OGJ NEWSLETTER

Russia has suddenly become a brighter prospect for foreign petroleum investment.

In the first of a sweeping series of fiscal reforms, President Yeltsin last week signed six decrees that include cutting major taxes-including VAT and profits taxes-by 10-20%, halving the oil export tax and abolishing export quotas and licenses. One of the decrees establishes a 2 year holiday on the profits tax for joint ventures with at least 30% foreign ownership and more than $10 million in start-up capital.

Just before the decrees were disclosed, Deputy Prime Minister Alexander Shokhin said the impending cuts would include reducing oil export duties from about 30 European currency units (ECUs), or about $35, per metric ton to about 15 ECUs ($17.60)/ton.

Yeltsin, impatient with the slow pace of economic reform in Russia, reportedly is preparing 100 decrees aimed at economic reforms and plans to sign about 30 of them by yearend. Of the six decrees he signed last week, others were aimed at reforming Russia's banking system, developing a fledgling securities market, and bolstering tax collection efforts. The tax cuts are expected to take effect beginning in 1995.

U.S. DOE earlier had signaled Russia's imminent granting of oil export and excise tax relief to foreign JVs after a U.S. delegation to Moscow argued petroleum companies' case for it.

Deputy Energy Sec. Bill White said, "Many firms are going to withdraw or not do business unless the $5/bbl export tax is abolished."

Full details of the decrees were not available at presstime last week, although White earlier indicated one of them would also ease the burden on import excise taxes for crude oil and refined products.

Some analysts maintain a bearish outlook for oil prices in spite of the recent rally. Nymex light sweet has hovered at $18 19/bbl the past 2 weeks as traders reacted to perceived possible disruptions of production in Yemen, Nigeria, and U.K. North Sea plus problems with Russian exports.

However, Kidder Peabody says none of the perceived supply bottlenecks is as serious as claimed by the oil bulls. Focusing on Yemen's civil war, the analyst notes E&D has not been disrupted there and contends there will be little real effect on Yemen's oil production.

"We expect oil markets to give up most of the recent $3/bbl gain in the coming weeks or months," Kidder Peabody said.

A longer term bear, East-West Center's Fereidun Fesharaki, pegs Arab light at only $14/bbl in 1995, $20 in 2000, and $23 in 2005. Fesharaki slashed his forecast after reflecting that his previous approach to predicting oil prices-one that factored in supply disruption fears-no longer works.

Sulfur will drive crude price differentials and thus dominate world crude pricing in the future, he contends, with the light sweet/heavy sour differential jumping another $1/bbl the next 5-10 years.

Downstream, however, Fesharaki is much more bullish. He figures refining margins will improve significantly this decade, with capacity tight, especially in the Asia-Pacific region. Asia Pacific's "insurmountable" shortfall in diesel will spur higher prices and new investment in hydrocracking.

Fesharaki sees a new price structure with diesel, giving it a long term fundamental premium of $1-4/bbl over gasoline.

OPEC has a different view of things. With oil prices driven recently to low levels by hyperactive traders and speculators, says OPEC News Agency head Mohammed al-Sahlawi, markets are overlooking a fundamental fact: Global oil demand is growing. Citing strong demand growth in the U.S., Latin America, South Asia, OPEC, and the Pacific Rim, OPEC predicts global demand will jump to 79 million b/d in 2010 from 65 million b/d today.

Meanwhile, current oil price uncertainty, new taxes, and environmental rules are discouraging expansion of oil productive capacity, especially in cash strapped OPEC nations best capable of meeting future demand growth. That, says al-Sahlawi, sets the stage for another supply crisis.

Is Pdvsa moving toward production sharing contracts (PSCs) involving Venezuelan acreage prospective for light and medium crudes? Pdvsa Pres. Luis Giusti thinks two such projects could get off the ground by yearend, and no area has been ruled out. Private partners would take 20-25% of production. Any PSC model must be approved by Caracas and not run afoul of the 1975 nationalization law enforcing Pdvsa's upstream monopoly, which has eroded in recent years. Pdvsa is encouraging further erosion of that monopoly-claiming private participation does not equate to privatization-because of fears it can't fund its $48 billion, 8 year budget.

Beijing is trying to revive interest in Offshore China E&D. Senior geologists with state owned Cnooc will present a new acreage offering in the South China Sea in Houston in late June. Involved are 123 blocks covering 40,000 sq km in the South China Sea, many in the Pearl River Mouth basin.

Cnooc, targeting offshore output of 240, 000 b/d and about 384 MMcfd by 1997, is scrambling to stem the flight of multinational E&D capital to the former U.S.S.R., India, Indonesia, Viet Nam, and other Asian hot spots.

Saudi Arabia has asked Tokyo to intervene in the deadlock between two Japanese companies that has stalled a project to build and/or acquire 450,000 b/d of refining capacity in Japan to process Saudi crude and market products in Japan.

A policy rift between Nippon Oil and Japan Energy has kept the project on hold since November. International Trade and Industry Minister Eijiro Hata told Saudi Oil Minister Hisham Nazer that MITI would support efforts to expedite the project but that it was essentially a private sector decision.

At the same time, Hata asked Riyadh to make a decision on extending Saudi concessions held by Japan's Arabian Oil Co. beyond the scheduled expiration in 2000. That netted no reply from Nazer.

A war of words over a possible carbon tax persists between Alberta Premier Ralph Klein and Canadian Resources Minister Anne McLellan.

Klein said Ottawa would he threatening national unity and risking a rebellion by western Canadians if it imposed a carbon tax.

Western Canadian premiers issued a joint statement warning Ottawa against replacing a federal goods and services tax with something unfair to resource based economies in western Canada. McLellan said Klein's concerns are based on "paranoia" and he is destabilizing Alberta's economy by continuing to raise fears that Ottawa will impose a carbon tax. McLellan hasn't ruled out such a tax but says Ottawa isn't considering it.

API and NPRA are sponsoring efforts to form a group to survey compliance with EPA's reformulated gasoline rules.

The group, encouraged by EPA, would conduct an independent data collection program to verify industry's compliance with RFG rules.

The Clinton administration appears to be leaning toward recommending that Congress lift the export ban on Alaskan North Slope crude.

DOE has been circulating a draft report that shows removing the ban would improve the market for Californian and Alaskan crudes. However, the report, to be released in mid-June, will contain no recommendations.

Ending a 16 year struggle, the U.S. House has passed a wilderness protection bill barring commercial use of 1.7 million acres of federal land in western Montana, adding to the state's 3.4 million acres of congressionally designated wilderness. The bill lists another 1.3 million acres for wilderness study or special management.

The U.S Senate environment committee has agreed to investigate bonding problems the 1990 Oil Pollution Act will cause for OCS independent operators. The law requires the companies to have $150 million in insurance or financial assets.

Phillips and Amoco have opted to participate in the Anadarko block adjoining the oil strike that sparked the Gulf of Mexico subsalt play. Ship Shoal Block 337, offsetting Mahogany oil field to the northeast and containing a 3,500 acre structure-the Alexandrite prospect-about 500 ft updip, netted the top high bid of $40 million at the Mar. 30 OCS gulf lease sale.

Phillips also is joining Anadarko and Amoco in Block 338 and will be operator of both. Interests in all the blocks surrounding Mahogany will be Anadarko and Phillips 37.5% each and Amoco 25%. Drilling on 337 could begin in late 1994 or early 1995, depending on results from a 3D shoot being processed and from current Mahogany drilling (OGJ, May 2, p. 33).