OGJ Newsletter

Dec. 10, 2001
UN approval to extend the Iraqi oil-for-aid program for another 6 months would, at first glance, seem to deflate any expectations of a supply disruption.

Market Movement

Iraqi oil supply disruption inevitable?
UN approval to extend the Iraqi oil-for-aid program for another 6 months would, at first glance, seem to deflate any expectations of a supply disruption.

Instead, it may be just delaying the inevitable day of reckoning when Iraqi oil supply prospects collide with the geopolitical and military objectives of the US-led coalition in the war on terrorism. Discovery of any "smoking gun" involving Iraqi complicity in terrorist acts or continued work on prohibited weapons manufacture would accelerate that day of reckoning sharply.

The latest rollover of the oil-for-aid sales program was engineered jointly by the US and Russia via a compromise hailed as further evidence of growing cooperation between Washington and Moscow since Sept. 11. Under the compromise, Russia agreed to approve by May 30 a new list of goods requiring UN review before Iraq can import them. The US, meanwhile, agreed to Russia's call for a clarification of what steps Iraq must take in order to have the sanctions lifted.

New world order?

Some pundits have jumped to the conclusion that this compromise represents the beginnings of a "new world order" in oil markets, in which Russia positions itself and other former Soviet republics as a reliable alternative to OPEC in exchange for the US softening its position on Iraq. If that were true, it would accelerate the revival of Iraq's oil sector faster than anyone had expected and represent a long-term depressant on oil prices.

It isn't cynical to suggest that the compromise may represent a mutual accord by the US and Russia to postpone the possibility of an Iraqi oil supply disruption until a hoped-for economic recovery in second half 2002. But it is an unfathomable leap from there to suggest the Bush administration would overlook the continuing threat Saddam Hussein poses for the sake of joining with Russia to undermine OPEC.

Rest assured that the Bush administration will provide the "clarification" Russia seeks on Iraqi sanctions removal. And Iraq will surely object to that clarification vehemently. Furthermore, Russia recognizes the need for a resumed weapons inspection regime too, as shown in comments by Russia's UN ambassador, Sergey Levrov, quoted by the Associated Press: "The only way to radically solve the Iraqi problem is to ensure that international disarmament monitoring resumes in Iraq in conjunction with the suspension and lifting of sanctions, and the only way to achieve this is to eliminate ambiguities which exist in the [1999 UN] resolution [to ease sanctions in return for Baghdad's cooperation with weapons inspectors]."

Together with the likelihood that the US antiterrorist campaign will focus increasingly on Baghdad, there remains an excellent chance that Iraq's (legal) oil supplies will come off the market before second half 2002. Only last week, Bush demanded that Iraq must allow UN weapons inspectors to return or "face the consequences."

US refining margins weakest in 2 years

To date, US refining margins have averaged $4.24/bbl for the fourth quarter, down 33% from third quarter levels, according to a recent UBS Warburg report.

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"With two thirds of the quarter now complete, this is likely to be the weakest period for refining since fourth quarter 1999," UBS said (see table).

Refining margins have seen a "particularly sharp decline" on the US Gulf Coast and the "import-vulnerable" East Coast, UBS noted. "We estimate that Gulf Coast refining margins have fallen 45% vs. third quarter 2001, while margins on the East Coast have dropped 40% sequentially.

Holding up better, UBS said, have been the "more geographically isolated and formulation-specific regions" of the Midcontinent and West Coast.

"However, margins have weakened recently in these areas too, as demand for gasoline incurs a seasonal decline. Part of the strength in the Midcontinent is due to some refinery outages and maintenance, although we expect the impact of these events to shrink with time as plants come back on line," UBS said.

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Industry Trends

THE PHILLIPS-CONOCO merger significantly increases pressure on the remaining middle-tier major US refiner-marketers to merge or be acquired, according to Boston-based Strategy Analytics.

Phillips and Conoco recently announced plans for a $35 billion "merger of equals" (OGJ, Nov. 26, 2001, p. 26).

Strategy Analytics said the combined firm would be the third largest US petroleum company, ranked by assets, after ExxonMobil and ChevronTexaco.

Randall Nottingham, director of Strategy Analytics' energy market practice, noted the combined firm would be the nation's largest refiner and gasoline retailer.

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In terms of marketing capacity, the merged ConocoPhil- lips will have 16,664 service stations under its various brands, assuming no significant mandated dives- titures. This would result in a 9.5% share of the market (see table).

Nottingham said the Phillips-Conoco merger will "put considerable pressure on the remaining mid-tier majors, including Marathon, Valero [Ultramar Diamond Shamrock], Sunoco, and Amerada Hess, to merge with a complementary regional partner or be acquired by one of the supermajors."

He said that while the industry's consolidation trend is likely to spare some mid-tier and regional competitors, "the previously broad middle market is becoming a lonely place, and the urge to merge will be increasingly hard to resist."

