed him.

Ramirez Corzo was director of Pemex's exploration and production division. A Pemex statement did not explain why Munoz Leos resigned. Fox had appointed him as Pemex's top executive in December 2000.

Since September, Munoz Leos was the target of widespread criticism in Mexico regarding allegations that he approved a benefits package for unionized staff without support of the Pemex board.

In addition, a Mexico City newspaper reported last month that Munoz Leos used Pemex money to pay for plastic surgery for his wife.

THE UAE has named Mohammed bin Al Dhaen Al-Hamili oil minister, succeeding Obeid bin Saif Al Nasseri in a cabinet reshuffle approved by Supreme Council President Sheikh Zayed bin Sultan Al Nahayan, ruler of Abu Dhabi.

The changes—the first in 7 years—merged the electricity, water, and oil ministries under one department to be directed by Al-Hamili as the new energy minister, reported the Emirates News Agency.

Al-Hamili was the UAE's governor in the Organization of Petroleum Exporting Countries during 1994-2002. He also served as chairman of National Gas Shipping Co. and Abu Dhabi National Tanker Co.

The UAE has said that it will continue to cooperate with efforts to stabilize world oil markets and meet rising demand under the new energy minister.

THE US MINERALS MANAGEMENT SERVICE issued a proposed notice of sale outlining terms for Outer Continental Shelf Sale 195 of leases off Alaska's northern coast in the Beaufort Sea.

The sale tentatively is scheduled for Mar. 30, 2005. The Alaskan governor's office has 60 days to comment on the size and timing of the proposed sale.

The proposed sale area includes 1,800 whole or partial blocks encompassing 9.4 million acres from the Canadian border on the east to near Barrow on the west.

It excludes areas near Barrow and Kaktovik that the Inupiat people use. They hunt bowhead whales, seals, and other marine life for subsistence and live in the coastal town of Kaktovik.

Throughout the sale area, MMS requires that offshore oil and natural gas activity be coordinated with the Inupiat whalers. The MMS also developed other lease stipulations to help minimize environmental effects from oil and gas development.

The stipulations include the use of pipelines rather than tankers and booming for fuel transfers.

MMS estimates that the Beaufort Sea contains 7 billion bbl of oil and 32 tcf of natural gas. In February 2003, MMS completed an environmental impact statement for three Beaufort Sea OCS sales, including Sale 186 held in September 2003 (OGJ Online, Sept. 29, 2003).

The EIS also covered Sale 195 and Sale 202, scheduled for March 2007.

Quick Takes

THE PEP 38460 PROSPECT joint venture, led by New Zealand Overseas Petroleum Ltd. (NZOP), has declared commercially viable the Tui-Amokura-Pateke oil fields in the Taranaki basin off New Zealand. The declaration was based on a proved and probable reserves base of 20-30 million bbl of oil, which would be developed from three or four subsea wells tied back to a floating production, storage, and offloading facility. Costs for subsea and subsurface components are expected to be $120-150 million—or more if an FPSO is purchased rather than leased. NZOP, a subsidiary of Transworld Exploration & Production Inc., Houston, is operator of the fields and holds a 45% interest. Other participants are Australian Worldwide Exploration Ltd. subsidiary AWE New Zealand Pty. Ltd., Mitsui E&P New Zealand Ltd., Stewart Petroleum Co. Ltd., and WM Petroleum Ltd. The group has approved funding for front-end engineering and design, which could allow final project sanction in June 2005. First oil is planned for second half 2006.

