OGJ Newsletter

March 29, 1999
Last week's agreement between OPEC and non-OPEC oil producing nations to cut crude oil output (see story, p. 18), in conjunction with fundamental corrections already under way, has set the stage for a turnaround in world oil markets. That's the view Purvin & Gertz's Ken Miller presented to the firm's seminar at The Woodlands, Tex., last week.
Last week's agreement between OPEC and non-OPEC oil producing nations to cut crude oil output (see story, p. 18), in conjunction with fundamental corrections already under way, has set the stage for a turnaround in world oil markets. That's the view Purvin & Gertz's Ken Miller presented to the firm's seminar at The Woodlands, Tex., last week.

WTI will move to sustainable levels greater than $15/bbl over the next 12 months, said Miller, if OPEC members can average at least 75% compliance with pledged cuts. Reduced non-OPEC supplies and an inevitable recovery in global demand will ensure a firm recovery in prices moving into the next decade, as the call on OPEC crude begins to rebound by 2001.

Following the producer agreement, U.S. Energy Sec. Bill Richardson said, "Low oil prices are generally good for consumers and market economies; however, they have enormous impact in countries for which oil production is central to their economies. The U.S. believes that the forces of supply and demand operating in competitive markets should dictate the price of oil, and we do not support measures aimed at manipulating the market. I believe a better approach is to create demand by helping Asian and other troubled economies and by cutting the costs of production.

"I have raised the concerns of domestic producers at the highest levels of the U.S. government (OGJ, Mar. 22, 1999, p. 36)ellipseI have also proposed several initiatives that would help preserve our energy security and mitigate the impact of low oil prices on (U.S.) production capacityellipseI believe these initiatives, combined with our steps to help troubled economies around the world, will form the foundation of our efforts to maintain (U.S.) energy security."

The recent increase in oil prices comes too late to halt another monthly slide in rig day rates, says Bob Rose, CEO of Global Marine. The firm's monthly Score (summary of current offshore rig economics) for February reveals yet another decline-a 2% drop from the previous month's numbers.

Rose called the producer cutbacks "the best news for oil-producing companies and oil service companies in over a year." He added, "Rising oil prices will likely have little impact on 1999 drilling plans, but there is rising optimism that 2000 will see a halt to the downturn."

Petrobras's new regime is taking shape, indicating moves toward privatization. Following the Mar. 5 resignation of Petrobras Pres. Joel Mendes Renno (OGJ, Mar. 15, 1999, Newsletter), Brazilian President Fernando Henrique Cardoso appointed Philippe Reichstul, vice-president of Inter-American Express Bank, as president of Petrobras's board of directors, although no other board members have been appointed. Mines and Energy Minister Rodolpho Tourinho was named chairman of the administrative council. This marks the first time in the firm's 46-year history that these posts are filled by two people, rather than a single person holding both positions.

The choice of the minister to head the administrative council is seen as a move by the government to keep close tabs on Petrobras, say local sources.

On Mar. 24, a Petrobras extraordinary general assembly approved the appointments, including a five-member administrative council, and removed the barriers to foreign ownership of a portion of Petrobras shares. The government now owns 84% of common shares, but the general assembly will consider a plan to sell about 33%, leaving the government with only 51%.

Tourinho told reporters in Rio that Petrobras would look into the possible sale of some of its refineries, or shares in its subsidiaries, including refineries. He added that some of the petroleum licensing areas granted to Petrobras, on which it can form joint ventures with foreign oil firms, may be returned to the National Petroleum Agency. These actions by the federal government are seen as a move towards eventual privatization of Petrobras.

News that Elf is planning big personnel and cost cuts is a tough pill to swallow for French trade unions. Confirming unions' worst fears, Elf Chairman Philippe Jaffr? told the financial community that Elf's E&P work force will be cut by 20% in the next 2 years, reducing staff to 7,900 from 9,800. Worst hit will be Elf's historic research and technical base at Pau, France.

Unions have threatened further action, following a Mar. 11 demonstration at Elf headquarters, and the mayor of Pau said he is prepared to go on a hunger strike if job cuts are implemented.

Jaffr? says Elf is no longer competitive, and that he will outsource a number of functions to try to remedy this. Cost-cutting will also involve asset sales and increased selectivity with regard to new projects.

