OGJ NEWSLETTER

Is the apparent stunning turnabout in Saudi oil policy just a veiled threat of retaliation for proposed global warming carbon taxes?

Press reports quoting Saudi officials as saying Saudi Arabia wouldn't be averse to a rise in oil prices jolted the market after OPEC's meeting in Vienna last week. "Saudi Arabia is convinced that an increase of up to $3/bbl will have no effect on economic growth or demand for oil, Associated Press quoted one undisclosed Saudi official as saying.

That shot the price of next month Nymex light sweet crude futures up $1.06 to close at $22/bbl May 26, the highest since Nov. 21, 1991, and the biggest 1 day jump since the Aug. 19, 1991, increase of $1.17 to $22.47, the week of the aborted hardliner coup in the former U.S.S.R.

Other crude and products futures followed suit, just ahead of the summer driving season and coming on the heels of an OPEC meeting that saw Saudi Arabia unexpectedly back off earlier hints it would lobby for a 1 million b/d quota increase. As a result, OPEC essentially rolled over its current production ceiling of almost 23 million b/d, excluding Kuwait and a likely unilateral increase by Saudi Arabia of about 120,000 b/d. The Saudi pronouncement also comes just before the U.N. Earth Summit in Rio de Janeiro this week, where global warming will be the chief topic, and just after the European Commission adopted a draft order for a carbon tax of $3/bbl of oil equivalent on fossil fuels beginning Jan. 1, 1993--which itself prompted a Saudi warning of oil market dislocations (OGJ, May 25, Newsletter).

Another way of looking cit it is that the Saudis have come under increasing pressure from rival Iran while the OPEC basket marker has been languishing at about $3 below its official $21/bbl target.

With that in mind, the Saudis, currently facing a cash crunch after paying its Desert Storm bill, might be taking an ideal opportunity to send a political signal to consuming and producing countries alike while enjoying a temporary windfall from the market's response.

However, with most analysts predicting the call on OPEC oil to be higher than the official ceiling, the cartel faces its perennial dilemma of quota cheating with the recent runup in prices. And again it will come down to whether the Saudis will be willing to lead a production cut to confirm whether last week's statements truly represent a basic policy shift.

EIA predicts world demand for petroleum products will rise about 1% in 1992 and 1.7% in 1993 as economic recovery progresses and low oil prices persist. EIA sees OECD demand up 440,000 b/d to 38.3 million b/d in 1992 vs. 1991. By 1993, OECD demand will rise another 590,000 h/d as Japanese and German economies recover.

EIA sees U.S. crude imports averaging $17.59/bbl this year, down about $I/bbl from 1991. The DOE agency also predicts U.S. crude production will drop by 210,000 b/d in 1992 and by 280,000 b/d in 1993. EIA expects U.S. drilling activity to improve slightly by yearend after a 32% year to year drop in the first quarter. EIA also expects gas prices to rise 11% in 1993, assuming a stronger U.S. economy and normal weather.

A majority of EC energy ministers has rejected the EC commission's proposal to deregulate energy production, transportation, and distribution of energy in the EC. The U.K., Ireland, Denmark, and Portugal approved two measures, but other opposition, mainly from France, over third party access for gas and electricity, sank the overall initiative to inject more competition in EC energy markets.

Nigerian National Petroleum Corp. plans to hire out its excess refining capacity in hopes of generating as much as $100,000/day in extra revenue. Lagos Daily Times reports NNPC would devote 50,000 b/d of capacity to outside processing out of the country's total capacity of 380,000 b/d.

Oil firms would be allowed to refine crude either bought in Nigeria or elsewhere, and NNPC would charge processing fees. To attract business the company is offering use of its Port Harcourt refinery, its only plant that produces unleaded gasoline. The 150,000 b/d Port Harcourt plant was built in 1989 with an eye to exports but since then has served local markets due to growing demand and frequent downtime at other refineries.

Venezuela's government has finally yielded to years of complaints from Pdvsa over its onerous tax burden but only in a tiny way.

