OGJ NEWSLETTER

Overnight, the world oil market outlook has changed dramatically with Iraq's invasion of Kuwait.

The situation remained unclear at presstime last week as to whether or how long Kuwaiti production might be disrupted as a result of the invasion and takeover. Markets reacted sharply at the outset, but whether a sharp runup in prices will be sustained remains to be seen. Just before the invasion, oil prices had risen on news of growing political instability in the Persian Gulf amid OPEC efforts to pursue a $21/bbl marker in a soft market. Brent for August had climbed 53 on the week to close at $19.93/bbl Aug. 1 but spurted to $23.50/bbl the following day. On Aug. 2, Dubai soared to $21.15/bbl from a pre-invasion $17.83/bbl. Nymex WTI for September had closed at $21.54/bbl Aug. 1, up almost $1 on the day on reports of Iraqi troops massing on Kuwait's border. At midday Aug. 2, WTI approached $24/bbl.

The invasion followed Kuwait's rejection of Iraqi demands at talks in Jeddah earlier in the week.

The Iraqis wanted $2.5 billion compensation for crude it accused Kuwait of stealing from Iraq's South Rumaila field on the disputed border, a writeoff of $10-12 billion in Kuwaiti loans made mainly to support Iraq's war with Iran, and annexation of two islands held by Kuwait at the head of the Persian Gulf.

Iraq's action introduces a new focus of power in the Middle East and in oil politics (see editorial, p. 19).

Prior to the July 25 meeting, Iraq's President Saddam Hussein had announced his push for a $25/bbl marker. OPEC has not been able to sustain an $18/bbl marker for most of the year.

Correspondingly, an OPEC accord that effectively lifts the group's second half quota by 400,000 b/d (see story, p. 36) with demand soft and the world awash in oil stocks seemed more likely to collapse rather than support a $3 hike in the marker. Perhaps the main question should be: Is Iraq simply acting as an "enforcer" with a show of bullying to quash future quota-breaking and thus underpin oil prices in the near term or does Saddam have larger, longer term designs on controlling markets?

The answer could come in the response by consuming nations, particularly the superpowers.

The U.S. has already moved to freeze Iraqi assets and take diplomatic actions, but is it willing to take the next step, military action (see "Watching Washington" p. 37)? Such an action would be difficult to carry out without Soviet assent, which may not be forthcoming. The Soviets are desperate for hard currency, and oil and gas are its principal exports--notably to former eastern Europe satellites that are now paying for Soviet oil and gas in hard currency (OGJ, July 30, Newsletter).

Writing ahead of the July 25 meeting, C.J. Lawrence's Charles Maxwell noted Iraq "can now consolidate its political position as the self-appointed principal power in the Arab world, it can pursue its reconciliation with a weaker Iran as neighbor and new oil ally, and it can enjoy the undoubted fruits of higher oil prices.

"For the oil world, Iraq's assumption of the role of enforcer is likely to prove a multiyear commitment to higher prices --if not to $25/bbl, at least close to $20/bbl by autumn.

"Iraq's greater degree of control over OPEC alerts the oil industry that underfunding of the search for new reserves over the past 6-7 years must be quickly made up for through sharply rising E&P budgets. It signals consumer governments that the days of low oil prices ... are coming to an end. It puts a higher premium on development of oil and gas reserves in the non-OPEC world, as well as in the U.S.S.R., as an offset to OPEC's perceived greater pricing power in the middle and late 1990s.

"It tells oil field service companies to gear up for some extraordinary years of growth ahead. And it breaks into our own peace of mind as consumers and investors with an insistence that we stop dreaming and start planning for a new era."

Even as the dramatic events in the Middle East unfolded, the threat of supply disruptions related to offshore safety continues to loom off the U.K. and U.S. About 5,000 offshore workers last week staged a 1 day strike protesting safety conditions and demanding further union recognition in the U.K. North Sea, following a helicopter crash at a Shell-Esso platform in Brent field the previous week. The action affected 30 platforms, although oil and gas flow was not disrupted.

Industry last week still was trying to gauge the effect on markets of a protracted shutdown of the Houston Ship Channel in response to a major oil spill in Galveston Bay resulting from the collision of the Greek flag tanker Shinoussa and two Apex Towing Co. barges under tow (see story, p. 27).

Late last week there were reports of the spilled oil--cat cracker feed--reaching sensitive estuaries. Press reports had about 7,000 bbl of oil still unaccounted for as of Aug. 1.

Confusion marks early accounts of the accident in a government investigation still under way in Galveston at presstime last week. Conflicting accounts of orders from a local pilot to the Shinoussa's helmsman appear to be focus of the inquiry. According to testimony, the inbound Liberian flag tanker Hellespont Faith and outbound Shinoussa passed within 10 m of each other as the Liberian tanker had overtaken the barges and not yet maneuvered back into its lane. With the two tankers heading for each other, the Shinoussa took evasive action, bringing it into the path of the barges. Apex is suing the Shinoussa's owners.

Texas officials won Coast Guard permission to try bioremediation to help clean up the spill, the first tests of which were to occur Aug. 2 or 3. Tests of on-water bioremediation during the Mega Borg spill and off Port Aransas, Tex., in June showed promising results (OGJ, July 23, p. 20).

Meantime, the Coast Guard last week received reports of

an apparently unrelated spill of unknown origin July 31 that has fouled beaches along Galveston's East and Stewart beaches.

Coast Guard Adm. William Kime expects Exxon to return for a third year to finish cleaning up the Exxon Valdez oil spill in Prince William Sound off Alaska (see story, p. 26).

ARCO Chemical and Sumitomo Chemical plan two capacity expansions of propylene oxide and styrene monomer at their joint venture complex in Chiba, Japan. An explosion and fire July 5 killed 17 workers and shut down ARCO's Channelview, Tex., PO/SM plant, contributing to tightness in styrene markets.

ARCO said the expansions were intended to meet growing Japanese demand, but did not say whether the timetable was accelerated to compensate for the temporary loss of 15% of U.S. styrene capacity. The first expansion of 10,000 metric tons/year of PO and 25,000 tons of SM is to start up in the fourth quarter, bringing the venture's capacity to 140,000 tons of PO and 335,000 tons of SM. Another expansion, under study and expected on stream in 1993, would hike capacities further to 200,000 tons of PO and 450,000 tons of SM.

There is some movement in Washington to deal with energy shortages. The Senate wants DOE to assess economic consequences of a U.S. ban on Iraqi oil imports.

Reacting to Iraqi threats against Kuwait before the invasion, Sen. Dennis DeConcini (D-Ariz.) proposed the study in a farm bill amendment approved 80-16.

DOE, Maritime Administration, and Customs Service have agreed to a process to waive the Jones Act during U.S. energy shortages. Last December's energy shortfalls prompted the pact. Under the law, normally only U.S. vessels can carry goods between U.S. ports.

The accord requires DOE to determine if there is an actual or imminent energy shortage, Marad to report on availability of U.S. flag tankers to carry supplies to alleviate the shortfall, and Customs to recommend that Treasury approve a waiver.

Kerr-McGee says several companies are interested in buying its Transworld contract drilling businesses and its 61.5% interest in Transocean Drilling Co. Ltd.

Transworld has six jack ups and seven semisubmersibles, Transocean four jack ups and one harsh environment semi.