OGJ Newsletter

Despite the prospect of threatened U.S. military action against Iraq, crude oil prices continued to fall last week (see editorial, p 21). As OGJ went to press, President Clinton expressed growing frustration with Iraq's refusal to allow U.N. weapons inspectors into suspected chemical weapons arsenals.

Feb. 23, 1998

9 min read

Despite the prospect of threatened U.S. military action against Iraq, crude oil prices continued to fall last week (see editorial, p 21).

As OGJ went to press, President Clinton expressed growing frustration with Iraq's refusal to allow U.N. weapons inspectors into suspected chemical weapons arsenals.

Clinton put Baghdad on notice that he is prepared to sanction air strikes if inspections are not resumed. As has happened throughout the U.S.-Iraq conflict, the U.K. backed the U.S., while France, China, and Russia called for U.N. Sec. Gen. Kofi Annan to be given more leeway to broker a deal. At presstime, Annan was en route to Iraq to make what many observers see as the final attempt to find a diplomatic solution to the dispute and prevent a U.S. attack.

Brent crude for prompt delivery closed at $13.58/bbl in London on Feb. 17, its lowest level in about 4 years. Brent for March delivery closed at $14.53/bbl. London's International Petroleum Exchange reported that, while the price of Brent is almost $6/bbl lower than for the same period in 1997, activity on the London trading floor is at an all-time high.

IPE cites low oil prices as the stimulus for increased activity.

Amid the commotion, traders appear to think an extended U.N./Iraq oil-for-aid deal is still the likely outcome of the current crisis. This would flood a currently oversupplied market with oil, driving prices lower still (OGJ, Feb. 9, 1998, p. 28).

IPAA and National Stripper Well Association are seeking help from DOE in coping with falling oil prices. IPAA asked DOE to rescind the sale of $207 million in Strategic Petroleum Reserve oil. NSWA wants DOE to oppose a new U.N. proposal allowing $5.2 billion worth of Iraqi oil into the market, saying a further fall in oil prices could force U.S. producers to shut in wells.

France put the U.S. on notice that it will push for "serious discussions" if Washington uses the Iran-Libya Sanctions Act (ILSA) against French oil firm Total for investing in Iran, a French minister said.

The warning comes as U.S. Sec. of State Madeleine Albright reviews whether sanctions against Total, Russia's Gazprom, and Malaysia's Petronas should be imposed for spending $2 billion to develop a major Iranian gas field.

A decision is expected shortly. If the deal falls under ILSA, Albright can impose sanctions immediately, waive sanctions for reasons of national security, or enter into talks with the relevant foreign government to resolve the issue.

On other fronts, a Unocal team ended a 4-day visit with Taliban authorities on prospects for oil and gas exploration in areas around Ghanzi, Kandahar, Farah, and Heart, Afghanistan, officials in Kabul reported.

Unocal was asked to study exploration prospects, inspect scientific installations, and collect data and soil samples, according to Afghan Oil Co. chief Mandarkhel. Contract bidding between rival groups led by Unocal and Argentina's Bridas for a planned natural gas pipeline project from Turkmenistan to Pakistan was not discussed, he added.

The presidents of Turkmenistan and Ukraine notified Russian President Yeltsin that they were becoming "strategic partners" in natural gas. Starting in 2001, Ukraine intends to purchase 20 billion cu m/year of Turkmen gas through a pipeline crossing Iran and Turkey.

The move signals to Russian gas giant Gazprom that this pipeline alternative is preferred to the high tariffs imposed by Gazprom. Turkmen President Niyazov reportedly said his country's gas price of $42/1,000 cu m allows for reasonable profits, and that Gazprom's offer to buy gas at $32/1,000 cu m is unacceptable.

Exxon's Azerbaijan unit and state firm Socar agreed to begin a joint study of the country's natural gas resources, domestic energy markets, and potential for gas exports. Socar has signed nine agreements with international oil companies to help develop the vast oil and gas resources in the Azeri sector of the Caspian Sea.

Exxon holds an 8% interest in the joint development and production-sharing agreement covering Azeri and Chirag fields and the deepwater portion of Gunesh* field. The so-called "megastructure" is operated by Azerbaijan International Operating Co., a group of Socar and 11 companies.

Western Petroleum, a marketer of Russian crude oil, inked a long-term oil purchase contract with Lukoil to support Lukoil's $1.5 billion credit line, underwritten by a group of five leading western banks.

Lukoil Pres. Leonid Fedun said, "The financing structureellipsewill allow for an aggregate of $3 billion of financing proceeds, of which the $1.5 billion bank loan is the first tranche." Purchase quantities were not disclosed.

Russia's First Deputy Prime Minister Boris Nemtsov says that PM Viktor Chernomyrdin will soon settle on a privatization plan for Rosneft, the last major fully state-owned Russian oil firm. The government may sell 50-75% of Rosneft but retain a "golden share" that would allow it to veto certain decisions of the company's new owner, Russian news agencies reported.

Whether foreign participation will be allowed remains unclear. Gazprom head Rem Vyakhirev, considered close to Chernomyrdin, says foreign investors will be barred from the auction. But government spokesman Igor Shabdurasulov told Russian news agencies that the government's main goal in privatizing Rosneft is to receive the maximum possible revenues from the auction.