Indonesia's newly elected government awarded 12 onshore and offshore oil and gas blocks and will award 10 more next month, reported OPEC News Agency. Each successful company will pay a $17.25 million signing bonus and invest $163 million in the next 3 years on exploration. The government let offshore production-sharing contracts (PSCs) to Indonesia's PT Medco Energi for the Nunukan Block in East Kalimantan, Malaysia's state-owned Petronas for Northeast Madura IV Block in East Java, Anadarko Petroleum Corp. for the Northeast Madura III Block in East Java, PT Easco East Sepanjang for the East Sepanjang Block in East Java, Genting Oil & Gas of Malaysia for West Natuna Block in the Natuna Sea, Transworld Exploration & Production for the Seruway Block in Aceh, and PT Waropen Perkasa for the Manokwari Block in Papua. Onshore PSCs went to PT Tropik Energi for the Pandan Block in South Sumatra, PT Bina Karindo for the Air Komering Block in South Sumatra, PT Kutai Etam Petroleum for the Sei Nangka Senipah Block in East Kalimantan, Altar Sociedade de Investimento SA Northwest for the Barito Block in Central Kalimantan, and PT Sele Raya for Yascoagung Belida Block in South Sumatra.

McMoRan Exploration Co., New Orleans, and Palace Exploration Co., New York, have formed the McMoRan-Palace joint venture, expanding a joint participation in Gulf of Mexico ventures in force since 2003. The JV, which will share costs and revenues equally, has committed an initial $500 million over a multiyear period to acquire and explore prospects in the Deep Miocene in the gulf and in other Caribbean basin areas and to develop McMoRan's existing deep shelf prospects. The JV has drilled one noncommercial well, is drilling six other wells, and plans to begin 10-12 more during the next 6 months in Dawson Deep field on Garden Banks 625, Minuteman on Eugene Island Blocks 212/213, and Deep Tern on Eugene Island 193.

First Calgary Petroleums Ltd. reported that the MZLN-1 discovery well on FCP's 100% held Ledjmet Block 405b in Algeria's Berkine basin flowed on test at rates of 214.4 MMcfd of natural gas and 9,863 b/d of condensate, normalized to a flowing wellhead pressure of 2,000 psi. Two intervals were tested: the Lower Siegenian F6-2 zone, in which 29.1 MMcfd of gas and 1,332 b/d of condensate flowed through a 36/64-in. choke at a flowing wellhead pressure of 4,753 psi, and the Upper Siegenian F6-2 interval, where 26.9 MMcfd of gas and 1,278 b/d of condensate flowed through a 40/64-in. choke at 4,158 psi. MZLN-1 is 13 km west of Menzel Ledjmet East field. FCP also reported initial results from the MZLS-1 well, its ninth well on the block. It was drilled to 4,500 m. Wireline logging indicated 51 m of net hydrocarbon pay over multiple intervals, FCP said. Production testing will begin in early November. MZLS-1 is about 6 km south of MZLN-1 and on the same fault block. It is west of the recently announced LES-1 cased well, on which testing continues. The logging results confirm the extension of the known area of hydrocarbon saturation towards the southern boundary as well as towards the west of Block 405b, the company said.

SYNTROLEUM CORP., Tulsa, said the flow rate from the first well in its low-BTU gas initiative in central Kansas exceeded expectations, and it has ordered the first nitrogen separation plant for operation in early 2005. The Syntroleum-operated 1-1 Colberg 19-9 well in Rice County flowed 1.2-2.3 MMcfd of gas, 40% nitrogen, from a formation at 2,459 ft that is the deepest of three gas-bearing reservoirs to be tested in the well. Three other wells are drilled and cased but not yet tested (OGJ Online, July 29, 2004). Syntroleum has leased more than 64,000 acres with 100% working interest in four counties.

US DRILLING ACTIVITY ticked up by 1 unit to 1,251 rotary rigs working the week ended Oct. 29, Baker Hughes Inc. reported. That's up from 1,107 a year ago at this time. Inland waters accounted for the bulk of the increase, up by 2 rigs with 22 working that week. Land operations increased by 1 rig to 1,136 active. This was offset in offshore operations, which slipped by 2 rigs to 88 in the Gulf of Mexico and 93 for the US as a whole. Canada's rig count increased by 16 to 372 units, down from 376 a year ago.

