OGJ NEWSLETTER

U.S. Industry Scoreboard 5/1

First quarter earnings for U.S. companies are definitely a mixed bag, with results in upstream and downstream sectors split sharply--not from each other, but within their respective sectors.

Generally, for U.S. majors, strong chemical earnings and buoyant crude oil prices outweighed the effects of depressed natural gas prices and dismal refining margins. But it was a tough time for U.S. independent producers whose portfolios are weighted heavily toward natural gas, a strategy that seemed a sure thing not too long ago.

Efforts to raise capital, pay debt, or look good to Wall Street ensure a continuing campaign of consolidation. Assets continue to change hands across the board, with one large integrated company, Kerr-McGee, holding a fire sale for its downstream assets as it withdrew from refining/marketing (see Industry Briefs, p.42). In addition, cost cutting now seems to he part of the industry's corporate culture rather than just a continuing trend of the moment.

Mobil cited strength in petrochemicals. sparked by increased demand and a tight ethylene market, and worldwide crude prices $3/bbl higher than last year's, for a 19% jump in first quarter profits that came despite extremely low refining margins throughout the world and the lowest North American gas prices in more than 3 years. Ashland, heavily dependent on refining/marketing, posted a loss that was comparable in scope to its profit in the same quarter a year ago. It cited the second warmest winter on record and market confusion surrounding introduction of reformulated gasoline (RFG) that pushed refining margins below variable cost breakeven levels.

ARCO more than doubled first quarter income year to year, courtesy of its strengths in petrochemicals and crude oil production. Its average U.S. crude price was $11.87/bbl in the first quarter, compared with $7.83/bbl a year ago.

Wainoco, with an emphasis on refining and natural gas, reported a first quarter loss of almost $10 million. The company noted its refining margins were the lowest in years but added that crack spreads for its main products, gasoline and diesel, have improved by more than 20% since Mar. 31. Still, its first quarter natural gas prices plummeted year to year to 98/Mcf from $1.55/Mcf.

Natural gas wasn't a bleak spot everywhere. Union Texas, with LNG prices indexed to oil prices, saw LNG prices jump to $3.07/Mcf in the first quarter from $2.72/Mcf a year ago. Combined with ethylene margins rocketing to 16/lb from 1/lb a year ago, its first quarter earnings nearly doubled from a year ago.

Petrochemicals were the bright spot last quarter, and the outlook continues to remain strong. ARCO Chemical reported record revenues and gross profits for the quarter, and Lyondell Petrochemical posted cash flow from operations that represented the best quarter in the company's history.

First quarter earnings, in millions of dollars with 1995 first and losses in parentheses, were Exxon 1,660 vs. 1,160, Mobil 636 vs. (145), Amoco 523 vs. 398, Chevron 459 vs. 388, Shell Oil 340 vs. 179, ARCO 322 vs. 149, Texaco 301 vs. 202, Union Carbide 228 vs. 61, Conoco 186 vs. 215, Occidental 178 vs. (40), Lyondell 127 vs. 22, Phillips 111 vs. 127, Marathon 77 vs. 110, Unocal 74 vs. (214), Coastal 57.6 vs. 81.1, Citgo 50.5 vs. 43.3, Union Texas 47 vs. 27, FINA 33.5 vs. 25, Amerada Hess 25.2 vs. 83.7, Freeport McMoRan 19.4 vs. 12.4, Murphy 16 vs. 23.7, Valero 15.1 vs. 28.4, Diamond Shamrock 5.4 vs. 12.2, LL&E 3.5 vs. (3.4), Tosco (3) vs. (6.1), Wainoco (9.6) vs. 1.5, Total North America (16) vs. 12.9, and Ashland (29) vs. 33.

Last week, the Iraqi parliament reportedly rejected unanimously the U.N. offer of limited oil sales to pay for food and medicine and fund war reparations and weapons monitoring work in Iraq. This put the seal on Saddam's immediate refusal of the offer Apr. 14, claiming it was a U.S. government ploy to prevent complete removal of U.N. sanctions.

"Saddam acted as predicted," said Leo Drollas, chief economist for London's Centre for Global Energy Studies (CGES). "You can always rely on him to do the silly thing. His rejection of humanitarian aid was a boost for oil prices."

Drollas noted crude prices dropped about 50/bbl on news of U.N.'s offer to Saddam: "The price has been creeping up again since then because the market's fundamentals are still strong."

