OGJ NEWSLETTER

Feb. 13, 1995
U.S. Industry Scoreboard 2/13 (76711 bytes) The fate of worldwide petroleum investment could hinge on trade and related economic reform issues capturing headlines today. The general council of the new World Trade Organization, successor to the General Agreement on Tariffs and Trade, has held its first meeting and has begun filling key positions. Seventy-six nations have signed the WTO treaty, which calls for radical cuts in tariffs, and 50 more are considering it. Former Mexican President

U.S. Industry Scoreboard 2/13 (76711 bytes)

The fate of worldwide petroleum investment could hinge on trade and related economic reform issues capturing headlines today.

The general council of the new World Trade Organization, successor to the General Agreement on Tariffs and Trade, has held its first meeting and has begun filling key positions.

Seventy-six nations have signed the WTO treaty, which calls for radical cuts in tariffs, and 50 more are considering it. Former Mexican President Carlos Salinas de Gortari is one of the candidates for WTO director general.

Due to delays in Congress, President Clinton dropped a proposed $40 billion loan guarantee package to shore up the Mexican peso and used his executive powers to grant Mexico $20 billion in short term loans and loan guarantees.

Mexico will pledge its $7 billion/year oil export revenues as collateral, and its government will take further steps to cut spending and trim the trade deficit.

Although the U.S. and China have levied trade sanctions against each other, Energy Sec. Hazel O'Leary is proceeding with a trade mission to China this month. Accompanied by eight leading oil and gas executives and 60 representatives of other energy firms, associations, and government agencies, O'Leary will speak at conferences in Shanghai and Beijing and meet with various Chinese energy officials. DOE said members of the delegation will sign $4-8 billion worth of energy deals with China.

Look for a massive privatization of Russian oil and gas companies to begin this year, says Deputy Economics Minister Serghei Vassilyev.

Moscow hopes to start sales of 10-15% of state controlled interests earlier than scheduled in order to earn more than 13 billion rubles. Much of that investment will come from foreign petroleum companies seeking to invest as much as $60-70 billion in Russia's petroleum sector despite high risk in a crisis ridden economy. Direct investment in Russian oil and gas joint ventures remains relatively scarce, even with 50 active producing JVs. So acquiring shares of Russian companies might be a way to avoid some of the hurdles to direct foreign investment in JVs, including prohibitive taxes, absence of financial and legal guarantees, and competitive roadblocks put up by local oil giants such as Lukoil and Surgutneftegaz. Vassilyev sees coupon bonds, secured by foreign currency and hydrocarbon resources, as the preferred vehicle for raising capital because of their liquidity in Russia's undeveloped stock market. Foreign investors seeking stock issues could buy securities transferable later to stock shares.

At least one western company is giving up on its Russian JY. Gulf Canada will sell it 25% interest in the KomiArcticOil joint stock company as no longer part of its strategic focus.

Gulf says the investment is technically sound but has been delayed by the uncertain political and constantly changing economic environment. The project has reached a point in development of Upper Vozey oil field in the Komi republic where it must begin drawing funds from a previously established financing facility, a decision Gulf says ought to be made by a new long term shareholder.

Brazil's new government wants to lift constitutional restrictions that hinder foreign investment in E&P. Planning Minister Jose Serra said the government wants to allow risk contracts and JVs with state owned Petrobras and end the state monopolies on oil/refined products transportation and gas distribution. It also would do away with a constitutional requirement that domestic shipping be reserved for Brazilian flag vessels.

Pdvsa is seeking approval from Venezuela's congress for three heavy oil JVs involving its operating units and U.S. majors. Involved are ARCO-Corpoven's $3.5 billion project to produce, upgrade, and export heavy crude; Chevron-Maraven's $2 billion project to produce Boscan field heavy crude for 30 years to support Chevron's asphalt business; and Mobil-Lagoven's project to produce and upgrade 100,000 b/d of Orinoco belt extra heavy crude.

Congress also is studying profit sharing agreements Pdvsa proposes for oil and gas E&P with foreign firms (OGJ, Sept. 19, 1994, Newsletter).

