OGJ NEWSLETTER

There are mixed signals on potential for fuel supply disruptions in the U.S. this winter.

Generally, the outlook is for adequate supplies of natural gas and refined products (see related story, p. 21). However, there remains the possibility of supply disruptions in certain sectors of the petroleum industry.

U.S. Gulf Coast propane supplies are headed for a record low this winter, says Purvin & Gertz, Houston. With supplies now more than 9 million bbl below October 1993 levels, 7-10 days of severe cold weather in the gulf and/or southeastern states could trigger a supply shortfall, P&G warns. In that case, the analyst sees Mont Belvieu spot propane approaching 40/gal in January-February with the possibility of severe price spikes such as occurred in early 1993, when propane jumped to more than 70/gal. Factors in the supply shortfall include high prices in Northwest Europe and Japan that will curb waterborne imports into the U.S., high ethylene and propylene prices that have prompted gulf petrochemical operators to consume more than normal propane as olefins feedstock, and high levels of unfractionated propane at Mont Belvieu as a result of idle equipment. In addition, Dixie and Texas Eastern pipelines are already on allocation and cannot move additional shipments from the Midcontinent.

The U.S. could face a major disruption of imported oil supplies into the U.S. if the Coast Guard does not defer implementation of its rules requiring tankers to have certificates of financial responsibility (COFR). That's the warning Intertanko Chairman Miles Kulukundis gave in a letter to U.S. Transportation Sec. Federico Pena. The Coast Guard has a deadline of Dec. 28 for all vessels trading to the U.S. to have a COFR guaranteeing financial responsibility in the event of an oil spill. The vast majority of tanker owners trading to the U.S. do not have such guarantee schemes in place yet - and many won't be able to afford them and with voyage times of 40 days from the Persian Gulf, the effective deadline is at hand now, Kulukundis notes. COFRs are part of the mandate created by the Oil Pollution Act (OPA) of 1990, passed in the wake of the Exxon Valdez oil spill in Prince William Sound off Alaska.

In another example of OPA disrupting U.S. oil supplies, several days of high winds in Prince William Sound forced a halt to tanker loadings and cut throughput to 300,000 b/d in the Trans-Alaska Pipeline System (TAPS) late last month. Under a Coast Guard rule effective Nov. 17 and issued in accordance with OPA, the Valdez Narrows is closed to large tankers when winds exceed 30 knots. Last week, TAPS flow was returning to its normal 1.65 million b/d level after the high winds eased.

Alyeska, TAPS operator, plans the first closure of a pump station on the pipeline since start-up in 1977, citing declining Alaskan North Slope oil production. As part of a cost-cutting drive, Alyeska will shut down Pump Station 7 near Fairbanks and close a topping plant at Pump Station 8 by March. The company predicts North Slope oil production will fall to 1.53 million b/d in 1995 and only six of the 10 main line pump stations will still be needed by 2000.

Watch for Greenpeace to intervene in at least two regulatory hearings involving Canadian gas exports to the U.S. (see related story, p. 24).

The militant environmental group plans to oppose a transmission pipeline in the Grizzly area of British Columbia proposed by Westcoast Gas Ltd., Vancouver, before Canada's National Energy Board in February. It also will try to throw a roadblock in the way of an 880,000 kw gas fired cogeneration plant KVA Resources Inc., Spokane, has proposed at Creston, Wash. KVA's project will be the subject of a hearing in Washington state.

Canadian oil and gas producers are close to a deal with Ottawa on a voluntary pollution reduction program. Canadian Association of Petroleum Producers (CAPP), which represents 95% of Canadian operators, will agree to have members report emissions on a regular basis and demonstrate their ability to show improvements. CAPP Pres. Gerry Protti says the best way to avoid intrusive regulations or taxes is to demonstrate some leadership. Federal Minister of Natural Resources Anne McLellan expects completion of a memorandum of understanding within 2 weeks. Canada wants to cut emissions of so-called greenhouse gases to 1990 levels by 2000.

Canadian oilsands action continues to be strong.

