OGJ NEWSLETTER

Oil price concerns in the wake of OPEC's production increase to 25 million b/d in October are not justified, Merrill Lynch says.

The analyst believes production is in line with strong seasonal demand and expects demand for OPEC oil will increase further in first quarter 1993. Pointing to high OPEC production and the absence of oil exports from Iraq, Merrill Lynch notes, "The available surplus may he too limited to accommodate unforeseen developments such as an unusually cold winter or political turmoil in Russia." But the analyst expects if oil prices remain weak during OPEC's meeting this week, production controls may be reintroduced.

The meeting could provide clues about underlying friction between Saudi Arabia and Iran that surfaced at the last meeting, Merrill Lynch notes.

The analyst says Iran's announcement that it has increased productive capacity to 4 million b/d from less than 3.5 million b/d may be a politically motivated move aimed at increasing its assertiveness in pursuing production controls and higher prices. Saudi Arabia could react to that by hardening its position favoring higher production and lower prices, but Merrill Lynch says the Saudis may be cautious so they don't "alienate Iran politically in view of uncertainties created because of a new American President."

"Saudi Arabia must wonder whether the new U.S. administration will be as resolute as the previous one was in pursuing a strong policy in the Middle East consistent with Saudi interests," the analyst notes.

"One implication of the new administration may be a quiet tilt of Saudi oil policy toward a more 'hawkish' view." The possibility also exists that resumption of Iraqi oil exports could be aided with a new U.S. administration less preoccupied with forcing Iraqi leader Saddam Hussein from power. But unless Iraq fulfills all the U.N. conditions, it's doubtful.

The analyst believes President elect Clinton's initial aim will likely be to prove assertive in international affairs rather than to appear weak by accommodating Iraq. Even if sanctions were lifted, Iraq's ability to freely export oil is questionable.

Merrill Lynch notes the oil pipeline through Turkey may not be fully operational if the Kurds in the north have anything to say about it, and the Saudis may not want Iraqi oil to flow through its pipelines as long as Saddam is in power. Thus, resumption of Iraqi oil exports may be confined for a while to 1.5 million b/d or less, half the prewar level, the analyst says.

Chevron, Texaco, and Agip agreed to join China National Offshore Oil Corp. (Cnooc) in developing two oil fields in the Pearl River Mouth basin in the South China Sea, Xinhua reports. The fields are to start up by yearend 1995 and together are expected to produce about 30,000 b/d. Cnooc will foot $51 million of the expected $280 million development bill.

Instability in Russia will continue another 1 2 years, and whether or not President Yeltsin remains in place will have little effect.

That's the view of Pertti E. Aalto, Neste Oy general manager, exploration and production, Eastern Europe and Russia. "I remain optimistic" about the long term, "but somewhat pessimistic in the next 3 5 years," Aalto told a business seminar sponsored by the Finland Trade and Technology Center in Houston earlier this month. This winter's food supply is a critical concern for Russia's government. Beyond that, progress will depend on several factors, including how fast conversion of the military/industrial complex can take place, and how quickly trade among C.I.S. republics can be strengthened, Aalto says. Because of their horizontal organization, Russian companies try to do everything, he says, lowering efficiency and complicating ventures with foreign firms. Aalto sees little fundamental change in the business culture "at least for 2 generations." And many key individuals will remain in place for the foreseeable future. "There is no way back, but Russia is not going towards a democracy either," said Aalto.

Russia will charge world prices for oil, gas, and other natural resources to former Soviet republics that no longer use the ruble, economic spokesman Alexei Ulyukayev says.

Moscow will no longer "subsidize the economies of neighboring states" by selling them fuel and other resources at below market prices. He says some republics have been buying Russian resources at below market prices and selling them abroad at higher prices for foreign currency. The demand for world prices follows Ukraine's move earlier this month to ban the ruble. Lithuania recently agreed to pay world prices for a guaranteed supply of Russian oil and gas in 1992 93, an agreement that will be used as a model for future sales of Russian resources to C.I.S. members dropping the ruble. Latvia and Estonia have replaced the ruble, and Tajikistan, Moldova, and others are considering similar moves.

