OGJ NEWSLETTER

Oil markets continue to react strongly to the perception of a glut. Nymex light sweet crude for January delivery dropped to $14.95/bbl Dec. 1 from $15.48/bbl the day prior, inched up 2cts/bbl Dec. 2, then dropped 40cts to $14.57/bbl Dec. 3. That's the lowest since Nymex WTI next month delivery closed at $13.97/bbl Nov. 23, 1988.

North Sea oil prices also hit a 5 year low as Brent crude for January closed Dec. 7 at $13.27/bbl. By close of trading Dec. 8 Brent had rallied to $13.50/bbl. London's Independent newspaper pegs the rally on reports OPEC ministers plan to unveil a new initiative at their current meeting in Damascus. Total OPEC oil production averaged 24.77 million b/d in November, up from 24.65 million b/d, the Independent reports. OPEC agreed Nov. 24 to maintain its 24.52 million b/d total quota. North Sea output hit an all time high in October, averaging 4.94 million b/d. Norway and Denmark hit record levels, while new fields revived U.K.'s flagging output.

In spite of OPEC's failure to lower its production ceiling, most analysts agree a drastic price collapse such as that in 1986 is unlikely.

It is likely WTI will settle in a trading range of $13-17/bbl, says Kidder, Peabody, not because of OPEC's stance but because of technology improvements in oil E&D and radical shifts in world political balances.

The analyst notes E&D funds are far more productive now than at any time in recent history, and western oil firms are seizing opportunities in areas previously closed like the C.I.S., Yemen, and Viet Nam. The analyst expects WTI to average $16.50/bbl in fourth quarter 1993 and $15/bbl in 1994.

Analyst C.J. Lawrence says OPEC's quota seems reasonable heading into winter, and it should be adequate to allow a gradual positive draw on inventories. Thus, patience with relatively low oil prices the next 8-12 months should bring supply, demand, and inventories back into alignment.

C.J. Lawrence pegs WTI at $15-15.50/bbl for December and about $16/bbl for first quarter next year. In spring the analyst says the quota will pull prices to perhaps $17/bbl, in summer to $18/bbl, and by yearend 1994 it says prices could easily be $19-20/bbl.

IPAA has petitioned President Clinton for relief from low priced oil imports (see story, p. 31). In response, Energy Sec. Hazel O'Leary said, "While it is natural to focus on the short term economic gains that will result from the recent decline in world oil prices, our energy policy must not lose sight of some of the long term negative effects that this trend will have on certain sectors of our economy, our environment, and our national security. While our administration is following the situation closely, we do not have any plans for immediate short term intervention...Oil prices have been cyclical since 1900, and likely will continue to have ups and downs. Rather than debating daily fluctuations in the spot price, what we must concentrate on is the long term viability of our domestic gas and oil industry."

California Gov. Pete Wilson proposes eliminating the California Energy Commission among other changes in state energy agencies. Plans call for abolishing CEC and transferring its nonforecasting functions to a new Department of Energy and Conservation within the state Resources Agency. He wants to combine the oil, gas, and geothermal programs of the Department of Conservation and the State Lands Commission, then transfer them to DEC. He wants to eliminate the energy and power plant siting programs of CEC and California Public Utilities Commission, creating a new Energy Facilities Siting Board including representatives of CPUC, the chair or executive director of the California Air Resources Board, the secretaries of Cal/EPA and the Resources Agency, and the head of DEC. Wilson proposes CPUC staff reorient its procedures away from trial type hearings by recasting the Administrative Law Judge Division into an Alternative Dispute Resolution Division. Lastly, he would open the electricity transmission grid to all users and give CPUC a referee role to resolve disputes between utilities and independent power producers. Lawmakers are to vote next year on the plan.

Chevron U.S.A. is mulling a proposal from private investment group Lincolnshire Management Inc., New York, to buy its 173,000 b/d Philadelphia refinery. They hope to reach a definitive agreement by the end of January. Lincolnshire Pres. W. James Tozer Jr. says under its proposal the refinery will continue to operate as an independent merchant refinery serving customers in the U.S. Northeast using its present configuration, management team, and work force. Chevron announced last May plans to sell the Philadelphia and Port Arthur refineries (OGJ, June 27, p. 26). Deadline for accepting bids for the 177,000 b/d Port Arthur refinery is mid-December.