Nottingham predicted at least one of those companies would be involved in a merger or acquisition by the middle of next year.

THE LNG MARKET is expected to double in size over 10 years. Market research firm Emerging Markets Online outlined its prediction in a new study.

EMO expects one third of the proposed market growth will come from Japan, South Korea, and Taiwan, which together currently consume 67% of the world's LNG. A quarter of the growth will come from the emerging markets of India and China, and the remainder will come from demand growth in Europe and the US, "largely to meet demand for gas-fired power generation."

The report lists growth trends and industry drivers, including increased competition in LNG trade, an ever-rising demand for natural gas, falling costs of LNG supply and shipping, and rising demand from Europe and the US for gas-fired power plants.

EMO said, "LNG trade liberalization in existing markets is leading to uncertainty and opportunity."

Government Developments

US FEDERAL LEASE SALE 181, held Dec. 5, marked a missed opportunity for industry, according to the National Ocean Industries Association.

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NOIA criticized an Interior Depart- ment decision made earlier this year to trim 4.4 million acres from the lease sale-the first sale to be held in the eastern Gulf of Mexico since 1988.

"The acreage that was to be included in [the sale] was cut by nearly 75% earlier this year, even though the deleted tracts were specifically identified for leasing by the previous two administrations because of their importance to the national energy supply," NOIA said.

During the sale in New Orleans, 17 companies bid a total of $458.9 million for 95 tracts out of 233 offered. The apparent high bids totaled $340.5 million. All of the blocks bid on were in 1,600 m of water or deeper, subject to a 10-year lease term at 12.5% royalty.

Plans for the sale were revised in deference to concerns by Florida officials who included Gov. Jeb Bush (R), brother to President George W. Bush. Florida's congressional members said they feared the original scope of the sale acreage might pose an environmental risk to their coast.

Lease sale proponents had argued the sale would not incur any environmental risk because it was at least 100 miles off Florida.

Even more troubling to NOIA is the fact the area originally designated for leasing is not included in the current administration's proposed draft plan for offshore leasing for 2002-07.

Tom Fry, NOIA president, said, "By removing key resource areas, which can be rapidly integrated into already existing infrastructure from the 5-year plan, the administration is denying itself the flexibility necessary to effectively plan for and manage our energy future."

He warned that if the current draft plan is approved, producers could not access the disputed area until 2008 at the earliest.

"Placing energy resources off limits at this crucial time of economic and geopolitical uncertainty is tantamount to planning a crisis," Fry said.

For its part, API said the sale being held shows the US commitment to developing secure domestic energy sources.

"We are pleased by the robust interest in this sale demonstrated by the oil and natural gas industry," said Betty Anthony, API's upstream general manager.

Quick Takes

DEEPWATER WEST AFRICA leads off this week's production news.

Girassol field has begun production in 1,350 m of water 150 km off Angola. Field development, which continues, will cost $2.8 billion.

Angolan state-owned oil company Sonangol holds the concession for Block 17, which contains Girassol. TotalFinaElf is operator with 40%. Partners are ExxonMobil 20%, BP 16.67%, Statoil 13.33%, and Norsk Hydro 10%.

At production startup, 11 wells were connected (eight are producers) via 70 km of infield pipelines linked to three riser towers carrying production to a floating production, storage, and offloading vessel (OGJ Online, July 6, 2001). By yearend, the flow is expected to reach 100,000 b/d, and a 200,000 b/d plateau is expected in second quarter 2002. Development drilling will continue until 2003. Thirty-nine subsea wells are planned: 23 producers, 14 water injectors, and 2 gas injectors.

In addition, Amerada Hess said Bergesen DY Offshore, Oslo, has completed the upgrade of Berge Hus, a former very large crude carrier, into an FPSO called Sendje Ceiba.

It will replace the Sendje Berge FPSO working on Ceiba field off Equatorial Guinea.

Sendje Ceiba, with onboard processing capacity of 160,000 b/d of liquids and a water-injection capacity of 135,000 b/d, will begin taking Ceiba production in early 2002 (OGJ Online, Apr. 25, 2001).

Suncor Energy's oil sands base plant. Photo courtesy of Suncor.
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Topping other production news is the outlook for burgeoning oil sands output in Canada. Suncor Energy has approved capital spending of $900 million (Can.) for 2002, with most of that targeted for its oil sands business. Suncor's goal is to produce 500,000-550,000 b/d by 2010-12. Meanwhile, its oil sands operation is nearing completion of a $3.25 billion expansion expected to increase production capacity to 225,000 b/d by January 2002, up from October 2001 average production of 115,000 b/d. The 2002 budget includes $420 million (Can.) for the in situ phase of its oil sands development and expansion of upgrading facilities. That spending is part of a $1 billion plan to bring total oil sands production capacity to 260,000 b/d in 2005. Suncor also plans next year to apply for regulatory approval to further expand its oil sands operations 25 km north of Fort McMurray, Alta. Regulatory approval is not expected before 2004. If authorized, that expansion would involve Suncor's oil sands mining, in situ developments, extraction, and upgrading facilities. Suncor has been developing the Athabasca oil sands deposit for 34 years.

