OGJ Newsletter

U.S.-Iraqi hostility combined last week with prospects for tight petroleum markets to boost crude prices to post-Gulf War highs (see related story, p. 19). Middle East tensions mounted Sept. 11 on word that Baghdad had fired surface-to-air missiles at U.S. fighter jets patrolling the expanded no-fly zone in southern Iraq and Sept. 12 following reports that Kuwait had agreed to host eight U.S. F-117A Stealth fighters.

Sept. 16, 1996

8 min read

U.S.-Iraqi hostility combined last week with prospects for tight petroleum markets to boost crude prices to post-Gulf War highs (see related story, p. 19).

Middle East tensions mounted Sept. 11 on word that Baghdad had fired surface-to-air missiles at U.S. fighter jets patrolling the expanded no-fly zone in southern Iraq and Sept. 12 following reports that Kuwait had agreed to host eight U.S. F-117A Stealth fighters.

Washington warned of more air strikes against Iraq, if needed to protect U.S. interests. "We have perfect vision in Iraq, and he will not be able to fool us," the State Department said of reports that Saddam Hussein was massing troops in the south to curb Shiite unrest.

Italy-in a letter to Sec. Gen. Boutros Boutros-Ghali raising humanitarian concerns-joined the small camp of nations calling for speedy reinstatement of the $2-billion U.N.-brokered oil-for-food deal that would have begun returning Iraqi oil to world markets as early as this week.

But a Tokyo trader echoed opinions of many observers by noting, "We won't be seeing Iraqi oil in the foreseeable future."

Escalating U.S.-Iraqi conflict spiked October Brent on the Singapore International Monetary Exchange to a Sept. 12 high of $23.82/bbl in early trading, eclipsing the Simex post-war high of $23.50/bbl set a week earlier. Oil prices also rallied on Nymex and London's IPE in early trading Sept. 12.

Amid contentious debate over U.S. breaches of Iraqi sovereignty, clear winners are beginning to emerge from the oil windfall created by Baghdad's incursion into Kurdish-held territory .Jeddah-based National Commercial Bank estimates that if Brent averages $19.50-20/bbl for the rest of the year, Saudi Arabia this year stands to net an incremental $10 billion more revenue than forecast earlier.

The unexpected cash will help reverse more than a decade of budget deficits, rebuilding Riyadh's foreign currency reserves and enabling the kingdom substantially to repay commercial debt.

Meantime, with Alaskan North Slope spot crude holding above $20/bbl, Alaska's state treasury has a shot at erasing a projected $411 million deficit expected in fiscal 1997 begun July 1. State planners had forecast an average ANS oil price of $16.67/bbl for the year, but traders last week were quoting ANS oil at $21.60/bbl.

With 80% of Alaska's operating budget coming from oil royalties, fees, and taxes, each $1/bbl increase generates about $100 million of incremental revenue for the state.

Prudhoe Bay owners Exxon, ARCO, and BP say a pipeline supporting exports of ANS gas as LNG could become feasible in a decade, if the project's estimated $15 billion cost could be trimmed 20%.

However, the companies contend gas from the giant ANS field could not reach Asian markets before 2005, under any scenario.

Yukon-Pacific, which has a permit to lay a gas line parallel to the Trans-Alaska Pipeline System, says oil company proposals to trim Alaskan LNG export costs amount to stall tactics and that other supplies could claim shares of Asian gas markets if the project is delayed too long.

Exxon, ARCO, and BP collectively own 85% of Prudhoe gas cap reserves, but all are working on gas projects in other parts of the world.

Some state lawmakers fear the companies have assigned a lower priority to Alaska's reserves. "If we are displaced in the marketplace," Rep. Ramona Barnes said, "I think the displacement will be done by the major producers in Alaska."

U.S. attacks on Iraq aren't helping win support for economic sanctions Washington wants to implement against oil-producing countries allegedly supporting international terrorism.

Malaysia's Petronas has vowed to retain its 30% interest in a $600 million Total plan to develop Sirri A and E fields off Iran. Petronas' share of Sirri development costs easily will surpass the $40 million threshold set by Washington for invoking sanctions against companies doing business with Iran.

National Iranian Oil Co. last week said it's confident a number of oil and gas projects will find support, despite the U.S. threat (OGJ, Sept. 9, Newsletter).

