OGJ Newsletter

June 14, 1999
U.S. INDUSTRY SCOREBOARD 6/14 [48,802 bytes] Ethnic violence around the Nigerian oil town of Warri is threatening to make a sizable dent in the country's production. Shell and Chevron have been forced to halt maintenance work in nearby fields, and shut-ins loom. The clash comes only days after Olusegun Obasanjo, Nigeria's first democratically elected leader in 15 years, was sworn in and the government initiated a review of previous suspect contract awards (OGJ, June 7, 1999, p. 33).
Ethnic violence around the Nigerian oil town of Warri is threatening to make a sizable dent in the country's production. Shell and Chevron have been forced to halt maintenance work in nearby fields, and shut-ins loom. The clash comes only days after Olusegun Obasanjo, Nigeria's first democratically elected leader in 15 years, was sworn in and the government initiated a review of previous suspect contract awards (OGJ, June 7, 1999, p. 33).

Oil company workers have been evacuated or have holed up in guarded compounds, as fighting between rival tribes led to numerous deaths. Reports of the number of fatalities vary, with some as high as 200. Chevron reportedly said one group threatened to blow up a 3.6 million bbl tank farm at the Escravos terminal if the government sent troops into the hot spots. The government did deploy troops to the area, and calm has been restored, at least temporarily.

The threat to Nigeria's exports was reflected in oil prices: Brent crude oil for July delivery closed at $16.24/bbl in London trading on June 8, having risen from $14.72/bbl at the close of business on June 1.

On a more positive note, Obasanjo is planning to expand Nigeria's fledgling petrochemical and natural gas sectors during the next 4 years. He says the two underdeveloped areas are key to the country's economic recovery and believes they can produce revenues that match those from oil production.

Iraq started oil production from Qurna field, according to local press reports. The project's first phase comes nearly a decade after the suspension of the field's development in 1990, when Iraq was hit with U.N. sanctions as a result of its invasion of Kuwait. Qurna, with estimated reserves of 20 billion bbl, is only the first step in developing some of Iraq's largest fields. Production from the field is expected to rise from the initial 40,000 b/d to 80,000 b/d by yearend.

Iraq plans to raise production capacity from 2.7 million b/d today to 3 million b/d by yearend and to 3.5 million b/d in 2000, according to Middle East Economic Survey. MEES said Iraqi Oil Minister Amir Rashid told reporters in Baghdad, "We will do this through our local efforts and from already producing fields." MEES said, as soon as sanctions are lifted, Iraq plans to begin production from partially developed oil fields, initially with the assistance of Russian oil firms.

Afghanistan is again making moves to revive its oil and gas industry. A Taliban-government official told reporters in Pakistan that a national oil firm is being set up to exploit the country's estimated 5 tcf of gas and 95 million bbl of oil. Afghan National Oil Co. was abolished in 1979 when the Soviet Union invaded the country, and plans to restore the company have been in place for over a year (OGJ, Feb. 16, 1998, p. 34).

The official also pledged the Taliban's full support of a proposed 1,400-km pipeline from Turkmenistan gas fields to Pakistan via Afghanistan. Representatives of the three countries will meet in Ashgabat in 2 months to firm up arrangements for the pipeline, he said. He added that the $1.9 billion project would be undertaken by the international consortium Centgas, which until recently was led by Unocal (OGJ, Dec. 14, 1998, Newsletter). Although no formal announcement to this effect has been made, such a decision would leave Argentina's Bridas, which has been vying vigorously for the project, out in the cold.

The official also said Afghanistan has reached an agreement with the United Arab Emirates regarding cooperation in the area of oil and gas production, and possibly in exploration and development, as well. No further details were given. The U.A.E. is one of only three countries, along with Saudi Arabia and Pakistan, that recognizes Afghanistan's Taliban government.

Meanwhile, Greece's Consolidate Construction Co. is to explore the Taliban-controlled area of Herat near the border with Iran, government officials told reporters in Kabul. A draft contract reportedly has been signed.

A plan to sell off 49% of Mexico's ailing state-run petrochemical plants has been shelved until the next presidential administration takes over at the end of 2000, Energy Secretariat officials have told Mexican newspapers recently (see Editorial, p. 19). The much-questioned scheme attracted little interest from national or foreign companies, and in February, after the bidding round for the Morelos plant failed to draw interest, Energy Secretary Luis Tellez hinted that the scheme would be abandoned (OGJ, Jan. 25, 1999, p. 44).

