OGJ NEWSLETTER

Nov. 26, 1990
World oil markets have settled into a relative calm that probably won't be broken short of shooting in the Persian Gulf or a long, severe cold snap. Market fundamentals are sufficiently bearish that even Saddam's plan to double Iraqi occupation forces in Kuwait sent U.S. futures prices up only $1.72, with Nymex crude for December delivery closing Nov. 19 at $31.50/bbl, down 37 on the week and $4 from November's high to date. Brent for 15 day delivery rose only 55 in relaxed trading

World oil markets have settled into a relative calm that probably won't be broken short of shooting in the Persian Gulf or a long, severe cold snap.

Market fundamentals are sufficiently bearish that even Saddam's plan to double Iraqi occupation forces in Kuwait sent U.S. futures prices up only $1.72, with Nymex crude for December delivery closing Nov. 19 at $31.50/bbl, down 37 on the week and $4 from November's high to date.

Brent for 15 day delivery rose only 55 in relaxed trading to close Nov. 20 at $30.65/bbl vs. $32.85/bbl a week ago.

Product prices continue to soften, notably Nymex unleaded, which last week slipped below 80/gal only the seventh time since the Middle East crisis began. Rotterdam premium gasoline last week dropped another $16 to $284/ton, down $80 from levels at the beginning of the month. Wholesale and retail prices around Europe also continue to slide. Contributing to U.S. gasoline price softness is an octane glut caused by motorists switching to regular from premium unleaded in the wake of price spikes. Octane Week reports a record low of 0.25 in the spread between regular and premium unleaded spot prices in New York Harbor and on the Gulf Coast earlier this month, a halt to MTBE spot trading, and a net drop of 25/gal for toluene (see story, p. 32).

Culprits are lagging demand from price hikes and economic doldrums and a continuing output surge, notably in Saudi Arabia.

Saudi Aramco will have sustainable production of 8.6-8.7 million b/d by November's end and will maintain an average 8.5 million b/d in December, says Middle East Economic Survey, quoting Aramco sources. That compares with earlier IEA estimates of Saudi yearend productive capacity at 8 million b/d. The figures exclude Saudi Arabia's 135,000 b/d Neutral Zone share.

Of the latest 1 million b/d increment of sustainable production, the split is 50-50 between medium and light crudes.

MEES breaks out current Saudi output as 700,000 b/d extra light, 5 million b/d of light, 1.3 million b/d of medium, and 1.6 million b/d of heavy.

Pdvsa won't go into direct debt to finance expansion in traditional areas of crude production and future hikes in oil and gas reserves, says the Venezuelan state oil company's president Andres Sosa Pietri. The comment was apparently intended to quash rumors Pdvsa would seek funds from international banks and capital markets to finance part of its $24 billion 1990-95 capital budget. Pdvsa plans to spend $8 billion solely from cash flow to hike reserves and productive capacity through 1995.

Pdvsa foreign units have turned to outside debt financing, however. The unit Pdvsa created to operate the mothballed Bahamas refinery it bought from Chevron issued deutschemark bonds to finance part of the purchase.

In addition, joint ventures in LNG, petrochemicals, and other areas are to be financed with bank and other credits as well as with Pdvsa/coventurer equity.

Oman has hiked crude production 10% to 770,000 b/d and its reserves to a record 4.16 billion bbl.

State owned PDO plans aggressive E&D work, projecting Oman's producing wells will triple by 2000.

Iraq may be trying to slip several cargoes of crude oil onto world markets disguised as Libyan crude.

Germany's Economics Ministry warns German oil importers that several Iraqi tankers have been anchored in Libyan ports since August and Libyan Brega Oil Co. is offering this crude as Libyan oil to German independents at $1/bbl below world prices.

Iran and Qatar will spend $3 billion to jointly develop offshore Pars field gas for export to Europe via pipeline planned through Turkey. Start-up is set for yearend 1994.

Prospects for moving Soviet gas to South Korea via North Korea are brightening, says Hyundai Business Group. It cites the spillover benefit of Soviet plans to extend the Yakutsk pipeline to Vladivostok by yearend 1991 and a lack of opposition by North Korea to a trans-Korea line.

Hyundai also is pursuing a Soviet joint venture to develop Capsian Sea area oil reserves in Kalmyk autonomous republic.

