OGJ NEWSLETTER

Glimmers of peace in the Persian Gulf and softening market fundamentals have sent oil prices to their lowest level in more than 3 months.

Bearish factors include Iraq's agreement to hold high level diplomatic talks with the U.S., reports Iraq might release all foreign hostages and Saddam might withdraw from Kuwait if he can keep Rumaila oil field, and a growing consensus that oil supply/demand will balance in the fourth quarter and beyond.

Nymex crude for January plunged $3.37 to $27.29/bbl Dec. 5, down almost $6 on the week and the lowest closing since Aug. 31. Products prices followed suit, notably a drop of more than 7 to 68.84/gal for gasoline futures, the lowest for next month delivery since the day Iraq invaded Kuwait.

Will non-OPEC oil exporters play a role in the bull market, as they did previously in a bear market? Egypt, Mexico, Norway, Colombia, Malaysia, Oman, Brunei, and the U.S.S.R. met in Mexico Dec. 5-6 to discuss world oil supplies and prices. Also on hand was OPEC Sec. Gen. Subroto.

Purvin & Gertz contends the market overall finally is responding to underlying fundamentals and projects world oil demand will continue falling sharply through the fourth quarter. With OPEC output averaging about 23.5 million b/d vs. 22.4 million b/d in the third quarter and a substantial inventory buffer remaining from first half, winter supplies should be more than adequate, P&G says. The analysts expect Dubai will continue to drift with a stalemate at $25-30/bbl or plunge to $20 or less in the event of a peaceful settlement, refinery margins will continue to improve from a sharp drop in September-October, and the spread between sweet and sour crude prices will drop sharply.

Signs of lagging demand and slipping oil prices include:

Japanese traders say crude prices for November shipments from the Middle East will fall by $3-4 from October levels.
Japan's energy imports in fiscal 1991 will grow a modest 5.9%, from 1990 because of a domestic economic slowdown, says Japan Foreign Trade Council. That compares with an 11.7% jump to $239 billion for energy imports in fiscal 1990 ending Mar. 31. The council predicts crude prices won't top a high of $24.20/bbl in fiscal 1991 vs. an average $23.8 billion in fiscal 1990.
Japanese refiners' stocks rose 2.68 million bbl in October to 321.16 million bbl, equal to 88 days' supply and unchanged from a year ago, MITI says. Products stocks, accounting for 55% of the total, rose 4% from a year ago because of higher domestic output. That lessens need for a government stock draw.
South Korea's government plans to curb demand for gasoline and kerosine by jumping retail prices for the two products 28%, to 66/1. and 33/1., respectively, effective late last month. Price hikes for diesel, bunker fuel, LPG, and LNG are expected early next year. Ministry of Energy & Resources noted South Korean energy consumption rose by almost 23% in September despite higher oil prices.

Meantime, Indonesian Minister of Mines and Energy Ginandjar Kartasasmita calls on industrialized nations to draw down oil stocks to an average 77 days of consumption from the current 99 days to stave off a possible 1.5 million b/d shortfall in the winter. He maintains industrialized nations are competing with developing nations for oil supplies, driving up prices.

Longer term, those developing nations will chew up a bigger chunk of the world oil market. A World Bank study estimates developing nations' oil demand will probably double by 2010, due mostly to increasing urbanization and use of autos coupled with increased energy use associated with rising incomes and shifts from traditional fuels. BHP predicts Asian crude imports will likely double to 10 million b/d by 2000, the result of stagnating crude production and rising demand. BHP also expects petroleum products demand will double to 2 million b/d.

Leading European shipbuilders will cooperate in designing a new very large crude carrier capable of meeting tough environmental requirements and competing for sales on world markets.

They are Spain's Astilleros Espanoles SA, Germany's Bremer Vulkan GmbH and Howaldtswereke-Deutsche AG, France's Chantiers de l'Atlantique SA, and Italy's Fincantieri SpA. The design is to be complete by yearend 1991.

Ottawa's plans for new federal environmental legislation should not be passed until jurisdictional disputes are resolved and regulations streamlined, IPAC says. A parliamentary committee is studying legislation to establish a federal environmental assessment process and replace existing assessment guidelines interpreted as law by court decisions. More than $60 billion in Canadian investment is reviewable under current guidelines, and industry is afraid of increasing paralysis, IPAC says.

Alberta has accepted a compromise settlement by producers in a dispute with California Public Utilities Commission involving natural gas exports. Energy Minister Rick Orman said he will honor the results of a vote by producers on the issue of pipeline access. CPUC wants to boost competition by increasing access to the PG&E/PGT Alberta-California pipeline to marketers other than PG&E unit Alberta & Southern.

The parties agreed to a limit on pipeline access to firms already in PG&E's supply pool. Alberta earlier warned CPUC it could interrupt deliveries as a result of the dispute.

New gas pay is turning up in traditional oil provinces and vice-versa. Brunei Shell found "substantial" quantities of gas below Champion oil field off Brunei, about 37 miles north of Bandar Seri Begawan. The discovery well, drilled to 11,480 ft, also gauged significant volumes of condensate. No flow rates were given. The Champion Ultra Deep cut gas pay in zones below the producing oil field after two earlier wells were abandoned because of high pressures encountered. The well took 9 months to drill using the Santa Fe Monitor jack up, equipped to handle pressures of as much as 15,000 psi. Shell Brunei says the well gives considerable encouragement to potential of similar prospects elsewhere in its concession area. Champion produces 37,800 b/d of 22 gravity crude and 35 MMcfd of high CO2 content gas.

British Gas, Union Pacific, and Yukong turned up oil in the gas prone Gulf of Suez off Egypt. Initial tests of 1 Warda, on North Zaafarana Block B-1 in the northern gulf, yielded "promising results." Egyptian press quoted Egyptian Oil Minister Abdel-Hadi Khandil as saying the well produced "encouraging qualities of crude" and reported the 6,000 ft well was in virgin territory. Testing is expected to last through yearend.

U.S. oil companies continue to step up E&P spending.

Shell Oil expects to reverse oil and gas production declines of the past few years in 1991 with projected capital and exploration outlays totaling $3.3 billion vs. $2.8 billion in 1990. About $2 billion of that has been earmarked for U.S. E&P and half that going to Gulf of Mexico E&D, including $200 million for Shell's $1.3 billion deepwater Auger project. Shell spent $1.8 billion for U.S. E&P in 1990.

Enserch Corp. plans a 1991 capital budget of $308 million, up almost 40% from about $221 million this year. Enserch is betting on increased production and higher prices for oil, gas, and NGL. About $205 million-more than 95% of the 1991 increase-will go to E&P, with 25% of that allocated to the Gulf of Mexico. Enserch estimates 1990 E&P spending at $123 million.

Agencies representing Alaska and the departments of Interior and Transportation have formed a regulatory task force to review TAPS operation and maintenance procedures to ensure safe operation. A DOT official notes that "25%, of the nation's domestic oil production is transported through this pipeline. It is vital that the safety and operational procedures used in this system are of the highest caliber." GAO contends regulatory oversight of TAPS has been inadequate, notably worrisome because of corrosion concerns. Alyeska completed its investigation of 19 sites for possible corrosion and says it found the line sound.

The probe was spurred by allegations by a former contractor employee of falsified data and alcohol and drug abuse by contracted inspection teams (OGJ, Nov. 26, Newsletter).