OGJ Newsletter

• U.S. Industry Scoreboard 10/19 [44,115 bytes]

Just as oil prices are sliding back down to 6-week lows after a weather-related rally in September and early October, it might be a good time to entertain some contrarian views of oil price forecasts.

All the fundamentals are in place for a big jump in oil prices within the next 6 months, says George S. Littell, of Houston consultants Groppe, Lang & Littell. He told a luncheon group in Houston last week, "Today looks just like 1973" (see editorial, p. 23). And Iraq is the "emerging oil power." Three key dates to watch, he says, are Nov. 3, Nov. 24, and May 4, 1999.

First, nothing will happen until after U.S. elections on Nov. 3.

Then, when its current 6-month, U.N.-brokered oil-for-aid sale accord expires on Nov. 24, Iraq could stop exporting, driving up prices. Having spiked oil prices by reducing supply, Iraq then would encourage buyers to sign purchase contracts that were not routed through the U.N., says Littell. That would be, for practical purposes, the end of sanctions against Iraq.

This year's weakening of U.S. sanctions against Iran "is the role model" for what will happen to sanctions against Iraq, says Littell.

Finally, says Littell, the Israeli/Palestinian accord on land distribution could revive Middle East turmoil on its fifth anniversary May 4.

Littell also predicts non-OPEC output will peak next year, adding upward pressure on prices. He predicts essentially flat non-OPEC output in 1998. Prices plunged this year mainly because Iraq returned to markets in a big way, says Littell, but things would have been much worse if non-OPEC output had risen significantly. Littell's projected average price this year for WTI is $15.80/bbl.

Meanwhile, U.S. independents are concerned that IEA forecasts are undermining the world oil market. Sen. Pete Domenici (R-N.M.) has asked the General Accounting Office to investigate the accuracy of IEA's oil supply/demand forecasts and whether they have deflated crude prices.

IPAA notes that IEA predicted world supply would exceed demand by 3.4 million b/d in second quarter 1998, but later reported inventories grew during that time by only 1.8 million b/d. IPAA said, "If IEA predictions are not accurate, and the magnitude of oversupply is much less, the market might very well have reacted in a different way in the last 11 months. Oil prices might not have seen their precipitous drop from where they were 1 year ago."

In another sign of hard times for U.S. independents, the Oklahoma Independent Petroleum Association canceled its annual 2-day meeting that was to be held this month.

"We believe it's much more important our members be allowed to focus on their top priorityellipseto keep working and keep their companies going," said OIPA Pres. Jim Palm, citing difficult economic conditions behind the cancellation.

OIPA's 44th meeting, scheduled for next June, is still on the calendar.

The state of capital spending plans today suggests that many companies aren't banking on a forecast of higher oil prices.

Norway's state firm Statoil is tightening its belt in anticipation of tougher times ahead in the petroleum industry.

The company has cut its capital spending plans from this year's 20 billion kroner to 16 billion kroner in 1999, of which 10 billion kroner has already been committed. CFO Erling iverland told staff that spending on computer equipment would be cut by 30-40% next year vs. 1998, while replacement of office equipment and company cars will be postponed.

"We face demanding challenges in choosing which projects should be realized," said iverland. "The most important consideration is that we maintain pressure and progress in the projects to which we're committed."

Chaos continues to spread in one of the world's leading oil exporting nations, with little apparent effect on oil prices.

After two majors declared force majeure affecting liftings of more than 500,000 b/d last week because their facilities were seized (see story, p. 38), Nigerian leader Gen. Abdulsalami Abubakar ordered governors of the country's nine oil-producing states to take over negotiations with oil firms on behalf of host communities, in a move aimed at reducing friction.

The junta's chief of general staff, Rear Admiral Mike Akhigbe, made the announcement after meeting a delegation from Ogoniland, a key trouble spot in the Niger Delta. Akhigbe said the government is determined to address the problems of the oil communities once and for all and that it is worried by the scale of destruction, disorder, and disruptions to operations in the nation's oil industry. He acknowledged that such violence from the host communities toward oil companies constitutes a major disincentive to development efforts.

