OGJ NEWSLETTER

Depressed natural gas prices continue to cause grief for U.S. petroleum companies, but analysts contend first quarter earnings look solid for many companies.

Consolidated Natural Gas says its expected writedown of the value of producing leases at the end of the first quarter will result in a noncash after tax charge of $100-150 million. CNG blames wellhead gas prices that in February were down 40% from the same time a year ago.

Meantime, CNG will cut about 470 jobs at subsidiaries in five states to bolster earnings. Charges related to the staff cuts will be recorded later in the year, mostly in the second quarter.

PaineWebber contends disappointing natural gas prices are overshadowing a rebound in crude oil prices and the underlying operational strength among U.S. independents prompted by some timely upstream investments in recent months.

For the quarter, wellhead gas prices realized by a group of 26 U.S. independents the analyst tracks are expected to be 30% below 1994 levels, but crude prices are expected to be 25% higher than year ago levels, and overall hydrocarbon production is likely to be up as well. As a result, the PaineWebber group is expected to see an increase in total cash flow of 14.5% from a year ago.

One concern for bigger U.S. independents heavily dependent on gas prices is that improved technology and an emphasis on adding reserves through acquisitions and lower risk drilling have not significantly reduced finding costs, Merrill Lynch contends.

During 1994, for a group of 14 large independents the analyst tracks, average reserve development costs exceeded those for proven property acquisitions for the first time since 1989, while average exploration outlays remained essentially flat. Total group costs incurred in 1994 for exploration, acquisition, and development (EAD) slipped to $5.08 billion from $5.1 billion in 1993. While revised worldwide finding costs for the group fell to 82//Mcf equivalent (Mcfe) from 91/Mcfe in 1993, revised U.S. finding costs rose to 86/Mcfe from 80/Mcfe. Merrill Lynch said, "It appears that a $1.65-2/Mcfe gas price range is still required to generate an economic return on invested capital from an EAD program."

Integrated firms focusing on oil and chemicals are faring better.

Merrill Lynch thinks first quarter earnings for a group of nine integrated U.S. companies it tracks will he 10.2% higher than first quarter 1994 adjusted earnings. Upstream, crude price strength was pitted against gas price weakness, and downstream, refining margins were depressed while chemical profits were surprisingly strong. Average WTI spot price the group realized in the first quarter was $18.35/bbl compared with $14.83/bbl a year ago.

A U.S. gas distribution company is trying to get in on the ground floor of Mexico's gas industry. NorAm Energy Corp., Houston, parent of Arkla, Entex, and Minnegasco, signed an agreement with privately held Mexican conglomerate Grupo Gutsa to pursue development of Mexico's natural gas distribution infrastructure. Mexico's constitution prohibits foreign investment in the country's oil and gas sector, but recent indications - perhaps accelerated by the peso's collapse - are that foreign investment in certain sectors, such as downstream petrochemicals and natural gas pipelines, may he allowed.

Will crude price strength hold? It's being driven by downstream factors, especially concerns over adequate gasoline supplies in the U.S. amid reports of refinery outages and stocks of reformulated and conventional gasoline drifting perilously low ahead of the summer driving season. Nymex crude still hovered near $20/bbl the second week in a row last week (OGJ, Apr. 10, Newsletter), with the May contract closing at $19.88 Apr. 11. Nymex gasoline prices mostly held fast after a 3/gal rise the previous week, closing at 61.59/gal May 11.

However, the recurring specter of Iraq's oil exports flooding the market has some concerned about an oil price collapse.

Salomon Bros. has downgraded its investment recommendations for a handful of majors, citing an oil price risk associated with possible limited sales of Iraqi oil. While the U.S. still opposes any effort to lift trade sanctions against Iraq, it teamed with Argentina and the U.K. to propose Iraq be allowed limited oil sales of $1 billion/quarter to generate funds for purchases of food and medicine.

That would pose grave problems for OPEC in allocating production cuts to accommodate added Iraqi supplies pegged at 800,000 b/d. Salomon Bros. expects the U.N. Security Council to approve the sale, leaving it up to Baghdad to accept the offer, which the analyst describes as more user friendly than earlier, similar proposals. The idea is to back Saddam Hussein into a corner, with his refusal leaving the suffering Iraqi people no one else to blame. As of early last week, however, Iraq was standing by its rejection of any such offer.

By the end of its second 5 year plan in 2000, Iran expects to be producing 4.5 million b/d of oil and 82 billion cu m/year of gas.

Current output is 3.6 million b/d and 66 billion cu m/year. Iranian Oil Minister Gholamreza Agazadeh outlined the country's petroleum goals at the Sub-Saharan Oil & Minerals Conference late last month in Johannesburg.

Agazadeh also said petrochemical output will jump to 15.5 million metric tons/year from the current 9 million tons/year during the 5 year plan, and refined product output will increase to 1.7 million b/d from 1.1 million b/d.

