NEWSLETTER

U.S. majors reporting early have posted a big jump in first half profits from a year ago. Chief contributors to the rise in earnings were higher oil prices, continued strong petrochemical margins, and the benefits of cost cutting. On the downside were still-fragile refining margins and depressed gas prices.

ARCO logged its best second quarter in 5 years with an average crude oil price of $13.34/bbl vs. $10.30/bbl in second quarter 1994. Its chemical earnings rose more than 165% in the quarter from a year ago. Amoco's first half profits surge reflects cost savings of more than $200 million from restructuring.

Generally, the non-U.S. upstream sector handily outperformed the U.S. E&P sector because of the slump in gas prices. Chevron's non-U.S. upstream earnings jumped 45% in the second quarter while those in the U.S. rose only 3% from a year ago. Meantime, Shell Oil notes that while improved product margins and lower operating costs contributed to improved refining profits in the second quarter, downstream income was squeezed in the first half overall as crude price gains outpaced those for refined products.

Among other companies, it was a mixed bag for earnings, often marked by unusual circumstances, such as the tenfold jump in Williams Cos. earnings sparked by an after tax gain from sale of its WilTel network services unit.

First half earnings, in millions of dollars, with 1995 listed first and losses in parentheses were: Williams 1,200 vs. 115.7, Chevron 1,066 vs. 645, Amoco 1,056 vs. 808, Mobil 815 vs. 733, Shell 725 vs. (16), ARCO 713 vs. 173, Texaco 563 vs. 230, Oxy 365 vs. (59), Lyondell 262 vs. 54, Phillips 224 vs. 203, Unocal 152 vs. (155), Coastal 114.8 vs. 124.2, Kerr-McGee 82.4 vs. 52, FINA 75.3 vs. 38.4, Union Texas 67 vs. 35, Ashland (9 months) 54 vs. 136, Murphy 36.6 vs. 51.2, LL&E 9.9 vs. 6.8, Total (9.9) vs. 13.3, and Amerada Hess (15.0 vs. 66.9.

Will OPEC try to defend market share in a depressed market?

An adviser to Saudi Arabia's oil minister contends that, after the recent fall in oil prices, OPEC may not freeze its quota for 1996 at its November meeting.

Middle East Economic Survey quotes Muhammad Al-Sabban as saying OPEC should set its production ceiling bearing in mind an expected rise in non-OPEC oil output. The economist argues OPEC's short term strategy should be to convince major non-OPEC producers to cooperate with OPEC in shoring up the oil price, "which is what both sides want and is preferable to the potential impact on prices of competition between them."

Al-Sabban contends OPEC, with its surplus productive capacity of 3.5 million b/d, should not stand by while non-OPEC producers eat into its market share.

"It is not expected that OPEC will agree during the coming November meeting to freeze its production ceiling for next year," said Al-Sabban. However, "with present projections of an increase in global oil demand of 1.5 million h/d next year and assuming no net change in stocks, any increase in the OPEC ceiling which approached 1.5 million b/d, thus disregarding incremental non-OPEC oil production, would definitely lead to a collapse of prices."

AGA says U.S. gas demand is likely to grow 2.6% to 21.9 quadrillion BTU (quads) this year, continuing an 8 year trend of rising gas use and reaching its highest level since 1973, when 22.5 quads were used.

AGA Pres. Mike Baly said, "During the past decade, natural gas demand has increased about 31% from 16.7 quads in 1986 to a projected 21.9 quads in 1995, and this trend should continue as the nation's economy grows and the gas industry continues its aggressive marketing efforts." In AGAs midyear forecast base case, electric utility gas use is projected to rise 8% to 4 quads, and the industrial sector use is to grow 5% to 8.7 quads. In residential and commercial sectors, an increase in customers in 1995 has been offset by an extremely warm first quarter, and demand will remain at the 1994 level of 8 quads.

AGAs 1995 outlook released in December had projected demand growth of 3.4% this year, but Baly said the combination of warmer than normal weather and slower than anticipated economic growth have reined demand growth.

MMS plans workshops with industry to discuss ways to expand a pilot program for collecting federal royalties in kind. MMS said the success of a gas marketing pilot project in the Gulf of Mexico has prompted it to look for other in-kind collection procedures. The 1 year project, which began Jan. 1, allows MMS to take its royalty gas at or near the lease and sell it to competitively chosen gas marketing companies. The workshops will be held at local MMS offices Aug. 22 in Houston, Aug. 24 in Denver, and Sept. 15 in New Orleans.

