OGJ Newsletter

June 7, 1999
Due to a holiday in the U.S., data for this week's Industry Scoreboard are not available. Industry consolidation has taken a step forward and one backward. Shareholders of Exxon and Mobil have okayed the companies' planned $82 billion merger, leaving regulatory approval in the U.S. and Europe as the final hurdles. Individual owners cast their ballots overwhelmingly in favor of the marriage, with 99% of Exxon's voting shareholders and 98% of Mobil's endorsing the deal. Industry


Due to a holiday in the U.S., data for this week's Industry Scoreboard are not available.

Industry consolidation has taken a step forward and one backward.

Shareholders of Exxon and Mobil have okayed the companies' planned $82 billion merger, leaving regulatory approval in the U.S. and Europe as the final hurdles. Individual owners cast their ballots overwhelmingly in favor of the marriage, with 99% of Exxon's voting shareholders and 98% of Mobil's endorsing the deal. Industry analysts are generally confident that regulatory approval will not be a stumbling block for the planned merger.

Meanwhile, Chevron has revealed that Texaco terminated the companies' merger talks before any agreement could be reached (OGJ, May 17, 1999, Newsletter). Chevron Chairman Ken Derr said, "I'm surprised that the Texaco board turned down a very competitive offer that included a significant price premium to Texaco shareholders and an opportunity to receive Chevron stock, with its acknowledged strong growth prospects. I've said before that we will evaluate attractive acquisition opportunitiesellipsewhile executing our business plan to generate strong returns for our shareholders."

In the alliance arena, reports have been emerging from E.U. headquarters of a likely forced break-up of the European refining and marketing joint venture of BP Amoco and Mobil. The European Commission is investigating potential market dominance in light of the BP-Amoco and Exxon-Mobil mergers. A BP Amoco official dismissed the reports as "speculation."

Taking the opposite approach to increased competitiveness is Tesoro Petroleum. In its bid to obtain the Wall Street holy grail of "value creation," Tesoro is considering selling off its exploration and production business to focus on the downstream. Chairman Bruce A. Smith said, "Both our refining and marketing and E&P operations have tremendous opportunities, but growth requires additional investment. Given our desire to improve financial flexibility, we will not be able to prudently fund all these opportunities."

The Halliburton Energy Services-Tyumen Oil Co. alliance-created last year for the rehabilitation and development of Western Siberian oil fields (OGJ, Nov. 30, 1998, p. 77)-is moving forward with rehabilitation plans for Samotlor field. The alliance's steering committee approved a list of U.S. and Russian-made equipment to be used, paving the way for prequalification of equipment suppliers to begin. Halliburton was to have submitted price proposals for services and equipment by the end of May. Once Tyumen Oil approves them, it will finalize its general contractor agreement with Halliburton. The firms have already signed a cementing services agreement and are in the process of finalizing accords for logging and drilling services, says Halliburton.

After a string of dry holes, Caspian Sea E&P companies have reason to be hopeful again now that BP Amoco has made what appears to be a major find on its Shah Deniz license. So thrilled is the Caspian oil industry that the State Oil Co. of Azerbaijan Republic issued a press statement announcing the find, in a bid to quell fevered speculation. The well cut gas and condensate pay zones in the Shah Deniz structure. A BP Amoco official said the well is being tested and that this will take 1 month. The structure is reportedly large enough to hold 1.5-5 billion bbl of oil and 1.4-18 tcf of gas (OGJ, Apr. 13, 1998, p. 35).

The discovery emphasizes the ever-growing importance of Caspian-area export pipeline alternatives (see story, p. 21). To this end, the U.S. Trade and Development Agency says it will partially fund a feasibility study of a trans-Balkan oil pipeline that would cross Bulgaria, Macedonia, and Albania, ultimately linking Caspian and Black Sea resources with Western Europe.

"Over the last year, TDA has been actively promoting the development of multiple pipelines to connect these vast resources with western markets," said TDA Director J. Joseph Grandmaison. To fund the new study, TDA awarded $588,000 to Bulgaria's Ministry of Regional Development and Public Works. U.S. firm AMBO LLC will cofund and conduct the $980,000 analysis. AMBO has been working with U.S. oil firms on developing a trans-Balkan option that would bypass Turkey's crowded Bosporus Strait. Pipeline cost is pegged at $900 million.

Look for crude oil prices to continue falling after Iraq announced its intention to increase exports to 2.2 million b/d under its oil-for-aid agreement with the U.N. Brent crude lost more than 40¢/bbl in trading on June 1, with dated Brent closing at $14.22/bbl and July-delivery Brent at $14.72/bbl. This was the first time Brent futures plunged below $15/bbl since OPEC's cutback agreement in late March (OGJ, May 24, 1999, p. 44).

Two ambitious gas infrastructure projects are beginning to take shape in disparate areas of the world.

A long-discussed, multibillion-dollar natural gas-based industrial initiative for the Persian Gulf region has made some progress with the signing of a memorandum of understanding between U.A.E. and Oman. The MOU brings Oman into the so-called Dolphin initiative alongside U.A.E. Offsets Group (UOG), a government-sponsored group conceived as an economic promotion association but now thought of as more of a venture capital or think-tank organization.

The agreement calls for the construction of one or more pipelines in Oman and cooperation between Oman and UOG in unnamed industrial and commercial developments.