PRODUCTION OF 18,000 B/D OF OIL began Oct. 24 from ROD oil field and six satellites in the Sahara Desert's Berkine basin in eastern Algeria (OGJ Online, Oct. 24, 2001). To date, 34 development wells are available for production, which is to rise to 80,000 b/d of Saharan blend crude from the fields later this year upon completion of the ROD central processing facility. Associated gas and water will be reinjected. Currently, production is moving through a neighboring processing facility, said Melbourne-based BHP Billiton Ltd., joint operator of the development phase with Algeria's Sonatrach. Sonatrach and Italy's ENI SPA will operate the production phase. ENI funded 63.96% of the project and BHP, 36.04%. Shell Exploration & Production Co., has postponed until late first quarter 2005 the replacement of flexjoints on its Mars platform export pipelines to avoid Gulf of Mexico production constraints beyond those caused by damage from Hurricane Ivan. The 2-week Mars shutdown for the replacements originally was scheduled for Nov. 4 (OGJ Online, Aug. 11, 2004). The Mars tension leg platform, on Mississippi Canyon Block 807, initially was shut in on May 22, and temporary repairs were made to both lines while the flexjoints were refurbished. Production resumed June 28. Operator Shell holds a 71.5% interest, and BP PLC holds 28.5%. Howe field in the UK North Sea has gone on stream at a rate of 13,000 boe/d, said OMV UK Ltd., a project partner. Most of the production is oil with natural gas accounting for 15%. The field lies on Block 22/12a in 90 m of water in the Central Graben area of the North Sea. Shell Enterprise Oil Ltd. operates and owns 60% of Howe. OMV UK and Petro Summit Investment UK Ltd. hold 20% each.

NIGERIA wants its country's refineries to process half the crude oil produced in Nigeria by 2010. Director of Petroleum Resources Mark Ofurhie said the government is seeking experienced Nigerians to own and run the refineries to meet a mandate set by Nigerian President Olusegun Obasanjo, OPEC News Agency reported. The government would sell Nigeria's four refineries, which have total refining capacity of 445,000 b/d but which have been operating below capacity, and award licenses to entrepreneurs to build new plants. Petronas Penapisan (Melaka) Sdn. Bhd. has selected ExxonMobil Research & Engineering Co. technology for a grassroots catalytic lube basestock plant at its 190,000 b/d Melaka, Malaysia, refining complex. The plant will convert 16,000 b/d of low-sulfur waxy atmospheric residue to 6,500 b/d of lube products. Operations are to begin in mid-2007.

ANADARKO PETROLEUM CORP., Houston, has begun construction of a 1 bcfd LNG terminal at Bear Head, on Cape Breton Island, along the Strait of Canso in Nova Scotia. The terminal is slated for completion by late 2007. Anadarko took on the project in August when it acquired Access Northeast Energy Inc., a private Halifax, NS, company having the LNG terminal as its sole project (OGJ Online, Aug. 13, 2004). Anadarko produces oil in Algeria and Qatar, LNG exporters in which the company has said it hopes to expand gas exploration. Woodside (USA) Energy Inc. and Crystal Energy LLC, Houston, signed a heads of agreement for Woodside to participate in the proposed Clearwater Port LNG import terminal 12.6 miles off Ventura County, Calif. (OGJ Online, Feb. 16, 2004). Under the HOA, Woodside would provide technical expertise and funding to move approvals through US regulatory agencies and would operate Clearwater Port in exchange for preferential access rights to the terminal. Crystal Energy already has applied to the US Coast Guard for a deepwater port license to convert the Grace oil and gas platform to an offshore port for LNG regasification. The terminal is being designed to accept a base capacity of 6 million tonnes/year of LNG—about 800 MMscfd of gas that would be transferred from tankers directly into pipelines to onshore infrastructure. Parent company Woodside Energy Ltd. has operated the $10 billion North West Shelf venture off Western Australia for more than 15 years and delivered more than 1,600 LNG cargoes to Asia, the US, and Europe. Crystal Energy's principal shareholders who have pledged the financial backing necessary to convert Platform Grace are Small Ventures USA LLC 54%, owned by William O. Perkins III, and Ritchie Energy Long-Term Trading LLC 22%, a unit of Ritchie Energy Trading Ltd.

