OGJ Newsletter

U.S. Industry Scoreboard 10/07 [70312 bytes]

Despite the recent collapse of the Iraq/U.N. oil-for-aid agreement in a volley of cruise missiles, U.N. members' concerns over the plight of Iraqi people have reappeared.

A U.N. official said the group hopes to approve the deal again "in a matter of weeks." Oil traders see that as only an outside chance, with oil prices holding steady last week. November Brent closed at $23.10/bbl Oct. 2, having spent most of the week around this mark.

UBS analyst Geoff Pyne says market fundamentals show the situation will remain tight this quarter: "European and perhaps U.S. refiners drew on stocks ahead of the expected resumption of Iraqi exports, so they suffered a double whammy when the current situation blew up. There is now a crisis in distillates, with stocks low and diesel demand running high, particularly in Europe. U.S. refiners spent lots of the summer making gasoline rather than distillates."

There are several pressures on oil prices at the moment, said Pyne, and all are pointing up. It could be many months before this situation will clear.

"Regarding Iraq," said Pyne, "I do not think that the U.N. can do anything quickly. The current situation suits the U.S., which doesn't want any change before the elections next month. But after the elections, the Iraq/U.N. deal will move slowly. Our assumption is that limited Iraqi oil exports will start mid-1997."

In the meantime, said Pyne, OPEC members are likely to go on increasing production, particularly Algeria and Venezuela.

Non-OPEC supplies also are expected to build in the near future: "It's difficult to see how the market will absorb all this into the new year, but in the short term market there is nothing to encourage the bears."

Petroleum privatization and deregulation moves gain more ground.

Italy's Ministry of Treasury, the majority owner of the oil and gas group ENI, will make its second public offering of ENI stock this month.

Last year's offering raised about $4.2 billion, or 15% of ENI's share capital (OGJ, Nov. 6, 1995, Newsletter). The Italian treasury doesn't plan to offer more than another 15% of its share capital this year. The initial price of the offer will be disclosed Oct. 20 and the final price Oct. 27.

PT Elnusa, a unit of Indonesia's state-owned Pertamina, plans to go public in first quarter 1997, using capital from stock sales for expansion. Elnusa, which supplies gasoline to retailers, will seek listing on the Jakarta and Surabaya stock exchanges. It is the first Pertamina unit to go public.

Poland's oil industry holding group, Nafta Polska, is expected to unveil a memorandum to investors by yearend disclosing details of privatization. The process will begin with sales of 20-30% of the shares in Poland's largest refineries at Plock and Gdansk. The remaining five small refineries can choose whether to merge with the larger ones or seek investors individually.

Russia's Gazprom, the largest natural gas producer in the world, is looking to sell a 9% stake to foreign investors starting this month.

Gazprom has a monopoly on gas production and distribution in Russia and sales of $15-20 billion/year. Although technically a joint-stock company, Gazprom retains close ties to the state, and its managers have taken lead roles in Russia's government, notably former Gazprom director and current Prime Minister Victor Chernomyrdin. Yet despite these ties, Gazprom was embarrassed last week when the government froze some of its accounts for nonpayment of about $2.8 billion in back taxes. Analysts differ on the implications of the government's move, but some suggest a compromise settlement is likely.

The stock sale announcement was preceded by extensive work to enable Gazprom to enter the world market. The Bank of New York and Price Waterhouse were brought in to advise on the proceedings. Revenues from the sale will be used to finish construction of the pipeline from the Yamal Peninsula to western Europe. Started in Soviet times to supply Communist bloc countries, the Yamal pipeline will have an overall price tag of $36 billion.

In India, total deregulation of the nation's petroleum industry has been recommended by a task force led by Oil Minister Vinjay Kelkar.

Recommendations call for phasing in the process during a specified time limit, revamping tariffs, gradually eliminating subsidies and deregulating gas prices, the group's report urges. The report says that import duty structure should be a major determinant of consumer prices in the future. Heavy taxation of raw material and infrastructure raises production costs and end-product prices, the report notes. So overhauling the tariff structure is needed to stimulate investment in the energy sector, the group recommends.

