OGJ Newsletter

March 1, 2004
US gasoline prices may be headed toward another spike at the pump through a pending shortage approaching the peak summer driving season, analysts say.

Market Movement

US gasoline prices on the rise

US gasoline prices may be headed toward another spike at the pump through a pending shortage approaching the peak summer driving season, analysts say.

"US retail gasoline prices are spiking upwards ferociously for no less than the third time within the past year," said Paul Horsnell, head of energy research, Barclays Capital Inc., London, in a Feb. 25 report. "In the middle of last March, the average US price for regular gasoline peaked at $1.728/gal. In the last week of August, an all-time peak was set at $1.747/gal. Now we have a third peak forming, with the average currently standing at $1.688/gal, a rise of 4¢ over the past week," he said.

In California, retail gasoline prices increased by 16¢/gal during the same period, "and again for the third time within a year are now above $2/gal," Horsnell said. "It may get worse still. There are widespread reports, particularly in the [US] Midwest, of wholesalers restricting sales in an attempt to conserve supplies."

Gasoline futures prices

On Feb. 24, gasoline for March delivery dipped by 0.33¢ to $1.0244/gal on the New York Mercantile Exchange, despite analysts' claims that "the market's perception is that gasoline stocks remain dangerously low and may not be rebuilt quickly enough to meet demand during the summer season of peak gasoline demand" (OGJ Online, Feb. 25, 2004). On Feb. 25, following a US government report of a large drop in crude input at US refineries, especially on the Gulf Coast, during the week ended Feb. 20, the March gasoline contract jumped by 3.45¢ to $1.0589/gal on NYMEX.

Total US refinery utilization decreased to 87% during the week ended Feb. 20 vs. 90% the previous week, said Robert S. Morris at Banc of America Securities LLC, New York, in a separate report.

Refining capacity down

Meanwhile, Shell Oil Co. temporarily curtailed processing at its 333,800 b/d refinery in Deer Park, Tex., following a Feb. 22 fire in the plant's sulfur-recovery system.

Marathon Ashland Petroleum LLC on Feb. 23 shut down for unplanned maintenance a platformer combined feed heater, which produces high-octane blending components for making gasoline at its 72,000 b/d Texas City, Tex., refinery.

Tesoro Petroleum Corp. of San Antonio, Tex., earlier reported its 161,000 b/d Golden Eagle refinery near San Francisco experienced a short-term power outage Feb. 20. The company subsequently advanced maintenance on a hydrogen unit at that facility, reducing throughput by 20,000 b/d.

US inventories

Crude input through US refineries averaged nearly 14.5 million b/d during the week ended Feb. 20, down by 498,000 b/d from the previous week's average to wipe out the cumulative increase over the previous 2 weeks, the US Energy Information Administration reported. Most of that decrease was on the Gulf Coast where refinery inputs averaged 6.5 million b/d—"the lowest weekly average since Oct. 11, 2002," EIA said.

Imports of crude into the US averaged 9 million b/d in the week ended Feb. 20, down by nearly 1.2 million b/d from the previous week. Most of that decline was on the Gulf and East Coasts, officials said. With both imports and refinery inputs of crude down significantly in that period, US commercial crude inventories were unchanged at 273.8 million bbl, EIA said, just above recent 28-year lows. Distillate fuel stocks fell by 1.1 million bbl to 111.4 million bbl, while gasoline inventories dropped by 1.6 million bbl to 203.4 million bbl.

The American Petroleum Institute subsequently reported that US crude stocks fell by 27,000 bbl to 274.5 million bbl during the week ended Feb. 20. Distillate inventories fell by 3.4 million bbl to 115.9 million bbl, it said, but gasoline stocks increased by 447,000 bbl to 202.6 million bbl.

Tight US gasoline inventories "continue to be the primary factor" in support of higher oil prices, said Morris. The April contract for benchmark US light, sweet crudes surged by $1.10 to $35.68/bbl Feb. 25 on NYMEX, with the May contract gaining 88¢ to $34.33/bbl.

