OGJ Newsletter

May 31, 1999
U.S. INDUSTRY SCOREBOARD 5/31 Indonesia soon will emerge as the next hot area for foreign investment in refining-marketing.
Indonesia soon will emerge as the next hot area for foreign investment in refining-marketing.

The trend will get under way in earnest in 2001, when state firm Pertamina begins privatizing by offering stakes in its seven refineries, says Pertamina Managing Director Martiono Hadiantoas. He notes that 1999-2000 represents a transition period for Indonesian refineries, still running at well below capacity because of lingering fallout from the Asian economic crisis. By 2001, he says, Indonesian refineries are expected to be back up to essentially full capacity utilization, creating an ideal opportunity for private-sector participation to begin.

Certain to be at the head of the list of prospective investors are Japanese refiner-marketers that are still in the midst of a major contraction at home. Especially intriguing is the prospect of Nissho Iwai reportedly setting up meetings with Kuwaiti oil officials at the Indonesia International Oil & Gas Conference & Exhibition, organized by London's ITE Group and slated for Sept. 7-10 in Bali.

Industry sources in Indonesia say that Nissho Iwai and possibly other Japanese firms are considering buying Kuwaiti crude oil for processing in Indonesian refineries in which they would hold equity stakes.

The idea is to make Indonesia a satellite refining hub for Japanese refiners that are closing outdated facilities at home while giving them a more centralized location for products distribution in the Asia-Pacific market-a more appealing plan than trying to cope with an increasingly competitive and unprofitable Japanese market. The Kuwaiti-Japanese tie-up also plays to a strategy that OPEC Sec. Gen. Rilwanu Lukman reportedly espouses: encouraging such arrangements in order to maintain Indonesia as OPEC's East Asian outpost. Because Indonesia is strapped for cash and already faces the prospect of dwindling revenues from crude oil exports-as its domestic production remains flat and domestic oil demand grows-it has been among the more reluctant OPEC members to embrace reduced quotas.

The Indonesian privatization effort will extend to retail marketing as well, until recently closed to foreign investment. Details of Indonesian downstream privatization and the regulatory outlook are to be unveiled by Pertamina and the Petroleum Ministry at the Ba* conference, following the introduction in the legislature of the country's new oil and gas law in August.

Already champing at the bit for a major presence in Indonesian marketing, Jakarta sources say, is Total Fina, a major oil and gas producer in the country. But showing a more noncommital stance is the country's biggest producer-and leading Asia-Pacific refiner-marketer-Caltex. That reticence may stem from the exploratory talks under way between the joint venture company's parents, Chevron and Texaco, over a possible merger (OGJ, May 17, 1999, Newsletter).

In a sort of antiprivatization move, Norwegian state firm Statoil briefly entered the race to take over Saga Petroleum but has since rescinded its offer, allowing Norsk Hydro's bid for Saga to continue uninhibited. The state owns 51% of Hydro, and Hydro's bid is conditional on its existing shareholders not participating in the deal (OGJ, May 17, 1999, p. 30).

Statoil, which also owns 20% of Saga, expressed interest in taking complete control of the firm, after which the Arbeiderpartiet (Labor party)-leader of the current coalition government-proposed that Statoil and Hydro coordinate their bids. Saga Chairman Wilhelm Wilhelmsen responded: "The board fully understands that theellipsestate looks after its direct ownership interests. But, at the same time, the board strongly warns against the state behaving in a way that will affect Saga's future ownership structure and thus reduce (share) values. It is clearly in the interest of Saga's shareholders and employees to receive other offersellipseThis also includes any bids from foreign companies, which will be seriously considered in the same manner as other alternatives."

An agreement between Statoil and Hydro changed Hydro's offer to make it conditional on acceptance by holders of 70% of Saga's shares vs. the earlier deal's 90%. Under the new deal, instead of receiving Saga stock, Statoil wants some of Saga's oil and gas interests on the Norwegian continental shelf. Statoil would get about 5% of Saga's assets in exchange for a cash payment to Hydro.

