OGJ Newsletter

U.S. Indusrty Scoreboard 12/21 [43,965 bytes]

Oil prices are not expected to trade at significantly higher levels in the weeks to come, unless hostilities between Iraq and the U.S. and its allies escalate sharply or spill over into other Middle East countries.

U.S. and U.K. forces in the Persian Gulf launched an attack on military installations in Iraq late on Dec. 16, only hours after U.N. weapons inspectors were recalled from Baghdad. In a pattern repeated several times in the last 2 years, Saddam was accused by U.N. inspectors of preventing their work. At presstime, the attacks were expected to continue for several days but probably halt for the start last weekend of the Muslim holy period of Ramadan.

While the attacks sparked the biggest 1-day jump in oil prices in over 6 months, following 2 days of price rises totaling about 75¢, oil prices still remained near their lowest level in decades after the strikes began (see story, p. 34). None of the attacks had, by presstime, targeted oil facilities or threatened to disrupt Iraqi oil exports under the U.N.-brokered oil-for-aid sales program.

Dated Brent prices leapt by more than $1/bbl in response to the news. At close of trading Dec. 16, as expectations of air strikes against Iraq grew, dated Brent stood at $11.04/bbl, up $1.15/bbl on the day, while February Brent stood at $11.34/bbl, up 78¢/bbl. In the U.S., January Nymex crude posted an 83¢/bbl gain on Dec. 16, closing at $12.38. The February contract stood at $12.72/bbl, up 77¢.

As the news sank in the next day, however, crude prices also sank in London, with February-delivery Brent trading at $11.07/bbl by mid-morning.

The recovery in oil prices last week was bolstered by reports of a meeting slated for Dec. 17 in Madrid of the oil ministers of Saudi Arabia, Mexico, and Venezuela. Traders' fervor was tempered, however, by speculation that the meeting is unlikely to lead to further production cuts, given that the next scheduled meeting of OPEC oil ministers is not until March.

New data show OPEC members still are not controlling production. Since the June meeting, OPEC's ability to curb overproduction by some members has been questioned, and new OPEC production estimates from Middle East Economic Survey (MEES) throw OPEC's commitment into doubt.

Total OPEC output for November was 27.56 million b/d, a 710,000 b/d rise from Oct. 4 OPEC output of 26.85 million b/d, MEES said. "On this basis, it is calculated that compliance with the 2.6 million b/d of production cuts pledged by 10 OPEC countries, excluding Iraq, fell to an average of 73% in November, as compared with 93% in October," MEES said.

MEES blamed OPEC's November excesses on Venezuela, up 200,000 b/d, Iraq up 180,000 b/d, Iran up 150,000 b/d, and Nigeria up 140,000 b/d.

Meanwhile, API says Iraqi oil exports to the U.S. spiked in the second half. In August, they were 700,000 b/d and in September 520,000 b/d-enough to rank Iraq No. 5 or 6 among U.S. oil import sources. Meese estimates Iraq's output, governed by the oil-for-aid accord rather than pledged OPEC cuts, reached a post-Persian Gulf war record of 2.46 million b/d last month, of which 1.88 million b/d was exported.

The oil price crash has taken its toll on Venezuela's ambitious oil industry plans (see story, p. 32). A proposed $1.8 billion joint venture involving Pdvsa and Coastal Corp. to produce, upgrade, and market 100,000 b/d of extra-heavy crude from the Orinoco belt-one of six such JVs-has been shelved due to low oil prices. "The (proposed) joint venture with Coastal is not going forward," said Pdvsa's heavy oil division manager Carlos Jorda.

He also said a final decision is expected in the first quarter regarding a similar $3.5 billion venture involving ARCO, Texaco, and Phillips.

U.S. Energy Sec. Bill Richardson is considering steps to help independent producers through the current oil price slump.

A DOE task force has recommended several options, including buying SPR oil, emergency loans for independents, and tax incentives to maintain marginal production.

Richardson plans to propose a relief package in early January. Separately, Richardson said he would visit Saudi Arabia in February to encourage the kingdom to allow western oil firms to invest in E&P there.

Almost simultaneously, the U.S. Commerce Department has announced that it plans a trade mission to Saudi Arabia, U.A.E., and Kuwait for U.S companies.

