OGJ NEWSLETTER

Petroleum companies are likely to report a big drop in first quarter earnings because of depressed oil prices.

However, a surge in products demand is pulling up crude prices and likely sets the stage for improved earnings, especially downstream, in the second half. That seems to vindicate OPEC's strategy of hewing to market share and letting an improving world economy, led by the U.S, be the engine pulling oil revenue growth back up the hill.

If OPEC can hold production near quota levels for the rest of the year, there is little doubt oil prices will improve sharply by fourth quarter. So says London's Centre for Global Energy Studies, citing cold weather and a stronger U.S. economy as catalysts for the improved outlook. CGES says while the U.S. government is cautiously forecasting GNP growth of 3% in 1994, similar to last year, other forecasters expect growth closer to 4%.

Increased IEA estimates for fourth quarter 1993 and first quarter 1994 demand trimmed OECD oil stocks to 65 days from 67 days last year. That could help push OPEC's basket crude price to $16/bbl by the fourth quarter if OPEC can rein production to 24.8 million b/d.

There is now fundamental market support for crude and product prices, maintains CGES.

"Sour crudes remain strong in the Atlantic Basin as refiners are still trying to rebuild low stocks of heating oil and residual oil now that the turnaround season is coming to an end, while producers of gasoline-rich crudes are facing difficulties in selling cargoes," said CGES.

Nigeria is said to have been forced to cut its April deliveries price retroactively in a bid to keep exports flowing. However, CGES sees gasoline-rich crudes demand improving as the gasoline season gets under way and alternative sources of light sweet crude, such as the North Sea, are constrained by the start of the offshore maintenance season.

API reports exceptionally strong U.S. demand for some products in the first quarter. Deliveries of kerosine jet fuel were up 5.5%, distillate fuel 8.6%, and residual fuel 17.7% from first quarter 1993. U.S. crude production averaged 6.762 million h/d for the quarter, down 2.2% from a year ago.

Brent largely maintained its recent gains, closing at $15.12/bbl for June delivery Apr. 15 after a gain of 860/bbl through the week. Brent retreated to $14.95/bbl at Apr. 21 closing. Nymex next month WTI hit a 5 month high last week, closing Apr. 20 at $16.82/bbl and up almost $1 on the week.

Dean Witter says the worst may be over for oil but it is about as good as it's going to get for natural gas this year.

The analyst sees a demand-driven improvement in oil prices in the second half with no major help from OPEC in the way of output cuts. Dean Witter pegs WTI postings at an average $15-50/bbl in 1994, which entails a strong rebound from the $13.50/bbl first quarter average. Posted WTI could reach an average $17 in 1995--close to the 1993 average--because of increased demand. And the analyst contends an expected increase in world oil demand of 1-2 million b/d the next 18 months could accommodate Iraq's return to the market with little difficulty. It sees spot gas prices at $2.05-2.10/Mcf this year and about $2.20 next year. Dean Witter predicts the 11 independents it tracks will report a 65% drop in earnings for the first quarter.

Merrill Lynch also expects U.S. independents to report sharply lower earnings for the first quarter as a result of lower oil prices. Noting a first quarter average for WTI spot prices of $14.83 vs. $19.83 a year ago, Merrill Lynch says independents' earnings are likely to remain weak until the fourth quarter, when a price rebound will bring spot WTI's average for the year to $15.75. It pegs the Natural Gas Clearinghouse spot gas average at $2 for the year, flat with 1993. For the group of majors it tracks, Merrill Lynch sees first quarter profits down almost 15% from a year ago.

The outlook for U.S. downstream earnings remains favorable, especially east of the Rockies, Merrill Lynch says, citing rising product demand, high refinery utilization rates, and firm stock levels.

Canadian oil and gas companies in 1993 posted their best collective earnings since 1990 despite a steep drop in oil prices in the fourth quarter. Only nine of 90 companies Nickle's Statistics Quarterly tracks had losses as the group logged a profit of more than $1.6 billion (Canadian), compared with losses of $1.02 billion in 1992 and $1.52 billion in 1991.

