OGJ NEWSLETTER

Sept. 17, 1990
Has $30/bbl become the new psychological floor price for oil during the Middle East crisis? Oil companies are telling markets there are no real short term supply problems, but that is having little effect on prices, driven by fears of military conflict in the Persian Gulf. Nymex crude futures for October delivery last week re- turned to levels above $30/bbl, rebounding from about $26/bbl seen after most OPEC producers agreed to boost oil output last month. By late last week, Brent for October

Has $30/bbl become the new psychological floor price for oil during the Middle East crisis?

Oil companies are telling markets there are no real short term supply problems, but that is having little effect on prices, driven by fears of military conflict in the Persian Gulf.

Nymex crude futures for October delivery last week re- turned to levels above $30/bbl, rebounding from about $26/bbl seen after most OPEC producers agreed to boost oil output last month. By late last week, Brent for October delivery had hovered at about $30-31/bbl since Sept. 4.

U.S. gasoline futures prices showed signs of stabilizing, with Nymex gasoline slipping about 3.5/gal during Sept. 3-13. But U.S. heating oil futures rose about 7/gal in the same period.

In Europe, premium gasoline remained flat with the Aug. 22 level at $415/metric ton, while gas oil prices were down slightly from Aug. 22 at about $260/metric ton.

European gas oil and heating oil prices could soar this winter, says Shell France Pres. Henri Pradier, who says rationalization of European refining capacity has gone too far. He claims a shortfall of European downstream capacity, notably in gas oil and heating oil. In a cold winter, price of heating oil would soar and disconnect from crude price levels, he says.

BP France Pres. Raymond Bloch, on the other hand, says although cold winter might bring temporary tensions in the heating oil sector, there is currently no shortage of products.

Bloch, also president of European Petroleum Industry Association, favors drawing down government stocks before needed to prevent tight markets and price spikes.

Total says refiners' need for costly deep conversion units will be accentuated by the Middle East crisis.

Meantime, Total expects use of natural gas as a petrochemical feedstock will accelerate in Europe, where only 8% of ethylene is produced from gas vs. 50% in the U.S.

Washington continues to press efforts to boost U.S. energy security in the wake of the crisis, although prospects are dim for big oil production hikes soon (see story, p. 21).

Congressional conferees agreed to expand SPR fill to a goal of 1 billion bbl from 750 million bbl. It now holds 590 million bbl. Their compromise bill authorizes leasing oil to fill SPR, a pilot refined product reserve, and limited drawdown in the event of a U.S. supply shortfall--clarifying concerns over need for an IEA trigger to justify an SPR draw.

DOE Sec. Watkins says the administration will expedite permitting for natural gas pipelines to help back out oil use.

DOE will work with FERC to remove regulatory barriers to displace the equivalent of 55,000 b/d of oil.

DOE also will work to expedite permitting for development of Niakuk and Point McIntyre fields on Alaska's North Slope.

The two fields together could produce 100,000 b/d in 18 months, DOE claims. Operators of those fields project start-up no earlier than 1992-93.

DOE further plans to work with state and federal authorities to move more gas to California to expand thermal EOR work that it says could boost oil flow by 100,000 b/d in 2 years.

No agreement is expected before early 1991 on Point Arguello start-up. DOE is mediating a transportation controversy between California state/local officials and a Chevron group.

Separately, Rep. Phil Sharp (D.-Ind.) urged Interior Sec. Lujan to aggressively enforce common carrier requirements in the Minerals Leasing Act for oil pipelines crossing federal land.

Sharp says intrastate California lines are "operated as private 'plant facilities' by major refiners who ship only their own oil in their own lines." Forcing common carrier status could enable start-up of Point Arguello by allowing shipment to Los Angeles via pipeline and avoid "uneconomic shipment of Chevron's oil all the way to Texas on the All-American Pipeline."

Sharp cited Mobil's Bakersfield-Los Angeles line, noting,

"If this line and others in the region were instead interconnected and operated as true common carriers under the act, the 'downstream' transportation problems now shutting in Point Arguello oil might be eased more quickly and at a lower cost."

The U.S. horizontal drilling push is spurring crude pipeline capacity expansions. Enron will further expand its South Texas pipeline system capacity by more than 50,000 b/d.

Enron will build a $4 million, 32 mile mainline spur from Pearsall to Lytle that will hike deliverability to 90,000 b/d from 40,000 b/d. Enron also plans a $1.1 million, 30,000 b/d-plus gathering line, extending 10-15 miles between existing lines, that crosses major producing areas. Both projects are to be complete by yearend. Enron in May completed tripling its Austin chalk trend mainline capacity to 75,000 b/d.

The U.S.S.R.'s bedeviled petroleum industry is likely to receive unprecedented leeway to rectify policies that have pushed it and the entire Soviet economy close to collapse. But the window of opportunity to improve the industry's poor conditions may be open for less than 2 years. If definite improvement is not achieved by then, the U.S.S.R. could reembrace much of the rigid, supercentralized command system of the past.

Under radical market based reforms put forth last week by President Gorbachev, the U.S.S.R. would attempt to revitalize its petroleum sector with more foreign loans, joint ventures, and increased purchases of foreign equipment and technology.

Gorbachev also wants to reverse sliding oil exports to European countries able to pay with hard currency.

Discontent with those proposed new policies already is turning up in the Soviet oil sector.

In letters to the Moscow newspaper Sovetskaya Rossiya, industry officials deplored Soviet reliance on oil and gas sales for most hard currency revenue, criticized purchase of "excessive" quantities of foreign equipment to modernize the Soviet oil industry, and called for phaseout of Soviet oil exports.

Bulgaria's Committee for Geology expects to announce the first successful applicants for licenses in the Black Sea Oct. 10. Other successful bidders will be announced in weeks to come. The state agency said it received an excellent response

from foreign companies for six offshore blocks and plans to offer onshore blocks, also on a production sharing basis.

International companies have until the end of November to bid on 10 onshore blocks of about 3,000 sq km each.

Bulgaria is forming state oil and gas companies to take a 50% stake in new licenses. Large foreign companies can expect to take a maximum stake of 40-45% and smaller companies 5-10%.

Enterprise Oil applied for blocks in the Black Sea and will open an office in Sofia if successful.

U.K. offshore operations last week were hit by the sixth I day unofficial strike by contractors' personnel.

Oil Industry Liaison Committee said strikes were concentrated in the southern gas province and Morecambe Bay off the west coast where about 1,000 men were idle. A further 500 men stopped work in the northern North Sea. Offshore Contractors Council says about 80% of workers ignored OILC's strike call.

Venezuela's state owned Pdvsa is restructuring foreign operations for a more aggressive marketing strategy in Europe, the U.S., and Far East. Pdvsa authorized its Citgo unit to negotiate purchase of 50% of New Jersey refiner Seaview Petroleum Co.

Pdvsa also is studying feasibility of a big oil storage/transshipment terminal in Malaysia in partnership with the government there. The Seaview deal shows Pdvsa is eager to gain a foothold in the U.S. asphalt market to secure placement of its heavy/naphthenic crudes. The Malaysian push would be Pdvsa's first in the Far East. Pdvsa wants to sell Japan Orimulsion, its extra heavy crude-water boiler fuel mix. Pdvsa is reorganizing its Interven unit to explore new opportunities stemming from European Community economic integration and eastern Europe market growth. Further, Pdvsa is merging its Citgo and Champlin units under the Citgo aegis to cut costs and improve efficiencies.

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