Distribution problems

"This third gasoline price spike in rapid succession is another symptom of a general malaise within the US energy distribution system," Horsnell said. "The problem has arisen from a series of dislocations after a decade of low returns and hence low investment," he said. "Other issues include the multiplication of gasoline specifications and the resultant loss of supply flexibility, for instance, whether it really makes sense for states to have primacy in the setting of gasoline standards, and whether the shift to ethanol in gasoline blends is more in the interests of corn farmers or gasoline consumers."

Industry Scoreboard

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Industry Trends

EXPLORATION AND PRODUCTION companies are maintaining a more bullish 2004 outlook for oil and gas prices as well as a more aggressive view of their capital spending plans, according to an informal survey conducted by Raymond James & Associates Inc., St. Petersburg, Fla.

In a recent industry research brief, Houston-based RJA analyst J. Marshall Adkins said, "Overall, the general attitude of most E&P companies was very positive with most expecting higher commodity prices and bigger capital spending increases than what have been publicly budgeted."

Last month, RJA queried about 40 E&P and oil field service executives attending the North American Prospects Expo in Houston.

Respondents said that oil and gas prices are likely to average 10-15% higher than Wall Street's expectations. The energy executives' estimates for the average 2004 natural gas price on the New York Mercantile Exchange averaged $5.27/Mcf, with a high forecast of $6.35/Mcf and a low forecast of $4.25/Mcf. RJA's estimated gas price was $5.50/Mcf.

The current First Call consensus—a widely watched aggregation of Wall Street analysts' earnings forecasts, provided by Thomson Financial research firm—is $26.83/bbl; generally budgeted long-term price expectations are $26/bbl.

"Given the large disparity between what [Wall] Street thinks and what the industry insiders really think, current cash flow and spending forecasts are likely too conservative. Likewise, higher producer cash flows typically means stronger drilling activity and earnings for oil service companies," Adkins said.

The average 2004 NYMEX oil price estimate for the survey group was $30.89/bbl. Estimates were $28-35/bbl. RJA's estimate was $30/bbl.

Adkins questioned why capital spending expectations remain conservative, given the relatively high price outlook. He noted that if oil and gas prices remain above expectations, spending levels could be "meaningfully higher."

Many E&P firms, in fact, were found to be "front-end loading their budgets with the expectation of increasing spending if energy prices hold up."

Adkins said, "For the more leveraged companiesUcapital spending will likely remain below cash flows in order to fund further debt reduction."

He said that major oil companies likely would continue redirecting the largest portion of their cash flow outside of the US.

The E&P executives said that they believe service costs will increase "modestly" in 2004. This rise was not expected to have any negative impact on drilling plans, RJA noted.

"We did, however, find some on the other side of the consensus view, those who thought there could be more meaningful price increases in the second half of the year," Adkins said. "In fact, we found some of the smaller operators have already locked in service contracts for the next several months." Some operators said that, if costs were to rise as rapidly as they did in 2001, some projects would have to be reevaluated and potentially abandoned.

Regarding mergers and acquisitions, most respondents expect more M&A activity in 2004 than in the previous year, due largely to an increase in the amount of cash generated by large E&P companies, RJA said.

"Others pointed to the fact that the majors, focusing on profitability, have continued to shed higher-cost, noncore assets, and private companies are finding it difficult to refuse higher bid prices," Adkins said.

"Based on the public market trading value of some companies, we would not be surprised by an increase in corporate transactions," Adkins speculated. Also, he added, "One of the more interesting things we heard concerning the M&A market was the opinion that as much as 30% of Canadian properties changed hands last year."

Government Developments

US SENATE leaders as of presstime predicted that a new streamlined energy bill could pass the chamber as soon as this month.

Senate Majority Leader Bill Frist (R-Tenn.) and Minority Leader Tom Daschle (D-SD) said they had expected the full Senate to vote in late February on a less expensive bill. But now, the timetable has shifted to March because of protracted negotiations over how the bill will be considered on the Senate floor.

The latest version of the legislation is estimated to contain about $14 billion in tax incentives, compared with an earlier, $31 billion bill the Republican-led House supported.

In its current form the Senate legislation contains no product liability protections for any clean fuel additives, including fuel ethanol or methyl tertiary butyl ether; an earlier bill that contained the "safe harbor" protections failed to get through the Senate last November.

