OGJ Newsletter

Due to a holiday in the U.S., data for this week's Industry Scoreboard are not available. As concerns mount over world oil supplies, access to resources, and markets, Japan has suffered another offshore oil spill-the worst in its history, officials are saying. The spill comes as Japan seeks to toughen regulations governing oil tankers after the Russian tanker Nakhodka broke apart in a storm early in January spilling almost 30,000 bbl of heavy fuel oil, according to estimates (OGJ, Apr. 21,

July 7, 1997

9 min read

Due to a holiday in the U.S., data for this week's Industry Scoreboard are not available.

As concerns mount over world oil supplies, access to resources, and markets, Japan has suffered another offshore oil spill-the worst in its history, officials are saying.

The spill comes as Japan seeks to toughen regulations governing oil tankers after the Russian tanker Nakhodka broke apart in a storm early in January spilling almost 30,000 bbl of heavy fuel oil, according to estimates (OGJ, Apr. 21, 1997, Newsletter).

In the latest incident July 2, the 259,999-dwt, Panamanian-registered, Diamond Grace supertanker hit the Nakanose reef in Tokyo Bay off Yokohama, spilling about 100,000 bbl of crude oil from two ruptured holds.

The reef, at a subsea depth of 37 ft, is one of the most well-known undersea hazards in Tokyo Bay.

The single-hull tanker, chartered by Mitsubishi Oil and operated by Nihon Yusen KK, was carrying more than 1.9 million bbl of oil from the U.A.E. and was bound for a Kawasaki refinery.

At OGJ presstime, the tanker was moving under its own power toward berth at Kawasaki.

Officials thought one storage tank had stopped leaking, but there was no confirmation on the other's status.

IEA's chief "regrets" a decision by the U.S. House appropriations committee to sell $209 million of U.S. oil from the Strategic Petroleum Reserve in fiscal 1998.

"Earlier, U.S. government stocks were over 90 days," said Robert Priddle, IEA director. "Now we calculate they are under 70 days. That's quite a drop."

SPR stocks totaled about 67 days supply early in May (OGJ, May 5, 1997, p. 62).

The House committee measure was contained in a broader $13 billion energy lands/programs spending bill. But Republican members of the House commerce committee-which authorizes SPR sales-plan to introduce an amendment on the House floor to delete the sale from the bill.

Paris-based IEA, formed in 1974 after the Arab oil embargo spiked oil prices, oversees an emergency plan to insulate 24 member countries-including the U.S.-from oil supply crises. IEA members maintain emergency oil stocks equal to 90 days of net oil imports.

Oil companies may have to live with the effects of unilateral economic sanctions and adapt their operating strategies accordingly.

That was one conclusion at a recent oil and gas investment symposium in Paris sponsored by the Franco-Arab Chamber of Commerce and the Arab Petroleum Research Center.

Speakers said companies must try to foresee what countries will be targets of sanctions, seen by some countries as tools to achieve their political agendas (OGJ, May 5, 1997, p. 37).

It was noted that recent high foreign investment in Venezuela's marginal/inactive fields round could stem from an inability to do business with countries that have U.S. sanctions imposed on them, such as Iran and Libya and most recently, Myanmar.

Iraq is ready to resume oil sales once officials submit an aid-distribution plan to the U.N. for Security Council approval.

The council earlier approved a new 6-month oil-for-aid program for Iraq, allowing it to sell $2 billion in oil during the period.

Scheduled June 8 resumption of sales has been delayed pending Iraq's aid-distribution filing.

"People are yawning and reading newspapers at our oil exporting organizations," said Abdul Amir al-Anbari, the Iraqi envoy who negotiated the initial oil-for-aid deal last December. "We'd very much like to become an important player on oil markets again." Iraqi officials have indicated shipments might resume late in July or early in August.

OPEC has lost whatever control it once had exerted on world oil markets, says Erwin Arrieta, Venezuela's energy and mines minister, whose country came under fire at the June 25 OPEC meeting in Vienna.

Commenting on the meeting where ministers agreed to adhere to the current 25.033 million b/d production quota for another 6 months (OGJ, June 30, 1997, Newsletter), Arrieta says OPEC is ignoring key market signals.

Arrieta says Venezuela believes crude sales should be tied directly to generation of earnings from market share or to higher oil prices.

The minister denies criticism that Venezuela's decision to open its doors to private investment is turning Venezuela into a violator of OPEC's quota system (see related story, p. 28).

"Those who accuse us are making their calculations based on figures that we are looking at for the year 2006. If we had those figures today, we would be violators; also, prices would fall drastically," Arrieta said.

Venezuela has embraced private, mostly foreign investment in its state oil industry in an effort to increase oil production capacity to about 6.6 million b/d by 2006, almost double current levels.

