OGJ Newsletter

April 3, 2000
What effect, if any, will OPEC's decision early last week to raise its production ceiling have on gasoline prices later this year?
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What effect, if any, will OPEC's decision early last week to raise its production ceiling have on gasoline prices later this year?

While some analysts have warned of a gasoline crisis this summer, the potential for a gasoline shortage and a summertime price spike is much lower than anticipated, says Energy Security Analysis Inc. "Crude oil stocks are simply not at dangerously low levels, as many experts have indicated," ESAI argues. Before OPEC's meeting, ESAI said the group would need to increase crude oil output from a first quarter average of 26.5 million b/d to 27.8 million b/d for the second quarter, and then probably another 0.5 million b/d in the third quarter to 28.3 million b/d. These figures are in contrast to a combined 1.7 million b/d increase agreed on by OPEC, including dissenter Iran (see story, p. 26).

In comparison, IEA indicated OPEC would need to add 2.3 million b/d to the market in the second quarter. Skepticism over OPEC's willingness to meet IEA's challenge has fueled concerns over crude oil supply adequacy.

Also on the eve of the meeting, Purvin & Gertz Pres. Bill Sanderson told attendees of the firm's International LPG Seminar that he expects WTI prices to settle in the mid to low $20/bbl range by the beginning of the third quarter.

"We expect WTI to trade in the low $20 range in 2001, with continued short-term volatility," he added. His outlook was contingent on a "measured response" by OPEC and increases in non-OPEC production coming on stream as scheduled. Asian economies will continue to recover, Sanderson added, driving petroleum demand there up 4%/year over the next few years.

The petrochemical industry will be more relieved than many about falling crude prices, says Arved Teleki, chief economist for Chemical Market Associates Inc.

Teleki told attendees of CMAI's World Petrochemical Conference in Houston last week that world oil prices and government monetary policies are the two primary concerns facing the petrochemical industry. Recent oil prices have been high enough and erratic enough to start damaging the world economy, says Teleki. And, because it's a user of oil and gas as both fuel and feedstock, the petrochemical sector takes a double whammy.

Like Sanderson, however, Teleki believes Asia's recovery is here to stay: "By 2003, [annual global economic] growth of over 3.5% is projected."

The Clinton administration has released a study confirming that growing US dependence on oil imports threatens national security-but proposed no additional energy policies. Oil groups requested the study under Sec. 232 of the Trade Expansion Act.

IPAA complained, "Domestic oil production is the cornerstone of [US] economic and military security, yet the administration's response fails to institute the long-range energy policies that could revitalize this sector...." Senate Energy Committee Chairman Frank Murkowski (R-Alas.) said, "I am disappointed that, over the past 2 months, the administration's efforts have focused on increasing imports...rather than on increasing domestic production and energy independence." Imports account for about 53% of US oil supplies.

A Washington, DC, federal court has ruled that gas producers don't have to pay the federal government's share of marketing costs on royalty gas. If appeals courts uphold the ruling, it will affect a similar provision in MMS's recently issued oil royalty reform rule (OGJ, Mar. 20, 2000, p. 25).

In a 1997 rule, MMS asserted that producers holding federal and Indian leases have a duty to pay the costs of marketing royalty gas downstream of the lease.

MMS recently said, "It is a well-established principle of oil and gas law that lessees have the duty to market production for the mutual benefit of the lessees and the lessor, with no deduction for costs of marketing."

IPAA and API challenged the regulation in a lawsuit, IPAA vs. Armstrong.

IPAA Pres. Barry Russell said, "This is a great victory for independent producers and for all consumers of natural gas. It blocks the government from imposing on producers and consumers an artificial tax on the transportation of gas between the wellhead and the burner tip."

API said, "In effect, what the court said is what we have been arguing all along: that producers don't have a duty to market, free of charge, the hydrocarbons they produce from government lands. While this case is directed at an MMS natural gas ruling, the same legal arguments can be made about oil produced on government lands. Therefore, we call upon MMS to reconsider its final crude oil royalty rule issued [recently]."