Meanwhile, Petro-Canada has applied to the Alberta Energy and Utilities Board and Alberta Environment for an oil sands development at Meadow Creek, Alta. Petro-Canada said the steam-assisted gravity drainage project could cost $700-800 million (Can.). Production is anticipated in 2007. The company also announced it plans a second in situ development project and noted that it would expand its 120,000 b/d Edmonton refinery (OGJ Online, Nov. 30, 2001). Petro-Canada applied to construct a facility at Meadow Creek that would produce up to 80,000 b/d of bitumen for 25 years.

TotalFinaElf has begun producing the first of four natural gas accumulations on Block 30/19 in the UK North Sea. The accumulations that make up the field complex 400 km northeast of Aberdeen are designated N1 (North Nuggets), N2 (West Nuggets), N3 (Southwest Nuggets), and N4 (South Nuggets) (OGJ, July 16, 2001, p. 56). Altogether, the first three Nuggets accumulations are expected to produce 165 MMcfd of gas, which will comingle with gas from the Alwyn area for export through the Frigg Transportation System to the St. Fergus terminal in Scotland. The Nuggets project involves subsea wells tied back 54 km to the Alwyn North installations. Development of N4 is expected later.

Also in the North Sea, Statoil's Huldra field has begun producing gas and condensate. Huldra's unmanned platform is controlled remotely from the Veslefrikk A platform 16 km away. Huldra has a simple processing plant for separating condensate and gas. Condensate is piped to Veslefrikk for processing, while the gas is sent to the Norsk Hydro-operated Heimdal field. Eventually, Huldra will produce at a daily plateau of 10 million cu m from 6 wells. The field is on Blocks 30/2 and 30/3. Statoil is operator with a 51.62% interest.

CHINA tops pipeline reports this week.

China Petroleum & Chemical plans to build two natural gas pipelines in eastern China's Shandong province by 2005.

The lines, to cost a combined 1 billion yuan ($120 million), will move 4 billion cu m/year of gas. Sinopec unit Zhongyuan Oil & Gas will manage construction.

Sinopec has signed letters of intent with industrial and household users for 4 billion cu m/year. One line will start at Zhongyuan oil and gas field at Puyang, supplying Jinan and Zibo and ending at Qingdao. The second will also start at Puyang, serving Heze, and ending at Laiyang. This is a spur of PetroChina's planned 4,000-km Xinjiang-Shanghai gas pipeline. Sinopec will acquire a stake in that line to move gas from its Tarim basin fields.

Elsewhere in pipeline news, Vector Pipeline has opened the first of two Indiana gas interconnections with Northern Indiana Public Service Co. (NIPSCO). The 42-in. pipeline transports western Canadian gas from the Chicago market hub in Joliet, Ill., to the hub at Dawn, Ont., providing access to markets and storage in the upper Midwest. The interconnect will provide 600 MMscfd of capacity to serve the northern Indiana area. The second Vector interconnection near La Porte, Ind., offering 150 MMscfd of capacity, will begin providing service to the NIPSCO system in mid-December. Vector Pipeline is a partnership of Calgary-based Enbridge 45%, Vancouver-based Westcoast Energy 30%, and Detroit-based DTE Energy 25%.

IN RETAIL MARKETING, a unit of Williams Cos. has agreed to market all fuel grade ethanol produced by Ace Ethanol when its 15 million gal/year ethanol plant in Stanley, Wis., begins production in mid-2002.

The Ace Ethanol relationship marked Williams' ninth ethanol marketing agreement this year and will bring the amount of ethanol Williams markets or produces to 400 million gal/year. Financial terms of the Ace Ethanol agreement were not disclosed.

As the second-largest US producer and marketer of ethanol, Williams supplies 300 million gal/year. Of that total, it produces 130 million gal/year of ethanol through its wholly owned facility at Pekin, Ill., and its 75%-owned Aurora, Neb., facility.

Williams plans to extend its ethanol distribution network because of growing demand for ethanol. Large market opportunities for fuel ethanol are developing in California, as methyl tertiary butyl ether is being phased out there by 2003 and is to be eliminated in New York and Connecticut by 2004.

CONSTRUCTION CONTRACTS outline plans for development of Azeri, Chirag, and Guneshli fields in the Azerbaijan section of the Caspian Sea.

Azerbaijan International Oil Co. recently signed six contracts worth $750 million, bringing spending to date on the project to more than $1 billion.

