OIL PRICE VOLATILITY POSSIBLE THROUGH 1992, DEPENDING ON GULF SCENARIOS

The world oil market in late 1991 and early 1992 may follow the same volatile path it did during the Persian Gulf crisis.

Oil prices could jump sharply in second half 1991 because of increased demand and lost crude exports stemming from United Nations trade sanctions. That was the case in second half 1990 when a U.S. led United Nations trade embargo blocked Iraqi and Kuwaiti exports after lraq's blitz of Kuwait, removing about 4.5 million b/d from the market as oil demand was still ratcheting up.

In the current case, continuance of sanctions against Iraq could keep as much as 3 million b/d from the market at a time when Kuwait's oil production remains crippled and oil demand picks up in the second half with traditional seasonal factors and a recovering world economy.

It all depends on when or if sanctions against Iraqi oil exports are lifted and when Kuwait's oil production is substantially restored. Although both are producing oil again, the biggest question facing oil markets now is how much they will be able to export in 1991 and 1992.

And there are these conflicting reports on the status of that situation:

• Iraq says repairs to its oil sector are proceeding rapidly and a substantial export capability could be available soon. But other industry sources suggest progress is slower than Iraq claims.

• Kuwait is ramping up a small volume of production for domestic use, but the market has paid little attention thus far to a more substantial volume intended for export from the Neutral Zone between Saudi Arabia and Kuwait.

• In interviews with Oil & Gas Journal and in congressional testimony well kill specialists returning to the U.S. from Kuwait attest to a slow rate of progress in well kills they blame on Kuwait's bureaucracy, claiming the campaign could take years. Kuwaiti officials insist all wells will be killed within a matter of months.

• That dispute is complicated by Kuwait's invitations to other countries to participate in the firefighting effort, a contribution wild well specialists working in Kuwait today see unlikely.

• While Bush administration officials report progress in fighting wild wells in Kuwait, a different picture emerges in testimony before a Senate hearing.

A 1991 price spike could be followed by a price drop in 1992 as demand slackens in response to higher prices and productive capacity builds among certain members of the Organization of Petroleum Exporting Countries.

That was the case in the months leading to the Persian Gulf war and shortly thereafter, when Saudi Arabia led an OPEC effort to produce all out to offset the loss of Iraqi-Kuwaiti supplies.

In the current case, the buildup of OPEC productive capacity represents the restoration of production from Iraq and Kuwait.

As in 1990, the level of Soviet oil exports again is a wild card in 1991.

A disruption in Soviet exports of any significant size and duration while Iraqi/Kuwaiti oil supplies are out of the picture could set off the kind of price spikes that were predicted but not delivered during the height of the Persian Gulf war.

MARKET STATUS

Simply put, there may be slightly too much crude available in a weak market at the moment, but there remains no spare productive capacity in the world, except for an Iraqi supply shut in by sanc-tions.

And the signs are that the sanctions will remain in force against Iraq as long as Saddam Hussein remains in power. In addition to U.S. and U.K. insistence on Saddam's ouster, the U.N. Security Council earlier this month refused to lift sanctions against Iraq because it had not fully complied with terms of the ceasefire resolution ending the war.

Progress could be further slowed by differences among U.N. members in the formula for Iraqi war reparations. The U.N. Security Council failed earlier this month to agree on a ceiling for reparations-ranging from Yemen's proposed 10% to France's proposed 30% and the U.S./U.K.'s proposed 50%.

Even with the restart of Iraqi exports, increased demand in the second half could absorb that "spare" capacity as well.

Analysts are again grappling with new supply/demand forecasts to gauge whether oil prices rise, fall, rollercoaster as they did during the Persian Gulf crisis, or seek a new kind of stability as all factors act as countervailing forces.

BEARISH MARKET VIEW

Purvin & Gertz Inc., Houston, sees the recent OPEC meeting's rollover of quotas undermining oil prices.