Spain's downstream restructuring continues. Spanish refiner/marketer Cepsa wants to buy a stake in Ertoil, the refining/petrochemical arm of Ercros, Spain's largest chemical group. Cepsa eventually may seek to take over Ertoil, whose book value is about $425 million. Ercros, controlled by Kuwait Investment Office, declines comment on the subject. Ertoil operates an 80,000 b/d refinery and several petrochemical units at Huelva in southwestern Spain.

Earlier this year, Ercros agreed in principle to sell a 25% interest in Ertoil to Nigerian National Petroleum Corp., subject to government approvals. Last September Cepsa received government approval to sell a 25% stake to Elf for about $475 million. Elf has acquired a 20.5% interest for $400 million thus far and will buy the remaining 4.5% next year. Abu Dhabi's IPIC also has a 15% share in Cepsa.

DOE has given Iroquois Pipeline sponsors final approval to import 400 MMcfd of Canadian gas to six northeastern states.

It acted quickly after FERC approved the project (OGJ,

Nov. 19, p. 40). Deputy U.S. Energy Sec. Henson Moore notes independent producers' fears that differing U.S. and Canadian rate design policies could discriminate against U.S. supplies and says DOE will contact FERC, Canadian regulators, gas industry, and consumers to consider a conference on the issue, adding, "If we are to have a truly integrated North American natural gas market, we need to look carefully at how competition may be affected by differences between U.S. and Canadian rate designs as well as the differences among various domestic pipelines."

Regulatory, fiscal, and environmental concerns cloud the U.S. crude production push.

A Tyler, Tex., state district judge set a Dec. 14 hearing on the disputed East Texas field oil production allowable.

The judge ordered the field's allowable raised Oct. 19 to 100% from the 86% set by TRC, which plans to appeal. Occidental sought the injunction because all other Texas wells are allowed to produce at 100%. Oxy, the field's fourth largest producer, puts the difference at an extra 10,000-12,000 b/d of production, including 1,230 b/d net to Oxy.

Several independents contend the higher rate will shorten field life. Oxy claims operator studies submitted to TRC indicate a field life of more than 50 years at either allowable.

Alaska's long running $4 billion tax and royalty dispute with producers has taken on a new wrinkle. Court hearings are expected late this month on a temporary restraining order 11 companies are seeking to block an emergency severance tax system to take effect Nov. 30. The new rule, imposed last month by Alaska's Department of Revenue, would force producers to base severance tax payments on market prices instead of company oil price estimates. Alaska claims it was shortchanged $25 million in August when the spread between reported prices and market value jumped to $4 from a typical 18-30/bbl.

Alyeska is proceeding with investigation of pipeline corrosion testing procedures after allegations by a fired contractor employee that the contractor's inspection teams falsified test data and used drugs and alcohol on the job (OGJ, Oct. 29, Newsletter). Alyeska as examined three of 19 TAPS sites, with excavations of buried pipe planned for at least nine of the sites. The program is due to be complete in mid-December. Federal officials have denied Alyeska's request to hike TAPS operating pressure to accommodate increased throughput, to as much as 2.1 million b/d, pending the investigation. Meantime, severe weather stacked up tankers waiting to take on North Slope crude at Valdez, slicing TAPS throughput to 1.5 million b/d the week ending Nov. 11. Throughput rebounded to 1.9 million b/d last week.

President Bush signed the Clean Air Act reauthorization into law Nov. 15, but the squabbling over its costs and effects still rages. Ethanol lobby group Renewable Fuels Association assailed the DOE mandated oil industry feasibility study of whether oil companies can meet clean fuel standards under the new law, calling on DOE to halt the study. RFA says, "The latest move by the oil industry is another example of its continued resistance to environmentally safer gasoline and an attempt to circumvent the federally mandated responsibilities under the CAA."

The CAA will cost the U.S. economy more than $50 billion/year, beyond the current $32 billion/year it pays for clean air, Clean Air Working Group estimates. CAWG administrator William Fay says, "The reformulated gasoline provisions present a challenge because the tough, new standards must be accomplished in a very short time frame and because no refiner knows at this stage specifically how the standards can be met. The petroleum industry must make major, costly modifications in its refineries and supply and distribution systems."

National Association of Manufacturers cautions the defeat of most environmental initiatives in this month's elections is not a sign concern over the environment is wavering but a signal voters oppose sweeping, unworkable proposals that threaten jobs and economic growth. NAM Pres. Jerry Jasinowski says, "Clearly the voters are saying that environmental progress must be balanced with economic growth."

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