Hibernia oil field development costs are likely to jump 15-20% from the original $5.2 billion estimate, says Petro-Canada, and project sponsors are taking steps to rein costs of the project off Newfoundland. That's from a study sparked by concerns about delays in engineering and construction of the project's gravity base structure reflecting complexity of its ice wall design, PetroCanada still expects the project to start up in late 1997 or in 1998.

The top bid block in last month's Gulf of Mexico lease sale that focused on the sizzling subsalt play contains a huge structure about 500 ft updip from Mahogany oil and gas field, says Anadarko.

The structure covers about 3,500 acres on Ship Shoal South Addition Block 337 offsetting Mahogany, where operator Phillips drilled a 7,256 b/d, 9.9 MMcfd strike that locked off the subsalt play.

MMS last week awarded Anadarko 16 of the 26 leases it was high bidder on, including the $40 million Block 337 (OGJ, Apr. 11, p. 36). The others are still under review. Interests in Mahogany are Phillips and Anadarko 37.5% each and Amoco 25%. Phillips and Amoco have an option to.acquire the same interests in Block 337 as in Mahogany. Anadarko plans a wildcat as soon as more studies and seismic work can be completed.

Russia plans to develop a natural gas infrastructure in the Murmansk region ahead of developing nearby supergiant Shtockmanovskoye gas field in the Barents Sea. Plans call for laying a spur from the western Siberian gas grid near the Obozerskaya rail terminal in the Arkhangelsk region, north of the Arctic Circle, to Murmansk and other Kola Peninsula cities, with first delivery in 1998. Gazprom will take the gas to market, and Giprospetsgaz is designing the line. Once Barents Sea gas is ready to go to market, the line flow will be reversed. A stumbling block: Environmentalists want the line route shifted closer to the city of Monchegorsk, which would add 4 billion rubles to the project cost.

Kazakhstan is pushing a major overhaul of its refining industry.

Mitsubishi, Mitsui, and Toyo Engineering have agreed to construct a $1.5 billion, 60,000 b/d refinery in the former Soviet republic on the eastern shore of the Caspian Sea, reports Agence France Presse. Construction is to begin in 1996 and be complete in 1999.

Meantime, Kazakhstan let a $1.2 billion contract to France's Krebs-Eurysis group's Hydrocarbon Engineering (HE) unit to revamp and expand the 103,800 b/d Atyrau refinery. The revamped refinery will process 120,000 b/d of crude from Tengiz, Mangyshlak, and Martishy oil fields and produce high grade gasoline, diesel, and propylene while meeting international emissions standards. It will incorporate new distillation, cat cracking, cat reforming, and hydrodesulfurization units plus ancillaries, storage, and new infrastructure. HE will supervise construction, to take 4 years, by local firms.

Thailand is getting serious about a third world scale petrochemical complex to meet that country's soaring demand for petrochemicals.

Partly state owned National Petrochemical plc (NPC), key player in Thailand's first such complex NPCl, let contract to Bechtel for a feasibility study of NPC3 that's due this month. It likely would be a natural gas based olefins complex that would include downstream units such as high and low density polyethylene and PVC. With Thai plastics demand increasing 14%/year, domestic olefins needs could reach I million tons/year by 2000, exceeding current capacity and planned expansions. What's needed, says NPC, are two new 300,000 metric ton/year ethylene crackers by 1997 and 2000, respectively. Look for I year each for engineering and project financing and 3 years for construction.

Expect the standoff on higher U.S. polyethylene resin prices to come to a head by the end of April, says Bonner & Moore, Houston. Price increases of 50/lb announced in the U.S. earlier this year by many sellers of high density polyethylene have been met with a refusal by processors to pay the higher price. Nor has there been much prebuying in advance of the price hike, B&M says. "This is causing an inventory build at the producer level that is beginning to put a strain on inventory/storage systems," the analyst said. "There are sporadic reports of hopper car shortages because of the buildup of cars on lease tracks."

B&M figures the increase initiative in a few weeks will be deferred until late in the second quarter, when ethylene costs could be on the rise.