OGJ NEWSLETTER

Is the U.S. gas market recovering? Merrill Lynch contends most of what is needed for a U.S. gas price recovery has happened and thinks a progressive if possibly unsteady-recovery is under way.

The analyst contends gas prices have weakened the past 2 years because of an excess of U.S. and Canadian deliverability, spawned in part by low costs and earlier expectations of $2/Mcf-plus prices. It sees this "minibubble" persisting another 12-18 months. Meantime, current expectations of $1.50-1.60/Mcf are discouraging drilling, which is shrinking deliverability toward a supply/demand balance. So Merrill Lynch predicts the average U.S. spot wellhead price will be $1.60/Mcf in 1995, $1.80/Mcf in 1996, and $1.95 in 1997, compared with $1.72/Mcf in 1994 and a recent low of $1.30/Mcf in February.

The analyst contends a price of $2/Mcf brings on excessive gas on gas competition because it generates for a typical well an average 21% internal rate of return (IRR). "This is sufficiently attractive to generate excess investment in new deliverability" it said. "Since companies have little ability to control their own wellhead prices, IRR, when threatened by weak pricing, is most effectively but still only partly defended by maximizing producing rates."

Even at $1.50/Mcf the IRR on a typical well is 11.3% with an acceptable 48 month payout. That explains why some producers, mainly larger ones, have an incentive to keep production high even at a lower price, Merrill Lynch said.

"Since the larger companies have a choice of worldwide investment opportunities in all phases of the oil business, they have only a very temporary, if any, incentive to slow the recovery of capital from a disappointing U.S. gas market for redeployment elsewhere."

Meantime, Natural Gas Clearinghouse's survey of average U.S. spot gas prices for June rose 4/MMBTU from May's level to $1.57/MMBTU, compared with $1.65/MMBTU this time last year. NGC attributes the increase to greater demand from electric power generation and storage injection. In the first half, prices have averaged $1.45/MMBTU, or 52 below first half 1994.

Bangladesh gas sector activity is heating. The World Bank's International Development Association will provide $128 million in credits to fund development of the country's gas infrastructure. Included are funds for laying a gas pipeline, drilling gas wells, building a gas treating plant, and installing a pipeline Scada/telecommunications system. Dhaka recently signed a number of production sharing contracts with foreign companies to explore for gas and contracts to develop electric power projects fueled by gas.

Nigeria soon may reactivate a $442 million methanol/MTBE project it shelved a couple of years ago. Oil Minister Dan Etete suggested as much recently in a talk in Abuja. First phase of the three phase project would produce 2,500 metric tons/day of methanol fed by domestic natural gas. A combine of contractors Mannesmann, Berge, and Pespen Group is to receive a 15% equity stake in the project and state owned Nigerian National Petroleum Corp. 34%, with the remaining interests to be put out for tender to multinational companies.

Lagging profits in Europe's refining sector presages more capacity closures. In a bid to boost its European refining profits, Mobil wants to close its 100,000 b/d Woerth, Germany, refinery and slash operating costs and further integrate operations of its 70,000 b/d Gravenchon, France, and 200,000 b/d Coryton, U.K., refineries. Altogether about 500 jobs will be affected.

The restructuring will save about $80 million/year before tax, and Mobil will take a $180 million charge after tax this year related to the moves.

Russia is stepping up its efforts to convince Azerbaijan to accept its proposed pipeline route through the breakaway Chechen republic to transport oil from Caspian Sea fields, despite fighting still under way there.

Lukoil Pres. Vaghit Alekperov contends shipping via existing pipelines through Grozny requires an investment of only $20-30 million for expansion and upgrading vs. a $1 billion grassroots pipeline via Turkey.

Lukoil wants to involve all of European Russia's oil pipeline network in transporting Caspian oil vs. Moscow's earlier preference for a line to Novorossiisk for further shipping through the Bosporus and Dardanelles straits. A final decision is expected in July-August.

Other proposals call for pipelines through Iran-opposed by western companies in the Caspian project group-or strife torn Georgia. Moscow now is banking on Baku accepting Lukoil's proposal to transport initial Caspian production, expected by early 1997, until a trans-Turkey pipeline can be laid.

