OGJ NEWSLETTER

The outlook for oil markets grows increasingly bleak.

More analysts are taking the view that market fundamentals have shifted oil prices down into a new range for several years to come.

East West Center's Fereidun Fesharaki contends Arab light will settle at $10 13/bbl for 3 5 years because the "fear factor" concern over possible supply disruptions has disappeared as a market consideration.

Further, says Fesharaki, OPEC cuts are less critical in affecting future price levels than is generally believed. He contends only a major cut, perhaps 4 5 million b/d, will have a lasting effect on prices.

Philip Verleger, writing in CRA Petroleum Economics Monthly, warns 1994 will be as bad or worse for producers and refiners than 1993 was, considering OPEC's failure to cut production and forward sales of refined products. He sees spot WTI at $12/bbl by late spring after a temporary rebound in February March. But there will likely he no respite for refiners, says Verleger, noting the failure of heating oil prices to rise sharply during the recent cold snap together with buildup of open interest in gasoline indicates margins will stay depressed. However, gasoline retailers will have "another fabulous year."

And the prospect is for increasing oil supplies outside OPEC. Contrary to Moscow's claims that Russian gross crude oil exports will decline in 1994 to 2 2.15 million b/d from 2.55 million b/d in 1993, Eugene Khartukov, also with East West Center, contends Russian oil and products exports may be higher this year than last. He projects Russian gross crude and products exports at as much as 3.7 million b/d in 1994 vs. 3.52 million b/d in 1993.

Will OPEC take dramatic action to staunch the bleeding? Gulf Cooperation Council oil ministers will meet in Saudi Arabia early next month ahead of OPEC talks on Mar. 25 that will focus on cutting production, says Kuwaiti Oil Minister Ali al Baghli. Support for cuts of 5 10% has come from Nigeria and Qatar. As usual, the Saudis hold the key and are likely to insist on maintaining a one third share of OPEC output even with cuts.

Perhaps indicative of the Saudi stance is a report from Middle East Economic Survey (MEES) that Saudi Arabia expects to reach a maximum sustainable capacity of 10 million b/d by yearend 1994 and plans to maintain that capacity indefinitely. The Saudis also expect to maximize revenues by boosting the share of lighter crudes in their production during 1994 98 to 77 79% from the current 76.3%, MEES said. Saudi production under the 5 year plan is predicted to increase to 8.4 million h/d in 1998 from 7.8 million b/d in 1994, excluding about 200,000 b/d from the Neutral Zone shared with Kuwait. Saudi Arabia's current quota is about 8 million b/d.

In the U.S., low oil prices continue to take a toll, shutting in wells and slicing budgets. Marathon was forced to shut in Wyoming wells producing about 400 b/d of heavy sour oil and to consider rethinking its 1994 capital spending program. Marathon Pres. Victor G. Beghini said oil market fundamentals are not as had as prices indicate, and there is a chance prices could begin increasing slightly during the third and fourth quarters.

However, he warned that if low oil prices or low margins cause a significant deterioration of the company's expected revenues, "we'll review the budget and adjust it accordingly, as we've done in past years."

Oil state congressmen will meet this week to discuss capital assistance and tax relief measures for U.S. independent producers.

The congressmen noted real crude oil prices have fallen to the lowest point in 20 years. They said, "The time has come for Congress and the administration to put forth a domestic energy policy that recognizes and deals with the problems of our domestic energy industry." They plan to request a meeting with President Clinton soon. Organizing the meeting were Sens. David Boren (D Okla.), Bennett Johnston (D La.), Don Nickles (R-Okla.), and Nancy Kassebaum (R Kan.) and Reps. Bill Archer (R Tex.), Bill Brewster (D Okla.), Jim McCrery (R La.), and Glenn Poshard (D Ill.).

