OGJ NEWSLETTER

Will the U.S. gas bubble linger still another year?

Feb. 4, 1991

7 min read

Will the U.S. gas bubble linger still another year?

Kidder, Peabody has slashed its gas composite spot price forecast for 1991 to $1.65/Mcf from $1.92/Mcf, citing warmer than normal weather for most of the U.S. and greater than normal volumes of gas in storage. The average U.S. spot price of about $1.75/Mcf in January was 650 less than a year ago. The analyst's forecast of $2.05/Mcf in 1992 still stands--assuming normal weather. PaineWebber, also projecting another year for the bubble, is cutting its U.S. active rig forecast by 50 to 1,100 in 1991 and by 100 to 1,200 in 1992. However, PaineWebber sees a short Persian Gulf war followed by a temporary oil price collapse to $10-15/bbl, then by continued declines in U.S. and Soviet oil output and a Saudi led OPEC rally pushing oil to the low $20s.

Meantime, oil markets are so bloated with crude stocks that even history's biggest oil spill in the Persian Gulf and expansion of the war into a limited ground phase has caused scarcely a ripple in oil prices (see story, p. 12). Brent for 15 day delivery slipped about $1 on the week to about $20/bbl before closing Jan. 31 at $21.05/bbl on news of Iraq's attack on Ras al Khafji in the Saudi sector of the Neutral Zone and word U.S. DOE will halve its planned SPR stockdraw. Nymex crude fluttered around $20-22/bbl most of the week. Rotterdam premium gasoline was down about $10 to close Jan. 31 at $235/metric ton. Gas oil fell the same amount to $240/bbl in the period.

Venezuela is slashing crude and products prices to stay competitive. Pdvsa has lopped $6.50 from its light crude price, $5 for medium gravity crudes, and $4 for heavy crudes.

Venezuela's average crude price last week was about $15/bbl. Pdvsa cut the price of unleaded gasoline for export $7.50 to $24/bbl and aviation fuel $10.50 to $28.50/bbl.

U.K. military sources claim allied bombardment of Iraq's refineries has knocked out 75% of its processing capacity.

Iraq is reported to have suspended public fuel supplies in an attempt to conserve stocks for military use. The large refineries at Basra and Baiji have been heavily bombed.

The war spurs a spate of energy bills in Congress.

Sen. Richard Bryan (D-Nev.) has refiled his bill requiring greater fuel efficiency from new autos. The measure, with 34 cosponsors, is similar to a Bryan bill that had support of 57 senators in the last Congress. It would require a 20% improvement in automakers' average passenger car fuel efficiency by model year 1996 and 40% by 2001. The Motor Vehicle Manufacturers Association says the standards "are unachievable with any known technology." Coalition for Vehicle Choice says they would result in smaller, lighter cars that are more dangerous.

Sens. Howard Metzenbaum (D-Ohio) and Joseph Lieberman (D-Conn.) plan to introduce a "windfall profits" tax bill as response to high Oil industry fourth quarter profits.

PMAA will seek primarily state level legislation requiring refiners to be divorced from retail activities.

PMAA also will lobby Congress to pass federal legislation banning refiners from selling motor fuels to wholesale customers at a price greater than their retail price--minus their cost of doing business--in the same market. Another goal is federal legislation to prevent resale price maintenance by refiners.

Sen. Bennett Johnston (D-La.), energy committee chairman, refiled a bill to establish a variable fee on crude imports. It would be phased in whenever internationally traded oil drops below $20/bbl or products below $22.50/bbl.

Oklahoma Republican Sen. Don Nickles filed a similar import fee bill creating a $25/bbl floor price.

Alaska Republican Sens. Ted Stevens and Frank Murkowski refiled their bill calling for oil leasing on the Arctic National Wildlife Refuge Coastal Plain.