World demand for oil rigs will strengthen next year, buoyed by action in the Gulf of Mexico, predicts the first issue of World Rig Forecast, a newsletter from Financial Times, London. The newsletter says activity in the gulf will continue to increase in 1994, peaking in June at a level 50% higher than in March 1993. The gulf has seen 22 rigs mobilized the last 9 months, reducing surplus capacity in oversupplied markets such as Northwest Europe and West Africa. The Middle East, India, and Southeast Asia also are expected to have surplus jack up capacity that could migrate to the U.S.

Rig activity in western Canada hit the highest level since 1985 the week ended Nov. 30, with 80% of the 426 available rigs drilling or moving to new locations, reports Canadian Association of Oilwell Drilling Contractors. The next week 82% of the 428 available rigs were drilling or moving.

The last time utilization rates were that high was in November 1985 and early 1986. Canada's drilling sector is now experiencing a shortage of tools and entry level workers. Caodc initially predicted a total of 4,500 wells would be drilled in 1993 but now estimates 9,000 wells could be completed by yearend. There were 4,471 wells drilled in western Canada in 1992.

Alberta Oil Sands Technology and Research Authority says at least three companies are interested in buying its 25% interest in an underground test facility in northern Alberta. The $140 million (Canadian) oilsands research operation near Fort McMurray conducts tests on recovery techniques in partnership with private companies (OGJ, Aug. 2, p. 25).

Aostra says it has been approached by three companies and expects inquiries from at least two more. The pilot project is producing about 1,400 b/d of bitumen, and Aostra estimates a $245 million commercial facility could produce 30,000 b/d with returns on investment of 15-25%.

Ecuador's congress approved reforms to the nation's hydrocarbon law, a move aimed at enticing greater foreign investment (OGJ, Nov. 8, p. 23). Under the law, Petroecuador will be able to delegate some functions to private firms through service contracts. Energy and Mines Minister Acosta Coloma says Ecuador wants to invest $5 billion the next 2 years to expand the petroleum industry. He says under a national downsizing plan, Petroecuador plans to cut 1,200 jobs in four phases.

Three Japanese firms will combine to participate in a refinery project in Mexico. Itochu, Mitsubishi, and Mitsui plan to invest in a $2 billion, 150,000 b/d refinery at an undisclosed site in Mexico that is scheduled to start up in 1997, reports Tokyo newspaper Nihon Keizai Shimbun.

An agreement is to be signed later this month, and Japan's Export-Import Bank is studying financial support.

U.S. Export-Import Bank plans to grant Russia $2 billion in export credits to revitalize the country's ailing petroleum industry.

That comes on the heels of World Bank's $610 million oil rehabilitation loan (OGJ, Nov. 29, Newsletter). ExIm Bank's low interest credits will be used to buy production equipment from U.S. manufacturers. A bank official says the U.S. stands to create 19,000 jobs from the deal through boosted sales.

An agreement between Sodeco and Russia clears the way for Exxon and Sodeco to revive an oil and gas development project off Sakhalin Island. The agreement allows Exxon and Sodeco to conduct feasibility studies and negotiate a production sharing agreement for an area that includes Chaivo and Odoptu-More fields, discovered by Sodeco, and Arkutunskoye-Daginskoye field, where further exploration and appraisal are needed. Exxon says they expect to finalize a production sharing agreement with the Russian and Sakhalin Island governments during first half 1994. Russia agreed to resume the project last October (OGJ, Oct. 4, Newsletter).

Indonesia still wants Exxon to develop Natuna gas field in the South China Sea. Pertamina halted talks on the project last July when the two sides couldn't come to agreement on profit sharing, taxes, and legal issues, but agreed to resume talks in October at Exxon's request (OGJ, Sept. 27, Newsletter). "The government will not shift the exploitation of Natuna gas field to another company outside Exxon," Research and Technology Minister B.J. Habibie told the official Antara News Agency. But Mines and Energy Minister I.B. Sudjana says Exxon and Pertamina still face the three obstacles.