OGJ NEWSLETTER

Oil and gas prices are showing surprising midyear strength.

Nymex light sweet crude last week continued to hover at its highest level since mid-November 1991, closing June 3 at $22.43/bbl for July delivery, up 51 on the week. With no signs yet that the Saudis are backing off their claim of support for a $3 rise in oil prices (OGJ, June 1, Newsletter), prospects of a tightening midyear market grew last week when API reported an unexpectedly large reduction of 4.6 million bbl in U.S. crude stocks.

Because the Saudis' continuance of a turnabout on oil policy comes at a time when clamoring for global warming "carbon" taxes on fossil fuels still is center stage with the Earth Summit in Rio (see editorial, p. 15), there aren't likely to be signals of price moderation from Riyadh until the mammoth Rio conference wraps up early next week.

After being the source of grief for U.S. and Canadian producers for more than a year, gas prices are suddenly an unexpected bright spot.

Natural Gas Clearinghouse reports June spot prices up 130 from last month to $1.61/MMBTU and up 40/MMBTU from the same time last year.

NGC says the hike reflects continued increased demand for injection into storage, concerns about the effects of state prorationing proposals, and increased demand attributed to scheduled shutdown of nuclear power plants.

PaineWebber noted last month if the June price hit $1.60/Mcf it would be the highest level for June the last 6 years. The analyst attributes strong prices to late winter weather boosting demand. That has deferred seasonal storage refilling, and now storage sponsors are searching for refills. PaineWebber also cites psychological effects of prorationing legislation and says a third factor is some producers may still be holding gas off the market, which buoyed prices after February.

Price strength is spawning predictions of upstream improvement in North America, although there are fresh indicators of continued malaise.

Shearson Lehman sees a second half turnaround for U.S. drilling activity, citing various sources that show drilling permit levels have increased significantly since the end of the first quarter. Shearson predicts an average of 718 rigs in the second half vs. its previous estimate of 668. The analyst jumped its estimate of the 1993 average U.S. rig count by 50 to 750.

But the Baker Hughes tally fell by nine last week to 629 active rigs. The month started on a high note with the count moving up 11 rigs the first week in May, one the second week, and 17 the third week.

The week ending May 22, 14 rigs were idled.

Texaco Canada will cut exploration this year and concentrate on developing gas leases in Northeast British Columbia.

The company plans to drill only three wells in 1992. Capital spending is projected at $13 million (Canadian) vs. $77 million in 1991.

Texaco Canada says its main effort will be a joint venture in British Columbia with Mission Energy Canada Corp. that operates as B.C. Star Partners. Texaco Canada expects improvement in gas demand because supply and demand are coming into better balance, although prices remain flat.

Texaco lost $1.6 million in the first quarter vs. a $23 million profit the same period in 1991. Texaco Canada Pres. Phillip Cram says his company does not expect to operate in the black until 1993 at the earliest, although administrative costs have been cut substantially.

Suncor's bitumen deposit being mined at its Fort McMurray oilsands plant in Alberta will be effectively depleted in 11 years, says Suncor Pres. Richard George. He pegs cost of mining adjacent bitumen reserves and transporting them to the existing upgrader at $300-500 million (Canadian), including the cost of a slurry pipeline. Still, that's considerably cheaper than building a new upgrader at a cost of at least $1 billion. Options under study include developing a new mine or using the existing upgrader to process bitumen produced by other companies elsewhere in Alberta. A fire earlier this year at the upgrader will cost about $7 million in lost revenues. Suncor expects the plant to be fully back on line the end of June.

Over EPA's objections, President Bush has ruled the public need not be given notice when industries make small changes in pollution emissions. EPA had planned to issue rules under the 1990 Clean Air Act amendments (CAAA) requiring such notice. Industry wanted to be allowed to exceed the limits, due to minor changes in plant operations, without going through the process of obtaining a new permit.