However, the war offers little change in the status of U.S. OCS access. U.S. Supreme Court has declined to hear a case challenging a local California rule requiring voter approval for construction of onshore facilities to support offshore drilling. An appeals court said industry's challenge to the law was moot in the case before it, Western States Petroleum Association vs. Sonoma County. Other municipalities along California's coast have enacted similar ordinances.

Is the Destin Dome area of the Gulf of Mexico finally living up to expectations? Chevron 2 Destin Dome 56 flowed dry gas at rates of as much as 22 Mmcfd from Jurassic Norphlet, capping a 3 year search in the area. Chevron and Conoco each holds 33.33% in the well, with Odeco and Murphy each holding 16.67%.

The war may force Ottawa to postpone plans to begin selling Petro-Canada. The government had planned to sell 15% of the company early this year but Energy Minister Jake Epp said the timing is being reexamined. Government sources cite market uncertainty and concern over the prospect of selling the state owned company at a time when Canadians are concerned about security of oil supplies. Ottawa is working on a plan to cut oil demand of 1.6 million b/d by 115,000 b/d under the IEA accord.

DOE, U.S. oil companies, and the Soviet Bureau of Fuels and Energy Complex plan meetings on energy cooperation Feb. 13-17 at DOE's Morgantown, W.Va., and Pittsburgh, Pa., energy technology centers. The Soviets have proposed about 50 projects in which they want U.S. participation. Notice of the meeting was issued in the Jan. 17 Federal Register.

More Soviet E&P joint ventures are on tap.

Officials of the Soviet Ministry of Geology, Ministry of Oil and Gas, and Turkmen S.S.R. together with Wavetech Geophysical Inc., Denver, last week announced the first of several planned competitive oil and gas lease sales in the U.S.S.R. The Turkmen republic plans a sealed bid auction Sept. 25, 1991, covering 1,000 sq km tracts in the West Turkmen sector of South Caspian basin and Yashlar sector of Amu-Daria basin. Tracts in Turkmenia's Badkhyz and Tedzhen basins will be offered in December.

Earlier, Laboratory of Regional Geodynamics (Large), the first privately owned Soviet geological/geophysical company, joined with GTS Corp., Houston, to offer nonexclusive seismic databases to non-Soviet oil and gas companies. Since 1988, Large's Soviet flagged seismic vessel Mezen has collected regional data in the Laptev Sea, East Siberian Sea, Kara Sea, and Lena Trough off Norway. The companies are offering the information through the joint venture Large International, Houston.

Cuban E&D and refinery construction plans are likely to suffer this year because of the U.S.S.R. cutting its technical contingent there to about 1,000 from about 3,000.

Moscow will slash subsidies to Cuba in 1991 and require Havana to pay in hard currency for reduced imports of Soviet oil.

Treuhandanstalt, the holding company for former East German state assets, has offered the remaining 55% interest in Verbundnetz Gas AG, the East German gas distribution company, to six investors. Wintershall was offered 15% and Gasprom, its Soviet partner in a gas supply agreement, 5%. Offers of 5% have gone to British Gas, Elf Aquitaine, Statoil, and the east German gas company Erdgas. The remaining 15% has been offered to local communities in eastern Germany. Last year Ruhrgas bought a 35% stake in VNG, and Shell-Esso unit BEB acquired 10%.

All the companies seeking stakes in VNG had applied for substantially larger holdings. Gaz de France was offered nothing. Treuhandanstalt says negotiations began Jan. 16 and it hopes a deal will be signed by end of February.

Speculation the U.S. will lift its trade embargo on Viet Nam in February or March has spurred four Japanese companies to rush into possible exploration deals there. Teikoku Oil, Showa Shell Sekiyu, Idemitsu, and Japex are negotiating exploration concessions off Viet Nam, reports Kyodo News Service. Showa Shell is interested in two Gulf of Tonkin blocks, and the other companies are eyeing acreage off Ho Chi Minh City.

Mitsubishi and Nissho Iwai are also said to be sounding out deals. Japan National Oil Corp. is expected to provide loans for Japanese oil companies working in Viet Nam.