OGJ NEWSLETTER

Dec. 24, 1990
All signs point to a second quarter oil price plunge. East-West Center predicts $20-25/bbl by summer even with a conflict in the Persian Gulf, which it sees as likely.

All signs point to a second quarter oil price plunge.

East-West Center predicts $20-25/bbl by summer even with a conflict in the Persian Gulf, which it sees as likely.

It expects December prices to remain at $25-26 rising with war fever in January but no higher than $32 because of lower demand and higher production. If there is no conflict in late January, war is unlikely before next fall, the center says. That means $25 in February and $18-20 in May-June. If shooting starts, that will spike prices to $50 and trigger an SPR release, thus halving oil prices by summer. The center thinks sliding U.S. oil demand may offset all Pacific Rim demand gain in 1991.

Merrill Lynch is skeptical of a diplomatic solution to the crisis but doesn't think hostilities will affect oil supplies.

That means a drop to the midteens by summer once production is restored in Iraq and Kuwait. The plunge would be brief because of a Saudi led effort to restore prices to $20 by yearend 1991, Merrill Lynch predicts.

Salomon Bros. thinks a peaceful resolution likely, with bloated stocks and lagging demand pulling prices down again.

The Saudis and other Gulf Cooperation Council countries have less to fear from Iraq and Iran than before the U.S. rushed troops to the Persian Gulf. Also, OPEC would be foolish to risk strong U.S. disapproval with a price spiking accord, Salomon says. With the damage to intraregional relationships from Saddam's blitz of Kuwait, self-interest is the only dependable expectation of OPEC members, the analyst contends. That sets the stage for continued overproduction and soft prices. But that won't last long. The specter of 810 oil serves no one in the long run, and the Saudis won't gratuitously offend Iraq, Salomon notes.

Long term, production slides in the U.S. and U.S.S.R. and resurgent demand in the developing nations will boost the call on OPEC oil to 27 million b/d in only 5-years, Salomon says, sup-porting its projection of $25 WTI through 1995.

Pdvsa Vice Pres. Frank Alcock warns of a 1986 style price collapse after the crisis is resolved because Iraq and Kuwait will be tempted to produce at full capacity to make up for losses during the conflict. He doesn't see the price collapse as long lived. however. The crisis also has diverted attention from a serious problem: the lack of sufficient high conversion refining capacity to treat increasing volumes of heavier and sour crudes as supplies of light, sweet crudes decline, Alcock says.

Prospects look good for refining/marketing margins and natural gas prices in 1991 and beyond, says Merrill Lynch. With the expected fall in oil prices, spot product prices are likely to fall more slowly, allowing refining margins to expand. A resulting slide in retail prices will boost demand and spur a shift back to high margin higher octane grades, the analyst says.

Longer term, the push for cleaner fuels will further tighten refining capacity-already squeezed by the phaseout of leaded gasoline outside the U.S. and diminishing crude quality-and specifically for gasoline, Merrill Lynch says. Reducing aromatics and olefins in the gasoline pool under Clean Air Act strictures can be done with different catalysts and/or operating reformers and cat crackers at lower severity. But that means lower octane blendstocks and thus adding more octane capacity.

Merrill Lynch says producers can look forward to pipelines paying $2.20-2.30/Mcf on average in 1991 and as much as $2.50/Mcf in 1992 vs. $1.80 in 1990. Gas will get a big boost from the upcoming National Energy Strategy and implementation of CAA amendments as environmental and energy security concerns spur widespread fuel switching in utility and industrial sectors.

Transportation Sec. Skinner has asked National Research Council to survey potential for improvements in auto fuel efficiency. The report, expected to recommend fuel economy levels, is due June 30. DOT has maintained the auto fleet fuel economy standard at 27.5 mpg for several years, but environmental groups say it should be lowered because of improvements in fuel quality and auto performance.

MMS has completed the draft of its-next 5 year offshore leasing plan but doesn't plan to release it until late January.

MMS wants to brief incoming governors of coastal states before the draft is released to the public. Oil officials in Washington say the delay may allow the Bush administration to coordinate the 5 year plan with the NES under preparation.

Union Texas' board has ended efforts to enhance shareholder value by se ling the company as a single unit, citing no acceptable proposals. The board will continue trying to find buyers for the company's U.S. onshore and offshore upstream businesses and hydrocarbon products businesses as well as pursuing other restructuring alternatives to boost share values.

The energy industry will spend more than $120 billion to revamp facilities and build new plants that contribute to a cleaner environment in North America, western Europe, Japan, South Korea, and Taiwan, says M.W. Kellogg Vice Pres. G. Phillip Tevis.

In addition, more than $200 billion could be spent the next 20 years on environmentally driven energy projects in the U.S.S.R. and eastern Europe, Tevis says.

Environmental concerns are going to cost Canadian industry more in 1991 and beyond. Ottawa's Green Plan will cost $3 billion the next 5 years without new taxes-meaning industry shoulders much of the load. The plan, which entails 100 initiatives, will take effect Apr. 1. Included are measures to stabilize Canada's CO, emissions at 1990 levels by 2000, cut NOx and VOC emissions by 40% in some areas by 2000, permanently cap SOx emissions at 3.2 million metric tons/year by 2000, tighten fuel economy and energy efficiency, implement a global warming strategy, and require industry reporting on hazardous pollutants.

Three of four major operators in the Canadian Beaufort Sea--Amoco Canada, Esso Canada, and Chevron Canada--won't drill there in 1991. Gulf Canada hasn't set its Beaufort plans for 1991. Amoco, which had hoped to drill two wells in 1990 and was considering two in 1991, said there was insufficient interest from partners. None cited an environmental impact review board's call for a drilling ban over oil spill concerns as a factor. After the ruling, Gulf shelved a well planned this fall.

Substantial blocks of Beaufort acreage will revert to the federal government because exploration permits will expire in 1991 without drilling. Permits will expire on 3.46 million acres of Amoco holdings, more than 907, of its lands in the area. Gulf is still awaiting a final ruling from the Canadian Oil and Lands Administration on the review board's recommendations.

After more than a year's delay, Venezuela's government is moving ahead on several petrochemical megaprojects--those requiring outlays of more than $10 million--to be financed partly by big debt-equity swaps with international partners.

State owned Pequiven plans several world scale plants to produce gasoline additives, plastics, fertilizers, and other products, mainly for export--calling for $3.4 billion from private equity partners and other sources such as supplier credits.

Parent Pdvsa, which had net earnings of $2.11 billion in 1989 and expects strong earnings this year, will finance most of its 6 year, $25 billion capital program from cash flow. For the first time, Pdvsa is seeking foreign investment in E&D, which will account for Pdvsa outlays of $6 billion during 1991-96.

Other outlays break out as $6 billion each for petrochemicals and refining sectors, $1.5 billion for coal, and $800 million for domestic marketing.

Including operating costs, Pdvsa will spend $12 billion on production and $8 billion on refining. About 40% of this spending will be for imported equipment, materials, and services.

Maxus is the first western company to sign an exploration deal in Bulgaria. Its 1 year technical evaluation agreement, covering about 5 million acres near production in the foothills of the Balkan Mountains, calls for geological and geophysical studies and gives Maxus the option to enter into an exploration/production license at the end of the first year.

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