OGJ NEWSLETTER

Renewed tension in the Persian Gulf has left oil markets largely unfazed.

Oil traders on London's International Petroleum Exchange took calmly the news that Saddam Hussein was mustering Iraqi forces on the border with Kuwait. After an initial 600 jump when the news broke late Oct. 7, the price of Brent for November delivery settled back to close at $16.97/bbl, up only 200 on the day. During the next few days, the price of Brent trickled down to close at $15.84/bbl Oct. 12.

IPE's Alban Brindle contends the market was discounting the effects of any potential damage to Kuwaiti oil fields by an Iraqi attack. "Traders seem fairly decisive on the fact that nothing will happen," Brindle said. If Iraq did attack Kuwait again, he said, oil prices undoubtedly would rise. "A $20-25/bbl oil price has been predicted by some analysts if Iraq attacks." Brindle said. "But I don't see that. A $1-2/bbl rise would be most likely."

Geoff Pyne, oil market analyst at UBS Securities, London, said traders had calculated that any oil production lost through an Iraqi military incursion into Kuwait soon could be made up by other producers.

Pyne said Saddam had indicated that Kuwait's portion of Rumaila oil field, which extends from Iraq into Kuwait, was a possible target for attack. This yields about 60,000 b/d of oil for Kuwait, which Pyne said the Kuwaitis could easily replace from other fields.

Pyne was surprised markets had not reacted to the likely effect of Saddam's maneuvers on the prospects for lifting the oil export embargo against Iraq. "The market ought to see that Iraqi exports now are unlikely to return in 1995, as many people expect," he said.

"This leaves potential for tightness in the market in first quarter 1995 and even fourth quarter 1995. This could bring a rich premium; if OPEC were stretched, this could be worth an extra 50cts-$1/bbl on the oil price."

Instead of political ramifications of Saddam's drawn saber, Pyne believes traders have their minds on more immediate things, particularly surplus stocks of distillate and other products. "The market is held in check because of the inventory overhang," he said. Pyne expects the product surplus to ease to allow the market to surge early next year.

As for the outcome of Saddam's bid to muddy the water regarding the oil embargo, Pyne feels there is no chance of a return to patient attempts by the U.N. to monitor Iraq's weapons arsenal. "Continuation of the status quo will not happen," he said, "although markets have so far failed to recognize the fact."

Nova sees Canadian gas supply/demand this winter as manageable, pegging its deliverability as 12.1-12.3 bcfd.

"That's a slight improvement from the recent past," said Pres. Bruce Simpson. "Two years ago we said peak deliverability would be tight, and last winter we said it would be tight but manageable." Increasing demand for Alberta gas has the Calgary pipeline on track to set its eighth consecutive record year for gas deliveries. During the first 9 months of 1994, Nova shipped 3.01 tcf, up 7.8% from the same period in 1993. Deliveries have averaged 11.03 bcfd.

Nova is wrapping up a single year record expansion valued at $792 million (Canadian), part of a 3 year, $2 billion capital investment program.

U.S. natural gas prices will remain soft, rarely topping $2/Mcf, until 1998. So says Carol Freedenthal of Jofree Corp., Houston.

He cites increased drilling efficiency, reduced drilling costs, greater success rates for gas wells, and new market efficiencies. On the demand side, coal price stability vs. gas price volatility is deflating earlier expectations of gas getting a bigger market share in the electric power industry.

Any new U.S. electric generating capacity built in the near future would be gas fired, former FERC commissioner Charles Stalon told AGA's annual meeting in Nashville last week. However, none will be built in the near future. he added. That's because, as Consumers Power Co. CEO Michael Morris told the meeting, the U.S. has, with a few regional exceptions, excess electric power generation capacity in place. Morris estimates gas fired power generation costs at $400-500/kw-hr compared with $800/kw-hr for coal and nuclear "off the map."