Sierra Club plans to sue EPA for failure to issue several regulations required by CAAA, claiming EPA has not promulgated rules requiring better monitoring of ozone, nitrogen oxides, and volatile organic compounds from autos and should explain why it has not issued rules to limit evaporative emissions of gasoline from cars.

The U.S. Treasury Department has signed a treaty with Russian tax officials to prevent companies doing business in the two nations from having their income taxed twice. Presidents of the two countries are to sign the treaty when Boris Yeltsin visits Washington in June. The treaty then will be submitted to the U.S. Senate for ratification.

The oil and gas industry of the former U.S.S.R. continues to walk an unsteady tightrope between positive and ominous developments.

The joint venture agreement signed last month by Chevron and Kazakhstan to develop supergiant Tengiz oil field (OGJ, May 25, p. 20) marks a new era in which former Soviet republics will be able to bargain hard and knowledgeably with potential foreign partners, says Izvestia.

The influential Moscow newspaper, which in mid-April scolded Russian officials for allegedly mishandling the offshore Sakhalin feasibility study, says that by making wise use of foreign consultants, Kazakhstan obtained a profitable contract with Chevron. Besides getting better financial terms, Kazakhstan was able to reduce the size of the concession granted to Chevron from the 23,000 sq km previously agreed to by former Soviet officials to 19,000 sq km, then to 12,000 sq km, and finally about 4,000 sq km, Izvestia said. That, the newspaper suggested, is enough area to enable Chevron to develop Tengiz and nearby Korolev fields but doesn't grant rights to a large additional tract that may include undiscovered petroleum deposits.

Meantime, Yeltsin says his country's oil and gas sector is in danger of collapse since the government failed to adopt a draft program to stabilize the industry, Itar-Tass reported. Shortcomings were not detailed, but Yeltsin said the draft contained several basic contradictions. Yeltsin said, "It is necessary to work out a production management structure for the industry, otherwise the industry will break down in a month or two. This will entail the wholesale collapse of the industry, the social sphere, and agriculture.

And in Moscow, prices for LPG, used by many as auto fuel, jumped fivefold overnight. On May 20 drivers lined up to buy fuel for 87 ko-pecks/l., and May 21 the price was 4.40 rubles/l.

Meantime, Russian officials have scrambled to avoid a strike in Tyumen, Russia's largest oil producing region. Soviet press reports a government commission was summoned to Tyumen on appeals of local authorities who claim severe cash shortages, delays in solving problems that face oil and gas facilities in the region, and a budget deficit are to blame. The Tyumen state bank is 15 billion rubles in arrears in wages to local residents. Yeltsin promised to deliver the needed cash.

Venezuela has suspended its oil swap deal with Cuba and the former U.S.S.R. because Russia isn't holding up its side of the bargain, reports OPEC News Agency (Opecna). Humberto Calderon Berti, a former energy and mines minister, said shipments were suspended because Russia quit sending its matching share of oil to Venezuela's joint venture refineries in Germany. The swap deal was made in the early 1980s, calling for Venezuela to provide about 60,000 b/d of crude to Cuba, while the same amount was being sent to German refineries for Venezuelan customers in Europe.

Pdvsa and Total will assess technical and economic feasibility of developing the Orinoco heavy oil belt in eastern Venezuela.

Pdvsa says the study is in line with its policy of associating itself with international companies that can supply capital, technology, and markets for heavy crude. Similar agreements have been made with ENI, Conoco, Amoco, Mobil, Elf, Veba, and Mitsubishi.

Iraq is ready to export 800,000 b/d from its Al-Bakr terminal in the northern Persian Gulf and can increase that to 1 million b/d in time, reports Opecna. Oil Minister Osama Abdul Razzak Al-Hiti told Iraq's national assembly the country is capable of exporting another 1.18 million b/d through the Iraq-Turkey pipelines as soon as the U.N. economic blockade is lifted.

He said Iraq is maintaining good relations with former importers and is ready to use its own oil tankers immediately.