The government will cut Pdvsa's export reference price (ERP)--the price at which it is taxed--to 118% of the actual export price from 120%. That will trim $31 million from Pdvsa's tax bill this year compared with its $9 billion total tax bill in 1991. Caracas plans to eliminate the ERP by yearend 1997. Pdvsa still must pay corporate taxes and royalties totaling about 82% of its operating profit, a level it says threatens its $48 billion 5 year capital program. Pdvsa outlays in 1991 were $4.1 billion, biggest to date. That breaks out as 78% upstream and refining/marketing, 12% petrochemicals, and 10% bitumen. Pdvsa had planned even bigger outlays in 1992 but is scaling back in light of soft oil prices. Press reports in Caracas put the cuts at as much as $1.2 billion, but Pdvsa hasn't disclosed the amounts. Service companies report some cuts in workover and infill drilling programs. It's apparent Pdvsa's major capital programs will be extended beyond 1996-97.

Persian Gulf tanker export capacity is on the rise. Saudi Aramco will add a fourth wharf at Yanbu Port in western Saudi Arabia and is increasing crude loading capacity to 4.5 million b/d from 3.2 million b/d, OPEC News Agency reports. The port currently can handle three crude tankers simultaneously. The expansion is to he complete by yearend.

Iraq says it has completed reconstruction of all its Persian Gulf ports and they are ready to receive vessels as soon as U.N. sanctions are lifted.

Iraq claims ports at Al-Bakr, Umm Qasr, and Khour at southern terminals and Khour Al-Zubair on the northern tip of the gulf, heavily damaged in the Persian Gulf war, have been restored to prewar capacity.

BP has canceled plans to drill a well on the Antufash block in the Red Sea off Yemen following Saudi Arabia's warning last month to companies about its border dispute with Yemen, reports Middle East News Network (OGJ, May 11, Newsletter). A Yemeni contracting company had arrived in Hodeidah to prepare for work before the announcement, and Yemen said BP's cancellation amounted to breach of contract, MENN reported.

Japan wants the international community to cooperate to fund deepsea drilling activity. Japan's Science and Technology Agency (STA) recently made the proposal, saying Japan would provide about 100 billion yen ($752 million) in funds and soon would begin soliciting participation of the U.S., Europe, Canada, Australia, and China. The agency will provide more details on its proposal at the OECD science forum in Paris in July. And STA affiliate Japan Marine Science and Technology Center will offer an advanced technology deepsea drilling vessel, rated to 3,500 m in 4,000 m of water, under development for use in the program. It is due for completion in 1993.

Russia's recent fivefold hike in oil and gas prices is far from sufficient to enable the republic's petroleum industry to achieve profitability needed to hike crude production or even maintain present output levels, say Moscow economists. The price decree, signed by President Yeltsin last month (OGJ, May 25, Newsletter), raises prices of crude sold domestically to 1,800-2,000 rubles/metric ton, or about $2.47-3.01/bbl. At the very least, the domestic price should be no less than 2,500 rubles/ton, the economists contend. That compares with a world market price of about 15,000 rubles/ton, or $20.55/bbl at realistic currency conversion rates.

Even before the official domestic price, covering 60% of the republic's oil production, was increased, crude on some Russian commodity exchanges at times sold for more than 10,000 rubles/ton, about $13.70/bbl.

When free market prices covering 40% of production were combined with government controlled prices, the average domestic selling price for Russian crude was 965 rubles/ton, or $1.32/bbl.

Meantime, Russian officials are putting price tags on plans to increase oil production in the republic the next 8-10 years by developing new fields and attracting foreign investment to rehabilitate old wells.

The republic will need about $1.4 billion in foreign investment to work over its estimated 25,000 old wells, says Russian Deputy Oil Minister Andrei Konoplyanik. Speaking in Moscow at a conference on Russian-Canadian cooperation in the energy industry, he said there are about 30 oil and gas fields in the republic that require foreign investment.

He notes foreign companies are ready to invest $60-70 billion in the Russian oil industry and likely will allocate in 1992 $1.1 billion out of $5.5 billion in expected credits to Russian industry.