P&G Pres. Bob Hermes contends the agreement is likely to lead to overproduction and inventory buildups, yielding an effective buffer supply for at least the next 6 months,

"The latest OPEC agreement did nothing to deal with the moderately growing output from the damaged areas, and close adherence to the quotas by all members would suggest a continuing moderate oversupply," Hermes said.

P&G estimates production from Iraq, Kuwait, and the Neutral Zone could climb to 1 million b/d in the third quarter-more if sanctions are lifted. With demand continuing to remain weak, stockbuilding could reach 1.5 million b/d in the third quarter. Accordingly, spot prices for West Texas intermediate could average a little more than $19/bbl this summer, P&G projects.

As to concerns of supply tightness if sanctions remain in effect and progress is slow in restoring Kuwaiti production, Hermes said, "The current indications of likely stock overhang from the first three quarters ... suggests that these concerns may be exaggerated."

Longer term, National Economic Research Associates, White Plains, N.Y., sees an oil price drop of $5/bbl in 1992, contending OPEC lacks the will to accommodate as much as 4 million b/d of Iraqi and Kuwaiti production by second half 1992.

BULLISH VIEW

Philip K. Verleger Jr., writing in Charles River Associates Petroleum Economics Monthly, contends the loss of capacity in Kuwait and declining production from the U.S.S.R. all but guarantee oil prices will rise the next 2 years.

Further, the "slim" chance of lower prices diminishes daily as sanctions against Iraq continue, he claims.

"The loss of capacity has created a situation in which long run prices are expected to increase faster than the rate of inflation for at least the next 2 or 3 years," Verleger wrote,

Noting that in the 3 months since the war's end, prices of 12 and 36 month forward oil have risen by $2.25/bbl, underpinning projections of higher oil prices in the near term.

The destruction in Kuwait, sanctions against Iraq, and continuing declines in Soviet oil production will cut oil supplies by 6 million b/d in 1991 and perhaps 7 million b/d in 1992 from levels of future supplies expected only 6 months ago, Verleger wrote.

He contends 12 month forward WTI prices could easily reach $22/bbl by yearend and $24/bbl by yearend 1992, barring more complications.

Using a Department of Energy model, Verleger says, suggests oil prices could return to the high $20s in 1991 and mid-$30s in 1992.

"Even higher prices can be anticipated if the strict embargo on Iraq continues," Verleger wrote.

Estimating world oil production at 65.7 million b/d in 1991 and 65 million b/d in 1992 if sanctions continue, Verleger sees a supply shortfall of at least 2 million b/d in peak first and fourth quarters, calling for huge stock drawdowns.

"The victorious powers may regret their decision to maintain sanctions on Iraq if such a scenario develops," Verleger wrote. "Indeed, the economic losses incurred by consumers due to high prices could easily exceed the costs imposed on Iraq by the embargo.

"Ultimately, these nations may find it necessary to provide emergency assistance to Iraq to get that country's oil fields back into service and thereby cap the rapid escalation in oil prices. It will be interesting to see whether western politicians elect to accept high prices or turn to Saddam Hussein for help."

ROLLERCOASTER VIEW

Merrill Lynch sees oil markets oversupplied in the third quarter but supplies tightening again in the fourth quarter.

Accordingly, the analyst says, "Oil price weakness in the summer should be followed by price firmness as we head toward winter."

It cites a current overhang of surplus inventories continuing through the third quarter. "Despite the apparent complacency, therefore, in the petroleum markets and in OPEC, there is still ... a risk of weakening oil prices in the next several months.

"if weakness is to be avoided, it will be ... because of the industry's desire to hold higher than normal levels of inventories in anticipation of tightening supplies toward the end of the year.

"By then, supplies could tighten significantly, and oil prices could be pushed higher, especially if production from Kuwait and Iraq is still curtailed."

NEW WORLD ORDER?

