OGJ NEWSLETTER

June 12, 1995
U.S. Industry Scorboard 6/12 (75275 bytes) The market has turned around for U.S. refiners, and 1995 now is shaping up as a good year for them despite the first quarter gloom. Charles Rivers Associates' Philip Verleger notes U.S. refining margins in May exceeded the 10 year average for the month and contends prospects for continued profits look very good, at least until fall, when margins come under pressure again. He thinks the improved market could mean a $3 billion jump in 1995 U.S.

U.S. Industry Scorboard 6/12 (75275 bytes)

The market has turned around for U.S. refiners, and 1995 now is shaping up as a good year for them despite the first quarter gloom.

Charles Rivers Associates' Philip Verleger notes U.S. refining margins in May exceeded the 10 year average for the month and contends prospects for continued profits look very good, at least until fall, when margins come under pressure again. He thinks the improved market could mean a $3 billion jump in 1995 U.S. refining profits from 1994.

The 10 year average gasoline to crude margin for May is $5.72/bbl on the Gulf Coast and $5.95/bbl in New York. In 1994, that fell to $2.76 on the gulf and $3.25 in New York. But this year, the May margin jumped to $6.77 on the gulf and $7.34 in New York.

Verleger thinks the current strong margins are a result of refiners responding with hedging activity to the low margins in early spring caused by vacillation among federal and state officials over the federal reformulated gasoline program.

Further, the improvement in margins could not come at a better time, during the market's normal seasonal peak.

However, Verleger warns of a slight dip in margins in later months. Much of the current strength in markets reflects a sharp rebound in open interest hedging in gasoline futures markets, particularly by refiners. Open interest in the July contract was at a near record level as of the end of last month, which may stem from forward selling of future gasoline imports. A flood of imports, in turn, will help eliminate most of the tightness in the market. In the event of such opportunistic selling, margins are likely to fall during the summer, contends Verleger, adding, "Margins will remain good, but not as good as they are now."

Meanwhile, the average U.S. gasoline price has hit its highest level since Operation Desert Storm early in 1991. The average U.S. pump price for self-serve unleaded regular was $1.212/gal the last week of May. That's the highest since the last week of January 1991 averaged $1.215/gal. The main contributor to gasoline price inflation is the recent growth in gasoline taxes, which has occurred while revenues to refiners and marketers have declined. Gasoline taxes have gone up 8.1/gal to an average 39.2/gal in a comparison of the two periods, while the price excluding tax has fallen 8.4/gal to an average 82/gal.

Legislation proposed by Germany's environment ministry threatens the country's refiners with a massive investment program to reduce benzene content of gasoline. Environment Minister Angela Merkel plans to ban all cars without catalytic converters by 2000 and cut benzene content of gasoline to 1 vol % from 2.1 vol % today. Esso AG said benzene reductions would require massive investment by German refiners, which are now producing gasoline with half the benzene content of other European refiners.

"The best way to reduce benzene emissions further would he to increase the use of catalytic converters," Esso said. "Further investment in cutting benzene in gasoline would have comparatively little effect."

Esso notes 60% of Germany's cars are fitted with catalytic converters, although it contends incentives are needed to have all cars fitted by 2000.

Only 6% of German's cars now require leaded gasoline, Esso added, and there are rumors that refiners soon will stop selling leaded fuel.

"Drivers may then he encouraged to buy additives to make up leaded gasoline," Esso said, "just as they already do in Austria."

Plans to harmonize European Union energy policy took a step forward June 1, when Energy Council ministers accepted the green paper that has Europe's petroleum industry worried. Now the European Commission will prepare a white paper setting out actions needed to implement the green paper's proposals, to be adopted by yearend.

Before the ministers met, Brussels' European Petroleum Industry Association (Europia) and London's Exploration & Production Forum warned against further intervention on energy matters. The associations said free market principles and industry's ability to respond quickly to supply difficulties would limit European dependence on imports (OGJ, May 29, Newsletter).

Among interventionist measures in the green paper is a proposal to guarantee supply of all fuels for power generation by "adjustment of indirect taxation in order to ensure equality of competition between substitute fuels."