McDermott Caspian Contractors won the contract for platform topsides involving fabrication, assembly, hookup, and commissioning of the production, drilling, and quarters integrated deck. The work was slated to start this month, with completion slated for September 2004. Another McDer- mott contract involves the installation of a 186 km, 30-in. pipeline from the main platform to landfall and a 12 km, 30-in. line for the compressor and water injection platform. Work was expected to start this month, with completion slated for May 2005.

Bouygues Offshore won a contract for fabrication and loadout of jackets and piles and the drilling template. Saipem has the contract covering the transport and installation of the drilling template and jackets and for the floatover of the topsides.

Eiffle won the contract for engineering, procurement, and construction of the drilling facilities. Emtunga International was hired to handle the engineering, procurement, and construction of the living quarters.

Elsewhere on the development front, a TotalFinaElf subsidiary has awarded units of J. Ray McDermott International contracts worth $160 million for two gas production platforms and related pipelines to be installed off Argentina. The contracts call for the design, engineering, procurement, construction, and installation of facilities for TotalFinaElf's Carina and Aries field development project 80 km east of Tierra del Fuego. The Carina-Aries development is expected to cost $400 million (OGJ Online, Oct. 19, 2001). One wellhead platform will be installed in 80 m of water and the other in 60 m of water. The affiliates also will install 100 km of flowlines and related chemical injection pipelines. J. Ray McDermott Engineering will design platform facilities, and Mentor Subsea will complete the pipelines. Platform decks will be fabricated at J. Ray McDermott's TNG yard in Veracruz, Mexico, while platform jackets will be built at the company's Harbor Island, Tex., yard. Fabrication is slated to begin in March 2002. Installation is expected to begin in November 2002, and production is expected to start up in the summer of 2003.

PETROBRAS PLANS to invest a record $8.9 billion to revamp eight of its refineries in Brazil by 2010.

Eider Prudente de Aquino, Petrobras's refining director, said this will be the largest capital investment in Brazil's refineries since the 1970s, when most of Petrobras's 11 refineries were built.

"The target of this investment is to absorb the growing production of crude oil, which has special characteristics such as being heavy with low sulfur content," said Prudente de Aquino. Petrobras plans to produce more higher-value products and improve the quality of gasoline and diesel oil, he added.

The refineries scheduled for revamping are the 226,000 b/d Duque de Caxias plant in Rio de Janeiro state, the 352,000 b/d Paulinia plant in Sao Paulo, the 189,000 b/d Canoas plant in Rio Grande do Sul, the 214,000 b/d Sao Jose dos Campos plant in Sao Paulo, the 151,000 b/d Betim plant in Minas Gerais, the 189,000 b/d Araucaria plant in Parana, the 170,000 b/d Cubatao plant in Sao Paulo, and the 306,000 b/d Mataripe plant in Bahia.

National Iranian Oil Co. intends to expand the capacity of its 400,000 b/d Abadan refinery to 555,000 b/d by 2006. NIOC said the expansion will help it decrease heavy oil production, boost gasoline output, lower production costs, improve fuel quality, and use modern technology. Feasibility studies for the first phase, to cost $37 million, have been completed. An unidentified engineering company is designing the expansion's second phase, which will cost $400 million.

AN INTEGRATED NGL and gas-to-liquids project is on the drawing boards for the Talara basin of northwestern Peru.

Synthroleum plans to build a 2,000 b/d NGL plant to upgrade and replace an existing plant owned and operated by Electrica de Piura. The plant is expected to process gas and extract NGLs from 30 MMscfd of inlet gas. In Phase II, Syntroleum plans to expand that plant and build a 5,000 b/d GTL plant. At full capacity, Phase II is expected to process 100 MMscfd of natural gas, and the combined NGL and GTL production is expected to total 10,000-11,000 b/d. In the last phase, Synthroleum will expand the GTL facility as more gas is developed nearby. The company expects that enough gas will be found to support 20,000-40,000 b/d of GTL capacity.

Elsewhere in processing news, BG Group has completed an expansion and revamp of its natural gas processing plant in La Vertiente, Bolivia. The project took 10 months and cost $30 million. It increased the plant's capacity to 4.2 million cu m/day (MMcmd) from 1.6 MMcmd. BG acquired the La Vertiente plant from Tesoro Bolivia Petroleum in 1999 for $100 million. La Vertiente takes gas from Taiguati, El Escondido, and Los Suris fields. The gas is transported through Transredes pipelines to the border, and then through the Petrobras-operated Bolivia-Brazil gas pipeline to the Brazilian delivery points of Comgas in Sao Paulo.

CORRECTION: A deal involving the underwriting of senior notes on behalf of Newfield Exploration Co. was incorrectly attributed to Warburg Pincus LLC (OGJ, Dec. 3, 2001, p. 72). The deal was conducted by UBS Warburg LLC.