The April trip will focus on the oil, gas, and petrochemical sectors. Its purpose is to match U.S. energy equipment and service providers with agents, distributors, end users, and business partners in the region.

"Saudi Arabia and Kuwait are considering opening their upstream oil and gas sectors to foreign investment and participation," Commerce said.

"Such an opening could be the beginning of substantial new oil, gas, and petrochemical investment and construction opportunities in these countries."

More oil firms are announcing layoffs in response to low earnings.

Chevron revealed a $5.1 billion capital and exploratory spending program for 1999 and a plan to cut expenses in 1999 by $500 million.

"Some of the plans call for employee reductions," said Chevron, "but net reductions will be modest, because of growth in overseas projects."

Mitchell Energy also plans to reduce its work force, although it has not yet determined the number of jobs to be affected. Mitchell says it is planning both staff cuts and a "voluntary incentive retirement program."

Cross Timbers, however, is taking a longer-term view. The firm has hiked staff by about 90 this year and is continuing to hire 8 or 9 people/month, primarily in the areas of information technology, petroleum engineering, and accounting. The increase is due largely to the nearly $1 billion worth of acquisitions the company has made in the past 18 months (OGJ, June 1, 1998, p. 25).

U.S. MMS Director Cynthia Quarterman plans to resign about Feb. 1. Deputy director Tom Kitsos will assume her job until the Clinton administration names a successor. Quarterman has been director since 1993.

She did not disclose her plans.

If EPA proceeds with a tougher U.S. gasoline sulfur standard, the cost of producing the fuel will rise about 6¢/gal, API Pres. Red Cavaney warns.

The agency is reportedly considering a 40 ppm national standard, while API wants a regional approach with an average of 150 ppm outside California. EPA plans to propose a rule early next year (OGJ, Dec. 7, 1998, p. 48).

The BP-Amoco merger plan crossed another barrier this week when the European Commission gave its blessing to the proposed wedding.

BP CEO John Browne said, "We remain on track to complete the merger by the end of the year." On Dec. 10, Amoco shareholders voted 98% in favor of the merger, following a nod by BP shareholders (OGJ, Dec. 7, 1998, p. 42).

Enron International continues to penetrate new industries in other countries, this time in South Korean gas distribution (see related story, p. 36).

Enron signed a joint venture accord with South Korea's SK Corp. to distribute gas in the country. Enron says the deal, valued at $450 million, marks the first time a foreign firm has held an equity stake in South Korea's gas sector.

Enron will gain interests in five of SK's city gas companies-Daehan, Pusan, Cheongju, Pohang, and Kumi City Gas-and in its LPG importer, SK Gas. Collectively, these companies hold a 20% share of the country's natural gas market and a 50% share in its LPG market.

Three majors and Kazakhstan have signed an agreement to study economic feasibility of parallel oil and gas pipelines from Kazakhstan across the Caspian to Baku, and on through Georgia and Turkey to Ceyhan on Turkey's Mediterranean coast. The 12-month study by Mobil, Chevron, Shell, and KazakOil will be the first to aggregate eastern and western Caspian reserves. Oil companies have said the Baku-Ceyhan oil pipeline, which could cost as much as $4 billion, would be uneconomic.

U.S. Energy Sec. Bill Richardson said, "It's no longer a question of if the Baku-Ceyhan pipeline will be built, but when." In the long term, he said, the Caspian nations will need an export pipeline route that keeps them independent of their market competitors for transportation to Turkey and Europe.

He concedes that any export pipeline must be commercially viable but said, "Commercial considerations are made up of more than just up-front capital costs. They must include tariffs, taxes, netbacks, and political and environmental risk. Governments can do a great deal to make Baku-Ceyhan feasible."

Richard Morningstar, U.S. ambassador for Caspian energy issues, says the administration will forbid U.S. firms from swapping Caspian crude for Iranian oil, if that effectively would hurt chances for a Baku-Ceyhan line.

Meanwhile, oil is flowing at last through the Baku-Supsa pipeline.

Costs to repair the 930-km line nearly doubled from the planned $290 million when crews discovered the old Soviet line would have to be replaced entirely. State Oil Co. of the Azerbaijan Republic and Azerbaijan International Operating Co. are arguing over who will pay the cost overruns.