OGJ Newsletter

• U.S. Industry Scoreboard 12/14 [44,056 bytes]

That can be seen in the results from Arthur Andersen's annual U.S. oil and gas industry survey, unveiled at the consultant's energy conference in Houston last week. A year ago, as reflected by the Andersen survey at that time, U.S. E&P firms were increasing capital spending and adding to staff because they believed opportunities were better than at any time in 15 years, Andersen's Managing Director, energy industry, Victor Burk noted.

"Today, extremely low oil prices are driving companies to take extreme action, including significant cuts in spending and people, as well as unprecedented merger and acquisition activity," Burk said. "(E&P) companies of all sizes have substantially reduced their price expectations for oil and plan to cut exploration spending and employment levels in 1999."

Among the findings of the survey (taken in late October):

• Oil price forecasts for 1999 have been slashed by 20% from a year ago, and gas price forecasts by 2%.
• More than 70% of respondents plan to cut or keep flat exploration spending in and outside the U.S.; 38% plan U.S. cuts, and 20% will trim spending elsewhere.
• More exploration will shift to gas away from oil (49% vs. 20% a year ago).
• Development spending will fall or remain flat for 54% of respondents, but 46%-all independents-will boost development outlays.
• Spending will rise for producing property acquisitions, with 53% of respondents expecting an increase and 18% expecting a decline.
• And 81% of respondents anticipate an acceleration of merger, acquisition, and divestiture activity.

The London branch of Commerzbank said, "We also expect asset sales of up to £400 million, write-downs of £100 million, and capex reductions of £100 million." The bank added, "E&P balance sheets are not a pretty sight. Lasmo's is the first of several survival-mode actions we expect to see. Enterprise is reviewing how it should respond; Saga has an active disposal program. We should not, however, be too concerned that the companies will cease to be going concerns. Cash costs are covered at less than $9/bbl, and options to reduce costs if the price stayed that low could be found."

Meanwhile, Australia's Woodside Petroleum is taking a more novel approach to the low oil price climate: cut costs yet preserve jobs. Woodside will trim $400 million (Australian) in spending in the next 2 years but said its 1,700 employees' jobs are not at risk. Woodside plans to shave up to 20% off total capital and operating expenditures, which would stand at around $2 billion in 1999.

Oil prices might begin to strengthen as early as 2000, says James A. Placke, director for Middle East research, Cambridge Energy Research Associates. Oil demand in Asia can recover next year if China doesn't resort to currency devaluation and if Japan's economic stimulus package boosts consumer demand and receives bank support.

But the market faces a capacity "bulge," Placke told the Arthur Andersen symposium. Excess global capacity to produce crude oil and NGL will grow from 3.8 million b/d now to 6 million b/d in 2000 as delayed projects come on stream in the North Sea, the West of Shetlands area, and off eastern Canada, and as projects elsewhere start up as planned. The increase about equals the amount by which demand will fall short of projections made before the Asian crisis.

Placke doesn't expect OPEC to make further official cuts in production, although unofficial agreements might restore discipline, eroding since September, around quotas now in place (see related story, p. 28). He estimated this year's average price of West Texas intermediate crude at $14.75/bbl, next year's at closer to $13/bbl, and 2000's at nearly $15/bbl.

The industry's downturn is taking a toll on plans for major projects.

Malaysian state firm Petronas is considering indefinitely suspending Phase II development of Block PM-3 in the Commercial Arrangement Area (CAA) between Malaysia and Viet Nam (OGJ, Nov. 16, 1998, p. 27), according to industry sources. Five oil and gas fields-Bunga Kekwa, Bunga Raya, Bunga Pakma, Bunga Seroja, and Bunga Orkid-have been discovered on the block, but the geology is complex, and more than 100 separate reservoirs have been identified. Petronas already has more oil and gas production than it can market and is looking at delaying future output until demand warrants, said the sources.

The block is operated by Lundin Oil, with other interests held by Petronas Cariga* and PetroVietnam Exploration & Production.

