OGJ NEWSLETTER

The oil price drop may have slowed for now, but the specter of another steep price slide hovers in the wings as the year winds down.

In response to modest oil supply cuts announced by Iran, Nigeria, and Venezuela, oil prices again rallied last week (OGJ, Dec. 21, Newsletter).

Nymex light sweet crude for next month delivery broke the $20/bbl barrier the first time this month, closing Dec. 21 at $20.04/bbl for February delivery. That's up almost $1 on the week vs. a January delivery closing.

In London, as Brent for February delivery rose to $18.64/bbl Dec. 21, compared with a Dec. 9 closing of $17.70 for January delivery, some traders believed the market's recent skid may have been temporarily halted.

"It is too premature to say the market has bottomed, but I think it has stopped going down for a while," Andrew LeBow, ED&F Man, New York, told Financial Times.

Part of the strengthening was attributed to Nigeria announcement it would cut its oil output by 10%. Lagos has found difficulty selling its crude recently, Financial Times reported, and sold several cargoes at a discount.

Venezuela's latest bid to strengthen markets involves cutting heavy oil exports by 25,000 b/d. Plans call for producing that volume of crude storing it until summer 1993, when asphalt demand is stronger. Because they involve heavy crude, the cuts don't affect Venezuela's OPEC quota.

Longer term, however, these developments aren't enough to bode well for a growing glut of oil in a weak global economy. Even as the economy shows faint signs of stirring, those of Germany and Japan still languish. And the trend among OPEC members is toward more productive capacity ahead of any return of Iraqi supplies to the market.

According to Middle East Economic Survey (MEES), most extra OPEC production in November came from Iran, where output reached 3.835 million b/d, up 215,000 b/d from October. Iran's November production should "...help to convince hardened skeptics that Iran's productive capacity-now claimed to be 4.1 million b/d, rising to 4.5 million h/d next March-has in fact registered significant gains during the course of the year," MEES said.

"What now remains to he seen is whether Iran will he equally efficient in reducing output to its OPEC quota allocation of 3.49 million b/d in December and the first quarter of 1993."

The odds currently weigh against OPEC for its next ministerial meeting, scheduled for Feb. 13.

Geopolitics of Energy notes that by the second quarter, OECD demand will have slowed as supplies remain in surplus.

"Not even a true beginning of a U.S. economic recovery will make a sufficient difference," the Washington newsletter said."

"Iran, Kuwait, and Saudi Arabia-and not the smaller producers will need to agree to reduce their production by more than 1 million b/d and stick to it. Otherwise, the February agreement will not be effective."

China is set to become a net oil importer by as early as 1995, reports China Daily. Oil exports are poised to phase out because China's double digit economic growth, to continue through 2000, will consume the nation's 2.8 million h/d oil production. China exported 460,000 b/d of oil in 1991 and imported 120,000 h/d. For the first 9 months of this year, oil exports have been reduced and imports increased, the Beijing newspaper reports.

Early signals from Russia's new premier, Viktor Chernomyrdin, are intended to ease concerns about economic reforms and help for that nation's bedeviled energy sector. Chernomyrdin, replacing Yeltsin protege and architect of economic reform Yegor Gaidar-a victim of hardliners in the Congress of People's Deputies-has called for $480 million in soft loans for the energy sector, a possible sign of looser monetary policy.

U.S. Export-Import Bank will lend or guarantee loans to Russia totaling $2 billion to buy U.S. oil and gas equipment. Ex-Im Bank Vice Chairman Eugene Lawson says the bank's goal is to make the U. S. the No. 1 exporter to Russia, which imports $30 billion/year in goods. He notes Japan's efforts to sell Russia $700 million in oil and gas equipment.

Can such efforts staunch the hemorrhage? Not in 1993, even with a surge in foreign investment, Russian Economics Minister Andrei Nechayev warns. He expects Russian oil output to drop a further 1 million b/d in 1993 after plunging 1.3 million b/d in 1992. Chernomyrdin earlier estimated Russian oil flow will drop to less than 8 million b/d for 1992.

Armenia's President Levon Ter Petrosian has declared a national emergency in response to the country's energy crisis.