IPE Brent crude for June delivery remained above $19/bbl at presstime last week, while Nymex crude continued to top $20/bbl.

Brent dipped below $18/bbl and Nymex slipped below $19/bbl in the period of uncertainty following the U.N. offer to Saddam.

"The market has a solid feel given current prices, "one trader said, "and OPEC is expected to stay firm because of members' severe cash flow problems. If they break ranks, the oil price will fall, so OPEC solidarity is key to their success.

Drollas notes oil prices are $4/bbl higher than at this time last year, so OPEC's main drivers are keen to maintain equilibrium, adding, "Saudi Arabia and Kuwait are holding hands and walking off into the sunset."

With Iraq once more dropped from the list of traders' chief concerns, CGES contends, non-OPEC production is now the main market uncertainty.

"With relatively light summer maintenance planned in the North Sea, prices could weaken more rapidly later in the year if non-OPEC output is higher than expected. In the meantime the market remains finely balanced."

Russia has signed an agreement to develop Iraq's North Rumaila and West Qurna fields once the U.N. embargo is lifted.

North and South Rumaila fields were heavily damaged in the 1991 Persian Gulf war. Baghdad contends redeveloping North Rumaila could yield 360,000 b/d, and Qurna is one of four giants earmarked for development (OGJ, Mar. 27, p. 24). The Russians contend the two fields could produce 1.2 million b/d of oil.

IEA predicts world energy demand will increase 35-42% from 1992 levels by the year 2010.

It estimates global demand for oil will increase to 92-95 million b/d in 2010 from the current 68 million b/d, depending on the level of conservation and whether demand is checked by rising energy prices. North American oil import dependence is to rise from about 33% today--48% in the U.S.-to more than 52% in 2010 and 70% in the U.S., assuming conservation restrains prices.

The call on OPEC crude is expected to jump to 47-49.5 million b/d from 27 million b/d, but could be 60 million b/d in the absence of oil price increases or additional energy savings. IEA sees world gas consumption rising to 2.26-2.7 billion metric tons of oil equivalent from 1.74 billion mtoe, with much of the increase coming from the power generation sector.

Canadian refiners will have to spend more than $3 billion (Canadian) for upgrades if required to meet new environmental standards proposed by governments.

So says engineering company Kilborn Inc., Toronto, in a new study. Federal and provincial governments are looking for ways to cut greenhouse gas emissions, with Ottawa pledging to cut them to 1990 levels by 2000.

The study looked at different methods to cut emissions from refining and burning gasoline and other fuels. Even just producing low sulfur gasoline and diesel would cost refiners about $800 million up front, with RFG measures costing even more, although Kilborn contends RFG is not needed because Canada's air pollution is not as severe as it is in some U.S. areas.

Pacific Gas Transmission is polling Canadian producers on extra capacity for its Alberta-California gas pipeline, but it has not determined scope or rates for any expansion. Deadline for bids on capacity to be added by Nov. 1, 1997, is June 9. PGT could add 400 MMcfd to its capacity of 2.4 bcfd at the Idaho-British Columbia border, which reached full utilization in the winter and will need expansion to meet increased demand in the Pacific Northwest.

The top 30 U.S. natural gas producers replaced slightly more than 100% of their 1994 production by adding reserves. up sharply from their 87% rate in 1993 and 69% rate in 1992. Natural Gas Supply Association says the companies produced 8.97 tcf last year while adding 9.08 tcf to reserves. Of the added reserves, almost 7 tcf was through discoveries and extensions to current fields, and 2 tcf from revisions in reserves estimates.

Norway's Gas Negotiating Committee (GFU), which negotiates gas sales contracts on behalf of all Norwegian gas producers, has blocked a move by one of its members to supply gas directly to Germany.

In February, Saga signed a letter of intent to supply Wintershall as much as 52.5 bcf/year of gas starting in spring 1996. Saga, a GFU member, says the idea is to provide 17.5 bcf/year of "swing" gas, beginning next spring, by "shopping around" for gas among North Sea gas producers in the summer.

This would be stored in Germany for distribution during winter when demand is higher. Saga intended to buy another 35 bcf/year from GFU, with deliveries to Germany starting in 1999.

Remaining GFU members Statoil and Hydro did not offer specific reasons for their opposition, but sources say they are concerned that several sources of Norwegian gas competing in the German market would drive down prices.