Market Movement
Gasoline futures price hits 100-day high
Gasoline futures prices hit a 100-day high on the New York Mercantile Exchange in the middle of last week, propelled by refinery problems in Texas and California and by fears that Tropical Storm Claudette might strike the US Gulf Coast as a possible hurricane some time this week.
Following consecutive gains in the three previous sessions, NYMEX's August contract for unleaded gasoline shot up 3.55¢ to 94.01¢/gal on July 9—the highest closing for a near-month gasoline contract since Mar. 31. It pulled up prices for other commodities in its wake.
The rally was spurred by a July 8 report that Shell Deer Park Refining Co. had shut down one of two catalytic reformers at its 340,000 b/d complex in Deer Park, Tex. The unit was taken down for unscheduled—but "not unanticipated"—maintenance that could take 7-10 days to complete, said a company spokesman. The next day, Valero Energy Corp. said it had taken down a 35,000 b/d hydrocracker for repairs at its 165,000 b/d Benicia, Calif., refinery. Company officials provided no estimate for the downtime at that facility.
Neither incident is expected to have a major impact on US gasoline supplies. But with US gasoline inventories already abnormally low during peak summer driving season, any supply disruption is almost certain to trigger market reaction.
The US Energy Information Administration on July 9 reported US gasoline inventories increased by only 500,000 bbl to 205.5 million bbl during the week ended July 4. US crude inventories were up only 100,000 bbl to 282.2 million bbl in the same period, while distillate stocks fell by 500,000 bbl to 109.2 million bbl, EIA officials said. The American Petroleum Institute's report for the same period was even more pessimistic, with US gasoline stocks down by 2.5 million bbl to 204.3 million bbl. API said US distillates dropped 677,000 bbl to 108.7 million bbl, but US crude stocks were up by 3.96 million bbl to 282.4 million bbl.
Product market tightens
So far this year, the tightness in the US market "has moved fairly consistently towards oil products and away from crude oil," said Paul Horsnell, J.P. Morgan Securities Inc., London. "The (US) deficit in oil products from the 5-year average is now at its highest this year, having widened in the last week by 400,000 bbl."
Meanwhile, the market's focus on US inventories has diverted attention from Europe, where gasoline stocks at the end of June were "more than 17 million bbl below their 5-year average," Horsnell said.
"US inventories are being held up by record high imports," he said. "But if Europe is now running low itself, then it is going to be hard to maintain (US) imports close to 1.1 million b/d for the rest of the summer."
Moreover, he said, "It's probably a month or so too early for traders to go into overdrive about it, but (US) heating oil inventories are not climbing as fast as they need to be in order to close the gap below normal. The situation can still be salvaged, but it won't be, as long as heating oil's premium to crude remains as low as it is now."
Oil output declines
Despite significantly higher market prices during the first half of this year, several nations outside of the Organization of Petroleum Exporting Countries have watched their oil production fall below year-ago levels, especially in mature producing areas, Horsnell noted.
"Non-OPEC production continues to be buoyed by Russia alone. Outside Russia, non-OPEC output fell in the first half of this year," he said.
"We can pretty much abandon the theory that it is absolutely inevitable that higher prices produce a strong output response that will in itself bring prices crashing down," Horsnell said. "The dynamics of non-OPEC production have changed as it has become more mature. Decline rates have advanced, and maintenance has become more complex, takes longer, and thus causes greater production losses."
NL Bulletin
Bidding has opened for work on Iraq's oil cacilities. The US Army Corps of Engineers (USACE) will let two contracts for restoration of production, refineries, pipelines, and other facilities to prewar conditions. The 24-60 month contracts, replacing one now held by Halliburton Co.'s KBR unit, each will be worth $500,000-500 million. One contract will support Iraq's North Oil Co., the other South Oil Co. Proposals are due Aug 14. USACE estimates funding needed to restore the Iraqi industry, with oil production of 3 million b/d, of as much as $1.68 billion. Information on the solicitation appears at https://ebs.swf.usace.army.mil.
Industry Scoreboard
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Industry Trends
INTERNATIONAL ENERGY financiers are setting voluntary green standards.
The World Bank's International Finance Corp. last month announced that 10 US and European banks will strive to make international oil and natural gas projects more environmentally responsible under a new program called the "Equator Principles.