Salomon Bros.' Bernard Picchi sees the recent overtures to western nations by Iran in its sponsorship of the recent producer-consumer conference at Isfahan, Iran (OGJ, June 3, p. 40), as a sign of growing oil market stability in the future.

"The West's experience shows that petroleum exploitation is becoming more-not less-technology intensive," he said. "Technology, more than any other factor, has brought financial health to petroleum exploration and development activities here.

"The resource nationalists never anticipated this, believing that the West's high cost reserves would eventually push the market their way if they waited long enough.

"It has now become clear, however, that Third World resource owners will be able to substantially increase their revenues only by expanding-not limiting-their production capacities. This means turning to the West for technology and markets (hence, the Iranians'...keen interest in acquiring western refining assets as well).

"Although bumps in the road are inevitable, the news from Isfahan ... is very positive for energy users. A better integrated energy world-a 'new world order' in energy implies growing production capacity and stable oil prices for the foreseeable future."

IRAQI EXPORT CAPACITY

Iraq has confirmed its crude oil exports could resume at 700,000 b/d through the pipeline link to Turkey and the Mediterranean imme-diately after the U.N. embargo is lifted. Exports could rise to 1 million b/d by yearend.

The twin pipelines through Turkey have a capacity of 1.5 million b/d.

Turkey, which earned about $250 million/year from pipeline transit fees, is also eager to see the pipeline reopened but reaffirmed it will not act independently of the U. N.

Turkish Foreign Minister Ahmet Alptemocin said during a visit to Ankara by Iraqi Deputy Prime Minister Tariq Aziz he wanted the pipeline reopened within the framework of a U.N. Security Council resolution.

However, the kind of U.N. resolution that would allow a restart of Iraqi oil exports appears no closer.

There still is disagreement over the maximum share of Iraq's revenues from resumed exports to be paid into the fund from which war reparations will be made.

U.N. Secretary General Perez de Cuellar called for a maximum of 30%, which spurred the U.S. to reaffirm its call for a 50% maximum.

Other permanent members of the Security Council-Britain, France, China, and the U.S.S.R.-are likely to back the secretary general's recommendation.

Britain and France have agreed with the U.S. in insisting that sanctions be maintained as long as Hussein remains in power and have pointed out if a new regime emerged in Baghdad there could be general agreement on a lower contribution to the reparations fund from oil revenues.

IRAQ'S SLOW PROGRESS

Repair of war damage to oil installations in Iraq is reported to be moving slowly with priority given to restoring refining capacity to meet local demand.

Iraqi Oil Minister Usama al-Hiti said recently each Iraqi refinery was damaged during the war. Capacity has been restored to about 450,000 b/d at the Daura and Baiji units.

Al-Hiti earlier this month claimed about 80% of the damage to Iraq's refineries had been repaired and said all refineries should be operating normally again by yearend. He also told OPEC News Agency repairs to damaged oil facilities, including export facilities were proceeding rapidly.

Four wells that caught fire in Luhais and South Rumaila fields were extinguished by Iraqi firefighting teams, as was a fire at a storage tank in Kirkuk field, where government troops battled insurgent Kurds.

Production facilities are said to be in relatively good condition, but the real problem involves transportation.

The first two pump stations on the IPSA pipeline to Yanbu on the Red Sea through Saudi Arabia are badly damaged, and repair work has not been able to start. All repairs must be undertaken from Iraq because foreign contractors are blocked from working there under the U.N. sanctions.

KUWAITI PRODUCTION

Production in Kuwait has resumed at about 25,000 b/d of oil from undamaged wells in Ahmadi oil field.

Production is moving through gathering centers 9 and 10, which also escaped damage during the war, then into storage at the Mina al-Ahmadi refinery.

Kuwait Petroleum Corp. said production will continue at the current level until the refinery goes back on stream in August in order to meet domestic demand for refined products.

Once the refinery is operating, oil production will climb to 120,000 b/d, about equal to domestic demand.

