OGJ NEWSLETTER

The price bulls are in full retreat on natural gas.

With U.S. natural gas prices having fallen to their lowest point in more than 2 years, analysts are rejigging their forecasts. Salomon Bros., citing evidence that weaker natural gas prices are the result of natural gas supplier expanding rapidly up as much as 3 4% from a year ago cut its forecast for spot gas prices for 1994 and 1995 to $1.80/MMBTU and $1.90 1.95/MMBTU from $1.90 1.95 and $2.05, respectively.

"The recent consensus view has been that natural gas prices needed to rise sharply to allow the energy industry to economically meet rising natural gas demand," the analyst said. "However, it appears that the industry has proven itself capable of expanding production capacity, even at natural gas prices below $2/MMBTU. Therefore, we expect natural gas prices to average slightly less than $2/MMBTU in real terms the next several years."

Natural Gas Clearinghouse average spot price for September has plunged to $1.42/MMBTU, the lowest since an average $1.42/MMBTU in July 1992. Spot prices offered at pipeline receipt points in Oklahoma and Wyoming were as low as $1.35.

Crude prices are struggling as well. Nymex crude fell $1.10 on the week and 41cts on the day, closing at $16.71/bbl Sept. 14. Recent weakness in gasoline and other product prices and easing of the Nigerian crisis apparently contributed to the slide.

Big questions surround the near term fate of U.S. gasoline markets, and a preview of those concerns has shown up in gasoline prices. Nymex October gasoline futures plummeted to a 6 month low of 43.65cts/gal Sept. 14 as U.S. refiners started efforts to make room for winter grade gasoline and reformulated gasoline (RFG) that is to be introduced Jan. 1. At the same time, Nymex gasoline for December delivery, the first contract to reflect RFG specs, is showing an 8cts/gal premium vs. the November contract, one that some analysts think could widen to 10 12cts/gal. While current gasoline stocks are up sharply because of new spec inventory requirements, accounting for the price drop API reports gasoline stocks rose 3.8 million bbl last week and 7.9 million bbl from a year ago it's difficult to gauge what the true supply situation is because of the new spec gasoline coming into the mix. Then there is the wild card of what might happen with Venezuelan gasoline, coming under tougher standards because of congressional action (see story, p. 25). At least one situation is becoming clearer, thanks to a U.S. court decision to stay EPA's order that effectively mandates use of ethanol in RFG (see story, p. 25).

Looks like EPA will approve an air quality plan by northeastern states that is modeled after California's stringent program. Although a final ruling isn't due until Nov. 10, the agency said the plan, submitted by 12 northeastern states and the District of Columbia, is needed to bring the region into compliance with federal air quality standards. Adopting the California standards would require tailpipe emissions to be cut almost in half by 2003, force 2% of all cars sold to be electric by 1999, and require production of ultralow emission cars using alternative fuels.

More jobs are disappearing as industry continues to restructure to cut cost, improve efficiency, and buoy profits amid a climate of uncertain prices and uncertain markets. Phillips last week disclosed plans to lay off 800 employees company wide by yearend as part of its continuing restructuring.

Will the Clinton Yeltsin summit result in bolstered U.S. foreign investment in Russia's petroleum sector? The two are slated to meet Sept. 27 28 in Washington, D.C. With signs of improvement in Russia's economy, U.S. officials see the likelihood of a summit announcement by Yeltsin that would entail a notable increase in support for private investment in Russia. Administration officials suggest the U.S. could spend as much as $500 million the next 3 years on Russian private investment and economic restructuring. With petroleum exports by far the biggest source of foreign exchange earnings for Russia, such support obviously would target the flagging oil and gas sector there.

