OGJ NEWSLETTER

Industry retrenchment continues apace as OPEC meets this week to stem the recent hemorrhage in oil prices.

IPAA says U.S. industry is in "meltdown," and news developments tend to support that view.

What will be the new floor for the U.S. active rig count? The Baker Hughes tally fell another 33 units last week to 653, breaking the previous record low--663 July 14, 1986--since the company began keeping track in 1942. Texas led the fall, idling 28 rigs.

Amoco Production Co.'s West African units will consolidate operations in Gabon and the Congo to reduce operating expenses. The centralized team will be in Pointe Noire, Congo. And Amoco may sell its two Gabon units that have offshore producing leases but said it will continue to evaluate and pursue opportunities there.

Imperial Oil, Canada's biggest refiner/marketer, plans to lay off more than 1,700 employees, shut down 1,000 retail stations, and reduce refining capacity.

Sebastian Guzman Cabrera, head of the Mexican Oil Workers Union, predicts Pemex may lay off as many as 30,000 workers the next 6 months.

Noble Drilling is closing land drilling operations in the Midcontinent and Rocky Mountain regions, where fleet utilization averaged 25% in 1991. Nine of the division's 29 rigs are working currently. About 200 employees will be affected. And Noble Drilling plans to sell its oil and gas leases, all in the U.S. and Canada. Estimated net proved developed reserves are about 10.9 bcf of gas and 1.224 million bbl of oil. Plans are to focus on its core contract drilling business.

Dekalb Energy laid off 30% of its 156 U.S. employees and has restructured its management team, expecting to see overhead savings of more than $3 million/year.

Columbia Gas Transmission filed with FERC for permission to reduce its commodity sales rate by 56cts to $1.97/dekatherm, its lowest level in 13 years. Columbia said the rate reflects current low market prices and rejection of about 4,700 noncompetitive gas purchase contracts authorized by the bankruptcy court. Prior to rejecting those contracts Columbia's sales rate was $3.70/dekatherm.

But not all industry indicators are negative. Amoco Chief Economist Theodore R. Eck said futures markets indicate the market price of U.S. crude will rise to more than $20/bbl and gas prices to almost $2/Mcf by yearend. He noted oil and gas prices lag the economy rather than lead it, and futures markets reflect near certainty OPEC will agree to production cuts. Eck said he expects the U.S. economy to grow 3-4% in second half this year, and tight oil markets are a possibility if world economies grow as anticipated."

The key, of course, is OPEC's ability to rein production, and the Saudis are the key to that effort.

OPEC must cut output by 5%, or 1.19 million b/d, to achieve its objective of a minimum reference price of $21/bbl, says BP Chairman Robert Horton. Horton also contends that unless the Commonwealth of Independent States receives $500 million in short term investment, oil production could drop by 400,000 b/d by the fall. There are less than 4 months to sort out production problems, he said, because in April western Siberian oil fields become very marshy, and the Russians find operating conditions difficult.

Prospects of an early resumption of Iraqi crude exports under Saddam Hussein's regime (OGJ, Feb. 3, Newsletter) look increasingly remote after a new round of talks in Vienna between U.N. officials and the Iraqis to discuss terms for restarting international sales was canceled last week.

December crude production in the former Soviet Union was the lowest for any month in 1991 at 9.4-9.75 million b/d, IEA estimates. IEA notes a wide variation in production estimates for the region highlights problems in gathering statistics in recent months. Fourth quarter exports of 1.8 million b/d from the former Soviet Union held up better than expected but appear to have dropped sharply in January as a result of licensing and contractual uncertainties. IEA also recorded a small decline in OPEC crude production in January from 24.4 million b/d to 24.3 million b/d, reflecting weaker underlying crude demand from refiners. The 400,000 b/d of production cuts by various members had no noticeable effect on January output but are expected to affect liftings in February. IEA says refinery crude throughput in December increased by 400,000 b/d in Europe, 500,000 b/d in the U.S., and 100,000 b/d in Japan. Preliminary indications for January show lower runs in Europe and the U.S. but continued high levels in Japan.

Elf signed a production sharing contract with Russia's Interneft to explore for and produce oil and gas in Saratov-Volgograd area of Russia. The first PSC involving a foreign company in Russia, it covers 20,000 sq km east of the Volga River. Elf plans to invest several hundred million dollars for exploration and expects to begin production by about 1995.

The former eastern bloc continues to seek outside deals involving petroleum. Czechoslovakia sent delegations to discuss oil supply arrangements with Austria's OMV, and Croatian and Slovenian governments. Venezuela has offered to supply refined products to the C.I.S., set up oil and gas production and processing joint ventures, and provide technical expertise. Iran agreed to sell 123,300 b/d of oil to Turkmenistan and buy from the Islamic former Soviet republic 105 bcf of gas and 750,000 bbl of diesel. Turkmenistan last month opened its borders with Iran, the first time in 70 years. Iran dismissed western intelligence concerns it is courting Islamic ex-Soviet republics with trade deals to perhaps seek nuclear weapons and spread Islamic fundamentalism.

Ukraine will receive big volumes of Iranian oil and gas under a wide ranging barter deal. During 1992-95 Iran will supply Ukraine 365-511 million bbl of crude and 2.65 tcf of gas. In exchange Ukraine will deliver refined products, equipment--including some for the oil industry--chemicals, and metals. Ukrainian Deputy Prime Minister Konstantin Masik said weapons may be included in the deal. Oil and gas will be transported through Azerbaijan under a separate agreement among the three. Masik said deliveries in 1992 will be about 80,000 b/d of oil and 106 bcf of gas, all for internal consumption. Beginning in 1993 Ukraine will be able to resell Iranian oil and gas to other countries.

Qatar has outlined plans for a new world class methanol/MTBE complex at Umm Said. The $600 million plant, due to start up in mid-1994, will export 475,000 tons/year of methanol and 500,000 tons/year of MTBE. State owned Qatar General Petroleum Corp., responsible for complex's natural gas and butane feedstock, will hold a 50% interest in the project. France's Total and International Octane Ltd. each will have a 25% stake in the complex. Total and IOL will be responsible for marketing plant output.

Fredonia Group projects continued polyethylene overcapacity in North America, with consumption to increase 3.6%/year to almost 25 billion lb/year by 1995 while production is expected to reach almost 26 billion lb/year. Utilization rates are expected to recover to slightly more than 80% by then. Fredonia predicts recycled polyethylene will exceed 1.2 billion lb/year by 1995.

Gulf Canada has withdrawn from the $5.2 billion Hibernia development project off Newfoundland (OGJ, Dec. 23, 1991, Newsletter), citing constrained cash flow due to low oil and gas prices combined with the fact Hibernia won't contribute cash flow for another 6 years. For more than a year Gulf has been trying to seek investors for its 25% stake, but has concluded a timely scale is not likely. Remaining partners Mobil Canada, Petro-Canada, and Chevron Canada said they remain committed to the project.

California regulators and Canadian producers have agreed on a set of ground rules for negotiating new terms for $1 billion in natural gas trade. Both sides said the agreement is only an initial step toward a settlement in the long dispute over contracts and pipeline access.

Even as EPA readies its final specs for Phase 1 reformulated gasoline rules under the Clean Air Act--due out in early February--U.S. refiners continue to sound the warning they won't be able to meet specs in time.

Ashland CEO John Hall says lack of oxygenates could force EPA to limit opt-ins by second and third tier ozone nonattainment areas. Based on projected winter 1995 gasoline demand in the nine worst ozone nonattainment areas and 41 carbon monoxide nonattainment areas, Ashland expects a U.S. oxygenate shortfall of 41,000 b/d.