The assets include: 3% of Snorre field, 2.04% of Troll, 9% of Norne, 6% of Gullfaks, 8% of Haltenbanken South, 1.88% of License 037 (Statfjord), 15% of License 215 (Gjallar), 5% of License 213 (Norne South), all off Norway; and 21.5% of Corrib field off Ireland. Saga says it is still awaiting alternative offers.

Pdvsa has revised its 10-year development plan, to be released in early June, to include a less ambitious crude production target and greater emphasis on its petrochemical and natural gas divisions, according to Minister of Energy and Mines Al! Rodr!guez. Under the most aggressive development plan in Pdvsa's history, first announced in the early 1990s, the company had expected to reach crude production capacity of about 6.5 million b/d by 2005. The new plan, however, foresees production capacity of 4.8-5.2 million b/d by 2009-10, officials said, vs. 3.82 million b/d in 1998.

Venezuela hopes new growth in the natural gas sector-including E&P, transportation, and distribution-will be spearheaded by new investments from international energy firms. The minister also referred to development of new gas production zones by international companies holding 100% equity in future projects, but he did not elaborate. The revised plan will also call for changes in domestic refining patterns, so as to export more refined products and less crude. And it will assign Pdvsa a more aggressive role in trading crude and products on international markets.

Mexico has decided to eliminate a 4% import tariff on natural gas imports as of July 1, Energy Secretary Luis Tellez announced May 21.

As part of the North American Free Trade Agreement, the tariff had been lowered by 1 percentage point/year and would have disappeared by 2003.

Since last year, Mexico has seen the tax as less important for protecting its energy market, and it began efforts to negotiate elimination of the tariff in exchange for tariff reductions by the U.S. and Canada on other products.

Undaunted by rejection of their recent claims for lower petroleum industry taxes, U.K. operators are knocking on the government's door again to plead for relief from capital gains tax. The U.K. Offshore Operators Association (Ukooa) asked the government to extend capital gains tax rollover relief to transactions involving oil and gas producing assets in its 1999 finance bill. "The current restriction on rollover relief is inhibiting the transfer of licenses between companies, which, in a mature sector such as the North Sea, is increasingly frustrating their efficient exploitation of remaining reserves," said Ukooa. "There is growing evidence that the capital gains tax exposure is now of such magnitude that it equals or even exceeds the value gained from such transactions, which, inevitably in these circumstances, do not go ahead."

Ukooa Director General James May said the U.K. industry still bears the burden of fragmented ownership, which makes development and operating decisions more difficult. Reducing this tax would speed a shake-up of assets and therefore development of remaining reserves.

The Shell-led group developing Cornea oil field in the Browse basin off Western Australia has applied to quit surrounding exploration permits WA-265-P and WA-266-P without completing the required work program. The action has the potential to divide the Australian exploration industry and damage Australian legislation governing the work program permit award process.

Cornea was discovered in 1997, causing great excitement and an early reserves estimate of up to 1 billion bbl of oil. To secure the surrounding permits, the group's bid included a promise to drill 46 wells in 3 years. After drilling six of these, the reserves estimate rapidly contracted to a non-commercial level. Five more wells netted negative results, and the group decided there is no point in continuing. Cost of the remaining 35 wells is pegged at $70 million (Australian).

To minimize damage to the work program bidding system, Shell has proposed spending a similar amount on other offshore exploration.

Canberra has said it will work closely with the Western Australia government in considering the Shell proposal.

Plans for a natural gas pipeline from Turkmenistan to Turkey have moved forward with the signing of a supply contract (OGJ, Mar. 22, 1999, Newsletter). The deal, signed by Turkmenistan and Turkey's Botas, sets the gas price at $78/1,000 cu m. Turkmenistan will supply 16 billion cu m/year to Turkey for 30 years; another 14 billion cu m/year will be exported to Europe.

The 2,943-km trans-Caspian pipeline is estimated to cost $2.5 billion.

The Chemical Manufacturers Assocation has pledged support of a Clinton administration proposal to make detailed production data on thousands of industrial facilities available to the public via the Internet.

CMA says the proposal does an admirable job of balancing the public's right to know with safety and security by eliminating worst-case scenario data from the Internet database. Facilities must begin reporting the data in June.

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