The protesters aren't letting up. At presstime, Nigerian youths had seized another five flow stations, all Chevron's, and ordered foreign oil workers to leave the area by Oct. 19, saying their safety could no longer be guaranteed.

Australia's Victoria state has been delivered from chaos caused by a gas processing plant blast late last month that cut off gas supplies to the state, bringing much of its industry to a screeching halt (OGJ, Oct. 5, 1998, p. 39).

Last week, Esso/BHP began moving gas back into the distribution system for the first time in 2 weeks. Residential customers also were reconnected, although they have been asked not to use any gas heating appliances, because supplies are limited. The gas is flowing via Gas Plants 2 and 3 at the joint venture's Longford gas plant near Sale, Gippsland, which treats raw gas coming in from Bass Strait fields. However, the No. 1 gas plant, severely damaged by a series of explosions and fires, is likely to remain out of commission for many months. Esso/BHP engineers have bypassed the damaged plant and isolated it from the working facility. Meantime, BHP declared force majeure on crude oil, natural gas, and NGL deliveries from its Bass Strait fields to Longford, where some facilities for gas and oil are shared.

The situation is helped by the approach of summer, which means the system will be able to cope for now, barring further technical problems.

But there remain concerns about the potential for gas shortages during next winter's peak demand. Attention now turns to the accident's cause and to talk of compensation for businesses financially hurt by the 2-week gas supply outage.

The Clinton administration's favored pipeline route for moving Central Asian oil out of the region appears to be on the verge of collapsing.

The New York Times reported that Azerbaijan International Operating Co.'s (AIOC) proposed pipeline for transporting oil from Baku to Ceyhan, Turkey, via Georgia is unlikely to take shape now, because it is too expensive. The U.S. favors the route because it traverses neither Iran nor Russia.

A shorter route to the Georgian Black Sea port of Supsa is thought more likely, said the Times. A final decision is expected this month.

Middle Eastern gas projects are suffering as a result of the Asian financial crisis. The problem of reduced demand is compounded by the growing wariness of financiers in the region, said Observatoire Mediterraneen de L'Energie's Naji Abi-Aad at a recent Abu Dhabi gas conference.

LNG projects in Qatar, Oman, Abu Dhabi, and Yemen were based on expected growth in Asian gas demand that will not materialize as expected.

Thailand has put on hold an LNG purchase contract with Oman. Korea Gas's ability to take contractual quantities of Qatari LNG is in question. And Tokyo Electric Power may reduce its LNG import commitments with Abu Dhabi.

The only alternative, said Abi-Aad, is to look to higher-risk markets.

As a result, many LNG producers' expansion plans are being scrapped.

The Palestinian territories may soon be getting Egyptian natural gas.

ENI last week signed cooperation agreements with Palestinian officials calling for supply of gas from ENI's fields off the Nile Delta and related energy infrastructure development in the territories. Also last week, ENI, Amoco, and Egyptian General Petroleum Corp. signed accords covering gas supply to unspecified buyers and development of the three firms' fields on the Temsah concession near Port Said. ENI and Amoco are expected to spend about $700 million to develop Temsah reserves, pegged at 3.9 tcf.

Controversy over MTBE's health effects has escalated.

Maine Gov. Angus King has asked the U.S. government to let his state exit the federal reformulated gasoline program because MTBE has contaminated as many as 4,300 water wells there. If EPA allows the withdrawal, Maine will have to find another fuel that meets clean air rules. A group of Maine homeowners has filed a class-action suit against MTBE manufacturers and trade associations that purportedly promote its use. The suit alleges that companies failed to warn the public that MTBE can seep into the ground and contaminate well water. A similar lawsuit has been filed in California.

Meanwhile, California EPA is considering adding MTBE to its list of identified hazards under the state Safe Drinking Water and Toxic Enforcement Act.

The agency drafted two documents-one on MTBE's possible carcinogenicity and another on its developmental and reproductive toxicity. It is accepting comments on the documents through, respectively, Nov. 17 and 24.

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