The principles reflect the IFC's guidelines for oil and gas, mining, and forestry projects pursued in developing countries. IFC is the World Bank's private sector investment arm.
Banks adopting the Equator Principles include ABN AMRO Bank NV, Barclays PLC, Citigroup Inc., Credit Lyonnais, Credit Suisse Group, HVB Group, Rabobank, Royal Bank of Scotland, WestLB AG, and Westpac Banking Corp.
More banks active in project finance are expected to adopt these principles, said Charles Prince, chairman and CEO of Citigroup's Global Corporate & Investment Bank.
Together, the group of 10 banks underwrote $14.5 billion of IFC project loans in 2002, representing 30% of the project loan syndication market globally, IFC said.
The banks' actions reflect an influence coming from environmental groups. Greenpeace is among activists saying the World Bank should encourage private banks to support responsible development with environmental goals.
One environmental group, the San Francisco, Calif.-based Rainforest Action Network (RAN), said the banks' latest effort to encourage responsible development is too weak because it is a voluntary program.
"The Equator Principles are proof that banks are feeling the heat from environmental groups worldwide," said RAN spokesman Ilyse Hogue. "Unfortunately, the Equator Principles won't do anything to prevent banks from bankrolling the oil and logging companies that are kicking people out of their homes to destroy the rainforests in places like Ecuador."
US ENERGY spending on information technology will climb for the next 5 years, says IDC, a market intelligence and advisory firm based in Framingham, Mass.
Energy IT spending is expected to grow from $18.9 billion in 2002 to more than $25 billion in 2007, representing a 5-year compound annual growth rate of 5.9%, IDC said.
The forecast was part of a study released last month entitled, "US Energy IT Spending Forecast, 2003-07: A First Look at the Year Ahead." IDC gathered and analyzed a wide variety of material, including surveys and interviews with key energy IT vendors and end-users. Industry associations also were contacted.
"In just a few short years, the energy industry has gone from promises of great growth to picking up the pieces with the collapse of energy trading markets, the uncertainty of deregulation, and the war with Iraq," said Christopher Boone, an IDC energy and utilities researcher.
"Nevertheless, IT vendors with energy industry expertise continue to gain from increases in oil and gas exploration investments by leading players and the need to consolidate IT systems in the aftermath of mergers and acquisitions. These efforts will sustain IT spending growth in the near term," Boone added.
IDC recommended that IT vendors provide products and services that cater to industry consolidation and also embed security into all IT initiatives aimed at the energy industry.
Government Developments
US FEDERAL REGULATORS are examining future possible standards for energy commodity price reporting.
US Commodity Futures Trading Commission (CFTC) Chairman James E. Newsome met with energy commodity trading representatives and their attorneys at the University of Houston last week.
They discussed topics including possible price manipulation by energy traders and the way that utilities and energy companies use price indices compiled by publications.
The UH Global Energy Management Institute sponsored the breakfast meeting, which was attended by about 40 people and was closed to the media.
"I think that Congress will make the determination of how price reporting will move forward," Newsome said at a news conference later. "It's important for Congress to address it." He said it was unclear whether it might provide price reporting standards or whether Congress would designate a federal agency to address the issue.
Currently, traders have no regulations regarding the way in which they report—or refuse to report—transactions to publications that compile and publish energy commodity prices. Traders also are not required to disclose deals or name the participants involved in any transaction.
Questions about fraudulent reporting and possible price manipulation among energy traders arose during 2000-01, when California witnessed electric power price surges and experienced power blackouts across the state.
Enron Corp.'s collapse in early November 2001 shocked the energy markets, resulting in an initial period of natural gas and electric power market disruption and then a period in 2002 of balance-sheet scrutiny by many energy companies as the ratings agencies assessed just how leveraged the industry had become (OGJ, Dec. 2, 2002, p. 20).
Earlier this month in Washington, DC, a group of natural gas and electric power trading companies asked federal regulations for limited liability protection regarding honest mistakes in reporting deals to publications putting out the price indices.
"Honest mistakes are not a violation of the Commodities Exchange Act," Newsome said, adding, "Certainty in the marketplace, (accurate price reporting) is very, very critical."
The CFTC and the US Federal Regulatory Energy Commission are working closely together to address solutions to credit risk problems, Newsome said. He praised efforts being made within the energy industry to adopt new codes of ethics and best practices.
Newsome urged all energy market participants, and especially trading system operators, to continue working to restore confidence in the use of risk-management mechanisms.
