OGJ NEWSLETTER

What was to be a smooth OPEC ministerial meeting instead began with a jolt last week as Ecuador announced it may bolt the group.

Ecuadorian Oil Minister Andres Barreiro says his country wants to increase production beyond its assigned quota and save the estimated $3 million/year it costs to belong to the group. Ecuador is one of the smallest OPEC producers, with output of about 318,000 b/d in the first half. It has increased the focus on development projects as part of an effort to maintain its status as an exporter into the next century (Ogj, Mar. 23, p. 23).

Although Ecuador producing outside the confines of an OPEC quota would have little effect on the market, the precedent of a member quitting the group is likely to alarm OPEC proponents of price stability.

More upheaval in currencies is affecting petroleum company financial prospects.

With the British pound out of the European Community's exchange rate mechanism and falling against the dollar, U.K. oil companies are set to gain. Because their revenues are counted in dollars and their costs in sterling, pressure has been lifted on U.K. producers' finances, spurring a run on their stocks, notably BP, Shell U.K., Enterprise, and Lasmo.

Morgan Stanley forecasts the exchange rate at $1.65:1 in the fourth quarter and $1.50:1 or less next year vs. $1.73:1 Sept. 17.

The analyst sees the change as positive for at least a year for North Sea E&P and for U.K. majors with significant U.S. holdings. Enterprise, whose shares performed best on the London market, last week applied to the U.S. Securities and Exchange Commission to raise another $128 million, following a $172 million perpetual preference share listing in June.

Meantime, a study by WEFA Ltd., London, tends to downplay the effect of a declining dollar on OPEC.

It shows that while the U.S. lost 15% against the deutschemark and 7% against the yen in recent months, OPEC's import bill increased only 2.6%. That contrasts with analyst's reports that the organization's purchasing power has plunged as the dollar weakened (OGJ, Sept. 14, Newsletter). WEFA says Gabon, Algeria, and Libya, with close ties to European currencies, are hardest hit, with their import hills rising about 4%. Least affected are Venezuela and Ecuador, with close ties to U.S. currency exchanges.

Russia's government late last week was expected to announce the schedule for more than doubling oil prices in 1993, the linchpin of Yeltsin's energy sector reform. The move is part of the government's acceptance of an official energy policy that links a controlled state energy market to gradually increasing world prices for energy suppliers.

Vice Premier Viktor Chernomyrdin, who submitted the plan for cabinet approval, contends the cost of natural gas should remain under state control while oil, product, and coal prices must be partially set free, not right away, so they can reach the world level in 1993.

Crude oil prices would rise to about 4,000-5,000 rubles/ton ($2.73-3.41/bbl) from 2,000 rubles/ton. Chernomyrdin says plans call for measures to provide a lower rate of price increases on gasoline and diesel.

Energy sector reforms can't come soon enough for a beleaguered Russian petroleum industry.

Russia has temporarily suspended exports of some refined products, notably diesel, to Japan, Germany, Italy, and Switzerland in order to supply arctic regions with fuel for winter and ensure no disruption in the current harvest, Izvestia reports. And the Moscow refinery has cut crude runs by 6% and production of gasoline by 10%. In addition to a glut of diesel and resid stocks, one processing train is down for repairs. Moscow area gasoline demand is about 44,000 h/d vs. current refinery yield of 36,500 b/d.

Russia's woes aren't daunting foreign joint ventures in the C.I.S.

Mobil and Exxon will join forces to pursue E&P opportunities in western Siberia. Mobil said their agreement covers an area of interest of about 86 million acres, noting that despite production declines in recent years, western Siberia still produces about 6 million b/d and a significant amount of gas. Neither mentioned contacts with Moscow yet.

Azerbaijan formally signed on with the Caspian pipeline group formed earlier this year among Oman, Kazakhstan, and Russia (OGJ, Aug. 3, p. 19). Chevron, involved in developing Tengiz and Korolev fields along the Caspian coast, also may join the group. The project involves laying a pipeline at a cost of as much as $1.5 billion to bring Caspian area production to market via the Persian Gulf, Mediterranean, or Black Sea.