Officials from production associations in Estonia, Latvia, and Lithuania are appealing to their respective governments to support construction of a gas pipeline crossing Norway, Sweden, Finland, Estonia, Latvia, Lithuania, Poland, and Germany. Arvi Hamburg, Estonia's deputy minister of energy production, says the whole region would benefit from a Trans Baltic pipeline, citing a 1.8 tcf storage facility in Latvia that could supply Estonia gas for 45 years.

Norwegian Petroleum Directorate has lifted its threat to shut down Ekofisk field over safety concerns by winter 1995 96. But it insists operator Phillips advance its submission of long term solutions by 2 months (OGJ, Nov. 9, p. 29). NPD accepted Phillips' proposal to submit by Feb. 1, 1993, a plan for binding, temporary measures for sound operation of the tank.

Phillips has no plans to appeal and accepted NPD conditions, although it remains concerned that moving up the deadline could hinder efforts to find the best long term solution.

Pemex will accept bids for drilling 22 wells in the oil rich Campeche Sound, Mexico City newspaper El Financiero reports.

Drilling will occur under a service contract and is to begin Jan. 12. Bidding is open to Mexican and foreign firms. El Financiero sees the inside track belonging to the companies that make up Mexpetrol: Bufete Industrial, Grupo ICA, Empresas Lanzagorta, Grupo Protexa, and Equipos Petroleros, as well as U.S. companies Universal, Triton, Smith, and Entrada.

Sources told El Financiero it is likely Universal and Triton will try to form a joint venture with one or more of the Mexican companies to bid.

The projects are to cost together more than $500 million and will be financed through a turnkey agreement whereby Pemex will not pay any up front costs but will guarantee payment through future crude sales.

Pemex Exploration & Production plans in 1993 to channel funds to more profitable projects. The unit plans to use the latest technology available for E&P programs in an effort to boost production to 2.68 million b/d of oil and 3.6 bcfd of gas. Plans are to keep 22 drilling teams mobilized, 16 offshore, three targeting onshore oil, and three in northern Mexico's natural gas fields. Pemex E&P plans to drill 46 development wells in 1993, 38 offshore, four in southern Mexico, and four in the north.

Pdvsa is in advanced negotiations with six foreign petroleum companies for joint construction of as many as four heavy crude refineries in northeastern Venezuela. The company is targeting total refining capacity of 400,000 b/d with the four plants. BP, Veba, Elf, Amoco, Mobil, and Conoco are negotiating terms of a partnership that could include exploration for light crudes in addition to the refinery project. Pdvsa expects to complete negotiations by January, then seek congressional approval.

Canadian Energy Minister Jake Epp says Texaco is expected to decide by mid December whether to buy into the Hibernia oil development off Newfoundland. Epp will meet Texaco officials this month to discuss details of a financial package that would give Texaco the equivalent of tax breaks granted to Canadian partners in the project. Negotiations have been under way since spring to find a new investor to pick up the 25% stake Gulf Canada will relinquish in the $5.2 billion (Canadian) project. Ottawa has provided cash grants and loan guarantees for Hibernia.

Baker Hughes estimates a U.S. active rotary rig count averaging 710 for 1992, down 7.5% from last year and a post 1940 record low. The estimate was presented at the IPAA meeting in Reno (see related story, p. 19). The company is projecting a 7% increase in 1993 to an average 760 active rigs but expects a sharp decline in the first part of the year due to a drop in the number of rigs drilling for unconventional gas. Baker Hughes estimates currently 50% of the rigs drilling for gas are searching for Section 29 unconventional gas. Increased gas demand in 1993 is expected to support prices at a level that will stimulate drilling later in the year.