Ben Dillon, IPAA's public resources vice-president, said the court ruling recognizes that, when producers incur the risks and costs of moving gas from the lease to points closer to consumers, they add value to the gas. "If the government wants to share in the benefits of those activities by the producers," he said, "the government must accept its share of the costs."

A recent court ruling has moved Unocal one step closer to being in the enviable position of collecting royalties on all reformulated gasoline produced in California. The Federal Circuit Court upheld the validity of Unocal's claim that it was granted US patents in 1994 on gasoline formulations that encompassed specifications that California later mandated for its Phase 2 RFG.

In 1995, Unocal sued six California refiners-ARCO, Chevron, Exxon, Mobil, Shell, and Texaco-for patent violation (OGJ, Nov. 3, 1997, p. 33).

Unocal says the latest decision confirms the earlier jury award of 53/4¢/gal for infringing motor gasoline production. It will now ask the Federal District Court, Central District, in Los Angeles for an accounting of nationwide infringing gallons manufactured by the defendants for the period since Aug. 1, 1996.

Unocal Chairman Roger Beach said, "Unocal is willing to discuss its patent claims with refiners and negotiate appropriate licensing terms...We believe that our patents offer a significant potential revenue stream to Unocal. The claims under the original...patent have been supplemented by additional patents."

The patents may have application throughout the US, Beach says.

The US Gulf of Mexico rig market continues to show gains, according to Global Marine's summary of current offshore rig economics (SCORE). The gulf SCORE rose 1.7% to 28.6% in February, while the global SCORE increased 1.3% to 25.9%. "The Gulf of Mexico SCORE has improved for 9 months in a row," said Global Marine Chairman Bob Rose. "Premium jack up utilization in the gulf stood at 100% at the end of February 2000," he said.

West Africa and Southeast Asia have also shown improvements.

The movement toward the virtual oil company continues to gain momentum (OGJ, Feb. 7, 2000, Newsletter). McMoRan Exploration and Halliburton have announced the formation of an alliance in which Halliburton will take over operation of McMoRan's Gulf of Mexico E&D program.

The partnership follows the independent firm's recent gulf acquisitions: one from Texaco to explore 89 tracts (OGJ, Jan. 3, 2000, Newsletter) and one from Shell Offshore for interests in 56 exploratory leases. Between the two deals, McMoRan gained exploratory rights to 160 blocks covering 750,000 gross acres.

It appears that Georgia and Azerbaijan have finally resolved their differences over transit tariffs for oil shipments in the planned Baku-Ceyhan export pipeline from the Caspian Sea's Azeri coast to Turkey.

Azeri President Heydar Aliyev and his Georgian counterpart Eduard Shevardnadze say they have reached a compromise on the tariff issue but declined to reveal the agreed-on figure. Late last year, they agreed to split an $0.18/bbl tariff, but Georgia later claimed Tbilisi was entitled to $0.20/bbl. Azerbaijan responded with an offer of $0.03/bbl, which Georgia refused.

It appears the two sides have settled on something a bit higher than that. Indeed, Aliyev waxed eloquent about his decision to be generous, to let Tbilisi "have" Baku's share of the transit fee. His comments indicate that Baku is willing to indulge Tbilisi, at least for now, to ensure that negotiations move forward.

Other issues remain to be confronted by the pipeline's backers, including the effects of Lukoil's apparently major oil discovery in the Russian sector of the Caspian (see story, p. 32). Russia is likely to ship any Caspian oil production through the Caspian Pipeline Consortium line, which will extend from Kazakh- stan's Tengiz field to the Russian port of Novorossiisk, with tanker exports moving across the Black Sea through the Bosporus Strait. The CPC line is expected to start up earlier than Baku-Ceyhan. This development does nothing to ease the minds of backers of Baku-Ceyhan, which are concerned that production from the Azeri sector of the sea won't be adequate to fill that line.