The CFTC has opened numerous investigations regarding possible misconduct in the over-the-counter energy markets and has filed several enforcement actions. During the news conference, Newsome said he could not discuss the specifics of any of these investigations.
"I am fully committed to resolving our other investigations as expeditiously as possible, so that wrongdoers are appropriately punished, and those that were not involved are exonerated," he said.
Market participants who cooperate with the CFTC are likely to see their cases resolved by yearend, Newsome said, adding that uncooperative participants could see their cases drag on into next spring.
Quick Takes
APACHE CORP., Houston, has reported the "most significant discovery" to date in Egypt's Western Desert with its Qasr-1X discovery well, which tested at a combined rate of 51.8 MMcfd of natural gas and 2,688 b/d of condensate from two zones.
The well logged 606 ft of net pay from six formations at 6,917-13,581 ft, Apache said. Pressure analysis of the Jurassic reservoirs at Qasr indicates the presence of a 670 ft vertical hydrocarbon column.
"The Qasr 1-X is perhaps the most significant discovery in Apache's 49-year history and establishes the Western Desert as an important hydrocarbon province well into the 21st Century," said Apache CEO and Pres. G. Steven Farris.
A production test of the Lower Safa reservoir from perforations between 12,908 ft and 13,084 ft yielded 38.1 MMcfd of gas and 2,155 b/d of condensate through a 1-in. choke with 2,549 psi flowing wellhead pressure.
The thickest pay interval, 311 net ft, was in the Jurassic Ras Qattara reservoir, but only 90 ft of the least prospective upper zone could be tested due to mechanical problems. Perforated at 13,252-13,345 ft, it flowed 13.7 MMcfd of gas on test and 533 b/d of condensate through a 1-in. choke with 851 psi flowing wellhead pressure.
"The lower part of the Ras Qattara that we were unable to test appears to be of even better quality than the upper interval," Farris said. "The Ras Qattara is a blanket sand which tends to cover very large areas."
Apache will drill an offset to the discovery and a twin well to test prospective AEB 5 and upper and lower Bahariya oil sands that were encountered uphole in the Qasr-1X. Plans are to connect the new field to Apache's Salam gas plant, 17 miles away.
The discovery is in the Ozoris area of Apache's 2.3 million acre Khalda concession, which it operates with a 100% contractor interest (OGJ Online, July 23, 2002).
BURULLUS GAS CO. has awarded a $300 million contract to Technip-Coflexip for the subsea development of Burullus's Simian-Sienna natural gas fields off Egypt. Burullus is a joint venture of Egyptian Natural Gas Holding Co., British Gas Egypt, and Edison Gas SPA.
Simian field lies 114 km off Idku, near Alexandria, in 677-933 m of water. It is expected to produce 665 MMscfd of gas to be used as feedstock for the first train of the LNG plant now under construction at Idku. It includes two tiebacks to Sienna field.
Technip-Coflexip will provide design, engineering, procurement, fabrication, installation, testing, and commissioning of subsea facilities. Duco Ltd., Technip-Coflexip's Newcastle-based subsidiary, will fabricate the umbilicals. Egyptian national subcontractors will design, fabricate, and install the platform.
The project's scope includes six subsea valve assemblies, manifolds M1 and M2, an electrohydraulic multiplex control system, and a methanol injection unit supported by a dedicated offshore controls platform. The platform will be supplied by a combined power and communication umbilical from the onshore facility.
The project also includes two main umbilicals, a 4-in. glycol injection pipeline, a 20-in. infield pipeline between the manifolds, and a 26-in. export pipeline from manifold M1 to be connected to the nearby Scarab-Saffron fields.
The project is scheduled for completion in March 2005.
In other development news, Russian oil and natural gas majors OAO Lukoil and OAO Gazprom established a joint venture July 1 to develop the Tsentralnaya structure in the Caspian Sea along with Kazakhstan's national petroleum company ZAO NK KazMunaiGaz. Lukoil and Gazprom each will hold equal interest in the JV, called OAO TsentrKaspneftegas. In 1995, Lukoil identified the most promising sectors based on extensive geological studies, the company said. Four licenses were obtained for the geological exploration of the Tsentralny, Yalama-Samur, Tsentralno-Kaspiysky, and Vostochno-Rakushechny, Lukoil said. Lukoil estimates that the Tsentralaya structure holds 521 million tonnes of oil equivalent.
