OGJ Newsletter

Oil prices are poised for a continued slide as more supplies are due to enter the market from Iraq and OPEC remains in disarray. U.N. Sec. Gen. Kofi Annan has brokered an agreement between Iraq and the U.N. that may end the impasse over weapons inspections that has haunted markets for weeks (see Watching the World, p. 51). News of the deal hit oil prices hard. Brent crude for prompt delivery closed at $13.16/bbl on Feb. 24, while April Brent closed at $13.91, following a large loss the previous

March 2, 1998

7 min read

Oil prices are poised for a continued slide as more supplies are due to enter the market from Iraq and OPEC remains in disarray.

U.N. Sec. Gen. Kofi Annan has brokered an agreement between Iraq and the U.N. that may end the impasse over weapons inspections that has haunted markets for weeks (see Watching the World, p. 51).

News of the deal hit oil prices hard. Brent crude for prompt delivery closed at $13.16/bbl on Feb. 24, while April Brent closed at $13.91, following a large loss the previous day.

The accord paves the way for an expansion of the oil-for-aid deal with Iraq to allow $5.256 billion worth of Iraqi oil to be exported every 180 days, which the U.N. Security Council approved last week. This is despite Iraq's statement that it only has capacity to export $4 billion worth over 6 months.

Meantime, Saudi Arabia is prepared to back OPEC production cuts, reports Middle East Economic Survey, but only if the biggest quota violators, Venezuela and Nigeria, are prepared to cut back as well-an unlikely prospect.

Sagging oil prices are forcing major oil companies to rethink E&P budgets in the coming year.

Royal Dutch/Shell top executives warn that current oil prices are chipping away at return on capital. Low prices are also hurting emerging economies. Venezuela's oil revenues are expected to fall by $1.8 billion, forcing the government to cut public outlays by $2.5 billion this year, a top government official said. Without cuts in government spending, Venezuelan inflation could reach 25-45%, seriously undermining the country's fragile economy.

RD/Shell also cites ripple effects from Asia's currency crisis in reporting less than stellar financial results for 1997.

Shell's income dropped 32% in fourth quarter 1997 compared with the prior year, while net income for the year fell 17% from 1996 earnings.

Mark Moody-Stuart, RD/Shell group managing director, says the company lost $130 million in Southeast Asian currency transactions in fourth quarter 1997, while tight economic conditions led to marketing income for the region falling by $170 million during the period.

Moody-Stuart added that closure of the Shell Middle Distillate Synthesis gas-to-liquids plant in Sarawak, following an explosion in December, has cost the group $110 million so far (OGJ, Jan. 26, 1998, p. 48).

RD/Shell's net income for 1997 was a disappointing £4.376 billion ($7 billion) on revenues of £10.2 billion ($16.3 billion). Fourth quarter 1997 income was £982 million ($1.57 billion).

It appears Asian economic flu symptoms may be less problematic for some Singapore refiners than others. Mobil and Singapore Refining Co. increased throughput to 280,000 b/d and 285,000 b/d, respectively, this month, as Esso and Shell continued to slash theirs.

Western companies continue their stampede into the Caspian Sea region.

Chevron and RD/Shell have formed a 50-50 alliance to identify and develop new projects in the Caspian Sea region.

A framework agreement the companies signed in London Feb. 16 will enable them to cooperate in new exploration, production, transportation, and sales projects for crude oil, NGL, and natural gas.

The two companies are major participants in the Caspian Pipeline Consortium, which is working to build a major export line to take crude oil from Kazakhstan to western markets.

Conoco and Azeri state oil company (Socar) will conduct a 6-month study to determine commercial viability of gathering, processing, and transporting the country's natural gas and gas liquids for domestic consumption and export sales.

Gazprom and Italy's ENI have signed an accord that could lead to $2-3 billion worth of contracts for the exploitation of oil and gas deposits in Russia.

