OGJ NEWSLETTER

Will uncertainty in the former U.S.S.R. ever diminish?

Russia's economic reform program is taking heat from every direction, and President Yeltsin is backing off plans to free oil prices by yearend even though as much as $24 billion in foreign aid hinges on reforms that include that move. Yeltsin fears adding to inflation that reached 740% in the first 4 months of this year. The first week of June he thwarted a massive oil sector strike by dispatching trainloads of rubles to pay wages (OGJ, June 8, Newsletter). Strike fears last week were staved off by delivering via railway cars unpaid wages of 4 billion rubles ($50 million) to workers in Siberia's Kuzbass coal fields and 25 million rubles ($500,000) to Krasnoyarsk chemical plant workers. Then the republic revealed a shortage of rubles, Reuters reports.

Yeltsin also has signed a number of resolutions aimed at boosting the oil and gas industry following his May 30 sacking of free market supporter Energy Minister Vladimir Lopukhin in favor of former Soviet Gas Industry Minister Viktor Chernomyrdin as deputy prime minister over the energy sector. The measures include allowing the ministry of fuel and power engineering to issue quotas to refiners for exporting products (see story, p. 24) and giving Gazprom permission to attract foreign credits of as much as $8.7 billion through Vnesheconom Bank and other authorized Russian banks. Gazprom will have to redeem the debt service on the credits and pay interest with earnings from gas exports, Itar-Tass reports.

Gazprom started construction of several pipeline projects intended to deliver more gas to Ukraine and Belarus. One system, to be commissioned in December, will link the Russian city of Tula with Kiev, supplying gas to Russian areas along its route. Another pipeline scheduled for December commissioning runs from Tula to Belarus, and a third will supply gas to Ukraine through Smolensk. Plans include modernizing compressor stations in Kursk and Ukraine to increase capacity by 530-700 MMcfd.

The Georgia republic has a pipeline project in the works and is reportedly soliciting Amoco's participation. Plans include a 500 mile crude pipeline linking the Caspian and Black seas to move 600,000 b/d of oil from Baku, Azerbaijan, to Poti, Georgia. Associated Press reports Amoco confirmed talks were held, but no deals were struck.

Russia plans to enlist foreign companies' aid in building a 660,000 ton/year methanol plant and 330,000 ton/year ethylene plant on Sakhalin Island, according to reports in the Japanese press. Russia will use gas and condensate from proposed field development off Sakhalin, transport production to Nogliki in northern Sakhalin and from there via pipeline to the proposed complex in southern Sakhalin. Production is to begin in about 2000.

Asahi Shimbun reports the required investment totals hundreds of billion yen. Russia is to offer an outline of the project to petrochemical companies in Japan, U.S., and western Europe in mid-June.

The U.K. gas market's new contender, Alliance Gas, intends to take 15% of the El.3 billion industrial and commercial gas market by 1996.

Formed by BP, Statoil, and Norsk Hydro to target the increasingly deregulated sector, the company has announced a deal with Manweb, a regional electric company, to form Manweb Gas Ltd. to market electricity and gas to its customers in Merseyside and North Wales. For the next 4 years Alliance's gas will come mainly from U.K. sources, including BP's Hyde field (OGJ, May 25, Newsletter). The company has U.K. government approval to import 200 MMcfd of gas from Norway beginning in 1996.

Argentina's YPF and Chile's ENAP signed a letter of intent to form a joint venture to build and operate a $200 million, 94,000-113,000 b/d trans-Andean oil pipeline linking the two countries. Construction is to begin by yearend and take about 18 months. The pipeline would allow Argentina to ship oil exports to the Pacific Rim, where demand is high, and link oil producing areas in Argentina with refining and consuming centers in Chile.

Malaysia and Viet Nam have begun talks about jointly developing hydrocarbons in a disputed area of the Gulf of Thailand after agreeing to resolve overlapping claims. They were working out details at a 3 day meeting in Kuala Lumpur that began June 3.