NIGERIA LNG LTD. has begun LPG shipments ahead of schedule from its plant in Bonny, with 40,000 tonnes of LPG—sold to Vitol SA of Switzerland—en route to Galena Park, Tex., aboard the Berge Clipper.
NLNG's three trains are expected to produce 1.2 million tonnes/year when its LPG production plateau is reached, while output will climb to 2.2 million tonnes/year when LNG Trains 4 and 5—now under construction—come on stream. The trains share common facilities, including utilities, storage tanks, and loading jetties.
The plant's LPG facilities, which began operation in April, were constructed as part of the LNG Train 3 expansion. They enable each of the existing trains to process associated gas that otherwise would have been flared.
In May, NLNG stepped up its presence in the US spot LNG market following an agreement to supply BG LNG Services with 3 billion cu m/year of LNG for 20 years (OGJ Online, May 14, 2003).
NLNG is a joint venture of Nigerian National Petroleum Corp. 49%, Shell Gas BV 25.6%, TotalFinaElf LNG Nigeria Ltd.15%, and Agip International NA BV 10.4%.
A SHOWDOWN between the Thai government and opponents over the controversial Thai-Malay natural gas pipeline and gas separation plant has heated up as construction work at the site in Thailand's southern Songkhla Province.
About 600 police recently took up position 500 m from Lan Hoy Siab in Songkhla's Chana district, where 400 opponents have been gathering as heavy construction equipment started to arrive. Two permanent camps and several police checkpoints are in place to guard the 360 acre site of the 425 MMcfd gas separation plant.
Trans Thai-Malaysia Ltd. (TTM) is the project sponsor with a joint venture of Petroleum Authority of Thailand and Petronas Carigali Sdn. Bhd.
Meanwhile, the war of words between government and protest leaders has escalated following harsh comments by Thai Prime Minister Thaksin Shinawatra, who criticized both pipeline opponents and human rights activists, provoking an angry response. The gas transmission line is set for completion in early 2005, and the gas plant in mid-2005.
Saipem SPA of Italy soon will start laying the 277 km, 34-in. subsea pipeline that extends west to Thailand's coast at Songkhla from Cakerawala field on Block A-18 in Thailand-Malaysia's Joint Development Area in the South China Sea.
Nacap Nederland BV of the Netherlands also is poised to lay the onshore section, an 89 km, 36-in. line from Songkhla to the Thai-Malay border at Sadao and an 8 km inland spur to the northern Malaysian state of Perlis. Ilva SPA of Italy is supplying the steel pipe. South Korea's Samsung Engineering Co. Ltd. will build the gas separation plant as soon as site preparation in Songkhla is complete.
Development of Cakerawala gas production facilities, consisting of three wellhead platforms, a central processing platform, living quarters, a riser compressor platform, and floating storage, has been completed and is ready to deliver gas since last September. The field is capable of delivering 390 MMcfd of gas for a plateau period of 20 years. Initial gas will go to Malaysia.
In other pipeline news, Tennessee Gas Pipeline Co., a subsidiary of Houston-based El Paso Corp., is holding a nonbinding open season through Aug. 11 to assess market interest in additional firm capacity through its proposed Freedom Trail expansion project. The expansion, scheduled to begin service in 2006, will increase mainline natural gas capacity by 50-150 MMcfd on Tennessee's Line 200 in New York and Massachusetts, with as much as 40,000 hp additional compression and as much as 40 miles of new pipeline looped along existing right of way. It would enable customers in the US Northeast to access various supply points along Tennessee's system, said company officials, including market and supply area storage, the Gulf of Mexico, and Tennessee's Niagara, NY, interconnect with the system of TransCanada Pipelines Ltd.
EXXONMOBIL CORP. subsidiary, Mobil Producing Nigeria (MPN), operator of the Nigeria National Petroleum Corp. (NNPC) joint venture, has awarded major contracts for additional oil recovery initiatives in the East Area off Nigeria.
The project includes gas gathering pipelines, gas compression, gas reinjection pipelines, and associated facilities 20 miles off Nigeria in 85-110 ft of water. Start-up is scheduled for 2006.
ExxonMobil awarded engineering, procurement, and construction contracts valued at more than $800 million for the compression platforms, pipelines, and riser platforms. Nigerian contractors and suppliers will be assigned significant phases of the development, including fabrication of seven major structures, pipe coatings, and offshore construction.