Texas Railroad Commission will conduct a formal study of the natural gas storage industry in response to producers' claims that overstated storage numbers are skewing gas markets (OGJ, Oct. 3, Newsletter). Producers allege such overstatements allow marketers to buy gas at bargain prices in the summer and sell it high when demand peaks in the winter. Marketers chalk it up to the free market system working and deny any deliberate manipulation, noting that the seasonal gas price spread has been fading. TRC last week approved a new monthly gas storage reporting form, a new storage operator survey form to he completed and returned by close of business Nov. 5, and an annual report that storage operators must file.

Alternative motor fuels continue to make inroads in the U.S. vehicle population. Ford sold a record 1,515 medium duty propane fueled trucks in North America from the time the 1995 model went on sale in March through September. That is more than double the number of such trucks it sold in all of 1994. Ford notes a growing number of nontraditional customers--those not directly related to the LPG industry--buying the propane trucks. Ford expects nontraditional buyers, notably new commercial fleet customers, to account for 10% of its propane truck sales in 1995, double the number in 1993.

U.S. refiners are on the brink of unprecedented government involvement in their most basic processes, Jeff Utley, chairman of the National Petroleum Refiners Association manufacturing committee, told the NPRA annual Q&A session in Washington, D.C., last week.

Utley, also refinery manager of Flying J. Inc.'s 25,000 b/d North Salt Lake City, Utah, refinery, noted that in addition to reformulated gasoline (RFG) specs, new fuel additive requirements are around the corner. These will include mass balancing, which places added recordkeeping requirements on refiners, and maximum achievable control technology, which will bring added controls for storage tanks, gasoline distribution facilities, and process vents.

Seldom mentioned, said Utley, is crude oil quality, which has a major effect on operations. Refineries designed to process high quality crudes will find it increasingly difficult to run heavier, higher sulfur crudes as regulations become more restrictive.

Calling for increased public awareness of the refiner's role in society, Utley told NPRA, "We are the energy that fuels the world's economy." He urged refiners to take an active role in the regulatory process and in educating students through plant field trips and classroom visits.

Those refiner regulatory difficulties are translating into economic woes, according to Charles River Associates' Philip Verleger, who sees financial prospects for U.S. refiners as "dismal."

Verleger contends RFG will prove to be a financial disaster for refiners, who are headed for substantial losses from its introduction because of the increase in MTBE prices and the market's failure to allow refiners to pass along the higher oxygenate premium.

In looking at January gasoline futures that are trading at a smaller spread vs. January crude than any year since 1988, Verleger says that doesn't appear to offer refiners any return for investment in MTBE.

Worldwide benzene demand is likely to grow 5.8%/year during 1994-98 to 30 million tons from 22.57 million tons in 1993, DeWitt & Co. predicts.

Strongest growth will be in the Far East/Asia region, with consumption growing 7.1%/year to 8.8 million tons in 1998. That reflects surging demand for styrene monomer, which accounts for 55% of benzene demand. DeWitt sees world styrene demand increasing by 6%/year to 19 million tons in 1998.

Look for a Nov. 3 decision on building a $2.4 billion pipeline across Poland to deliver Russian gas to Europe.

That will coincide with a visit to Poland by Russian Premier Viktor Chernomyrdin. Poland's East European Bank will organize financing for the pipeline, which will have throughput capacity of 6.4 bcfd.

Viet Nam soon will offer more offshore acreage to foreign oil and gas companies. BP, Amoco, Royal Dutch/Shell, and Mitsubishi are said to be included in the six groups bidding for Block 15-1, which lies 20 miles east of the southern port of Vung Tau in the Cuu Long basin, immediately north of where a Japanese group led by Mitsubishi disclosed a major oil discovery (OGJ, July 18, p. 31).

Viet Nam also will seek bids for two other blocks--near Bach Ho, Viet Nam's only source of commercial oil production--that formerly were held by the Russian-Vietnamese joint venture Vietsovpetro.