OGJ NEWSLETTER

Latin America remains a strong lure for petroleum industry capital.

Venezuela's congress has approved Pdvsa's profit sharing plan for E&P involving private companies (OGJ, Feb. 20, Newsletter). It calls for international tenders on 10 blocks to be explored under risk contracts, with any commercial discovery to be developed by a venture of the private company or group and a Pdvsa unit. It is the first direct equity participation under risk contracts by private firms in Venezuelan E&P since nationalization in 1976.

Private foreign and domestic companies are expected to provide about $23 billion in investment in Venezuela's petroleum sector the next 10 years, says Pdvsa. That compares with Pdvsa's capital budget for 1995-2004 of about $32 billion. Pdvsa's marginal fields program, under which private companies reactivate shutin or undeveloped fields in the country under service contracts, is expected to attract $1 billion the next 8 years. That in turn is expected to yield an incremental 420,000 b/d of capacity in 15 producing areas.

A Coastal Corp. unit has opened an office in Caracas in response to increasing investment opportunities in Venezuela. Prospects in Venezuela include projects for E&P, applications of proprietary refining technology, power generation, and natural gas transmission. No details are disclosed.

Meantime, Brazil and Venezuela signed initial agreements to closely affiliate their state oil companies and establish bilateral free trade within 10 years.

Plans call for setting up a venture of Pdvsa and Petrobras, Petroamerica, to capitalize on the two companies' strengths -Pdvsa's in refining, Petrobras' in deepwater E&P. The protocol calls for construction and operation of refineries, with the first slated for northern Brazil and supplied with Venezuelan crude, as well as refined products and petrochemical purchase agreements.

Enserch Corp. has agreed to form a venture with Mexican conglomerate Grupo Tribasa SA de CV to pursue energy sector development in Mexico.

The venture will seek to develop electric power plants and natural gas pipeline and distribution systems in Mexico. The Mexican senate recently passed a law allowing foreign investment in gas transmission, storage, and distribution (OGJ, May 8, p. 83), and Mexico is trying to attract foreign investment in its partly privatized electric power sector (OGJ, June 26, p. 30).

Russia hopes to resume exploring for oil off Cuba soon.

Under a protocol signed in June, Moscow agreed to conduct offshore exploration and rehabilitate oil production facilities in the country. An exploration program off North Central Cuba is budgeted by Russian firms Rosneft and Zarubezhneft at a cost of $150 180 million and is expected to attract other foreign investors, says Russian Deputy Fuel and Energy Minister Peter Nedzelsky. Key to revamping Cuba's oil sector is finishing construction of the 67 km, 60,000 b/d Varadero-Matansas oil pipeline, slated for completion in 1996. The final construction phase will cost $12 million, and Cuba hopes to get that from a $300 million credit that Moscow issued Havana in 1993 but since has remained frozen.

Taking a different tack, Colombia's state owned Ecopetrol will go solo in exploration of a major prospect in the eastern Andes foothills region of Piedemonte Llanero. Most F&P in Colombia is via association contracts in which the operator usually is a foreign company, with Ecopetrol reserving an interest once commerciality of a find is established.

Ecopetrol soon will spud 1 Coporo wildcat targeting a 1.3 billion bbl prospect 90 km south of giant Cusiana field. The well's $35 million price tag is a record for the company and equals Ecopetrol's total exploration budget in 1994. Ecopetrol has not made a significant discovery on its own in more than 45 years.

A bearish mentality currently pervades oil markets despite relatively bullish short term supply/demand fundamentals, says Stone Bond Corp. (SBC).

The Houston analyst notes world crude inventory stockbuilding in first half 1995 roughly matched that of first half 1994 but with markedly different effects on oil prices. In both years, oil prices rose at the start of the second quarter as markets realized stocks were inadequate to support growing demand.

In 1994, the rising price profile that started in April did not begin to subside until August-September. In 1995, however, crude prices started rising from a higher base in April, only to begin a 2 month drop at the end of the month. Given that supply/demand fundamentals for the 2 years are similar, SBC concludes the influence of futures and forward markets on cash prices is growing. It sees little likelihood of WTI topping $19/bbl in the near term, absent a supply disruption.

Much of the futures market's bearish mentality stems from reports following OPEC's last meeting that some ministers were hinting the group might abandon its quota system if non-OPEC producers keep taking market share (OGJ, June 26, p. 20). But Wood Gundy Inc., Toronto, contends OPEC has essentially abandoned its quota by overproducing. It pegs OPEC output at 25.7 million b/d in May vs. a 24.5 million b/d quota. If that level is sustained, world inventories will grow by 1.6 million b/d in the third quarter and be drawn down by only 275,000 b/d in the fourth, resulting in a glutted market beginning this quarter.

That suggests spot WTI could fall below $15/bbl, although Wood Gundy thinks continued demand growth will revive prices later this year or in early 1996. It forecasts WTI at $17.50/bbl this year and $18.50/bbl next year.

OPEC nations' oil administration structures are being shaken up.