Taiwan's Chinese Petroleum Corp. has agreed to cooperate with Russian firms to develop Sakhalin Island natural gas reserves.

CPC Vice Pres. C.Y. Huang recently led a Taiwan delegation to Russia to discuss possible oil and gas joint ventures. CPC is casting about for other gas supplies because it expects principal gas supplier Indonesia to become a net importer of natural gas this decade.

Formosa Plastics Group has shelved all plans for investment in China's petrochemical sector in order to concentrate on building a $3.6 billion ethylene cracker at Taiwan's Mailiao industrial zone, according to Taiwanese press reports. That includes a $7 billion petrochemical complex plus smaller projects in Fujian and Guangdong provinces. FPG officials aren't commenting on the reports, which quoted an unnamed senior company official.

Malaysia's Petronas is seeking partners for its proposed 100,000 b/d refinery at Malacca following the pullout of Idemitsu Kosan. Talks are under way with a U. S. company and Middle East entities to take up the 40% stake Idemitsu held in the project. Idemitsu cited a breakdown in negotiations on timing of the project and equipment to be installed. Idemitsu, Petronas 45%, and Samsung 15% signed a preliminary agreement on the project last November (OGJ, Nov. 18, 1991, p. 36). Idemitsu had acquired the interest when two earlier partners, Caltex 25% and Taiwan's CPC 15%, pulled out of the project, citing expected low profits. Petronas said Idemitsu's pullout would delay the project, scheduled to get under way in 1993, by 6 months.

Pemex has asked the U.S. Ex-Im Bank to cancel part of the $1.3 billion credit line extended last September.

The credit line was to help fund exploration and development in the Gulf of Campeche (OGJ, Sept. 30, 1991, p. 48), which Pemex says is on hold due to low prices. Mexico City newspaper El Financiero quotes undisclosed Pemex sources saying the decision also was influenced by completed negotiations of the North America Free Trade Agreement, which will allow Pemex to purchase directly from the U.S. and Canada.

Alberta plans a major overhaul of its royalty system that will include rate cuts, but not as much as industry sought.

Energy Minister Rick Orman says industry will not get the $500 million (Canadian)/year in requested cuts, but there will be overall reductions, including indexing the royalty structure to market prices. Industry has campaigned for lower royalties, saying current rates are discouraging drilling.

The restructuring plan is before the provincial cabinet's energy committee, and a final decision is expected this fall.

Meanwhile, Orman won't recommend to the cabinet approval of more gas removal permits until there's a resolution of the dispute between western Canada gas producers and California Public Utilities Commission over gas supply contracts and prices involving more than $1 billion/year in trade. He questions whether Pacific Gas Transmission should proceed with construction of its Alberta-California pipeline expansion.

CPUC wants PGT to open its system to all shippers this fall, but Alberta says this would violate long term gas contracts.

Natural gas continues to lead the U.S. petroleum industry's faltering climb out of the doldrums. Merrill Lynch has again upped its forecast for 1992 average Natural Gas Clearinghouse spot prices, by 100 to $1.65/Mcf.

The analyst contends September 1992 spot prices of $1.89/Mcf, compared with $1.34/Mcf same time last year, should have more staying power because of the inhibiting effect of Hurricane Andrew damage to production facilities (see story, p. 42) will have on prewinter storage building.

Further, a lack of hot weather coinciding with an August spot price of $1.79/Mcf strongly suggests fundamental improvement in the supply/demand balance, Merrill Lynch says.

And Baker Hughes' U.S. active rig count seems to bear out the analyst's view. For the fourth straight week, the tally of U.S. rigs drilling for gas outstripped the number of those drilling for oil last week, 345 vs. 342. That hasn't happened since the weeks ended June 18-July 16, 1990. The U. S. count also fell only 9% from a year ago.