OGJ NEWSLETTER

Will Iraq be a market nonfactor long enough for world oil demand to catch up?

Iraq last week dismissed as illegal the U.N. Security Council's resolution to seize as much as $1 billion in frozen Iraqi oil proceeds to pay for Kurdish/Shiite relief aid and U.N. weapons inspections and compensate victims of Iraq's 7 month occupation of Kuwait. It is the U.N.'s first such seizure of a nation's money. The resolution allows the U.N. to confiscate proceeds frozen in other countries--to a ceiling of $200 million per country--from oil sales prior to the August 1990 invasion of Kuwait. In addition, Saudi Arabia and Turkey can sell Iraqi oil they've held since the invasion and turn over proceeds to the U.N. At the time of the blitzkrieg of Kuwait, more than $5 billion in Iraqi foreign assets were frozen. Iraq has persistently rebuffed U.N. terms for a one time sale of $1.6 billion in oil to pay for humanitarian aid in Iraq and insists it will press efforts to seek U.N. permission to export $4 billion in oil during 6 months to pay for food, medicine, and humanitarian aid for its people as well as financing U.N. operations.

Within hours of the unprecedented measure's announcement, Saddam Hussein ordered construction of a petrochemical complex at an undisclosed site at a cost of 700 million dinars without specifying how his country will obtain materials to build the plant under the U.N. trade embargo.

County NatWest has upped its spot crude oil price forecast for 1993 by about $1/bbl for WTI at $21/bbl and $19.70/bbl for Brent based mainly on Iraq's continued absence from world markets, putting the average price for both about flat with its latest estimate for 1992. Its earlier forecast for oil prices to average less than $20/bbl in 1992 assumed Iraq would begin limited exports under U.N. sanctions during the year.

Now County Natwest sees an increasing possibility Iraq may not begin exports until well into 1993 and maybe not before 1994. It sees oil prices remaining flat in 1994, followed by $1/bbl/year increases thereafter.

OPEC is having no trouble sustaining production to keep pace with demand growth in Iraq's absence. IEA predicts OPEC production for 1992 will average about 24 million b/d, about the highest since 1980.

OPEC in September hiked oil production to 24.7 million h/d, its highest monthly level since 1981 and up 200,000 b/d from August, says IEA.

The September level also pushed OPEC third quarter output to 24.4 million b/d--vs. a quota of 23.4 million b/d--and gave the group its highest quarterly output in 11 years.

Russia's plans to boost oil prices to world market levels by yearend 1993 is compounding economic woes elsewhere in the C.I.S. and even in Moscow, according to Russian press reports.

Ukraine's Lisichansk refinery was facing shutdown early this month because of a sharp jump in crude costs, reports Izvestia. Tyumen producers told the refinery they would deliver crude only at world prices--24,000 rubles/ton, or about $14/bbl at the time. Passing along the higher crude cost would spike the price of A-92 premium gasoline about fourfold to 60 rubles/1. The refinery also provides diesel for industrial operations and resid for power plants in the Donetsk coal region.

Moldova says it will have to come up with another 126 billion rubles--more than half its GNP--to cover increased costs of Russian oil imports as a result of price hikes.

Moscow city officials are resisting the price hikes as well, noting traditional suppliers are trying to sell crude to Moscow refineries under contract for $5-7/bbl, which would equate to a 30 rubles/1. gasoline price, Itar-Tass reports. Moscow, using available oil stocks, plans to maintain gasoline prices at 13-15 rubles/1. for A-92. The Ryazan and Kapotnya refineries, which together supply about 92% of Moscow's gasoline, want $15/bbl for A-76 and $16/bbl for A-92 gasoline. The Kirishi refinery jumped gasoline prices to $16.75/bbl for A-76 and $17.35/bbl for A-92.

Moscow officials want the Yeltsin government to cap crude prices at $3.90/bbl to avoid industrial bankruptcy and social upheaval.