House leaders say they won't consider a bill if it does not include MTBE protection, and the White House largely has been on the sidelines on the issue. President George W. Bush, however, has been vocal in his support for a related provision in the bill designed to more than double fuel ethanol demand over the decade.

Not too surprisingly, the White House is not alone in supporting the ethanol market proposal this election year. There also is strong bipartisan interest from Congress in passing the ethanol mandate portion of the bill, known as a "Renewable Fuels Standard (RFS)."

That measure is widely expected to become law, one way or another. It might be part of the pending energy bill or, if that legislation fails, it may be added on to less combative legislation or wrapped into an annual appropriations bill.

RFS requires 3.1 billion gal of annual renewable fuel use in the transportation sector in 2005, increasing to 5 billion gal by 2012. In 2013 and beyond, the share of renewable fuel is to remain proportional to what was sold in the US market in 2012.

Other titles in the energy bill may not be able to muster as much support on Capitol Hill as the ethanol provision, however.

The Senate bill, for example, currently contains financial sweeteners for a proposed Alaska natural gas pipeline to the Lower 48. These include a "commodity risk" provision for natural gas producers and loan guarantees for pipeline operators.

The House opposes both measures but at one point was willing to accept a conditional loan guarantee, while the White House opposes the Alaska commodity provision because it fears it may distort the natural gas market.

Quick Takes

THE NORTH CASPIAN SEA production-sharing agreement consortium, Kazakhstan's petroleum authority, and Kazakh oil company Kazmunaygaz all have approved development plans for world-class Kashagan oil field in the northeastern Caspian Sea.

One of the largest discoveries in 30 years, Kashagan is projected to have ultimate production of as much as 13 billion bbl of oil (OGJ Online, June 28, 2002).

Initial production of 75,000 b/d of oil will begin in 2008, with later phases ramping up to 450,000 b/d of oil and subsequently reaching a plateau of 1.2 million b/d of oil.

Capital investment for full field development currently is pegged at $29-30 billion over 15 years.

The plan addresses such challenges as the supergiant field's severe climatic conditions, sensitive environment, high reservoir pressure, hydrogen sulfide content, relative remoteness, and lack of established infrastructure, the partners said. ENI SPA currently is completing a study to identify the best oil export routes.

To reduce sulfur handling and improve oil recovery, the consortium will build onshore gas processing facilities and offshore facilities for reinjecting raw gas.

Consortium members are operator ENI unit Agip Caspian Sea BV, ExxonMobil Kazakhstan Inc., Shell Kazakhstan Development BV, Total E&P Kazakhstan, ConocoPhillips Petroleum Kazakhstan Ltd., and Tokyo-based Inpex Corp.

British Gas PLC also currently is a member but last year opted to sell its stake, which five of the members will assume pending government approval (OGJ Online, May 16, 2003).

BP Exploration (Angola) Ltd., operator of the six deepwater Greater Plutonio fields on Block 18 off Angola, has awarded Stolt Offshore SA and Technip SA de CV of France a $730 million contract for engineering, procurement, fabrication, and installation of risers, umbilicals, and flowlines in the fields. The subsea facilities will connect to a single floating production, storage, and offloading vessel that will serve all six fields. The contractors will install 75 km of 12-in. insulated production, gas injection, and service flowlines; 103 km of umbilicals; 12 FPSO mooring lines; and 10 production manifolds, as well as a single riser tower to hook up the FPSO.