NEUTRAL ZONE FLOW

Production has resumed from the Neutral Zone between Saudi Arabia and Kuwait. Arabian Oil Co. (AOC), Tokyo, owned by a Japanese group and Saudi and Kuwaiti governments, has resumed production from offshore Khafji field at about 100,000 b/d.

Khafji platforms were producing about 200,000 b/d when the Iraqis invaded Kuwait Aug. 2, 1990. The offshore facilities were not damaged by the war, but operations were shut down because onshore storage, loading, and administrative facilities were damaged by Iraqi shelling.

AOC quickly repaired minor damage to its administrative offices and storage tanks but has been waiting for assurance that waters around the tanker loading facilities are free of mines.

AOC is said to be under pressure from Kuwaiti shareholders to return production to the prewar level as soon as possible to provide revenues shared equally between the two governments.

Production could later be hiked to 300,000 b/d.

TEXACO OPERATIONS

Onshore in the Neutral Zone, facilities jointly operated by Kuwait Oil Co. (KOC) and Texaco Inc.'s Getty Oil Co. unit may be at least 6 months away from resuming production, industry sources said. A few wells are still ablaze, and many others are leaking crude in fields operated by Getty and KOC-Wafra, Umm Gudair, and Fuwaris. Wafra was one of the most heavily mined areas, and clearing still has some way to go.

Getty also has to repair gathering centers and separation plants damaged by military action.

Local sources say the Texaco unit also faces transportation problems because its main outlet to the 70,000 b/d Mina Saud refinery was badly damaged.

The refinery is reported to be a virtual writeoff.

KUWAIT RESTORATION

Meantime, progress continues to be slow in restoring oil production in Kuwait.

Further, rancor continues to grow between Kuwaiti officials and the companies they hired as the front line of defense to combat hundreds of burning wild wells. The only thing certain is the lack of agreement as to how long the effort will take,

Well control specialists working in Kuwait today say it will be at least another year or more-perhaps as long as 5 years-before all wells are killed. In response to that claim, Kuwaiti Oil Minister Raschid al-Ameeri reiterated his government's contention all the well fires will be "under control" by the end of March 1992.

Complicating the effort are offers by other countries to help with the firefighting effort, which the well control companies working there now contend are futile because their own needs for equipment are not being met.

All the while, perhaps several million barrels of oil are burned each day, and environmental damage from the blazes mounts.

KUWAIT EQUIPMENT BUILDUP

The massive buildup of equipment and supplies needed to kill Kuwait's wells continues more than 3 months after most of the country's wells were torched by retreating Iraqi troops.

It remains unclear how many wells were sabotaged, with estimates of 550-750. Apparently about 600 wells were blowing wild at the end of the land war in February, and perhaps one fourth of those have been killed.

Well control specialists returning to the U.S. from Kuwait early this month said ample water is now available at wild well sites in three Kuwaiti oil and gas fields.

Workers said KOC officials managing the well control program have organized crews from each of three U.S. companies to focus on controlling higher volume wells.

Despite reports that Kuwait has hired more companies to help with well control efforts, workers returning from the scene said there are no signs that crews from other companies are in the field.

Wild Well Control Inc. (WWC), Spring, Tex., Boots & Coots Inc. (BCI). and Red Adair Co. (RAC), both of Houston, and Safety Boss Ltd. (SBL), Calgary, each have crews working in Kuwait.

Returning well control crewmen also disputed news reports that some killed wells have blown out again and that two BCI firefighters were seriously burned while trying to kill a burning well in Ahmadi field.

WELL KILL STATUS

As of early June, well control teams had killed more than 140 wells.

Some heavy equipment for the effort had arrived in Kuwait, but more was needed. In some cases, a WWC crewman said, available items were not well suited for the tasks at hand.

"We had some capping assemblies and some cranes," he said. "But if we had some lighter capping assemblies or heavier cranes, things would go more smoothly."