Triton has completed a $125 million forward sale of 10.4 million bbl of oil to be produced from Colombia's supergiant Cusiana/Cupiagua complex. The oil is to be delivered during 5 years beginning this month.

Purchaser is a new special purpose corporation using funds from the sale of investment grade securities placed privately by J.P. Morgan Securities with several major U.S. institutional investors. Triton has received about $87 million and will receive the remainder when the Cusiana/Cupiagua project becomes self-financing, expected in 1997, and when certain other conditions are met.

Royal Dutch/Shell was to begin negotiations with Perupetro last week over an agreement to develop Peru's supergiant Camisea natural gas field complex in the central southern jungle. Shell will team up with Mobil, which will receive a 42.5% stake in their venture to develop 10.8 tcf of gas and 725 million bbl of condensate. An earlier, $1.3 billion project proposal was canceled amid political wrangling by the administration of former President Garcia in 1988.

Conoco and partners have signed key agreements involving Venezuelan heavy crude oil projects. Conoco and Maraven signed an accord to begin engineering and field work on a $1.7 billion project to produce 125,000 b/d of Orinoco belt heavy oil and upgrade it to 105,000 b/d of synthetic crude.

In addition, a Conoco group signed a preliminary agreement involving a $320 million project to produce and market 100,000 b/d of Orimulsion, a bitumen/water emulsion boiler fuel that also is based on Orinoco heavy crude.

The global juggernauts of privatization and deregulation mark progress in some areas but have collided with labor in others.

U.S. Agency for International Development has let an $18 million contract to a group led by Bechtel to help restructure the energy sectors of 11 Central/East Europe and Baltic nations in making the transition to market economies, with an emphasis on privatizing oil, gas, and electric industries.

South Africa plans to sell its Mossgas synthetic fuels plant at a big loss, reports Johannesburg newspaper Business Day (see Watching the World, p. 26).

The plant, which cost $3 billion, could garner about $675 million if "packaged correctly," Mossgas sources told the newspaper. That would entail turning Mossgas, which converts natural gas to liquid fuels, into a methanol plant or oil refinery. Talks have been held with Saudi refining and Taiwanese petrochemical interests. The only alternative to such a sale would be to mothball the plant by early 1997, when current gas supplies are depleted, or to extend the plant's life to 2001 by spending $190 million to develop offshore gas fields.

Taiwan reports progress on plans to privatize state owned Chinese Petroleum Corp. (CPC). The plan, near completion, calls for selling 20% of CPC stock to foreign firms and 10% to employees. It also recommends privatization be complete by 2000 so CPC can remain competitive with Formosa Plastics Group and Tuntex Group, both of which plan to build refineries in Taiwan.

Colombia agreed not to privatize or sell major parts of state oil company Ecopetrol following 4 months of talks between the National Oil Workers Union (USO), Ecopetrol, and the Colombian Ministry of Mines and Energy.

During the long negotiations, strikes were threatened, and Ecopetrol lost more than $290 million during USO's occupation and shutdown of Payoa oil field. Ecopetrol reportedly made major concessions in wages and benefits.

The Brazilian oil workers strike turned a month old last week and spread to motor fuel retailers who threatened to close the country's 25,000 service stations during 8 p.m.-6 a.m. weekdays and all day weekends. Petrobras workers went on strike to protest President Cardoso's privatization program and demand higher wages. Courts have ruled the strike illegal, and Petrobras fired and replaced 26 strikers at Paulinia, the country's biggest refinery. Cardoso has dispatched government troops to four refineries to protect strikebreakers.

Deregulation and privatization in France's energy sector are causing massive labor unrest in that country. About 2,000 Elf upstream employees last week violently disrupted Elf's annual shareholders meeting to protest what they claim is a dismantling of their sector. They claimed the upstream group is to be split into various affiliates, with some functions to be outsourced. Elf confirmed the group's gas assets are to be combined in a new gas unit.

Since Elf's privatization started, Pres. Philippe Jaffre has disposed of $1.2 billion in assets and plans further cost cutting. A much milder protest occurred at Total's shareholders meeting over 300 job cuts at the Paris headquarters.

In addition, workers with French gas and electric utilities GdF and EdF took to Paris streets to protest European Commission deregulation initiatives.