OGJ Newsletter

Almost 20 years after nationalizing its oil industry, Saudi Arabia is showing signs of inviting U.S. petroleum firms back into the country. Crown Prince Abdullah Ibn Abdulaziz reportedly held a private meeting with representatives of seven U.S. oil companies in the Washington, D.C., area last week (see Editorial, p. 21). Abdulaziz invited the firms to tell him what role they could play in exploration and development of new and established fields in the kingdom. Low oil prices and increased

Oct. 5, 1998

8 min read

Almost 20 years after nationalizing its oil industry, Saudi Arabia is showing signs of inviting U.S. petroleum firms back into the country.

Crown Prince Abdullah Ibn Abdulaziz reportedly held a private meeting with representatives of seven U.S. oil companies in the Washington, D.C., area last week (see Editorial, p. 21). Abdulaziz invited the firms to tell him what role they could play in exploration and development of new and established fields in the kingdom. Low oil prices and increased competition for the U.S. oil market are thought to be behind the sudden apparent policy turnaround.

Attending the meeting were ARCO, Chevron, Conoco, Exxon, Mobil, Phillips, and Texaco. The companies are said to be surprised and cautiously optimistic, expecting cooperation to progress slowly. Meanwhile, Saudi Oil Minister A* al-Naimi-thought by many to oppose foreign participation in Saudi Arabia's upstream oil industry-met with U.S. Energy Sec. Bill Richardson last week to discuss issues related to Saudi Arabia's oil supplies into the U.S. market. The talks reportedly emphasized enhanced bilateral cooperation and included discussions of a number of joint projects, both inside and outside Saudi Arabia.

DuPont's board has approved a plan to begin divesting Conoco through an initial public offering, to take place by yearend (OGJ, May 18, 1998, p. 37). Following the IPO, DuPont will offer the remaining Conoco shares to its stockholders in a tax-free split-off, to be completed within 12 months.

DuPont CEO Charles O. Holliday Jr. said, "We have evaluated all available exit options and have determined that the IPO and split-off will offer the most value to shareholders, as well as position both companies for future success. We remain committed to the strategy we announced last spring to set both DuPont and Conoco on independent paths. DuPont can now concentrate its full attention and resources on growing its value. And Conoco can move forward within its own industry and continue its focus on growth."

OPEC production cuts and North Sea maintenance programs have arrested the oil price slide, but don't expect a sustained rally.

At close of trading in London on Sept. 29, dated Brent stood at $14.41/bbl, while Brent crude for November delivery was pegged at $14.36/bbl, a rise of more than $1/bbl over a week. Other factors being cited for the increase were investment funds covering short positions, the effects of Hurricane Georges, and talks of possible further production cuts at the November OPEC meeting.

But underlying oil demand growth remains weak, says Centre for Global Energy Studies, keeping downward pressure on oil prices: "The world's economic difficulties are mounting, and since oil demand is heavily dependent on economic growth, the outlook for oil is as bad as can be expected."

Barring a severe winter, CGES expects incremental demand won't exceed 660,000 b/d for 1998-just one third of the 1997 demand increase. This is despite a 34% fall in crude oil prices since fourth quarter 1997.

"Oil stocks are huge in relation to the lower demand now expected for 1999," said CGES. "Even if demand in 1999 grows by an optimistic 1 million b/d or more, inventories will take four quarters to lose just 69 million bbl. Oil prices are therefore not expected exceed $13/bbl (for dated Brent crude) on average in 1999, even if OPEC sticks to its targets beyond June next year.

"The best hope for stronger oil prices lies in the conjunction of a high level of compliance from the producers and a long, cold winter," said CGES.

If the weather is cold enough to add 300,000 b/d to worldwide oil demand, and if OPEC compliance with production pledges is 96%, Brent could rise 50¢/bbl in fourth quarter 1998, says CGES. "More importantly, it would ensure that oil stocks are drawn down to a more manageable level early in 1999, setting the scene for dated Brent prices to reach the dizzy heights of more than $14/bbl on average in the first half of the year."

Meanwhile, CGES suggests that producers brace themselves for further price trouble, as more than 20 unsold Middle Eastern crude cargoes have come onto the market at a time when refiners have cut runs and brought forward maintenance programs.

As oil producers wait to see whether last week's hike in oil prices will hold, further evidence of tough market conditions is appearing.