He attributed mismatches to the speed with which the well control campaign is accelerating.

"The Kuwaitis are gearing up so quickly, it would be a very difficult task for anyone to manage efficiently," he said. "Once this initial growth phase is over, coordination will be much more manageable."

In the meantime, he said, nothing extraordinary was needed. "It's just the same old deal-99% hard work."

WATER SUPPLY

Well control specialists said support crews had reversed flow of pipelines in Magwa, Ahmadi, and northern Burgan fields to pump water from the Persian Gulf to burning wells.

Seawater is being delivered to gathering centers through 24 in. lines used previously in production operations to move produced water from well sites. There are about 30 gathering centers in Kuwait.

From the gathering centers, seawater is being pumped through 6 in, flow lines to strategically placed 500,000 gal storage pits.

Workers said the size of available lines had caused some problems. At wells where conditions required large volumes of water to control blowouts, crews had risked running out of water.

Presently, support crews are installing 500,000 gal pits in pairs. Plans call for digging 1 million gal water pits to cut preparation time and speed well control operations.

KUWAITI STRATEGY

In recent weeks, KOC managers have focused crews on high volume, hard to control wells in addition to wells controlled with relatively quick, simple techniques, returning workers said.

But officials reportedly are having to adapt long range strategy to deal with daily priorities.

In one instance, support crews had to build road detours around stretches of two highways threatened by fire where limited visibility had caused a series of collisions. However, the detours caused problems because they were not well suited for transporting heavy equipment.

WWC, RAC, and BCI each has a big well team "trying to take out some of the big smokers with huge ground fires that are more problem-atic to deal with," a crewman said. SBI crews mainly are working smaller blowouts, he said.

Among the larger oil wells capped were some blowing as much as 40,000 b/d of crude.

Well control crewmen said coke residue accumulating around burning oil wells is causing a big problem.

"It's just like cement, and it builds up domes like small volcanoes around the wellheads," one worker said. "We've used explosives to fracture the stuff so we can peel it out of the way with bulldozers and backhoes."

WELL CONTROL COMPETITION

A BCI official said KOC will begin restricting visitors to the firefighting operations, which have numbered in the hundreds.

"We've got enough problems without having to worry about other people coming around," he said. "It's very easy to get hurt, not by the wells but by land mines and unexploded bombs."

A WWC crewman said some of the visitors had said they expected to sign well control contracts. But as of early June, no other well control teams had joined the effort.

KOC recently announced crews from the U.S.S.R., England, France, Romania, and China could begin arriving in 2-3 months, possibly to work on blowouts in northern Kuwait.

Several well control companies working in Kuwait have said KOC is under intense political pressure to bring in teams from countries outside North America to help fight Kuwait's well fires.

Whether KOC could support more firefighting crews remains to be seen.

"If KOC's going to supply their equipment, they've got to take care of u s first, " a BC 1 official said. "We got a second bulldozer just before I left. Normally, when we do a fire, we have five or six."

Even with adequate support from KOC, crewmen who have been battling blowouts in Kuwait the past 3 months question whether companies from other countries could do the work.

"I find it hard to believe these foreign companies have the experience they will need," one firefighter said. "In the past 30 or 40 years, someone from the U.S. has always taken care of these jobs. Now all of a sudden-overnight-all of these countries have firefighting companies."

WELL DAMAGE PROBLEMS

An SBI official said severity of damage to sabotaged Kuwaiti wells is making removal of debris and demolished wellheads the biggest problem facing SBI teams.

"We have found split flanges and various wellhead components that have been severely warped by the force of the explosions," he said. "Eighty to ninety percent of the problems we've encountered are not commonly associated with well control or fighting well fires. Each site potentially presents unique problems. Iraqis who planted explosive charges on these wells knew what they were doing."

To douse most of the well fires in its sector, SBI has relied on a dry siliconized powder, chemically similar to baking soda. When propelled by nitrogen at 200 lb/sec through high pressure nozzles, the dry chemical behaves like a liquid.

