OGJ NEWSLETTER

There's a turnabout in the near term outlook for oil vs. gas.

Not too long ago most analysts were consigning oil prices to the dungeon and gas prices to the ramparts. That's changed for some.

Salomon Bros. points to increased gas supplies as underpinning an unexpected plunge in gas prices. The analyst estimates the Henry hub gas price at about $1.95/MMBTU in the second and third quarters, down from $2.16 2.20 a year ago. It cites very strong progress in refilling storage, a 2.5% hike in U.S. gas production, and an 8.8% use in imports as creating a 4% jump in supply vs. a year ago compared with a projected demand increase of 3%. And Salomon Bros. notes Canadians are beginning to talk about a new natural gas bubble.

Another sign that increased deliverability is eroding gas prices is Seagull's curtailment of its U.S. gas production by 15% June 1 and prospects for another 25% cut should prices slide further.

However, EIA contends U.S. gas demand will grow 3.9% to 20.91 tcf in 1994 and another 2.2% in 1995, up sharply from the agency's earlier forecasts of 1.5% and 1.7%, respectively. It sees wellhead prices rising 8.5%/year from $1.99/MMBTU in 1993 lo $2.35 in 1995.

Continued strength in oil prices has led Salomon Bros. to again hike its forecast for spot WTI, to $17.60 in 1994 and $19.50 in 1995 from $16.85 and $18.50, respectively. Another analyst, Philip Verleger, cites the improving economic outlook for 1995 as pointing to an almost certain rise in oil prices without an end to the Iraq embargo. He expects a very large stockdraw of 1.5 million b/d to meet demand in fourth quarter 1994 that would put stocks near commercial minimums and leave almost no supplies available in the seasonally strongest first quarter of 1995. Without a resumption of Iraqi exports, WTI could reach $21 25/bbl, Verleger contends. He thinks the market will remain tight in 1995, with price hikes even greater if there are disruptions in major producers such as Russia, Nigeria, or Venezuela.

Several forecasters have oil prices remaining steady until the OPEC ministerial meeting this week, then declining somewhat. OPEC supply levels seem to support that. After dropping a startling 350,000 h/d in April, OPEC output rose 120,000 b/d in May, reports Middle East Economic Survey (MEES). OPEC topped its ceiling by 240,000 b/d last month, mainly because a faltering Iran regained lost ground by boosting flow by 105,000 b/d to 3.53 million b/d, still below its 3.6 million b/d quota.

Iraqi oil and Yemen's woes figure in near term market movements.

The Clinton administration has agreed in principle to Turkey's plan to flush out about 12 million bbl of crude oil trapped in an Iraqi export pipeline through Turkey. Under the plan, Turkey would sell the 8.2 million bbl of oil in the line that Iraq owns and use the proceeds to provide food and medicine to Iraq. Administration officials contend the one time sale does not mean the U.S. favors lifting the U.N. ban on Iranian oil exports. Turkey's foreign minister thinks the process could begin July 1 and take 4 months. Although that would only add about 100,000 b/d to world oil supplies this summer, the news helped shove almost 50 off Nymex crude June 3 7.

Yemen's civil war is spreading to oil installations. Press reports say two northern Yemen warplanes bombed Aden Refinery Co.'s 110,000 b/d Little Aden refinery twice June 5, setting afire six storage tanks, in a bid to capture the city of Aden. The refinery still was ablaze June 7. South Yemeni forces reportedly attacked oil installations in Marib and Shabwa provinces in retaliation for the refinery strike. Foreign oil companies pulled staff out of Yemen shortly after civil war broke out (OGJ, May 16, p. 25). The latest news from Yemen helped push Nymex crude back up 59 to $18.34 June 8.

Meanwhile, North Yemen has appointed Faysal bin Shamlan oil minister, MEES reports. Shamlan, managing director of Aden refinery in the early 1980s and later managing director of Yemen's Oil Marketing Authority, replaces Salih Abu Bake bin Hussainoun, who MEES said was appointed oil minister in the breakaway southern state.