Meanwhile, the Petrozuata extra-heavy oil JV of Conoco and Pdvsa's Maraven unit has closed financing for the $2.2 billion upgrading project planned in the Orinoco heavy oil belt.

In what's being called "an excellent benchmark" for future project financings of this type-and the largest single financing package for any project in Latin America to date-Petrozuata obtained $1.45 billion in project financing, including a $1 billion bond issue led by Credit Suisse First Boston and Citicorp Securities. The package includes $1 billion in bonds and a $450 million bank loan facility to be drawn down during the construction phase.

The deal-the largest project financing ever for Conoco-was completed in about 6 months vs. 12-18 months generally and was oversubscribed to the tune of $9 billion by interested potential sponsors.

Drilling of the first of 500 horizontal wells is scheduled to begin in August, ultimately leading to production of 120,000 b/d of 9? gravity oil during the 35-year project. Oil will be shipped from the field area, south of Pariaguan in Anzoategui state, to Jose via a planned 200-km pipeline.

Blended first oil is slated in August 1998, and a heavy oil upgrader at the Jose industrial complex on the northern coast will be completed in 2001. It will produce about 102,000 b/d of oil upgraded to 20? gravity.

Petrozuata has awarded a $500 million lump-sum engineering, procurement, and construction contract to the Contrina JV for design and construction of the processing, utility, and offsite facilities for the Jose complex.

Contrina consists of Halliburton unit Brown & Root, Parsons Process Group, France's Technip, and Proyecta and Dit-Harris, both Caracas-based.

From Jose, 63,000 b/d will be shipped to Conoco's Lake Charles, La., refinery, and Maraven will buy 39,000 b/d from Conoco for processing at its Cardon refinery.

Separately, Maraven is reported to be talking with Coastal about a similar project at a cost of about $1.9 billion.

Nine-degree gravity oil would be produced and upgraded to 14-16? gravity. Oil would be shipped to Coastal's Corpus Christi, Tex., refinery for further reprocessing. Maraven is reported to be considering the possibility of securing a stake in the Coastal complex, as well.

Moody's Investors Service and Standard & Poor's have issued downgrades or credit watch notices on Chesapeake Energy's credit and senior unsecured debt ratings.

Oklahoma City-based Chesapeake has been a major player in the Louisiana portion of the Austin chalk trend (OGJ, Dec. 23, 1996, p. 21). Moody's cut the senior unsecured debt rating to Ba3 from Ba2 and says additional downgrades are possible; S&P placed Chesapeake's double B credit rating and senior unsecured debt rating on CreditWatch with negative implications.

Actions stem from disclosure by Chesapeake that it will refocus its drilling program in the trend due to poor results outside the Masters Creek field area and that it expects a full-cost accounting ceiling writedown of about $150-200 million (pretax) as of June 30, 1997.

Chesapeake cut its capital spending budgets for 1998 and 1999 to about $275-300 million/year from previously forecast amounts of $400-425 million/year and plans to focus principally on development in the Masters Creek field area. The company says reduced spending will result in reduced production growth in 1998-99.

After board of directors' review, Pennzoil is telling its shareholders to reject Union Pacific Resources' $4.2 billion tender offer (OGJ, June 30, 1997, p. 30). Pennzoil says the UPR offer "does not reflect the inherent value of Pennzoil," and is "inadequate."

More Canadian gas may be finding its way to markets in Canada and the U.S.

Calgary's IPL Energy says it will build a $650 million (Canadian) natural gas pipeline from a Chicago hub to markets in eastern Canada and the Northeast U.S.

The proposed 1 bcfd line, known as Vector, would be allied with the proposed Alliance pipeline from Northeast British Columbia to the Chicago market. IPL has a 10% interest in the Alliance pipeline group but wants to increase its stake.

Vector plans an open season for shipping commitments this month.

Proposed toll rate is 24? (Canadian)/MMBTU.

Scheduled for completion in November 1999, Vector would compete with the Nexus line proposed by TransCanada PipeLines, Calgary.

Meantime, Houston's Tatham Offshore has unveiled a $3.5 billion (Canadian) proposal to ship natural gas from the Grand Banks off Newfoundland to Sable Island off Nova Scotia by subsea pipeline.

The proposed line would pick up additional gas at Sable Island and move it directly to markets in New England. Tatham is considering filing its proposal with the National Energy Board (NEB).

NEB is currently considering competing proposals to ship gas from Sable Island to shore and via onshore pipelines to the Maritime provinces and/or Quebec to New England markets (OGJ, June 23, 1997, Newsletter).

Privatization of state oil companies continues.

A holding company is being created by the Pakistan Ministry of Petroleum and Natural Resources.

The holding company, a financial concern, will use its capital to acquire about 51% interest in privatized organizations currently under ministry control.

Initially, Sui Southern Gas, Sui Northern Gas Pipeline, and Oil & Gas Development Corp. would make up part of the holding company.