On some wells, SBI pumps fluid containing packing material through a tapered stinger into the tubing and annulus (OGJ, May 13, p. 34). But water is used in most cases to cool the ground, equip-ment, and people near burning blowouts.

"If a large well is on fire, temperatures in the vicinity of the wellhead can reach 800 1,200 F.," a spokesman said. "Anything in the area is at tremendous risk unless it's constantly doused with water. Sometimes the heat is so intense we have to constantly spray our people with water to keep body temperatures at a level where they can survive."

SBI hasn't used explosives to extinguish well fires in Kuwait.

"Based on working conditions we've experienced in Canada, we felt more comfortable going with dry chemicals and have stayed with that strategy," an official said.

SBI OPERATIONS

SBI teams are working in Greater Burgan field westnorthwest of the town of Ahmadi.

Company teams first were assigned to control wells easiest to deal with. More recently its teams have begun killing harder to control wells in the eastern part of the field.

"The strategy at the moment is to move along the upwind side of wells burning in Greater Burgan field so our crews are not in as much risk of being trapped in very dense clouds of smoke while they work," an SBI spokesman said.

Two SBI teams left Calgary for Kuwait early in April. A third nine man team was expected to go to Kuwait before the end of June and a fourth by summer's end.

Each SBI team consists of one leader, four blowout specialists, two hydrogen sulfide specialists, one medic, and one reservoir engineer. About 100 workers are supporting SBI teams in Kuwait.

The company is limited to two teams in Kuwait because that is all KOC can support with adequate water, heavy equipment, and cranes.

WILD WELL PROGRESS

RAC founder Paul (Red) Adair complained at a Senate hearing about the lack of government support his crews are getting in Kuwait.

He said speculation the fires will be killed in 4-5 months is "a bunch of malarkey.

"At the rate we're going, we'll be lucky if we get through in the next 4-5 years. We could cut that in half if we had proper equipment and (enough) water."

Although 157 of about 600 burning oil wells-by Adair's count-have been killed, with as many as three kills/day, he stressed those were the easiest projects.

"The biggest problem will be about 158 high pressure wells in Burgan field. The real hard work hasn't started."

Adiar said the top worry later will be oil fields in which well sites must be cleared of mines first, especially if the mines are covered by several feet of oil. "We hear about the minefields, but nobody knows where they are."

On the positive side, Adair said, wellfighters do not have to spend time clearing collapsed drilling rigs from the sites, which normally takes much of the time in killing a wild well.

He also complained about equipment shortages and management of the well control effort and said he has been unsuccessful in getting Kuwait to have a team of burn doctors on standby.

Adair said firefighters still don't have enough water to fight well fires and what is on hand is salt water, which causes corrosion problems.

He said a major oil company would place a single executive in charge who would provide the needed equipment immediately and worry about the cost later. However, Kuwaitis respond slowly and are prone to seek bids for the lowest price on equipment.

REILLY'S TOUR

U.S. Environmental Protection Agency Administrator William Reilly said Kuwait is making good progress in fighting oil contamination.

Reilly earlier this month toured Burgan and Ahmadi oil fields, where firefighters told him 136 wild wells have been killed.

In addition, cleanup crews have collected or contained about 3 million bbl of crude oil that Iraqi troops released into the Persian Gulf during February.

Reilly also said the Kuwaiti oil field fires are not creating the severe health risks originally feared. There is a high level of particulates, but levels of sulfur and heavy metals in the air are not abnormally high.

"If hell had a national park, it would be those oil fires," Reilly said.

Meanwhile, the National Science Foundation has launched a study on how pollution from the burning wells may affect regional weather and climate.

The airborne study will determine whether the smoke will alter air and surface temperatures, conceivably over long distances, and change precipitation patterns. The $2.3 million study is being underwritten by the National Geographic Society and Chevron Corp.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.