Royal Dutch/Shell will set up a regional headquarters in Beijing by yearend 1997 in expectation that business in China will soon be its largest in the Asia-Pacific region. Shell's Beijing headquarters will initially employ only about 30 people, many of whom will move from the current regional center in Hong Kong. The Hong Kong office will retain local operating company staff and others from specific businesses as needed, as will be the case in Shanghai and other cities for local needs. Another reason behind the move is anticipation of approval soon to proceed with construction of a $6 billion refinery/petrochemical project at Nanhai. Shell also wants to bid in a third onshore license round, due to open soon, in which Tarim basin acreage will he offered for exploration.

Nigeria's Foreign Minister Tom Ikimi has stepped in to reassure oil companies that their operations in the country are safe. following an earlier threat to BP and Royal Dutch/Shell by Oil Minister Dan Etete over political tensions between Britain and Nigeria (OGJ, July 24, Newsletter). On July 20 Ikimi reportedly complained of the criticism by Britain and U.S. of Nigeria's policies hut gave assurances his government will encourage and protect all international investments in oil and nonoil sectors. Sources said it appeared Etete had spoken out of turn when he called Shell and BP on the carpet.

Russia's integrated oil giant Lukoil is undergoing a restructuring that underscores its status as a privatization story in Russia. Lukoil is integrating its subsidiaries to better control them centrally. With stock swap schemes recently approved by Lukoil's board, each of the many Russian and non-Russian oil firms that have been part of Lukoil will he more closely tied to the center.

Meantime, Lukoil is positioning itself to become the first Russian company of any kind to float a stock offering directly to U.S. investors. The U.S. Securities & Exchange Commission is considering a Lukoil request for a waiver of rules that require stringent accounting and financial controls. An SEC decision is expected soon. The plan involves Lukoil issuing American Depositary Receipts, a financing mechanism for selling stock abroad, to raise capital. Lukoil has SEC permission to begin filing preliminary technical documents for its issue. The Russian company plans to offer 15% of its stock to foreign investors.

Colombia continues to shape up as world class E&P province. BP has found two major oil and gas reservoirs overlying its Volcanera strike.

Its Florena and Pauto finds boost reserves estimates for the three field complex to 10 tcf of gas and I billion bbl of liquids. The 1-B Pauto Sur Volcanera appraisal cut a gross hydrocarbon column in Eocene Mirador and Paleocene Barco of more than 1,100 ft. Testing will begin in August. The 1 Florena wildcat, still being tested, initially flowed 3,800 b/d of 42-45 gravity crude and 13.8 MMcfd of gas from Barco at 13,700-14,200 ft. The 1994 Volcanera find has reserves of about 5 tcf of gas and 250 million bbl of condensate. The three strikes cover about 200 sq km on the Piedemonte and Recetor licenses.

BP says these finds bolster Colombia's plans to expand its gas market by early 1998, and it expects Colombian gas demand to increase rapidly. Florena, Pauto, and Volcanera are being considered for development together, with production ramping up in stages to 100,000-200,000 b/d of liquids and as much as 600 MMcfd of gas. Oil export is likely to be via Cusiana/Cupiagua, also being developed in phases due to pipeline constraints (OGJ, May 10, 1993, p. 30).

Latin America's privatization juggernaut rolls on. Pemex hopes to net $1.5 billion from the planned sale of 61 secondary petrochemical plants starting in October. The derivatives plants, located at Pemex's 10 petrochemical complexes, may eventually be sold to private investors in full, but Pemex will reserve a minority stake of one third to one fifth for now. First on the auction block will be the Cosoleacaque ammonia complex in Veracruz state, followed by petrochemical plants at Cangrejera, Morelos, and Parajitos, also in Veracruz. Bid tender will begin in October and is expected to end in mid-1996.

Demand for methanol is picking up amid a collapse in prices from stratospheric levels earlier this year. Major methanol producer Methanex, Vancouver, B.C., reports second quarter revenues of $259 million vs. $266 million a year ago despite receiving methanol prices that plummeted from a peak of $444/ton in the first quarter to an average $178/ton the last 3 months.

Methanol currently sells for $157/ton on the U.S. Gulf Coast. Methanex says a big jump in demand for methanol in the past 3 months, especially as MTBE feedstock, underpinned a 12% rise in sales volumes from the first quarter.