Elf hopes the measures will save 500 million euros/year by 2001, with technical costs falling by $3/bbl and return on capital employed increasing to 15% from 9.2% in 1998. Jaffr? aims to double net income per share in 5 years' time.

The Rocky Mountain Oil & Gas Association has decided to close its doors June 1, citing low oil prices and industry's structural changes.

Rmoga Pres. John Morrison said the Rocky Mountain oil industry has changed substantially in recent months, largely due to acquisitions, asset divestitures, mergers, and reorganizations.

"Tumbling crude prices were a factor in most of these changes, and this in turn has changed the nature of trade association work," said Morrison. He said Rmoga's functions will be spun off to other oil associations. Rmoga would have been 80 years old next year.

Petrochemical analyst DeWitt & Co. says low oil prices are having a positive effect on U.S. ethylene performance. Vice-Pres. Earl Armstrong told reporters at the firm's annual petrochemical review, "ellipseWe saw ethane prices in the U.S. fall (to about) 17¢/galellipse, and, all of a sudden, competitive balances changed with it...Demand has been extremely strong. Quarter four (1998)ellipsesurprised everybody. Polymer demand is going through the roofellipse"

DeWitt notes ethylene demand exceeded capacity in January 1999. "There is some potential for near-term margin improvement in the U.S.," said Armstrong. "It is already under way; the question is, how long will it last."

On the other hand, the global outlook for aromatics is depressing. DeWitt Vice-Pres. William P. Barry said low operating rates and prices continue to plague the industry. "The only differenceellipsebetween this year and last year is that margins and prices have eroded furtherellipse" Although Barry expects recovery in 2000 or 2001, any upturn is expected to be minor, he says.

In merger news, the Hibernia and Terra Nova management groups have agreed in principle to jointly develop and operate key fields off Newfoundland. The companies already share some services and had said they planned further cooperation to cut costs (see related story, p. 20).

Both fields are in the Jeanne d'Arc basin on the Grand Banks.

Hibernia is managed by Hibernia Management & Development Co., owned by lead partner Mobil, Chevron, Petro-Canada, Murphy Oil, Norsk Hydro, and Ottawa. Terra Nova, under development, is owned by lead partner Petro-Canada, Mobil, Norsk Hydro, Murphy, Chevron, Husky Oil, and Mosbacher Operating.

Meanwhile, Ultramar Diamond Shamrock (UDS) and Phillips have called off a planned refining and marketing merger. The firms signed a letter of intent last year to create a North American joint venture called Diamond 66 (OGJ, Oct. 19, 1998, p. 39). In a joint statement, Phillips Chairman Wayne Allen and UDS CEO Jean Gaulin said, "We were unable to come to final agreement on some key terms of the transaction. Therefore, we are terminating discussions."

Phillips Pres. and CEO Jim Mulva said, "Phillips and UDS negotiated in good faithellipseand we came to the conclusion that the proposed joint venture would not be in the best interests of our companies and our shareholders." Allen added, "Today's announcement in no way changes Phillips's strategy to grow and develop our refining, marketing, and transportation businessellipseWe will follow this RM&T business plan, including possible joint-venture and alliance opportunities that further build value for our shareholders."

ARCO has developed a new low-emission diesel fuel, EC (emission control) diesel. In initial testing, says ARCO, the fuel reduced particulates emissions by as much as 15% and NOx emissions by 5%, "with no loss in fuel economy." The fuel has higher cetane, lower sulfur, and less aromatics than conventional diesel. Tests aimed at validating these results will begin soon.

A discovery near Prudhoe Bay has added anther link to the ever-lengthening chain of the field's satellite discoveries. A 58-ft vertical section of oil-bearing sands was encountered by ARCO, Exxon, Mobil, and Phillips in a Prudhoe Bay satellite field dubbed Aurora. On test, V-200 flowed at more than 1,900 b/d of 30° gravity oil and 1.3 MMcfd of gas from the Kuparuk River sand.

Aurora is not a part of the main Prudhoe reservoir, said the partners.

It is on a lease owned equally by ARCO and Exxon. Including neighboring leases owned by the four companies, the area is estimated to hold 20-35 million bbl of oil. The partners will drill appraisal wells at Aurora this year.

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