Canadian Enerdata predicts net oil imports by the U.S. will reach 8.4 million b/d in 1994, or 47% of total consumption. That represents a jump in volume of more than 21% since 1992, the highest net import rate since 1977, and the second highest level of imports in terms of volume as well as a percentage of consumption. The consultant sees a 2.4% increase in U.S. petroleum demand in 1994, barring a faltering economy or very mild weather. World oil demand will continue to climb in 1994, with the former Soviet Union (FSU) a notable exception. Demand from OECD nations rose almost 400,000 b/d in 1993 from 1992 levels, averaging 39 million b/d. About 75% of that growth occurred in the U.S. Canadian Enerdata also expects world oil supplies to increase in 1994, despite declines in U.S. and FSU production. It foresees an overall gain of 1. 3 million b/d, led by an OPEC surge.

Price increases of 5/lb recently announced in the U.S. by many sellers of high density polyethylene (HDPE) will be difficult to achieve since Phillips one of the largest U.S. HDPE manufacturers opted for a 3/lb increase, says Bonner & Moore Market Consultants, Houston.

B&M says Phillips' action limits HDPE price increases to at least 3/lb and probably less, considering current 85% operating rates of U.S. HDPE capacity. Low operating rates also likely will undercut efforts to boost low density polyethylene and linear low density polyethylene prices.

Many U.S. resin producers acknowledge privately that higher polyethylene derivative prices are unlikely unless justified by higher feedstock prices. In the meantime, B&M says, "Few, if any, manufacturers can risk losing market share by trying to implement an increase."

Private sector involvement in Brazilian oil and gas E&D is expected to be approved by Brazil's congress, now reviewing amendments to the constitution.

Most of the 84 amendments related to Article 177 of Brazil's constitution which granted a petroleum monopoly to Petrobras in 1953 call for an end to that monopoly. The focus is threefold: either eliminating petroleum from constitutional purview, granting oil and gas licenses, or removing the monopoly only for certain aspects of production and reviving risk contracts.

The initial privatization of Elf is complete with sale of shares that brought in 33 billion francs ($5.61 billion) from investors. The sale was to the public of 38.6 million shares at a price of 385 francs/share and to French institutional and international investors another 21.7 million shares at 403 francs/share. Of the latter, 26% went to institutional investors in France, 45% to other European investors, 22% to U.S. investors, 2% to Japanese investors, and 5% other foreign investors. Institutional investors hold 9% of Elf, employees 4%, and other nonstate interests are held by 3 million public shareholders in France. The state retains a golden share of 13.9% in Elf, compared with a 50.8% stake prior to the sale. It also retains ministerial approval over certain shareholder interest levels and veto over key asset sales involving Elf Aquitaine Production, Elf Antar France, Elf Congo, and Elf Gabon.

Russia and Astrakhan oblast next spring intend to open a competitive hydrocarbon E&D tender on three large tracts north of the Caspian Sea.

Officials want international companies to bid for rights to develop and produce oil and gas on Astrakhan field's Right Bank west of the Volga River, where estimated reserves of 10 tcf of gas and 375 million bbl of condensate are expected to increase with more drilling.

Bids also are to be accepted for exploratory rights on Enotaevskii and Kharabalinskii blocks north of Astrakhan field. Tender rules and conditions, including the bid deadline, are to he announced in May or June.

China may be pulling in its horns on Spratly Islands exploration.

It agreed with Taiwan to conduct joint surveys of waters surrounding the islands, where long disputed territorial islands have stymied efforts to probe tantalizing hydrocarbon prospects. It will be the first joint survey for the two nations since the end of the Chinese civil war in 1949. Eleven Taiwanese scientists will join a Chinese research group on a Chinese vessel to sail from Guangzhou in mid March to spend I month studying subsea geology, hydrography, and chemical oceanography and mapping currents and flow patterns of waters in the region. And Taiwan still may proceed with plans to build an airstrip, port, and lighthouse on Taiping Island in the Spratlys, with an eye to promoting tourism (OGJ, Nov. 29, 1993, Newsletter).

China plans to lay a 2,132 km, 200,000 b/d pipeline to ship refined products through several southwestern provinces and on to Hainan Island at a cost of 4.26 billion yuan ($724 million). It will link Guangdong, Sichuan, Hainan, Yunnan, and Guizhou provinces, and Guangxi Zhuang autonomous region. Construction is to begin in 1995 and be complete in 1997. The project is out for international tender.