Petronas actively has been pursing overseas ventures in a drive to earn 30% of its revenue internationally by 2005. CEO and Pres. Mohamed Hassan Marican says Petronas has been able to form partnerships with other state companies, multinationals, and local firms in host countries.

Paris is preparing legislation that will allow recourse to French companies harmed by U.S. sanctions.

"The purpose is not to launch into a commercial or legal war with the Americans," Foreign Minister Herve de Charette insists, "but to put ourselves on the same footing and make our partners and friends understand that we are-all of us-committed to respect World Trade Organization rules."

Booming population growth and sweeping industrialization in Asia are creating a natural opportunity for increasing interdependence with Saudi Arabia.

With Asian energy demand by some estimates expected to reach 25.3 million b/d by 2000 and Saudi Arabia sitting on a fourth of the world's crude oil reserves, Saudi Oil Minister Abdul al-Naimi says the kingdom is keen to develop closer economic ties with consumers in the Far East.

Saudi Aramco in 1991 took a stake in South Korea's Ssangyong Oil and in 1994 paid $502 million for a 40% share of Filipino oil refiner/marketer Petron Corp.

In addition, India has approved a plan for Aramco to join Hindustan Petroleum in a 120,000 b/d refinery deal in the northern state of Punjab, and the Saudis are talking with Sinochem about setting up a 200,000 b/d refinery in eastern China's Shandong province. "Integration means stability and rising living standards," Naimi said last week at the Asia-Pacific Petroleum Conference. "It bears even more fruit with the right partners."

Meantime, integration of Nymex futures into Asian markets is to take an important second step by first quarter 1997 through a pending agreement with Hong Kong Futures Exchange. Sydney Futures Exchange in September 1995 began trading Nymex oil futures through the latter's Access trading system.

Nymex for the past 21/2 years has been talking with Simex about setting up an Access link in Singapore to complement Brent futures trading.

Nymex also is exploring plans to establish an Access link in China.

To meet the gigantic task of curbing India's growing dependence on imported crude, ONGC aims to ramp up domestic deepwater activity and participation in international deals.

The oil price spike of recent weeks could boost New Delhi's fiscal 1996-97 crude import bill to $9 billion, $1.4 billion more than budgeted.

ONGC Chairman Bora says the state company is pinning much of its hope for a major domestic discovery on exploration in more than 200 m of water, mainly in frontier areas such as Gondawanas and Vindhyas.

ONGC upstream arm ONGC Videsh, meantime, in cooperation with Hindustan Petroleum and Oil India Ltd., aims to take up E&D projects in the Sudan, Nigeria, and North Sea. ONGC earlier joined BP to search for gas off Viet Nam and is chasing opportunities in Iran, Egypt, Tunisia, and former Soviet satellites.

Three members of Ecopetrol's board reportedly have resigned to protest proposed changes to BP's Piedemonte E&D association contract.

Maintaining studies by research group Fedesarrollo show BP can earn as much as a 14% profit, 10 year Ecopetrol board member Jose Fernando Isaza in a letter of resignation to Colombian President Ernesto Samper warned that allowing BP to change the terms will set a dangerous precedent if other foreign companies demand contract changes.

BP says development activities in Cusiana and Cupiagua fields commit it to remain in Colombia for at least 2 more decades but argues available technical and economic data-confirmed by Ecopetrol and other studies-support its claims that a problem exists.

Critics have complained Bogota's efforts to improve association contract terms help Ecopetrol more than foreign producers (OGJ, Oct. 9, 1995, p. 33).

EIA says growing U.S. electricity demand will affect the environment more than a recent FERC rule allowing all power generators open access to the U.S. electricity transmission grid (see related story, p. 16).

An EIA study estimates NOx and CO2 emissions will rise at the most 3% because of new power generation resulting from the FERC rule.

"Transmission lines into the northeastern states are already used to the maximum extent possible," EIA said. "Without the availability of transmission lines to bring in electricity generated in coal-fired plants outside the region, the open access rule will have only small impacts on pollutant levels.''

EIA also says excess coal-fired generating capacity in other regions available to wheel electricity into the Northeast will diminish over the next few years as demand grows in local markets near those plants.