Zaire has seized assets of all foreign oil companies in an effort to ease chronic fuel shortages, reports New York Times. The Times said the move would be temporary and companies will be reimbursed for petroleum supplies taken and equipment and property returned. No time frame was given.

The government issued a statement saying it took the action "in order to prevent an already sick national economy from dying of suffocation."

It said from now on all petroleum products would be distributed and sold through government owned Petro-Zaire.

Mobil told the Times, "We have received word here that the oil industry has been nationalized, the government says temporarily. We understand the oil industry in Zaire, which we are a part of, is protesting this unilateral action." Other companies with operations in Zaire include Chevron, Royal Dutch/Shell, and Petrofina.

Iraq was to spud June 1 the first well in its western desert 25 km south of Al-Qaim in Ambar province bordering Syria.

General Director of Northern Iraq Oil Co. Ghazi Saber Ali says it's a prelude to full scale exploration of the area.

Libya plans to increase its productive capacity to 2 million b/d in 2 years from current sustainable capacity of 1.7 million b/d but fears U.N. sanctions could delay the plan. The U.N. imposed sanctions on Libya Apr. 15 over its refusal to extradite two suspects in the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland. An oil embargo may follow.

Libyan Oil Minister Abdallah Al Badri says Agip is expected to play a major role in the expansion because it plans further development of one onshore and one offshore field in Libya, and his country is renegotiating a. 1974 agreement with Agip to make the deal more economically attractive.

Baker Hughes' U.S. rig count found a new post-1942 low the week ended June 7, as 19 rigs were idled, 14 in Oklahoma, leaving 610 active rigs.

This time last year there were 948 rigs running in the U.S.

Pemex has unveiled a restructuring ordered by Mexican President Salinas in the wake of the Guadalajara tragedy (OGJ, May 25, Newsletter).

Pemex will he split into seven enterprises: exploration, production, refining, marketing, gas production and processing, gas products marketing, and petrochemicals. The new companies would have a measure of autonomy while an executive board, Petroleos Mexicanos Corporativo, would set budgets and provide overall guidance. Not surprisingly, privatization is excluded.

Analysts are rejigging their oil price forecasts in response to what some perceive as a fundamental shift in Saudi oil policy in favor of higher oil prices (OGJ, Newsletter, June 8). Kidder Peabody, citing "on its face, the most significant shift in Saudi policy since the kingdom's decision in 1985 to win back...lost market share through the introduction of netback oil scales contracts," expects OPEC third quarter production won't be enough to prevent a jump to $25-26/bbl for WTI by late summer, unless Iraqi exports start sooner than expected. Salomon Bros., which sees $24/bbl WTI as a given in the fourth quarter, contends Saudi Arabia for a variety of financial and political reasons wants the $21/bbl OPEC marker--which it and the rest of OPEC have endorsed since July 1990--to become reality because the Saudis "have grown weary of denying themselves and others badly needed revenues by being the lone voice of moderation in OPEC."

Then there are the contrarian views. East-West Center's Fereidun Fesharaki sees WTI at $22 in June, $21 in July, and $20 in August as OPEC production matches the call on its oil. He contends analysts misinterpreted the Saudi position but sees rising demand in the fourth quarter pushing WTI to $24-25/bbl with the Saudis stepping in with a 1 million b/d jump to 9 million b/d to push prices back to about current levels.

Philip Verleger, Charles Rivers Associates consultant, rejects the consensus view of a shift in Saudi policy. He contends the Saudis have cowed other OPEC members into accepting production levels that would ensure its insisted upon 34% share of OPEC's market with the implicit threat of overproducing to collapse prices again. That would also serve the Saudis' short and long term revenue needs.

Verleger dismisses purported Saudi ire over the proposed European carbon tax as a convenient smokescreen for Saudi Oil Minister Hisham Nazer to duck the OPEC meeting "when the Saudis had nothing to gain and much to lose." If the tenuous OPEC pact holds, says Verleger, WTI could hit $24 in the summer and remain above $22 the rest of the year, but surplus capacity could soften prices again by 1993, perhaps by yearend.