Europia, meeting June 7 to discuss a response to the green paper, expects major changes to its proposals as they take substance in a white paper.

London's International Petroleum Exchange and Singapore International Monetary Exchange were about to link trading in Brent crude oil contracts June 9. The mutual offset link will enable traders to open positions on one exchange and close them on the other after an extended trading day.

Almost 100 new fields could be developed off the U.K. the next 15 years, contends Grampian Regional Authority, Aberdeen. The council reckons offshore industry will provide 40,000 jobs in the Aberdeen area 10 years from now, a decrease from 46,500 oil related jobs in the region today. Eighty-one oil and gas fields have been developed off the U.K. to date, solid the council, and 17 more are due on stream in the next 4 years. "Even with a conservative oil price forecast," said the council, "a further 80 fields are still forecast to be developed over the next 15 years." The report pegs oil prices at $16-22/bbl to 2000.

India is trying a hard sell approach in promoting joint venture exploration to foreign multinationals. Teams are in London and Houston this week to push JVs with state oil companies ONGC and OIL to explore 18 onshore and 10 offshore blocks. The state companies will take interests of 25-40% in the JVs, which will have contract terms of 6 years. Previous exploration license rounds have generated little enthusiasm, mainly because the prime acreage was reserved for state companies. This round features acreage, some deepwater and some in the Himalayan foothills, considered highly prospective.

Meantime, India is mulling a measure to allow 100% participation by foreign companies in E&P ventures. India's oil demand is expected to soar to 3.28 million b/d by 2010 from the current 1.3 million b/d, and more than $80 billion is required in capital spending the next 15 years to reach self-sufficiency.

Kazakhstan late last week was to hold a preliminary tender presentation for sale of state owned oil and gas assets. Foreign companies will get to bid on the Aktyubinskneft and Yuzhneftegaz production associations, which have combined oil reserves of more than 1.5 billion bbl, and the 126,518 b/d Chimkent refinery. Almaty wants to complete the sales by yearend.

Bulgaria is shaping up as a potential transit hub for transportation of oil from the former Soviet Union to Europe.

The Nizhny Novgorod pipeline engineering unit of Russian gas giant Gazprom estimates a previously disclosed Russo-Greek-Bulgarian proposal to lay an oil pipeline from Burgas, Bulgaria, to Alexandroupolis, Greece, would cost $650-700 million for a capacity of 640,000 b/d (OGJ, Dec,. 26, 1994, Newsletter). Crude would be shipped to Burgas from Novorossiisk, enabling Moscow to bypass the straits of Bosporus and Dardanelles, where Turkey has imposed restrictions on transit of large tankers.

Meantime, Bulgaria is looking at another proposed pipeline to transport FSU oil across the Balkans-not intended to compete with the line to Greece-to Italy. It would take crude produced in Russia, Kazakhstan, and Azerbaijan that is moved by tanker out of Novorosiisk to Burgas and transport it via Macedonia and Albania to Brindisi on Italy's Adriatic coast.

FERC has decided U.S. interstate gas pipelines can recover costs of new facilities on a rolled-in basis from existing customers.

Pipelines must show the facility's benefits to the system are proportional to the rate effect on existing customers. FERC will make a presumption in favor of rolled-in rates if the rate effect is 5% or less.

President Clinton has threatened to veto the Clean Water Act rewrite the House passed last month. The Senate environment committee is expected to make extensive changes in the legislation. Among other things, Clinton objects to provisions that allow some water standards to be avoided or waived and prevent the federal government from controlling polluted water runoff.

Is oil and gas leasing of the Coastal Plain of the Arctic National Wildlife Refuge a realistic possibility now? Alaska's Republican senators think so and want to call the Coastal Plain the Arctic Oil Reserve to help buttress that prospect. Frank Murkowski and Ted Stevens want to counter what they contend are environmentalists' efforts to mislead the public into thinking industry wants to drill throughout the wilderness refuge, when interest always has focused only on the 1.5 million acre coastal strip, site of human activity for centuries.

Coastal Plain leasing gained a major boost last month when Congress passed budget hills that include $1.25-2.3 billion from Coastal Plain lease sales.

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