OGJ NEWSLETTER

The world oil market appears headed for a fragile balance in the fourth quarter even as the prospect of war in the Middle East grows.

Oil prices are still buffeted by political news rather than by market fundamentals. Brent for 15 day delivery seesawed last week to close Nov. 8 at $35.05/bbl, flat on the week but up more than $2 in 3 days, on the heels of U.S. efforts to gain support for possible military action in the Persian Gulf.

Perceived improvement in underlying market forces had sliced Brent to $32.78 from $35.90 Nov. 5 before recovering to $33.80 as traders reacted to a new ultimatum from Prime Minister Thatcher on an Iraqi withdrawal from Kuwait. Product prices lost most of the previous week's gains. Rotterdam premium gasoline lost $25 to $340/ton and gas oil $13 to $290/ton.

Saudi Oil Minister Hisham al Nazer told the New York Times his country's oil production topped 8.2 million b/d last week and will rise to 8.5 million b/d by early 1991. Saudi production has been higher than previous official estimates the last 3 months, totaling 6 million b/d in August, 7.5 million b/d in September, and 7.7 million b/d in October.

County Natwest Woodmac says the underlying balance of the -oil market is returning as OPEC makes up the Kuwait/Iraq shortfall more successfully than expected, Oil demand is falling due to higher prices and slower economic growth, it says, while the winter stockdraw looks comfortably manageable. Short term, the balance remains vulnerable to accidents, strikes, or cold weather.

But looking beyond the winter and possible war, there is a high probability of a sharp drop in crude prices, perhaps to less than $20/bbl. County Natwest forecasts an average price of $23/bbl in 1991. It says the drop would follow an end to the Iraq/Kuwait embargo but probably accompany the spring demand downturn even if the stalemate continues. OPEC is likely to regroup in the face of price weakness and defend the July 1990 price target of $21/bbl but will face difficulties as demand falls below its current 22.5 million b/d quota.

County Natwest sees a different outlook for products, likely to be in shorter supply than crude.

Factors include Iraq's progressive dismantling of 750,000 b/d of Kuwaiti processing capacity, which could take several years to restore, and the chance of damage to Saudi refining facilities if shooting starts. This points to a profitable 1991 for refiners, because retail prices are unlikely to fall as far or as fast as crude prices, the analyst says.

Energy geopolitical analyst Melvin Conant notes mounting concern that there can be no early conclusion to the crisis through war or negotiation: "The U.S. is mired in a swamp of conflicting overseas interests that almost guarantee its long term presence in the Persian Gulf as keeper of the peace much as the British moved up and down the gulf imposing law and order in the first half of this century ... The chance of war is at 75% and climbing."

Conant also cites military experts who contend the destruction of Iraq would raise serious security issues throughout the Persian Gulf, noting the U.S. and its allies have to think of Iran's conduct were it no longer countered by Iraq. He adds, "The current situation warns of a long future in which political instability in the region will be greater than at any other period in this century. This happens at a time when dependence on its oil has never been greater and is still growing."

Japan plans to cut its dependence on imported crude by more than 20% by 2010.

The Japanese cabinet approved an energy plan to boost use of nuclear, solar, and other alternative energy sources to pare oil's current 57.9% share of domestic energy demand to 45.3%.

All tankers sailing Canadian waters should be double hulled within 10 years, a federal commission on tanker safety and oil spills recommends. It also calls for a special $2/metric ton levy on all oil shipped in Canadian waters to help fund spill prevention and subsidize the cost of double hulling ships.

A report by the group, set up 18 months ago after a barge spill off Vancouver Island, was highly critical of current Canadian Coast Guard and industry capability for surveillance and spill prevention and cleanup in major spills.

The panel also recommends legal changes to permit individual or class actions for repair and compensation for spills, increased fines for polluters, and mandatory jail sentences for ships' officers in cases of ocean dumping. The report has been submitted to the federal transport department.

API says the U.S. government is doing little to out emissions from pre-1981 vehicles, although they contribute nearly three fourths of passenger car hydrocarbon emissions but less than a third of total passenger miles traveled. API says governments could hike registration fees for older vehicles, more closely regulate their emissions, or even buy back vehicles.

Mike Baly III, new AGA president, is urging DOE to convene a national natural gas summit on how gas can improve energy security, the environment, the economy, and energy conservation. He says gas can reclaim industrial process market share it lost in the 1980s-from 70% to 50%. AGA wants to double the number of natural gas cooling units the next 5 years to 250,000.

FERC says it will tailor future take or pay solutions for pipelines as part of comprehensive settlements. It issued Order 528 after an appeals court invalidated the purchase-deficiency method of recovering TOP settlement costs through a fixed charge.

FERC says all segments of the gas industry should share TOP costs but pipelines' burden should be "significant" and minimize costs to small, captive sales customers.

DEA Mineraloel, formerly Deutsche Texaco, plans to open 300 gasoline service stations in the former East Germany, with 110 in a joint venture with East German distributor Minol and the rest operated exclusively by DEA. The first conversions of Minol stations to the DEA brand are under way. In 1990-91, DEA will spend $66 million on establishing a presence in the east-a sum expected to grow to $333-400 million by the mid-1990s.

Spending could rise substantially if a joint bid by DEA and Veba Oil for the PCK Schwedt AG refinery in eastern Germany is accepted. DEA also plans to expand outside Germany. It has a deal with Castrol for joint ventures to start downstream businesses in eastern Europe, starting in Poland and Yugoslavia. DEA also could expand west, with Belgium as the first target.

Kuwait Petroleum International continues to expand its U.K. downstream operations from its London headquarters in exile. Kuwait Petroleum (GB) acquired an oil distribution terminal at Kings Lynn on the east coast of England from Kings Lynn Storage Ltd. KPGB operates 900 service stations in the U.K. and has about 57,, of the retail gasoline market.

Still more Soviet E&P joint ventures are on tap (see story, p. 40).

France's CGG, Wales' Robertson Group, and Norway's Nopec signed 5 year cooperation pacts with the two biggest Soviet marine trusts covering exploration in the U.S.S.R.

Agreements call for upgrading two Soviet seismic vessels, acquiring, processing, and selling seismic data, selling existing Soviet databases, and developing and selling integrated multiclient geological reports. A pact with Sevmorneftegeofisika for the Akademik Nemchinov vessel covers the Soviet Barents Sea and Kara Sea, the other with Dalmorneftegeofisika for the Akademik Gubkin vessel for Okhotsk Sea and Tatar Strait.

Jebco Seismic is offering more Soviet exploration/development data packages in the U.S.S.R. under its joint venture with the Soviet Ministry of Geology (OGJ, Mar. 19, p. 14). Jebco and the ministry will lower unit prices from earlier offerings and speed delivery of the new packages, which cover the western Siberia and Caspian Sea basins. Jebco also signed protocols for new data packages covering eastern Siberia and new pre-Caspian basin areas. Details will be announced next month.