The strategic alliance, comparable to one Gazprom has with RD/Shell, will promote E&D and examine ways the companies can cooperate on oil and gas transportation and marketing to the Middle East and the Far East.

Although Russian oil exports grew to 127 million metric tons last year, a 1 million ton increase from 1996, lower oil prices shaved $1.2 billion in revenues vs. 1996, according to the country's Ministry for External Economic Relations.

Continued low prices could undercut the economics of Russian oil exports, trimming export volumes this year.

Russian gas exports, however, reached 200 billion cu m in 1997, a 2 billion cu m increase from 1996. Gas exports garnered a 19.1% share of Russia's total exports last year compared with 18% in 1996. Although not all of Russia's gas customers are part of the former Soviet Union, gas exports to FSU members increased to 80 billion cu m and earned Russia $5.7 billion in hard currency.

Poland's government has listed the country's largest oil refinery and its gasoline retail network among assets to be privatized towards yearend.

A deputy treasury minister reportedly told parliament the sales would be through a public offering of shares on the Warsaw stock exchange. Earlier, the government had considered seeking foreign investment in the refinery.

The Petrochemia Plock refinery has crude distillation capacity of 260,000 b/d, while the CPN retail company operates about 1,400 service stations. Combined market value for the two firms is thought to be more than $1 billion.

There are more signs that the recently elected Norwegian government is keen to put the brakes on offshore developments and put environmental concerns above oil industry goals on its agenda.

Norway's Saga Petroleum has been told to stall awarding contracts for a new production platform in Snorre field.

Saga said that a letter from the Ministry of Petroleum and Energy stated a final decision on Snorre B project approval would be made in March, but that the ministry "...needs more time to evaluate recently submitted investment data from oil companies. It wants to gain a better view of capital spending requirements."

Saga said, "Required investment off Norway is felt by the ministry to lie well above earlier estimates, and the governing centrist coalition has become concerned that this could increase pressure in the economy."

Saga aims to develops Snorre field's northern sector with a production semisubmersible. The project is expected to recover 360 million bbl of oil and some gas, beginning in summer 2000 (OGJ, Oct. 13, 1997, p. 37).

India's Ministry of Petroleum and Natural Gas will ask parliament next month to amend its policy on awarding oil and gas production-sharing contracts to private-sector firms. Official sources say the time is ripe to change the policy, but that any changes would be only cosmetic. Although the government awarded exploration blocks in October 1996, final approval of PSCs has stalled.

The Papua New Guinea government has halted all natural gas projects pending legislation to regulate the industry.

No projects, including a $2 billion (Australian) Chevron-led 1,900 km pipeline from Papua New Guinea to Queensland, will go ahead until the legislation is in place, which the PNG parliament is expected to pass in some form late this spring.

Is ownership of drilling rigs once again becoming a viable option, or even a necessity, for exploration-driven operators?

With drilling rig market tightness showing no signs of loosening, and long-term charters tying up many rigs, one operator has bought its own. Cairn Energy, Edinburgh, paid $17.6 million for the Bahram jack up and is spending an additional $18 million to refit it in Dubai for high-pressure operations.

Cairn says Bahram is one of the few jack ups available that can drill year-round in shallow, cyclone-prone waters. It will be used to appraise untested deeper horizons in its Bay of Bengal gas fields and on other Bangladesh offshore blocks (OGJ, Aug. 5, 1996, p. 21).

One of the biggest mergers in petroleum industry history involves two giants of the service/supply sector and points to the continuing trend of integrating oil field services and engineering and construction services.

Halliburton Co. and Dresser Industries have agreed to merge in a stock deal valued at $7.7 billion. The surviving company will be named Halliburton, be headquartered in Dallas, and be helmed by current Halliburton Chairman Dick Cheney and current Dresser Chairman William Bradford as the new respective CEO and chairman. The combined market capitalization of the new Halliburton, with a work force of about 100,000, is more than $19 billion.

The deal is to be completed in the fall.