Iraq sacked Oil Minister Safaa Hedi Jawad, replacing him with Gen. Amer Mohammed Rashid, previously the country's main negotiator with the U.N. disarmament committee, ahead of fresh talks on disarmament progress.

Nigeria's Oil Minister Dan Etete fired Chamberlain Oyibo, director general of troubled Nigerian National Petroleum Corp. on grounds of alleged "irresponsibility" in running the state oil company.

Meantime, Saudi Arabia created deputy oil minister posts for King Fahd's nephew Abdul Aziz - seen as a rising star in the ministry - and for Abdul Karim - overseeing the new job of deputy minister for companies, which focuses on Aramco joint ventures with foreign companies.

World-Wide Shipping, Hong Kong, has proposed a radical scheme for collective action by shipowners to boost day rates in the depressed oil tanker market, London daily Lloyd's List reported. World Wide wants tanker owners to establish a pool of 30 large crude carriers of at least 290,000 dwt to negotiate better rates with shippers and restructure the market for smaller vessels by cutting the fleet of 460. London analysts are skeptical that the 50-80 tanker owners needed to make the plan work will respond to the proposal.

European Union environment ministers meeting in Luxembourg in late June claim to have laid the cornerstone for EU's future pollution control strategy. The ministers agreed to a common position on a directive on integrated pollution prevention and control, with industrial emissions and air quality among its chief targets. They debated the scope of the directive's pollution controls and decided further debate would be based on content of proposed rulings rather than their scope. On air quality, the ministers decided to pursue a single directive to replace a series of rulings. A framework directive will set out air quality strategy, while later directives will set levels for each pollutant.

Hungary will sell its natural gas transmission/distribution networks before proceeding with plans to privatize its state oil firms.

Bids will he invited at the end of July. In addition to its gas networks, Hungary wants to sell integrated oil giant MOL, smaller, trading oriented oil firm Mineralimpex, and state electric utility MVM. Plans call for offering 50% interest plus one voting share in MOL, but there are two possible hitches. Mineralimpex, owned by MOL, is to he sold before MOL, pushing back MOL:s likely offer date. Second, the government will give investors outside the oil industry preference in buying MOL interests. Local governments may be allowed to buy as much as 40% of gas network interests. George Webber, of state privatization authority APV, says a tender is likely in July for the gas networks, MVM, and 75% of Mineralimpex.

Chinese state firm China Petroleum Engineering & Construction Co. (CPEC) has agreed to provide $1.5 billion backing for a speculative project to build a pipeline to export oil from Caspian Sea developments.

Oil Capital Ltd. (OCL), New York, recently disclosed plans to lay a $1.8 billion, 930 mile, 700,000 b/d oil pipeline linking the Caspian with the Mediterranean. OCL claims this is the most direct route for Caspian exports and that its pipeline offers an alternative to other long term export options (OGJ, June 19, p. 26). CPEC is expected to be a major participant in the venture, also providing engineering and construction services and goods. OCL now claims to have lined up total backing of $2 billion for the line.

Canadian crude oil producers expect to gain markets if the U.S. Congress repeals the ban on exports of Alaskan North Slope crude.

Trans Mountain Pipe Line, which moves about 90,000 b/d of Canadian crude to Washington state, says the change will open the U.S. West Coast to more Canadian crude. Capacity on Trans Mountain's Edmonton-Vancouver pipeline is 220,000 b/d, of which 40,060 b/d is surplus.

The change could give Canadian producers alternatives to Chicago, now the major export market for their crude.

IPAA will appeal a court decision that allows Interior to challenge royalties paid on federal lease production for as far back as 15 years (OGJ, July 3, Newsletter). Meanwhile, Sen. Don Nickles (R-Okla.) and Rep. Ken Calvert (R-Calif.) filed bills to set a 6 year statutory limit on royalty collections.

Natural Gas Supply Association says U.S. taxpayers could save $600 million-1 billion/year if Congress retains a provision in the Defense Department authorization bill that allows federal agencies to buy electricity in the competitive marketplace. NGSA contends that would allow independent power producers, which use natural gas to generate more than half of their electricity, to compete for federal electricity contracts.

Egypt's first privately owned refinery-also the biggest Arab-Israeli joint project-has taken a major step forward. The $1 billion Middle East Oil Refineries (Midor) project to build a 100,000 b/d refinery at Alexandria received a $295 million credit from the European Investment Bank. Midor is owned by Israeli group Merhav 40%, Egyptian businessman Hussein Salem 40%, and Egyptian General Petroleum Corp. 20%. The project also has pledges of $270 million commercial credit from Egyptian banks and $100 million in export insurance cover age from Tel Aviv. Egypt and Israel each will take a third of plant output for domestic use and market the rest in Europe and the Middle East.

The International Court of Justice has rejected Portugal's challenge to the 1989 Timor Gap treaty between Australia and Indonesia (OGJ, Feb. 13, p. 27).

The treaty helped the two nations establish a zone of cooperation for oil and gas exploration that in recent years has resulted in several significant discoveries. The U.N. court said it lacks authority to rule on Portugal's claim that Australia violated East Timor's right of self determination by signing the treaty.