After 2000, Agazadeh said, "Crude oil has some problems." Prices are expected to remain flat in real terms until then, he said, contending that current oil prices are inadequate to develop production needed to meet expanding demand. He also cited tax policy in consuming nations as a problem, too, noting, "The only way for producers to respond is to arrange taxes on goods coming from the consuming nations."

Iran has ties with African countries, and Agazadeh said a "huge potential" exists for cooperation between Iran and sub-Saharan African countries in exploration, refinery construction, training, and supplying crude and products.

Meantime, Iran is pursuing cooperative petroleum initiatives with the Central Asian republics of the former Soviet Union (FSU).

Negotiations got under way this month in Tehran with Armenia, Turkmenistan, and Ukraine over an outline agreement covering plans to lay a 3,000 km natural gas pipeline from Turkmenistan's gas fields to Armenia and Ukraine via Iran. Because of a lack of hard currency in Armenia and Ukraine to help foot their share of the project's $1 billion cost, some barter or exchange agreements involving projects in Iran are likely. One possibility is Ukraine supplying fertilizer for Iran produced from Turkmen gas.

More FSU joint ventures have marked major milestones, and Exxon is the main beneficiary (see related stories, p. 28).

Apparently bowing to U.S. pressure, Azerbaijan has chosen Exxon over Iran's state oil company in its bid to divest more of its interests in the $8 billion Caspian Sea development project (OGJ, Mar. 13, Newsletter).

Baku offered Exxon a 5% stake in the project after recently giving Turkey's state owned Turkish Petroleum Corp. 6.75%, up from an earlier 1.75%. The Azeris originally held 20% of the project, which calls for developing about 4 billion bbl of oil in several Caspian fields. Baku earlier offered National Iranian Oil Co. a 5% stake, but that was blocked by U.S. partners after lobbying by the Clinton administration, which recently also blocked a $1 billion Conoco oil field development project in Iran (OGJ, Mar. 27, p. 25).

Exxon and Sodeco have completed negotiations with Moscow and local officials on a production sharing agreement (PSA) for the $15 billion Sakhalin I development project off Sakhalin Island in Russia's Far East.

After the partners completed a year of negotiations and a feasibility study of developing Chaivo, Odoptu, and Arkutun-Dagi oil and gas fields, they submitted the PSA to federal and local governments for approval. Moscow still must approve production sharing legislation that is currently under consideration.

Involved is development of reserves estimated at 2.5 billion bbl of crude and condensate and 15 tcf of gas in shallow waters that are icebound half the year. Interests will be Exxon and Sodeco 30% each and Russian partners Rosneft and Sakhalinmorneftegaz combined 40%.

Rosshelf's development of supergiant Shtockmanovskoye gas field in Russia's Barents Sea is expected to cost $10-12 billion.

That's according to a feasibility study conducted by Giprospetsgaz in concert with about 100 engineering design bureaus and funded by Gazprom. Plans call for production to start in 2003 and peak at 4.8 bcfd of gas and 14,000 b/d of condensate. Plans call for an international tender to finance the project.

Foreign operators continue to hit the sweet spot off Viet Nam. Total's second well off Viet Nam, on Block 11-1 in the Nam Con Son basin, cut several oil and gas zones that flowed a combined 2,100 b/d of crude and condensate and 32 MMcfd of gas. The CA-CHO well, 250 km southeast of Yung Tan, was drilled to 4,275 m and plugged. Operator Total moved the rig to another location on the block to delineate the find. Partners are TOGI, Shell, Petrovietnam, OPIC, Norsk Hydro, and South Con Son Oil.

China is pressing development of its oil shale resources.

State companies in the Fushun area of Northeast China in recent years have produced 1.2 million bbl of shale oil from deposits in the predominantly coal producing region. An oil shale processing plant with capacity of producing 2,400 b/d of synthetic crude oil is in the final stage of construction.

Borealis AS, Copenhagen, and Oman's Ministry of Commerce & Industry have signed a letter of intent to study feasibility of a $700 million petrochemical joint venture in Oman.

Borealis, a venture of Neste and Statoil, says the plan is to build a plant to utilize gas feedstock from Omani government fields.

Involved are a gas separation unit, 260,000 metric ton/year ethylene cracker, and two polyethylene units with combined capacity of 260,000 tons/year of HDPE and Lldpe, with prospects for later adding a polypropylene unit.

This summer U.K.'s Health & Safety Commission (HSC) expects to produce a consultative document on new offshore design and construction rules, with the aim of passing legislation by yearend.

HSC says this would be the fourth and final package of legislation created in the wake of the 1988 Piper Alpha platform blast and would mark legislation catching up with offshore industry practice of recent years.

On June 20, the second and third batches of legislation will become operational. Then, almost 90% of the 106 recommendations of the 1990 Cullen inquiry into Piper Alpha will have become law. The latest statutes will be the Offshore Installations (Prevention of Fire and Explosion/Emergency Response) Regulations 1995, and the Offshore Installation and Pipeline Works (Management and Administration) Regulations 1995.

The first batch of legislation under this program required operators to gain approval of a safety case for each offshore installation, setting out safety assessments and emergency procedures (OGJ, Dec. 14, 1992, p. 25).