Kuwait unveiled a strategic development plan to increase refining capacity to 1 million b/d in 2010 from 886,000 b/d at the three state-run Kuwait National Petroleum Co. refineries. In the project's first phase, national capacity will increase to 940,000 b/d. Current refinery capacities are: Mina Al-Ahmadi 435,000 b/d, Mina Abdullah 255,000 b/d, and Shuaiba 196,000 b/d.

ENI has agreed to buy as much as 50% of Libyan natural gas exports to Italy. The Libyan gas will reach Italy through an 8 billion cu m/year pipeline, scheduled for completion in 2001 (OGJ, Oct. 13, 1997, Newsletter).

Military technology transfers to the oil industry and new engineering designs were hot topics last week.

New findings on the effects of blasts on offshore installations were to be unveiled by the U.K.'s Steel Construction Institute at a London conference late last week. A £4.4 billion ($7.1 billion) joint industry safety initiative, spawned by the 1988 Piper Alpha disaster and funded by the U.K.'s Health and Safety Executive and 28 oil and gas companies, has seen large-scale gas explosions and fire tests carried out on specially constructed rigs.

HSE discovered new models for calculating blast behavior on platform topsides that suggest the effects of explosions had been underestimated in safety cases for some U.K. installations (OGJ, May 13, 1996, p. 38).

So-called "Star Wars technology" developed by the U.S. Air Force and the U.S. Army has found its way into a 2-year laser technology research project with the Gas Research Institute. The project will evaluate the mid-infrared advanced chemical laser (Miracl) and chemical oxygen-iodine laser for commercial use. Skeptics are reminded that Phillips Petroleum used the Army's Miracl to evaluate laser boring applications that indicated boring speed 100 times current rates through sandstone-shale.

Houston-based Hornsby & Co. reported that U.S. natural gas prices will fall in the coming weeks to $1.90-2.30/MMBTU, thanks to increased Gulf of Mexico production, moderate winter weather, and adequate inventories. Hornsby data showed that U.S. natural gas consumption in 1997 remained flat compared with 1996-albeit slightly higher year-to-year in the fourth quarter.

Working gas storage levels late in January were 1.701 tcf, up 12.6%.

State-led efforts to conserve U.S. oil and gas are leading to increased production from marginal wells, an Interstate Oil and Gas Compact Commission (Iogcc) report shows. Total marginal well oil output rose 5.8% in 1996 from the prior year, reversing a 12-year decline, and per-well production rose 5.7% in that time, to the highest level in 4 years.

ARCO Alaska, Exxon, and BP have found two oil accumulations while drilling a Prudhoe Bay "satellite" prospect.

The 1 Sambuca well cut a 100-ft vertical section of oil and gas-bearing rock in Kuparuk sands at a measured depth of 11,662 ft. Oil and gas also were found in a 160-ft vertical section of rock in the Sag/Ivishak formation at a measured depth of 12,965 ft. On test, the Kuparuk interval flowed 4,000 b/d of 29? gravity oil and 1.5 MMcfd of gas. The Sag/Ivishak formation flowed 1,400 b/d of 24? gravity oil and 490 Mcfd of gas.

U.S. companies are beginning to report their estimated production replacement ratios for 1997. Of those reporting, 60% have exceeded 200%.

Following is a sample of 1997 production replacement ratios, expressed as a percentage: Basin Exploration 800; ARCO 164; Exxon 121; Triton 1,300; Belco 643; Swift Energy 500; Tesoro 390; Anadarko 341; Santa Fe Energy 324; Coastal 300; Barrett Resources 269; Apache 228; Enron 220; Sonat 200; Union Pacific Resources 199; Burlington 188; Pogo 188; Seagull 168; Oryx 160; MCN 154; Marathon 147; Houston Exploration 119; Goodrich 700; and Texaco 167.

Wyoming independent producers lost a bid to block operation of the Express Pipeline, which is moving crude from Canada to Casper, Wyo. (OGJ, Dec. 9, 1996, p. 24).

A federal court judge ruled that the Bureau of Land Management's Wyoming state office was within its authority when it issued the right-of-way and special use permit for the pipeline.

Early reports of Canadian companies' 1997 financial results are in.

A comparison of 1996 and 1997 earnings for a sample of companies follows, with 1997 results listed first, in millions of Canadian dollars, and losses in parentheses: Imperial Oil 847 vs. 786; Shell Canada 523 vs. 326; TransCanada 407.6 vs. 385.2; NOVA 362 vs. 431; Petro-Canada 306 vs. 247; and IPL Energy 217.3 vs. 180.

Among U.S.-based companies reporting last week (in millions of U.S. dollars): Chevron 3,310 vs. 2,607; Pennzoil 175 vs. 134; Nuevo Energy 18.8 vs. 34.7; Witco Corp. 94.8 vs. (317); Anadarko 42 vs. 37.6; Tesoro. 30.7 vs. 13.9; Union Carbide 652 vs. 583; Triton (9.3) vs. (21.6): and, EEX, formerly Enserch, (216) vs. (37).

Officials attending the hemispheric meeting of energy ministers in Venezuela last week agreed to a plan of 40 cooperative actions.

The agreement includes: regulatory reform exchange, information and database development on energy and environmental legislation, energy-efficiency policy development, and replicable rural electrification project identification and development.