OGJ Newsletter

March 9, 1998
U.S. Industry Scoreboard 3/9 [70,539 bytes] Are oil markets still clinging to hope that OPEC will act to ease the oil price slump? Voicing growing alarm among some energy analysts that oil prices will fall, Centre for Global Energy Studies Executive Director Fadhil Chalabi said, "The futures market doesn't quite reflect this bearish sentiment."
Are oil markets still clinging to hope that OPEC will act to ease the oil price slump?

Voicing growing alarm among some energy analysts that oil prices will fall, Centre for Global Energy Studies Executive Director Fadhil Chalabi said, "The futures market doesn't quite reflect this bearish sentiment."

Chalabi said at last week's CGES Conference on Latin America's Gas Power Prospects that price strength remains in next winter's futures contracts. "The spread of futures seen in 1998 suggests that many believe OPEC will come to the rescue of oil prices sooner than later," he added.

CGES has factored the effects of Asia's economic woes into its latest oil supply/demand forecast, pegging Asian oil demand at 300,000 b/d higher in 1998, compared with a rise of 700,000 b/d in 1997.

At the same time, extended oil price weakness will boost oil consumption by 300,000 b/d this year while, at most, shutting in 200,000 b/d of marginal production-mostly in the U.S. Lower 48. "These two factors will add maybe $1/bbl," he said.

Chalabi estimated that, with oil stocks up 2 days' worth of cover from this time last year, the call on OPEC oil in 1998 will be only about 26.5-27 million b/d, compared with current production of 28.5 million b/d.

"Everybody is looking to OPEC right now, but it is not the same organization it used to be," Chalabi said, noting OPEC members' trends toward opening domestic oil sectors to foreign investment and acquiring extensive downstream interests. "OPEC is still necessary," he said. "The current crisis should be seen as a necessary shock for OPEC to ponder its long-term future. OPEC should rethink its strategy. It needs a clear vision to determine the best strategy to sustain continued demand for its oil."

Oil producers everywhere are hurting as oil prices have fallen to their lowest level for nearly 4 years, but not everyone is complaining.

London's International Petroleum Exchange (IPE) reports that trading in Brent crude oil futures was unusually high for February, traditionally traders' quietest month, because of threatened U.S./Iraq military action.

IPE said, "Brent crude futures traded an average of 51,364 lots/day last month, equivalent to more than 51 million bbl of oil or two thirds of total world oil consumption. This is the third highest daily average in the IPE's 17-year history. January this year was the busiest month ever recorded for Brent crude futures."

Moody's Investor Service continues to rate investment in major integrated oil companies as positive, even though world oil prices are in a slump. Although Moody's rates current market conditions as "problematic" for the majors, analysts believe cost-cutting measures and investments in projects that earn adequate returns on a lower oil price by majors will bolster earnings.

Moody's warned, however, that, should an all-out battle for market share develop within OPEC, a much stronger bearish oil price environment could lead to "more significant rating actions."

The French government and oil industry leaders are pushing for an end to trade sanctions against Iraq, following last week's U.N.-brokered deal that forestalled a military strike on the part of a U.S.-led coalition.

France is lobbying for a partial lift of the oil embargo so that Iraq can import much-needed oil field equipment to produce the $5.2 billion in oil authorized under the U.N.'s oil-for-aid agreement.

BHP hopes U.S.-Iran relations will warm enough for the Australian company to secure a multi-billion-dollar project linking natural gas fields in southern Iran with Pakistan.

Talks were reportedly being held between BHP, National Iranian Gas Co., and Pakistani officials aimed at resurrecting a 2,500 km pipeline that BHP reluctantly agreed not to pursue 2 years ago under pressure from U.S. Sen. Alfonse D'Amato (R-N.Y.) and groups that claimed it would be a violation of the 1996 Iran-Libya Sanctions Act.

Merger mania is far from over. Following closely on the heels of last week's gargantuan marriage of Halliburton and Dresser Industries (OGJ, Mar. 2, 1998, Newsletter) is the $2.6 billion merger of EVI and Weatherford Enterra. The combination will create the world's fourth largest oil field service company, with revenues that would have amounted to $2 billion in 1997 and current market capitalization of $5.1 billion.