Russia's Sakhalin project group continues to expand. Mitsubishi is the latest to join the 3M group of companies--Marathon, McDermott, and Mitsui--pursuing a feasibility study of Sakhalin Island offshore oil and gas development, according to Japanese press reports. That follows Royal Dutch/Shell's decision to join the group last month (OGJ, Oct. 5, p. 29). Mobil opted not to join the group, reports Japanese daily Nihon Keizai Shimbun.

Japan's Ministry of Transport is drafting plans to turn the west coast port of Niigata into a major import site for Russian gas, according to Japanese press reports. Plans call for building Japan's largest LNG terminal in a 10 year project costing more than $8 billion.

The government seeks to back out oil with LNG, setting a target of 57 million tons of LNG consumption in 2000 vs. 47 million tons in 1990.

Most of the new gas is expected to come from Sakhalin and Siberia. From Niigata it will go to the Pacific coast cities of Tokyo and Sendai. A pipeline to Tokyo exists, but a new spur from Niigata to Sendai is planned.

One Middle East border dispute boils over, while others simmer.

Kuwait is confident it can successfully mediate a border dispute between Saudi Arabia and Qatar that resulted in a clash at Al-Khaffus in the disputed area Oct. 1 in which three people were killed.

Agence France Presse reports the conflict is being resolved after a visit to both antagonists by Kuwaiti Crown Prince Saad al-Abdallah al-Sabah. Saudi King Fahd assured Saad he wants a peaceful settlement. Qatar wants negotiations to demarcate the disputed area south of Doha and says it is scrapping a 1965 border accord that Riyadh insists is binding.

And Saudi Arabia and Yemen opened talks late last month over the oil rich provinces of Najran. The two sides signed an agreement in 1934 stipulating the three provinces belong to Saudi Arabia, but the agreement, renewed in 1974, is to expire this month, and Sanaa refuses to extend it.

The two are also in dispute over an area Saudi Arabia borders with southern Yemen, where the boundary has never been formally delineated.

Meantime, talks between Iran and United Arab Emirates over three disputed islands at the mouth of the Persian Gulf collapsed late last month with Iran repeating its intent to defend its territory. Negotiations over the Abu Musa islands are to continue in Tehran at an unspecified date. Iran and U.A.E. sheikdom Sharjah have shared the area under a 1971 accord.

France's oil industry is up in arms over the government's new draft oil law it claims undercuts its competitiveness in Europe. The new law, to take effect in January, replaces a 1928 law seen as inadequate under the emerging single European market. The major point of contention is a requirement for crude importers to transport 5% of their volumes beyond the previous year's level on French flag tankers. French refiners contend the rule hobbles them with extra costs no other European Community refiners face.

Mexico Treasury Ministry officials are studying the possibility of reducing Pemex's tax burden by as much as 50%, according to Mexican press reports. Pemex has long contended it can't make investments needed to maintain production and export targets unless its tax bite is cut.

Merrill Lynch expects adjusted earnings for eight U.S. majors it tracks to be up 36% in the third quarter, with downstream earnings mixed.

It forecasts adjusted earnings of six other majors it tracks--including BP and Royal Dutch/Shell--up nearly 10% in the third quarter vs. a year ago, bolstered by international E&P strength. The analyst predicts a fourth quarter income jump of 45% vs. a year ago for the latter group.

The omnibus U.S. energy bill has cleared its final hurdle.

The U.S. Senate voted 84-8 late last week to shut off a filibuster against the bill and passed it by voice vote. The House approved the hill earlier (see story, p. 24). President Bush is expected to sign the bill shortly.

In merging House and Senate tax bills, Congress has deleted an 8 month extension of unconventional gas tax credits. Wells drilled by yearend still will he eligible until 2002 for the credit, 92 cents/Mcf for coalbed methane and 52 cents/Mcf for tight sands gas. Some oil and gas associations opposed the extension credit, in effect for 12 years, citing current excess gas supplies.

In the face of complaints from environmentalists and industry, EPA has withdrawn its April 1992 plan for identifying hazardous wastes.

That rule would have identified some wastes as hazardous if the content of hazardous chemicals were above a certain level and others if derived from or mixed with hazardous substances. EPA plans to develop a replacement rule in 1-2 years, after convening an advisory group.