Suncor will spend $100 million (Canadian) the next 5 years to develop a new oilsands mining site in northern Alberta. That's in addition to the previously disclosed plans to spend $250 million to expand production at Suncor's Fort McMurray site (OGJ, Nov. 21, Newsletter). Suncor notes conversion from bucket-wheel to shovel operation and use of 240 metric ton trucks have helped cut recovery costs at its Fort McMurray, Alta., site. Suncor expansion plans are based on efficiencies that have cut its costs to $10 (U.S.)/bbl and made synthetic crude competitive with conventional crude.

Syncrude has opened a new $8 million (Canadian) oilsands research center at Edmonton, Alta., to support its drive to improve technology and expand production of crude oil from oilsands. Syncrude notes that a federal task force on Canadian oilsands in early 1995 will release a report recommending further development. It expects oilsands to provide about 50% of Canada's crude oil production within the next 15 years.

The offshore drilling industry is poised for recovery, with utilization and day rates spiking before the end of the decade.

So says Salomon Bros. in a new study. The analyst contends that while the fleet attrition rate will slow to 1-2%/year the next few years, utilization will continue to climb. Fleet utilization has risen to 81% this year from a modern low of 60% in 1987. Salomon Bros. notes a continuing trend of consolidation, with a recent flurry of mergers and acquisitions, and emergence of profitable niche markets, notably deepwater and harsh environment drilling and floating production systems. The analyst predicts utilization will rise to 84% in 1995 as improving oil and gas market fundamentals underpin continued strength in the Gulf of Mexico, recovery in the North Sea, increased action off West Africa, and firming demand in the Asia-Pacific region in 1995 that will accelerate in 1996.

After 1995, continued strength in market fundamentals will spur the rig fleet to approach full utilization by 1998, Salomon Bros. predicts. It sees rig demand growing 3%/year and supply declining 1-2%/year, with utilization topping 90% in 1997 and corresponding upward pressure on day rates. By 1998, day rates for most classes of rigs will have doubled from current levels as the fleet approaches full utilization.

A decision by Norwegian voters to reject European Union membership is viewed by Oslo and gas producers as a missed opportunity to promote gas supplies to Europe from within the market. Statoil does not expect the "no" vote to have any effect on gas markets and Norway's position as a major supplier.

However, Oslo and Statoil favored EU membership so Norway could take part in discussions on Europe's energy framework. Statoil says a particular concern is long term competitiveness of gas in comparison with other fuels, especially since some EU members are keen to utilize their own coal reserves. Norway reportedly voted 52.2% against EU membership and 47.8% in favor, the second time Norwegians have rejected EU entry in a referendum. Now Norway is the only Scandinavian country outside the EU.

Sweden's Scanraff has inaugurated a $40 million diesel/fuel oil unit at its 200,000 b/d Lysekil refinery to produce fuels in line with Europe's toughest sulfur content legislation. The unit can yield about 43,100 b/d of diesel fuel with a maximum sulfur content of 0.001%. Scanraff, owned 78.5% by OK Petroleum and 21.5% by Norsk Hydro, will sell output from the new unit through OK and Texaco gasoline stations throughout Sweden. Stockholm is successfully implementing a policy of taxing fuels with higher sulfur content out of the market. This approach has already worked with leaded gasoline, which is no longer sold in Sweden.

The methanol building boom continues apace. Saudi Basic Industries Corp. (Sabic) plans to build an 850,000 ton/year methanol plant at its Al-jubail site on Saudi Arabia's Persian Gulf coast. First production is slated for 1997 and will bring Sabic's total methanol capacity to 3.2 million tons/year.

The company sees worldwide demand for methanol rising, with increasing requirement as a feedstock for gasoline octane enhancer methyl tertiary butyl ether (MTBE), which Sabic recently described as the world's fastest growing chemical, driven by government crackdowns on leaded fuels (OGJ, Nov. 28, p. 30).

"World methanol demand is rising by about 6%/year," said Sabic Vice Chairman and Managing Director Ibrahim Ibn A. Salamah, "and will continue to do so through to 2000, boosted by a 20% plus annual rise in MTBE demand.

"This surge in demand is a key issue facing the world methanol industry right now. By committing to increasing capacity, we believe that we are being farsighted and taking the right steps to ensure that we will not see a situation where feedstock shortages restrict MTBE output."