The transaction will be accounted for as a pooling of interests and is expected to be tax-free to Weatherford stockholders.

EVI CEO Bernard Duroc-Danner will be chairman and CEO of the combine. Weatherford CEO Thomas R. Bates Jr. will be president, COO, and director. The transaction could close in late spring or early summer.

Chevron's bid to bring to life its Destin Dome 56 gas project off Florida's coast has hit a wall of opposition from state officials. Florida denied Chevron's development application, saying the company did not provide enough information to evaluate the project's potential environmental impact (OGJ, Dec. 9, 1996, Newsletter).

Chevron official Brent Wood said the company will appeal the state's decision directly to the secretary of the U.S. Department of Commerce.

"We are disappointed with Florida's decision," said Wood. "We provided a comprehensive plan-20 volumes of information that we believe is the most comprehensive (application) ever filed in OCS activity in the gulf."

Wood said the appeal could take 12-18 months.

London's Centre for Global Energy Studies has spotted signs of recovery in Asia's hard-hit economies and expects economic growth to return, but at a restrained level.

"Oil consumption in these countries," said CGES, "is expected to grow over the period 1996-2010 at an annual average rate between 3.1% (equivalent to 300,000 b/d) and 5.1% (equivalent to 533,000 b/d). This compares unfavorably with the 7.4%/year recorded over the period 1986-96, but a slower growth rate is likely to be more sustainable."

The analyst expects China to account for 44% of projected oil demand rises, with India accounting for 10% and South Korea 17%. "Pressed for a single headline number for Asian tiger oil demand in 2010," said CGES, "we opt for 18.2 million b/d, which implies annual growth of 3.6%. More than 90% of Asian oil tigers' imports in 2010 will be from the Middle East."

The future may look bright, but the lingering effects of a nasty market flu have cut into Thailand's consumption of oil products and LPG.

The country reported domestic petroleum products consumption in January reached only 100.8 million l./day, down 10% from January a year ago.

Slowdowns in the transport and manufacturing sectors were blamed.

Asia's economic crisis appears to have cut through to bone. Indonesian state firm Pertamina has reportedly shut down its Balongan refinery because it cannot pay for spare parts. The 125,000 b/d plant was shut down after a mechanical failure and is not expected to restart until the end of March.

Foreign banks are said to have been rejecting Indonesian letters of credit. Indonesia has cut imports of crude oil and refined products since the collapse of the rupiah and has diverted much of its usual oil exports to its own refineries.

Royal Dutch/Shell has decided to sell its entire upstream interests in Thailand, including the kingdom's first onshore oil field, Sirikit. Shell said it wants to focus on larger-scale E&P activities elsewhere and in Thailand, where it has been operating for 105 years, to concentrate on refining and marketing.

The company joins Statoil and Exxon in ditching Thai operations, following the country's plunge into economic turmoil last year (OGJ, Dec. 29, 1997, p. 18). Shell is inviting companies to submit offers for Thai Shell Exploration & Production, which operates onshore Block S1 and Block B6/27 in the Gulf of Thailand.

The Russian government has pushed oil giant Rosneft a step nearer to privatization with the appointment of London's Dresdner Kleinwort Benson (DKB) to set the share price.

Russian officials reportedly expect Rosneft shares to sell for a total $2 billion, while industry analysts believe the value may be nearer $1.5 billion.

The news follows a flurry of mergers and acquisitions in the Russian oil scene, with western firms buying stakes in Russian companies and several apparently targeting Rosneft (OGJ, Jan. 26, 1998, p. 42).

DKB said on Mar. 3 it would present its valuation of Rosneft in 2 weeks. "Terms of the sale have not been decided. Likely bidders include a consortium of Lukoil, Gazprom, and Royal Dutch/Shell and another consortium of BP, Oneximbank, and Sidanco," (OGJ, Nov. 24, 1997, p. 42).

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