THE SECOND UNIT of a gas processing plant for Phases 4 and 5 of the South Pars natural gas expansion project off Iran has become operational. When both units operate at full capacity, the plant will process 1 bcfd, a rate that will reach 2 bcfd when all four planned processing units go on stream, Pars Oil Gas Co. told OPECNA. South Pars field is an extension into Iranian waters of supergiant North gas field off Qatar. Iran is developing it with international partners in 25 stages, 10 of which so far are active (OGJ, Sept. 20, 2004, p. 24).

TRINIDAD AND TOBAGO has signed an agreement with a consortium led by Clico Energy LLC for construction of a $700 million ammonia, urea, and melamine complex at Point Lisas industrial estate. Colonial Life Insurance Co. Ltd. will own 40% of the complex, Clico Energy 30%, and German energy company MAN Ferrostaal AG 30%. Sources say Trinidad and Tobago also is holding negotiations with BP Trinidad and Tobago LLC for construction of another "megaproject"—a gas reformer to produce synthetic gas for several methanol and ammonia plants. Trinidad and Tobago, already the world's leading exporter of methanol and ammonia, no longer will approve projects to build single ammonia or methanol plants, according to a recent announcement by Prime Minister Patrick Manning (OGJ Online, June 3, 2004). Manning said the country could generate more revenue by selling its natural gas as LNG to the US, where it provides 75% of all LNG imported, and would consider further methanol and ammonia expansion only if it were part of such comprehensive megaprojects. Husky Energy Inc., Calgary, has begun construction of a 130 million l./year ethanol facility adjacent its heavy oil upgrader at Lloydminster, Sask. The plant, to be the largest ethanol facility in western Canada, is expected to be operational by mid-2006. Total capital costs will be determined after major contracts are awarded. The facility is eligible for $7.8 million in funding under Canada's ethanol expansion program. Canada has invested $100 million in the program, announced Aug. 12, 2003, which is intended to expand fuel ethanol production and use in Canada to reduce transportation-induced greenhouse gas emissions.

A NEW 100 MMCFD INTERCONNECTION has begun service on Vector Pipeline LP's 42-in. natural gas pipeline near Joliet, Ill., and Guardian Pipeline LLC's pipeline from the Joliet hub to the Dawn, Ont., hub. The interconnection, expandable to 400 MMcfd, connects Vector's system with Wisconsin markets via the Guardian line and to other pipelines, such as Midwestern Gas Transmission and Natural Gas Pipeline of America, through Guardian's hub services. Vector is a joint venture of Enbridge Inc., Calgary, 60% and DTE Energy Co., Detroit, 40%. Guardian is a partnership between Wisconsin Energy Corp., Milwaukee; WPS Resources Corp., Green Bay, Wis.; and Viking Gas Transmission, a subsidiary of Northern Border Partners LP, Omaha.

ALGERIA'S state-owned oil and gas company Sonatrach has awarded a $160 million contract to Japanese shipyards Itochu Corp. and Mitsui & Co. Ltd. to build a 75,000 cu m capacity Medmax LNG carrier, with an option for a second like vessel, reported OPECNA. Separately, Sonatrach signed an agreement with French bank Caylon for financing 75% of the carrier's cost, reported OPECNA. Sonatrach recently acquired two other LNG carriers, Berge-Arzewa and Lalla Fatma N'Soumer, and plans to increase its gas export capacity to 85 billion cu m in 2010 and to 100 billion cu m by 2015.