Japan's government is stepping in to ease the transition to deregulation, as retail gasoline competition from supermarkets puts pressure on traditional outlets (OGJ, Aug. 26, p. 31). MITI has asked for a $63 million appropriation for 1997-98 to assist service station owners in developing new lines of business.

Two Japanese majors have instituted the first step of a cost-cutting agreement in the wake of April's move to deregulate petroleum product imports, (OGJ, May 6, p. 35). Under the accord, Nippon Oil is supplying fuel oil from its refinery at Yokohama to Idemitsu's customers in the city, while Idemitsu is providing fuel from its refinery at Ichihara to Nippon Oil's customers in the area. The two companies also are shipping fuel to their neighboring storage facilities in Taganoura. As the next step, the companies will reorganize their oil tank truck fleets for joint deliveries by yearend, a move Nippon estimates will cut delivery costs by about $4.5 million/year.

France's Industry Minister Franck Borotra is trying to spur that nation's downstream restructuring.

Borotra is asking cooperation from BP, Esso, Shell, and Total regarding their refineries at the Fos-Berre-Lavera complex in Southeast France, where refinery utilization averages only 70%. The minister has been acting as a go-between among refiners to determine which site should be shut down. BP and Shell have been seeking partners, and BP says it will sell outright if no partner can be found. But to date, no area refiners plan to shut down.

Observers say that despite poor margins, cash flows remain positive. As long as no significant investments are required, it's "better to soldier on than shut down," said Jean Paul Vettier, Total refining-distribution manager. Others note investments can be postponed as long as sweet crude supplies remain ample.

EPA plans to toughen its stance on two key rules affecting the petroleum industry.

Refiners and other industrial concerns would have to inform the public of all toxic chemicals they use, under an EPA notice of a proposed rule.

Existing "right-to-know" rules require companies to submit emissions data to EPA, which releases it to the public. EPA Administrator Carol Browner said, "The expansion we are considering would give the public the right to know not just which chemicals come out of local industrial facilities, but which chemicals go into their neighborhoods and how they are used.''

EPA also is considering whether to allow all states to require sale of reformulated gasoline, although the 1990 Clean Air Act Amendments mandated RFG only for high ozone regions. NPRA says EPA's action is motivated by politics and questions its authority to expand the program without new legislation.

The Texas Chemical Council (TCC) is pressing the state to stop promoting use of propane as an alternate motor fuel, saying it threatens the state's petrochemical industry and overall economy.

Propane accounted for about one fifth of all feedstocks used to produce plastics in Texas last year, TCC notes, adding that feedstock costs account for more than 60% of the cost of producing ethylene in a typical plant.

If the state's promotional efforts succeed in driving up demand, the group warns, "propane will be too expensive to be used as a feedstock by the domestic petrochemical industry, bringing higher inflation, and costing Texas jobs and tax revenues, as well as higher export earnings."

DOE plans to disclose an "innovative" approach this week for selling its share of Elk Hills Naval Petroleum Reserve near Bakersfield, Calif.

The U.S. owns about a 22% interest in the field and Chevron the rest. Congress has required the sale (OGJ, Feb. 26, p. 36). DOE is seeking five oil and gas field appraisal firms to help it establish a minimum sales value for its share, believed to be worth more than $1.5 billion.

Gulf of Mexico discoveries continue to be the mainstay of U.S. oil and gas reserve additions, EIA reports.

EIA says U.S. proved gas reserves were more than 165 tcf, with two thirds of 1995 discoveries occurring in Texas and the Gulf of Mexico. Proved gas reserves rose in 1995 the second year in a row, despite a 15% drop in wellhead gas prices to an average $1.59/Mcf. Crude oil reserve additions replaced 95% of 1995 oil production, leaving more than 22 billion bbl of proved reserves. EIA says 60% of oil reserve additions were in gulf federal waters.