The ban on exports of Alaskan North Slope crude is likely to be lifted, says East West Center's Fereidun Fesharaki, but don't expect a significant boost in Alaska/California crude prices.

Export volumes to Asia are likely to be only 200,000 400,000 b/d with a marginal effect on prices, he contends. Those same volumes will need to be imported into California from other areas, spurring the U.S. West Coast market to find it more economic to pay a little more for ANS. This means ANS's natural home is California, not Asia, Fesharaki says.

President Clinton has agreed to meet June 16 with about 100 members of Congress backing a legislative package to help U.S. oil producers.

Among other things, their bill includes a $3/bbl or 50/Mcf tax credit for initial volumes of marginal and new production (OGJ, Mar. 28, p. 35). Last week, DOE Deputy Sec. Bill White said Clinton will listen to the lawmakers, but "It will not be a decisionmaking meeting."

Two dry holes mark the beginning of postsale drilling in the Gulf of Mexico's subsalt play. The first Anadarko operated subsalt exploratory well in the gulf, 1 Mesquite off Louisiana, found sand and water but no commercial hydrocarbons below a salt sill underlying Vermilion Block 349 at 9,400-11,750 ft. Anadarko and Phillips each held a 50% interest in the wildcat. Total depth was 16,146 ft. The other subsalt dry hole in the gulf is Amoco's 1 Mattaponi wildcat on South Marsh Island Block 169, where it was partners with Oryx, Amerada Hess, and Petrobras. They follow Phillips' Mahogany strike, the subsalt find last fall that sparked a hot play and big bids at the most recent federal lease sale in the gulf (OGJ, Apr. 11, p. 36).

Now it's China's turn to complain about exploratory drilling in disputed waters of the South China Sea. ARCO and British Gas spudded a wildcat June 4 on Viet Nam's Block 4 1 off Vung Tau. Block 4 1, of which China claims about one fourth, adjoins a Chinese block U.S. independent Crestone Energy is exploring. Hanoi recently assailed Beijing over Crestone's drilling plans. Also lying within disputed waters are Vietnamese blocks to be explored by groups led by Mobil and Oxy.

Papua New Guinea wants to freeze new mining and petroleum projects for 6 12 months until legislation governing resource development has been reviewed. Of chief concern are disputes over equity participation by the state and landowners in resource projects.

Details of the moratorium are still to be worked out, but it is likely to depress exploration in the country and spur possible pullouts.

Romania will get a $175.6 million World Bank loan to help revitalize its oil and gas industry and encourage investment by foreign petroleum companies. And European Investment Bank has pledged $52 million cofinancing to the loan. Romania's new petroleum program will include establishment of a new regulatory agency to foster development of an efficient and commercially viable petroleum industry and environmental measures.

Plans also call for a comprehensive fuel policy that includes price policies for oil and gas transmission and distribution, Further, plans call for restructuring Romania's state oil companies, upgrading and modernizing facilities, and implementing price liberalization steps to pave the way for privatizing Romania's petroleum industry.

Spain this month will ratify a protocol between Enagas/Gas Natural and Spanish electric utilities to set supply conditions, volumes, and prices for gas delivered by the trans Maghreb pipeline from Sonatrach's Hassi R'Mel field in Algeria. The protocol could include a 20% take or pay premium in the event of an Algerian supply disruption a strong possibility in a nation wracked by fundamentalist Islamic revolt. Currently gas suppliers are seeking a gas price about 30 50% more than customers are offering.

European Commission has approved a proposed megamerger of polyolefins businesses by Royal Dutch/Shell and Montedison.

The companies will take equal shares in Montell Polyolefins, to be headquartered in Netherlands. Montell will have $3 billion/year in revenues and capacities of 3.3 million metric tons/year of polypropylene and 700,000 tons/year of polyethylene. Montedison is the world's largest polypropylene manufacturer with 12% of worldwide capacity (OGJ, Jan. 10, p. 34).

Montell will control 18% of production, which has stirred protest from at least one rival, Union Carbide. Completion of the merger depends on receipt of all other necessary regulatory approvals, including the U.S. Federal Trade Commission and Brazil's competition authorities.