OGJ NEWSLETTER

Oil companies must brace for a public relations hammering as they report sharply higher earnings in the weeks to come.

Charges of war profiteering and price gouging are being leveled at oil companies by politicians and consumer groups as talk grows in Washington of reviving the dreaded "windfall profits" tax. U.S. refiner/marketers did not help their cause by imposing products price freezes at the outbreak of war in the Persian Gulf--believing as everyone else did that crude prices would shoot up--only to have crude and products futures prices plummet in short order when fears of a major oil supply disruption evaporated. Some companies quickly cut wholesale and retail prices, lifted freezes, or rescinded price hikes, but not before the industry's image was hurt more. The irony is that a surge in upstream profits in 1990 might well be offset-by a plunge in upstream profits in 1991, as markets face an increasing prospect of a price collapse in a glutted market (see story, p. 21). Should oil prices drop and product prices rise--stemming from tighter refining capacity caused by tougher air quality rules--oil companies will again have to grapple with those questions from an increasingly skeptical public.

Salomon Bros. puts fourth quarter 1990 earnings for a group of the biggest international majors up 63% from fourth quarter 1989 and for a group of big U.S. majors up 68%. Those jumps are paced by big upstream gains, but downstream profits rose slightly from the third quarter because of relative stability in crude prices during much of the period, Salomon said.

Here's a rundown of some U.S. oil company profits, with fourth quarter followed by annual results, 1990 in boldface vs. 1989, in millions of dollars and losses in italics: LL&E 27/54 vs. 10.2/44.1, Exxon 1,555/5,010 vs. 1,285/4,655, Chevron 633/2,157 vs. (833)/251, Valero 33.3/94.7 vs. 7.2/41.5, Equity Oil 1.5/2.1 vs. 0.5/1.6, Diamond Shamrock 7.7/77.5 vs. 8.2/60.1, Texaco 388/1,450 vs. 287/2,413, Ashland first quarter fiscal 1991 (11) vs. 22, Santa Fe Energy 12.5/17 vs. 0.6/25.3, Total North America 0.3/42 vs. 9.6/48.2, Mobil 651/1,928 vs. 447/1,809, Amoco 538/1,913 vs. 319/1,610, Global Marine (3)/(15) vs. (36)/(61), and Rowan 2.9/1.9 vs. (16)/(37).

DOE Sec. Watkins hopes President Bush will approve a National Energy Strategy next week. Watkins told National Petroleum Council if Bush can find time to make a few more NES decisions, the document can go to Capitol Hill along with DOE's fiscal 1992 budget Feb. 4-5. He added, "There are many items in our particular budget this year that have close linkage to the NES."

It doesn't look likely the U.S. gas bubble's long awaited demise will speed any this year. Disappointing gas prices of late and higher than expected oil prices have sparked a reversal in 1990's trend toward drilling for gas in the U.S. In the latest Baker Hughes tally of U.S. active rigs, oil rigs outnumber gas rigs 631 to 410. Before Iraq's invasion of Kuwait, the tally was usually evenly split, with gas rigs sometimes gaining the lead.

Jofree Corp. sees U.S. gas prices rising by only 1% in 1991 to an average $1.62/MMBTU, peaking at $2.15-2.25/MMBTU in the 1991-92 winter.

Jofree sees U.S. gas demand in 1991 rising only 100 bcf to 18.7 tcf in 1991 as demand for all other energy sources falls. With 1991 oil prices likely averaging about $20/bbl--possibly dropping into the teens if the Mideast crisis is resolved without further loss of productive capacity, Jofree says, expect only a slight increase in drilling spurred by tax credits for unconventional gas wells. Jofree estimates the U.S. rig count will rise to an average 120-1,130 units this year vs. 1,010 in 1990.

TransCanada's Western Gas Marketing says producers supplying 13-14% of the 19 tcf of gas it has under contract won't renew contracts expiring in 1994. About 170 of 2,500 contracts Western holds will be affected by producer decisions not to renew at the end of term. Companies that have indicated they will opt out of Western contracts have the option of marketing the gas themselves, using another marketer, or renewing with Western.

Mexico's drilling activity will jump 507, in 1991 as that country struggles to maintain crude export levels and meet domestic demand. Pemex has reached the end of its stocks of oil country tubular goods and will step up its OCTG purchases. Pemex plans to drill 120 wells this year vs. 80 forecast in 1990.

The International Petroleum Exchange still wants to launch a naphtha futures contract but has deferred its scheduled Jan. 31 start-up indefinitely pending further review of the Persian Gulf situation.

The Soviet military's bloody crackdown in restive republics has yet to disrupt foreign business sorties into that country. U.S. Eximbank has opened its guarantee and insurance programs to cover U.S. exports to the U.S.S.R.

President Bush made the action possible by recently waiving the Jackson-Vanik Amendment to the 1974 Trade Act, which has banned Eximbank financing for the U.S.S.R. since January 1975. Eximbank is limited to $300 million in total authorizations for Soviet projects and will limit financing for any project under its programs to about $50 million.

Repsol signed an exploration and development accord with the Soviet Ministry of Geology covering E&D in two undisclosed areas in the Turkman Soviet Socialist Republic.

Repsol will manage operations and split production with the Soviet Ministry. Separately, Repsol signed an agreement with the U.S.S.R. setting guidelines for future collaboration in oil marketing and petrochemical projects. The Spanish company also plans to open an office in Moscow.

Spain has agreed in principle to buy 70-140 bcf/year of Soviet gas beginning in 1994-95.

Details of the final contract are to be worked out by state owned Enagas and Sojuzgasexport. The move is part of Spain's plans to diversify its gas supply sources, now limited to Algeria and Libya. Supplies from these two countries represent about 80% of consumption with the remainder coming from domestic production. If negotiations are successful, Soviet supplies would account for at least 30-31% of projected Spanish gas demand of about 225-230 bcf/year in 1994. Spain earlier signed with Norway a 20 year contract covering supply of 35 bcf/year of gas from Troll and Sleipner fields in the North Sea starting in 1993.

Britain could become a net importer of crude in the second quarter because of extensive field shutdowns in the North Sea. Production will fall sharply while operators complete installation of emergency shutdown valves and subsea isolation valves. County Natwest Woodmac estimates average North Sea production in the first half will fall to about 1.6 million b/d from the depressed 1990 average of 1.83 million b/d. Production will rise to 2 million b/d in the second half, when no major field shutdowns are planned. In the second quarter, U.K. production is likely to fall below 1.5 million b/d, with consumption averaging about 1.7 million b/d.

Operators were to have completed ESV installation by yearend 1990, but many of the projects were delayed by strikes among contracting personnel in the summer. The U.K. DOE has approved new schedules for the work, most of which will be complete by the end of June. However, on platforms where ESVs are not fully operational, DOE has insisted on reduced pipeline operating pressures, a switch from live crude to dead crude operations, and introduction of new operating procedures.

County Natwest says new ESV deadlines are unlikely to be relaxed despite implications for overall oil production because the government is taking a tough line on offshore safety in the wake of the Cullen report into the Piper Alpha disaster.

Britain's first frontier license round attracted 13 applications from 37 companies. Applications cover six of the 11 clusters of blocks on offer in the Atlantic west of the Shetlands. Successful bidders will be announced in the spring.

One notable omission is BP, which noted it already has the biggest portfolio west of the Shetlands.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.