Citing a need to cut costs, Unocal has withdrawn from the CentGas consortium, a multinational group planning to build a 1,400-km, $1.9 billion natural gas pipeline from Turkmenistan to Pakistan via Afghanistan (OGJ, Nov. 3, 1997, p. 31). Unocal was the leading partner in CentGas.

The firm had already spent a reported $15 million on the project.

Norway's Statoil has sold its largest upstream interest in Thailand to a consortium of Thai firm PTT Exploration & Production (Pttep), France's Total, and BG. The deal involves Statoil Thailand's 10% holding in Bongkot gas field in the Gulf of Thailand, responsible for nearly a third of Thai natural gas production.

The deal will increase Pttep's stake to 44.44% from 40%, Total's to 33.33% from 30%, and BG's to 22.22% from 20%. Statoil decided late last year to withdraw from Thailand as part of its strategy to concentrate its activities in other areas-mainly the North Sea and Gulf of Mexico.

Statoil still has two minor Thai assets: a 45% share in Block B10/32 in the Gulf of Thailand, where a gas discovery was made last year, and a 10% stake in Andaman Sea Blocks W8/38 and W9/38, where deepwater exploration drilling a year ago was unsuccessful.

Two U.S. senators have asked the Federal Trade Commission to defer its ruling on the BP-Amoco merger. An FTC decision is expected in the near future.

Mike DeWine (R-Ohio), chairman of the Senate antitrust subcommittee, and Herb Kohl (D-Wis.) urged FTC to consider the merger in light of the Exxon-Mobil deal (OGJ, Dec. 7, 1998, p. 37). They said, "We understand, of course, that oil prices are at or near historic lows, and that petroleum companies must be allowed to take reasonable business measures to sustain profits and further exploration efforts. Nonetheless, we cannot allow temporary market conditions to dictate anything less than a thorough antitrust review."

Meanwhile, Frank Murkowski (R-Alas.), who chairs the Senate energy committee, said his panel would hold hearings in late January or early February on how low oil prices are prompting oil industry mergers.

The merger rumor of the moment is that Royal Dutch/Shell is eyeing Chevron for acquisition. A website that tracks Dutch stocks speculated Shell would offer $100/share for Chevron during an analyst meeting in London Dec. 14.

The website, www.dutchstocks.com, has been temporarily shut down, reportedly because the unconfirmed rumor was giving Chevron's stock a boost.

Indonesian state oil company Pertamina has nullified a contract with ARCO, BG, and Indonesian firm IKTP for a major LNG project in Irian Jaya, according to local press reports. The plant, slated for start-up in 2005, would use gas from ARCO's huge Wiriagar and Vorwata finds (OGJ, Apr. 13, 1998, Newsletter). The reports said the $500 million contract was let through an improper bidding process. This had nothing to do with ARCO or BG but was rather the result of the inclusion of the third firm, run by an ally of former President Suharto.

Pertamina plans to re-tender the contract.

The Chevron-led group planning the $3.5 billion (Australian) Papua New Guinea-to-Queensland natural gas pipeline (OGJ, Nov. 30, 1998, p. 33) is seeking to extend the line to Brisbane in the southeast corner of the state.

Speaking at the Papua New Guinea Mining and Petroleum Investment conference in Sydney, Peter Botten, managing director of consortium member Oil Search Ltd., said discussions are already well advanced with potential customers in Brisbane.

The inclusion of Brisbane would free up the project from reliance on aluminum company Comalco, a key potential customer. Comalco is deciding whether to go ahead with its $1.4 billion alumina refinery in Gladstone, Queensland, or to change the location to Malaysia.

Botten says there is sufficient gas demand to support the project.

The U.S. Bureau of Land Management plans to hold a lease sale for the northeast quadrant of the National Petroleum Reserve-Alaska in late April or early May. High-potential tracts, mostly in the northern area, will carry a 1/6 royalty and the rest a 1/8 royalty. All leases will be for 10 years.

Conservation groups have sued to block the sale (OGJ, Aug. 24, 1998, p. 26).

Copyright 1998 Oil & Gas Journal. All Rights Reserved.