A Shell Petroleum Development Co. of Nigeria group will undertake a $2 million environmental survey of Nigeria's Niger Delta on the heels of growing tension between the oil industry and national groups over Nigeria's worsening environment. Recent accusations of environmental damage have further heated an already tense relationship between oil companies and community groups.

Last year's 2 month strike of oil workers was characterized by attacks on oil company and contractor employees, sabotage of oil installations, and increasing demands by local political groups (OGJ, Aug. 8, 1994, p. 25). In the Ogoni region, Shell has been accused of environmental devastation and exploitation. The company withdrew staff from the region in January 1993 after a series of attacks.

Shell says facts do not fit the exaggerated environmental allegations, which often are linked to calls for a greater share of oil revenues and wide ranging political demands. It notes two independent reports under way are expected to link environmental degradation in Nigeria largely to the pressures of a burgeoning population, rather than solely to the oil industry.

Worldwide orders for fossil fuel fired power plants are expected to total about 80 million kw-hr/year in the foreseeable future, predicts Siemens AG, Munich. Of these, 25-30 million kw-hr/year will be build/own/operate (BOO) projects. The German giant has formed Siemens Power Ventures GmbH to cash in on a growing trend for BOO projects backed by private investors.

Siemens figures about 50-60 new BOO units will be ordered each year with smaller units favored in the U.S. and larger ones in the Far East.

More capital budgets reflect optimism for 1995. Chevron plans a $5.1 billion capital and exploration budget this year, up 5% from last year. About $2.7 billion is earmarked for E&P, unchanged from last year and focused 70% outside the U.S. Chevron will hike worldwide spending for refining/marketing and transportation 5% to $1.9 billion, with a big chunk of that going to affiliate Caltex boosting outlays by 25% in booming Far East markets. For chemicals, another 1994 bright spot, Chevron will jump outlays 60% to more than $200 million.

Union Texas Petroleum plans 1995 capital spending of $212 million, including a jump in exploration spending by 85% from 1994. The company expects to spend about $74 million to drill a combined nine wildcats in new areas in Argentina, Alaska, Tunisia, Viet Nam, and eastern Indonesia, plus as many as another 20 delineation and appraisal wells in exploration programs under way in the U.K. North Sea, Indonesia, and Pakistan. UTP's 1994 capital budget was $131 million, including $40 million for exploration.

Is another public health debate over a gasoline component (see related story, p. 17) about to erupt? Researchers at Britain's Bristol University say the radioactive carcinogen polonium 210 should be added to the list of carcinogens found in vehicular emissions. They theorize polonium in exhaust emissions can arise from lead in gasoline or from its presence in oil as part of trace uranium radioactive decay chain products. U.K. Petroleum Industry Association (Ukpia) says the polonium link to cancer is uncertain and more research is needed. Ukpia also notes if polonium is linked to lead additives, the government's policy of phasing out lead from gasoline will eliminate the problem.

New Jersey Gov. Christine Todd Whitman says her state will wait until next winter to opt out of a voluntary federal program calling for 2.7 wt % oxygen in gasoline (see related story, p. 20).

State officials had considered cutting the oxygen levels in gasoline to 2 wt % this winter to reduce costs for consumers while still enabling the northern part of the state to comply with reformulated gasoline requirements.

An overall bullish psychology is starting to emerge for crude oil, says Houston consultant Stone Bond Corp. (SBC), noting that crude prices have rallied to their highest level of the year despite conflicting signals from refined products markets. Nymex crude for March delivery closed at $18.78/bbl Feb. 3 before slipping back to close at $18.30 Feb. 8. SBC predicts WTI will reach $20.30/bbl the next few weeks after a rally pushing it to a $19/bbl average it forecast for last week. It cites crude oil stocks dropping 1.2 million bbl in the preceding week and running about 10 million bbl below last year, OPEC production at a relatively low 24.9 million b/d, and world demand estimated at a record 70.2 million b/d. Despite new concerns over gasoline demand in the U.S., gasoline prices have not been as weak as expected. Relatively low stocks going into the spring buildup for summer driving should support gasoline prices and ultimately crude prices. The cold snap that covered much of the U.S. Northeast last week helped spike heating oil prices as well. That said, SBC sees refining margins worsening worldwide in the short term, given the expected runup in crude prices and limited potential for product price increases.

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