Despite this, Shell U.K. denies it plans to cut 2,000 jobs in London, after Royal Dutch/Shell announced a move to shut four major offices in Europe. Although 2,000 staff work at the Shell U.K. office slated for closure, many are expected to be relocated to Shell's other London building, now occupied by Shell International. Others will be relocated to Aberdeen.

Shell said the number of jobs affected across all activities located in Shell-Mex House would likely be about 200, at most.

North Sea contractors must slash costs if the region is to remain a viable oil province. That's what Francis Gugen, managing director of Amerada Hess Ltd., told the Offshore Contractors' Association: "It is costing us $12/bbl to extract oil from the North Sea. That's as much as we have been selling it for this year, and that won't work any longer. I want to bring extraction costs below $10/bbl quickly, safely, and with improved environmental performance. Wells are simply too expensive. They are killing us. We must put holes in the ground for half the cost or twice the value. Costs must be stripped out of exploration wells by integrating geology with well engineering."

Low oil prices are spilling over into the service and supply arena.

Rig utilization is down (see related story, p. 36) and Global Marine's Summary of Current Offshore Rig Economics for August fell 5.2% from July, to 67.6%. This is the largest monthly decrease in the index since January 1994 and the fourth consecutive monthly decline.

Global Marine CEO Bob Rose said, "Depressed oil prices continue to take their toll on offshore drilling activity, especially in the U.S. Gulf of Mexico. The number of work-ready, idle rigs has grown from none in March 1998 to 27 at the end of August. Near-shore rigs in U.S. waters have borne the brunt of cuts in drilling budgets to date. For example, day rates on some new contracts for jack ups in the Gulf of Mexico have fallen below $20,000, while severe-environment and deepwater semisubmersibles in the North Sea and (off) Brazil are still commanding rates in excess of $100,000/day."

An International Association of Drilling Contractors/Offshore Operators Committee task force has presented preliminary landmark deepwater well control guidelines to the industry. The task force, composed of officials from major and independent operators and oil field service companies, unveiled the guidelines at IADC's annual meeting in New Orleans late last month.

"These guidelines are for the guys on the rigs" said Moe Plaisance, IADC/OOC task-force chairman and Diamond Offshore vice-president. They provide procedures for well planning, well control, equipment selection, and emergency response, and training for deepwater operations. Developed in consultation with MMS, the guidelines show industry's commitment to safety and environmental protection and its ability to work with the government without regulatory intervention. A committee will meet semiannually, or as required, to update the guidelines as new developments and new technologies become available.

Horizontal drilling could stir a revival in western New York's "Bass Islands" faulted limestone oil and gas trend.

The 3B Maring in Chautauqua County flowed at rates exceeding 250 b/d of oil and 150 Mcfd of gas from a slim hole, short-radius, horizontal bore hole. The well cut 85 ft of fractured and faulted reservoir. It was first drilled in 1991 as an unsuccessful vertical test of the Bass Islands formation. On re-entry in August 1998, from a depth of 2,580 ft, the well reached horizontal within 68 vertical ft and has a further 200 ft of horizontal extension. The producing zone is acidized.

Resource Energy holds a 100% working interest in the well. The firm plans to further develop its more than 10,000 acres of mineral rights in the trend.

A gas plant explosion in Australia's Victoria state has turned into a national crisis (see story, p. 38). The resulting supply disruption has paralyzed businesses and left millions of residents without hot water or the ability to cook.

With most of Victoria's major manufacturers unable to continue operating, at least 60,000 employees are without work. Among the companies forced to shut down are BHP, Coca-Cola, Ford Australia, and Toyota. The number of layoffs is expected to rise to 120,000 this week, as effects of the crisis spread across state borders. Victorian Trades Hall Council Sec. Leigh Hubbard told reporters, "This is an economic disaster that requires government help as if it were a natural calamity."

Coming just before a national election, the disaster is weighing heavily on Prime Minister John Howard. He has offered government assistance if Victoria asks for it, but the state has so far rejected calls for emergency relief, apparently believing the crisis to be a private problem requiring a private solution.

State Premier Jeff Kennett said the best Victoria could hope for was to have a trickle of gas by the end of this week. He predicted the crisis would cost Australia hundreds of millions of dollars per day.