The Dolphin initiative encompasses an array of projects "along the whole gas value chain," said UOG. The project will include: further development of Qatar's supergiant North gas field; construction of a pipeline linking Qatar with U.A.E.; transmission, disribution, and storage of gas in local markets, thus feeding the expansion of existing gas grids; and investments in gas-fed petrochemicals and power generation facilities. Investments over the next 6-7 years are expected to total $8-10 billion.

"The signing marks the start of a process aimed at formalizing a long-term arrangement to supply Oman with 300-600 MMcfd of gas," said UOG. UOG Deputy Chairman Mohamed Saif Al Mazrouei said, "The MOU carries further significance for Dolphin as it envisages the onward transmission of gas." Although he did not elaborate, local press reports have indicated that Pakistan would be among the gas recipients. A UOG official called the reports "rumors."

Meanwhile, gas discoveries in Canada's Fort Liard area, in the southern Northwest Territories, are expected to feed a planned gas network there. Westcoast Energy has reached an agreement in principle with the Acho Dene Koe aboriginal group to jointly develop a natural gas infrastructure in the region. Gas gathering, processing, transportation, and distribution are envisioned.

Westcoast Pres. and COO Art Willms said, "This agreementellipsereflects our long-standing commitment to ensure that local communities benefit from our operating activities." A Westcoast official said a more definitive plan is expected to be in place by Aug. 1.

Paramount Resources and Berkley Petroleum, both of Calgary, have made another significant natural gas discovery in the Fort Liard area. The well, just north of the British Columbia border, flowed on test at a rate of 45 MMcfd. Paramount, Berkley, and partners plan an aggressive follow-up drilling program, with commercial production expected within a year. They suspended three other wells in the area after achieving only marginal production. Chevron Canada Exploration recently reported a major discovery in the same area, which it said could produce at up to 100 MMcfd from reserves of up to 600 bcf.

Enron is spreading its wings again, this time with a bid to take a minority stake in South Korean gas importer Korea Gas. An Enron International official confirmed that the company has made a "nonbinding, conditional proposal" to acquire a portion of the Kogas shares.

The South Korean press is reporting that Enron, Britain's BG, and Japan's Osaka Gas have been short-listed in the bidding for a 27.3% stake in Kogas, but at presstime Enron said it had not yet received formal notification of this. The interest is reportedly valued at $760 million. South Korean law forbids any single firm from acquiring an interest of more than 15%, so the stake will be divided between at least two of the three firms and possibly among the three.

An official with the Planning and Budget Ministry said almost all issues had been decided, and a decision may be announced this week.

Further proof of despair in Japan's beleaguered oil industry is in, with nine majors posting an enormous combined loss for the 1998-99 fiscal year-the first such occurrence in 17 years. Idemitsu Kosan, Nippon Oil, Mitsubishi Oil, Cosmo Oil, Koa Oil, Toa Oil, Japan Energy, Kygnus Oil, and Kyushu Oil lost a total of ?15.4 billion for the year, compared with a profit of ?8.4 billion the previous year, said the Petroleum Association of Japan (PAJ). Combined sales for the nine were down by over 12.5% to ?7.72 trillion. A sharp slide in gasoline prices outweighed the benefits of lower crude prices, says PAJ.

"The results were even worse than we were expecting. The slump in the gasoline market and severe overcapacity has shattered the industry," said Lalitha Gupta, oil industry analyst with Deutsche Securities in Tokyo. Moreover, PAJ warns that the industry is now facing its toughest period ever. Most of the companies have instituted cost-cutting measures, and efforts to raise gasoline prices in line with higher crude prices are in place. But analysts remain skeptical: "The pace of closing of service stations remains far too slow," said Gupta, "and, until the pace of closures is dramatically increased, their restructuring efforts are likely to have little positive impact on the market."

She added that the industry must make a dramatic push towards consolidation: "Companies need to merge and to cut down refining capcity."

London's International Petroleum Exchange has received five bids for equity from energy companies and plans to meet with the bidders to thrash out the small print of their proposals. IPE says its offer was oversubscribed, with bidders staking claims on 80% of the business while only 70% was on offer. The bids value IPE at £35.7 million ($57.1 million).

Bidders were BG, Distrigaz, Enron, the Nord Pool Scandinavian electric power exchange, and industrial conglomerate OM Gruppen. The gas and electricity bias suggests bidders are more interested in IPE's potential as a total energy exchange than its current status as an oil futures market.

Australia will give a $70 million (Australian) boost to the renewable energy industry, beginning with an endowment of $100,000, to be given to the new Sustainable Energy Industry Association of Australia (Seiaa) over 2 years. The funds will be used for training and accreditation support for sustainable energy service providers and vendors and for development of the network via newsletters and information exchanges. It will also be used to further develop standards for industry equipment and services and to assist in establishing mechanisms for engaging the mainstream electricity supply.

The government has also allocated $29.6 million for the Renewable Energy Commercialization Program to support any initiatives that have strong commercial potential. Another $30 million will be granted to the Renewable Energy Equity Fund for use as venture capital, while $10 million will go to the Renewable Energy Showcase to demonstrate renewable energy technologies. And an allotment of $300,000 will be used to develop an Internet site. These programs are being run by the Australian Greenhouse Office and AusIndustry.

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