The $1.7 billion natural gas reinjection project is expected to improve oil recovery from multiple reservoirs in the NNPC-MPN JV area, increasing oil production by 110,000 b/d and ultimate recovery in the JV area by more than 500 million bbl. Current production capacity is 750,000 b/d of petroleum liquids.
The project also will eliminate gas flaring 2 years ahead of Nigeria's 2008 schedule.
MPN holds a 40% interest in the NNPC-MPN JV. The Nigerian government holds 60% interest through NNPC.
In other production activities, Burlington Resources Inc., Houston, has started oil production from Menzel Lejmat North (MLN) field in Algeria and has commissioned the field's oil processing and storage facilities. Burlington expects MLN's initial 14,000 b/d oil production to increase to 33,000 b/d later this year. As operator, Burlington is developing MLN as the first of a series of discoveries on Block 405a in the Berkine basin near Hassi Messaoud, 700 km southeast of Algiers. Phase I includes development of four satellite oil fields on the block's northern portion. Subsequent phases, which will include fields with oil and large natural gas and condensate reserves on the block's southern portion, are targeted for 2006-07. Burlington has a 65% working interest in the production-sharing contract on Block 405a. Talisman Energy Inc. subsidiary Talisman (Algeria) BV holds 35% working interest, and Algeria's state oil firm Sonatrach participates in both revenue and production through the contract. Burlington said it also anticipates international production start-ups during 2003 and early 2004 of a partner-operated offshore oil development in China, and a Burlington-operated natural gas development program in the East Irish Sea. Meanwhile, Burlington said it has resumed partial production from two of the six deep natural gas wells in Madden field in Wyoming and has restarted the Train II unit at the Lost Cabin processing plant. The wells and plant were shut in in mid-June as a safety precaution after localized pipe deformations were found in the sour gas gathering system (OGJ Online, June 24, 2003). The wells are flowing at 65 MMcfed, yielding plant output of 40 MMcfed of natural gas. Production capacity into the plant inlet is 310 MMcfed, with 200 MMcfed of treated sales gas capacity. Burlington holds a 42% interest in the production.
NIPPON PETROLEUM REFINING CO. has started up commercial operation of a 342 Mw integrated gasification combined cycle (IGCC) power plant at its 340,000 b/d Negishi refinery in Yokohama, Japan. Construction began in 2000.
Asphalt from the refinery is serving as feedstock for the power plant, the first in Japan to use the IGCC gasification technology licensed by Texaco Development Corp., a subsidiary of ChevronTexaco Worldwide Power & Gasification.
IGCC produces electric power from feedstocks such as coal, refinery bottoms, or petroleum coke. It works by injecting the solid or liquid feedstock with oxygen into a high-temperature, high-pressure gasifier where the feedstock is broken down and converted mainly into syngas. The IGCC plant's combined-cycle system includes a gas turbine that burns the syngas to produce electricity. Heat from the gas turbine's exhaust is then recovered to produce steam to power traditional steam turbines.
TAIWAN'S state-owned Chinese Petroleum Corp. (CPC) has won a contract to supply 1.7 million tonnes/year of LNG to Taiwan Power Co.'s Tatan plant. CPC's winning bid of $8.65 billion for the 25-year contract that begins in 2008 took industry watchers by surprise, as it was nearly 25% below the $11.6 billion floor price that Taipower set and 6% lower than the next lowest bid.
Other companies competing for the contract were Tung Ting Gas Corp, Talin LNG Ltd., and United Resources Inc.
Local media cited CPC Vice-Pres. Roy Chiu as saying that CPC will purchase LNG required to fulfill the terms of the contract from Qatar Gas II, a joint venture of Qatar Petroleum Co. and ExxonMobil Corp. The Qatari firm has offered to sell LNG to CPC on very favorable terms in what is being viewed as a move to replace Indonesia as Taiwan's primary source of LNG once CPC's existing contract expires in another 5 years.
When announcing the contract, CPC Pres. Wenent Pan said the company would spend more than $580 million to build two receiving terminals and to connect pipelines.
One of the new terminals will be built at Taichung Port, with the other to be built at an as-yet-undisclosed site in northern Taiwan. Construction of the terminals and pipelines is scheduled to get under way in first half 2004.