Marathon Oil Corp. unit Marathon Petroleum Norge AS and partners ConocoPhillips and Oslo-based DNO ASA plan to submit to Norwegian regulatory authorities an impact assessment for Alvheim area fields development in the Norwegian Sea in early March and a plan of development and operation by midyear. Alvheim comprises the Heimdal formation Kneler and Boa discoveries on Production License 203, about 140 miles from Stavanger, and the previously undeveloped Kameleon field. The project also may include other tieback satellites, such as the nearby Klegg find (OGJ Online, Apr. 15, 2003). Marathon anticipates plan approval by the third quarter, and first production is expected in 2006. Marathon plans one Alvheim area well in 2004. Alvheim and the Klegg discovery are estimated to contain a combined gross risked resource of 200-250 million boe. Meanwhile, Marathon and partners have signed a purchase and sale agreement with Statoil Marine KS to acquire Statoil's Odin multipurpose shuttle tanker for conversion into an FPSO for Alvheim. The sale is subject to approval of the Alvheim area development plan by the partners and Norwegian authorities. The group, preparing to modify the Odin once a plan of development is approved, has called for bids for various components of the vessel modification. Capacity of the double hull, 530,000 bbl vessel will increase to 560,00 bb. Izar (formerly Astilleros Espanoles) built Odin in 2001 to be used as an FPSO or as a drillship.

MADRID-BASED Repsol-YPnSA is planning to construct a $350 million LNG regasification plant at Port Lázaro Cárdenas, on Mexico's West Coast (see map). One of Mexico's largest industrial ports, the site currently is the only port on the Pacific Coast with access to Mexico's national gas grid.

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The plant will have an initial capacity of over 4 billion cu m/year, upgradeable to 10 billion cu m/year.

The Lázaro Cárdenas Integral Port Administration has made land at the port available to Repsol-YPF for $10.1 million.

The facility is expected to go on stream in 2008.

Statoil ASA is trying to secure the entire 7.7 billion cu m/year LNG regasification and storage capacity expansion that Richmond, Va.-based Dominion is planning at its Cove Point, Md., LNG terminal. If successful, Statoil will gain a 20-year lease for this capacity, more than quadrupling its current 2.4 billion cu m/year level, which is one third of the existing Cove Point LNG processing facilities and storage. The BP Group and Royal Dutch/Shell Group hold one-third each in the existing Cove Point capacity (OGJ Online, Sept. 3, 2003). Expansion includes two new storage tanks totaling 195 million cu m of added capacity and Cove Point East, a 445 MMcfd capacity increase on Dominion's 87-mile Cove Point natural gas pipeline in Virginia and Maryland (OGJ, Feb. 2, 2004, p. 58). The new facilities become operational in November 2008. Houston-based Crystal Energy LLC has submitted applications to the US Coast Guard and the California State Lands Commission for its 1 bcfd Crystal Clearwater Port LNG project off California, initiating an environmental review process in about 2 weeks. The proposed $300 million port, 11 miles off Ventura County, calls for modifying existing Platform Grace to import LNG and deliver regasified gas ashore via a new gas pipeline (OGJ Online, Feb. 3, 2004).

OILEXCO INC., London, has an oil discovery with the initial well in its 100% owned drilling program in the UK North Sea. During an 18 hr test, the 15/25b-6 well on the Brenda prospect flowed 2,980 b/d of 40° gravity oil on test through a 40/64-in. choke at 458 psi from 56 ft of perforations. Associated natural gas flowed at an average rate of 600 Mcfd throughout the test, but no water or sand was produced.

The well was suspended for future reentry as a production well, and Transocean Offshore Inc.'s J.W. McLean semisubmersible, which drilled the well, moved 4 km northwest to commence drilling the Sheryl prospect, the second well of Oilexco's drilling program.

The J.W. McLean also will drill an appraisal well 1.1 km southwest of the Brenda 15/25b-6 well.

Ankara-based Aladdin Middle East Ltd. (AME), operator of Karakilise oil field and the Karakilise licenses in the Diyarbakir petroleum district of southeastern Turkey, plans to begin drilling the Karakilise-2 oil appraisal well in mid-March. Karakilise field is estimated to have 22 million bbl of reserves, and the license area holds an overall potential exceeding 80 million bbl (OGJ Online, Oct. 7, 2003). The Karakilise-1 discovery well began production in mid-September 2003 and has produced 26,000 bbl of 32.5° gravity light crude. An engineering study is under way to optimize production, said AME's 50% working partner Avenue Energy Inc., Ankara, a subsidiary of Avenue Group Inc., Sherman Oaks, Calif. AME plans to drill further into the Mardin section with the Karakilise-2 well to investigate the possibility of multiple pay zones in the Lower Cretaceous and Paleozoic sections. Cabot Oil & Gas Corp., Houston, is preparing to complete a well drilled to test the 11,500 acre Cyclone Rim prospect in Sweetwater County, Wyo. The Osborne Spring Unit No. 32-14 wildcat reached 13,760 ft TD this month and encountered 150 ft of potential pay in the Cretaceous Ericson, Almond, Lewis, and Lance formations. Operator Cabot has a 50% working interest in the well, and Davis Petroleum Corp. 50%.