Saudi Arabia has called for domestic and international companies to invest in its petrochemical sector. Middle East Economic Survey (MEES) contends the call could herald privatization of the Saudi petrochemical industry, currently controlled by Saudi Basic Industries Corp. The plea comes a year after Riyadh canceled a joint venture led by Mobil to construct an $800 million, 835,000 metric ton/year MTBE plant at Yanbu. MEES says it is not clear whether the project will be reactivated. Abd Al Aziz Al Zamil, Minister of Industry and Electricity, called on petrochemical companies to submit feasibility studies for proposed projects.

Energy privatization continues apace in the former Communist bloc. Germany's Treuhandanstalt, overseeing privatization of former East German state concerns, sold Veag electric utility to a West German group led by RWE Energie and top brown coal field producer Laubag to an RWE unit. Eastern Germany is targeting a 23% share of its electricity market for natural gas by 2000, up from the current 10%. Ruhrgas contends coal will remain the dominant source of primary energy in eastern Germany for some time, for political reasons.

Pdvsa is considering adjusting its proposed profit sharing agreements for exploration and development of new areas prospective for light and medium crudes in Venezuela. Pdvsa may adjust the projected profit level according to the size of the discovery. It wants to sweeten terms to avoid the kind of weak turnout Colombia's recent bid round experienced. Currently, private investors would keep 15% of future profits, and their 100% exploration investment risk would be considered a loan to a development joint venture with Pdvsa to be repaid at commercial rates. Terms are to be disclosed in Houston in 1 2 months.

Petrobras has another big deepwater oil find in the Campos basin off Brazil. It didn't disclose the well name or flow rates but estimates reserves at 175 290 million bbl of good quality crude. The well is in 875 m of water 100 km off Rio de Janeiro. Production tests are to begin this week to determine commerciality.

Cambodia has a promising oil and gas strike, its third hydrocarbon find to date. Premier 1 Kaoh Tang flowed 1,180 b/d of oil and 1.365 MMcfd from pay at 3,069.5 3,075.6 m. A shallower zone is being tested. The well, on Block 4 in the Khmer trough, was drilled on a farmout from Idemitsu (OGJ, Apr. 18, Newsletter). Ampolex is the remaining partner, and each of the three holds a one third interest in the block.

Royal Dutch/Shell's big gas find off Philippines is commercial, the company confirmed. Reserves are pegged at 1.9 3.9 tcf in Camago Malampaya complex, where Shell and partner Oxy drilled another recent appraisal well. Tentative plans call for a $2 billion project that would include laying a 500 km, $700-900 million subsea pipeline from the field to landfall at an undetermined point on South Luzon. Manila may help with financing the line, and Shell and Oxy are considering taking on more partners in the project. One possibility for landfall is the Batangas area, where Shell is building a $667 million, 110,000 b/d grassroots refinery. The refinery could take some of the gas and serve as the pivot point for additional pipelines to Manila and elsewhere in Philippines. Target for first gas is 2000. For the project gas to make a market, Philippines must build more gas fired power plants with a combined total of 3 million kw of capacity. Energy officials project that kind of demand and more.

The Thais are angling for still more Myanmar gas. Petroleum Authority of Thailand (PTT) is negotiating with Texaco for delivery of about 200 MMcfd from Yetagun field in the Gulf of Martaban. Price is at issue. PTT recently signed an agreement to take Myanmar gas from a Total Unocal combine (see related story, p. 36).

Australia's Cooper basin partners led by Santos have reached agreement with South Australia's government for a new 10 year gas deal that will supply the state with half its gas needs to 2013. It provides for supply of 380 bcf/year in 2004 2013 along with a sweetener of cheaper gas for the next 5 years via extension of the 1989 purchase agreement between the producers and buyer Pipeline Authority of South Australia. The move lets producers lock in a core supply of gas at a time when interstate competition is likely to intensify. It also allows South Australia breathing room and cheaper fuel for its electric utility in preparation for increased competition in the electric power market. There remains, however, ample scope for Cooper basin partners or other potential suppliers, namely the BHP group with its Minerva field strike in the offshore Otway basin, to provide more gas after 2004.