The government is expected to release in the coming weeks an interim investment program to keep the plants up and running for the next 2 years and to make them more attractive for potential future buyers.

Meanwhile, the planned privatization of Mexico's electricity sector is now thought almost certain to fail (OGJ, Feb. 8, 1999, Newsletter). The ruling Institutional Revolutionary Party and conservative National Action Party both quietly support President Zedillo's proposal and, together, have the votes to pass it, but no one wants to touch a politically sensitive issue like energy privatization at the beginning of the 2000 presidential election campaign.

Russian oil major Yukos is making moves to lessen the effects of having nearly 32% of its shares owned by foreign banks (see related stories, pp. 21 and 25). According to the Wall Street Journal, Yukos has transferred the majority of its shares in Yuganskneftegas and Samaraneftegaz to "offshore entities." The transfers were made through repurchase agreements, according to a Yukos official, who said the shares would return to Yukos by yearend.

Industry merger and takeover action is continuing apace (see Industry Briefs, p. 38). Following its surprise bid last week for Norwegian independent Saga Petroleum, Elf upped the stakes this week. Elf raised its offer by 10 kroner/share to 125 kroner/share, in an all-cash bid intended to ward off an all-paper approach by Norwegian conglomerate Norsk Hydro (OGJ, June 7, 1999, p. 31). Saga said it "looks upon this as a positive development."

Saga's board was to discuss the ownership situation on June 8 to decide how to handle the bid.

Not to be outdone, Norsk Hydro boosted its offer a few days later, to 135 kroner/share. The new offer is a cash-stock combination and values Saga at 20 billion kroner ($2.55 billion).

In a move that would significantly bolster its U.S. natural gas and electricity distribution system, NiSource has made an unsolicited bid of $5.7 billion for Columbia Energy Group. NiSource's $68/share offer comes on the heels of Columbia's recent play for Pittsburgh-based Consolidated Natural Gas (OGJ, Apr. 26, 1999, Newsletter). Columbia later withdrew its bid for CNG, bowing out to Dominion Resources Inc. (OGJ, May 24, 1999, p. 46).

In a letter to Columbia Chairman Oliver G. Richard III, NiSource Chairman Gary L. Neale said, "A merger of our two companies has substantial benefits to our respective shareholders, customers, and employees. Unfortunately, your refusal to discuss these benefits leaves us no alternative but to go public with our proposalellipse.Although we have found it necessary to make our proposal public, we continue to prefer to workellipsewith you and your board to complete a transaction."

Another natural gas distribution and electricity merger is planned, this one a mutually agreeable deal between Southern Union Co. and Pennsylvania Enterprises Inc. Southern Union will acquire PEI to create a firm with a market capitalization of about $1 billion. The transaction is valued at about $500 million. The new firm will serve 1.2 million gas and electricity customers in Pennsylvania, Texas, Missouri, Florida, and Piedras Negras, Mexico.

Following a similar move the the U.S. EPA, Canada is expected to announce this month a tougher policy to cut gasoline sulfur to 30 ppm by 2005. The target was proposed last October by the ministers of environment and health after a federal task force related high sulfur levels to a number of health problems. Under the draft regulation, Canadian refiners would have to lower sulfur emissions in two steps-from the current 1,000 ppm to 150 ppm by 2002 and to 30 ppm by 2005. Canadian refiners would have to spend an estimated $1.8 billion (Canadian) to upgrade plants, which could trigger a 4.5¢/gal increase in retail gasoline prices. The Canadian Petroleum Products Institute, a lobby group, said it supports the proposed federal goal.

President Clinton has ordered 500,000 federal buildings to reduce their energy use 35% by 2010, expanding on the current goal of a 30% drop by 2005. The U.S. government uses about 32% more energy per square foot than privately owned buildings. Its energy bill is $4.2 billion/year, about 75% of which is spent by the Defense Department. Clinton also ordered the government to cut its greenhouse gas emissions 30% below 1990 levels by 2010.

Washington gas groups are getting some cross-fertilization. Skip Horvath has been named president of the Natural Gas Supply Association, which represents producers. The consultant formerly was executive vice-president of the Interstate Natural Gas Association of America, which represents pipelines. NGSA is pursuing a lawsuit against its former president, Nicholas Bush. It alleges Bush embezzled more than $2 million.

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