PLAINS ALL AMERICAN PIPELINE LP plans to increase capacity on its Basin crude oil pipeline system from the Permian basin in West Texas to Cushing, Okla., by reactivating several pump stations along the 345 mile segment from Colorado City, Tex. to Cushing. The partnership expects to complete the project this month, when total capacity on this segment of the pipeline is expected to increase to 400,000 b/d from its current 350,000 b/d. The partnership also is studying expansion of the Basin system from Midland to Colorado City.

First gas is flowing into the North West Shelf Australia LNG Pty. Ltd. consortium's second trunk- line to its LNG complex, enabling the group to more than double gas production capacity off Western Australia. The 42-in.pipeline and production expansion are intended to meet expected additional LNG demand from Asia and other markets. It delivers natural gas 130 km from three offshore production facilities to the consortium's onshore gas processing facilities at Karratha on the Burrup Peninsula. (OGJ Online, Nov. 8, 2002). The $800 million (Aus.) project enables the partners to boost the venture's offshore production capacity to 3.85 bscfd from 1.65 bscfd. NWS Australia LNG Pres. John Banner said the group also would commission its fourth LNG processing train this year. Woodside Energy Ltd. is operator for the six partners in the North West Shelf Venture.

MIKKEL GAS FIELD reserves in the Norwegian Sea are now put at 28 billion cu m of gas and 40 million bbl of condensate—20% higher than estimated on the original plan for development and operation, Statoil ASA reported (OGJ Online, Feb. 8, 2002). Production started up Oct. 1, 2003. Mikkel currently is producing 5.8 million cu m/day of gas. Its well stream is piped to subsea installations developing Åsgard's Midgard reservoir before being transported to the Shell-operated Åsgard B production platform. Following separation, the gas is piped through the Åsgard trunkline to the processing complex at Kårstø, north of Stavanger. Amvest Osage Inc., a unit of Amvest Corp., Charlottesville, Va., has increased coalbed methane production to 7.5 MMcfd from 83 wells in Osage County, Okla., and is continuing CBM and conventional oil and gas development on 370,000 acres on the Osage Reservation. The company will drill 75 wells/year for several years on Osage lands and will try horizontal drilling this spring in selected coal seams. Amvest's rights extend to all coal seams and carbonaceous shales. Amvest mainly targets the Dawson, Weir-Pittsburg, and Rowe coals and secondarily the Iron Post, Croweburg, and Bluejacket coals, all of Pennsylvanian age. Deepest drilling depths are 2,400-2,500 ft. In the fiscal year ended July 31, 2002, Amvest invested more than $21 million, acquiring Delaware-incorporated TEC Resources LLC, drilling 33 wells, and installing gas and water gathering systems. It had drilled 136 wells by late 2003. The former TEC properties still produce 2-2.5 MMcfd.

Petroleum Development Oman has awarded a $40 million contract to Precision Drilling Corp., Calgary, extending its underbalanced drilling technology and services contract for 4 more years.

The contract facilitates the use of additional technologies in Oman, including in low-pressure drilling environments where conventional signal transmission is impractical. Mobilization of equipment to Lekhwair field in Oman is under way.

Gasoline complex added at Uruguayan refinery

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Uruguay's state oil company ANCAP (Administracion Nacional de Combustibles Alcohol y Portland) put on stream in fourth quarter 2003 a gasoline production complex at its La Teja refinery in Montevideo, increasing nominal processing capacity to 50,000 b/d. The facilities, which employ technologies supplied by Paris-based Axens IFP Group Technologies, in- clude a naphtha hydrotreater, a continuous catalyst regeneration reforming Octanizer (shown), and a paraffin isomerization unit. Photo courtesy of Axens IFP.