The government wants to restart the republic's nuclear power plant near the Turkish border, closed after the Leninakan earthquake 4 years ago, reports the Independent newspaper, London. A 4 year conflict with Azerbaijan over the Azeri enclave of Nagorny Karabakh led to blockades and eventually to the energy crisis. Azerbaijan cut off the main gas supply to Armenia 4 years ago and Georgia has cut by a third gas supplied from Turkmenistan to Armenia, apparently under pressure from Azerbaijan, its main supplier. Fuel shortages are so acute that buses are a rare sight, said the Independent. Cooking gas has been cut off, hospitals have stopped operating because of frozen operating rooms, and schools have closed until spring. There has been no central heating for the last four bitter winters.

British Gas' transportation and storage businesses should be split and divested from the rest of BG activities, contends Ofgas Director-General James McKinnon, in testimony before the U.K. Monopolies and Mergers Commission (MMC). Tensions have escalated recently between the recently privatized U.K. gas monopoly and the U.K. government gas industry regulator (OGJ, Dec. 21, p. 36).

"Our objective is to enable genuine and self-sustaining competition to develop in the gas market," McKinnon said. "The key to British Gas' monopoly is its ownership and control of the gas transportation and storage system.

"After detailed investigation, I have concluded that simply to create a separate transportation and storage unit and to allow it to he owned and controlled by British Gas, as the company proposes, cannot serve the objective of achieving real competition."

McKinnon said ownership of the pipeline and storage system should be by an independent company without allegiance to any one supplier. BG would not respond to the comments, noting only that MMC will report on its decision by July 1993.

Companies have been awarded 22 onshore exploration licences by the U.K. Department of Trade & Industry, 12 of which are coalbed methane prospects. Conoco won coalbed methane acreage as part of Kinetica, its joint venture with electric power producer Powergen. Kinetica won two licenses as operator, one in Cheshire, Staffordshire, and Shropshire, the other in North Yorkshire and Humberside.

President Bush, Mexican President Salinas. and Canadian Prime Minister Mulroney signed the North American Free Trade Agreement (Nafta) Dec. 17. The pact now must be ratified by legislatures in each country.

President-elect Bill Clinton afterwards reaffirmed his support for the treaty but says he will seek stronger protection for affected U.S. employees and more environmental safeguards.

An OECD report calls for Pemex to boost efficiency by further decentralizing operations and allowing privatization of many areas in the oil industry not explicitly restricted by Mexican law. The report says inefficiency at Pemex has led to losses equivalent to more than 1% of the country's gross domestic product. Mexico's constitution reserves most oil related activities for state companies, but in recent months Pemex has begun to privatize some downstream and service/supply functions (OGJ, June 15, Newsletter).

OECD calls for further privatization and points to Norway as an example of a country that allows foreign firms to invest in oil exploration through competitive, shared risk contracts. OECD cites contracts based on output recently approved under Nafta as a step in the right direction.

The push to deliver more U.S. gas to Mexico gains momentum.

A combine of Bechtel, Coastal, El Paso Natural Gas, General Electric, and ICA Industrial won the tender by state utility CFE to design and construct a 700,000 kw gas fired cogeneration power plant, Salamayuca II, adjoining an existing 320,000 kw plant near Cuidad Juarez.

GE has a $240 million order to supply three gas turbine generators and three steam turbine generators for the $600 million plant.

Included in the winning bid is a $57 million expansion of El Paso's pipeline system to feed the plant, expected to take 175 Mmcfd of U.S. gas. The expansion, adding a Mexican border delivery point to El Paso's system near Clint, Tex., will provide as much as 300 MMcfd of firm and interruptible transportation service and involves adding 36 miles of 24 in. or larger pipe and 28,000 hp of compression. Plant start-up is scheduled for mid 1996. El Paso filed with FERC in July its plans to provide as much as 350 MMcfd in transportation service to Baja California Norte and Southwest Arizona at a cost of $71 million (OGJ, Apr. 6, p. 21).

Two utilities are the first Mexican gas companies to join the American Gas Association. Cia. Mexicana de Gas, Monterrey, is the largest privately held gas company in Mexico. Gas Natural de Juarez serves more than 20,000 customers and is building a pipeline to Chihuahua and Monterrey.

Calgary oilwoman Patricia Black is Alberta's new energy minister.

She succeeds Rick Orman and was appointed by the province's new premier, Ralph Klein, who replaced the resigned Don Getty.

She has worked as a petroleum accountant and financial manager with several companies, including Suncor and Sabre Energy. The new minister said one of her priorities will be to end a long gas price and contract dispute between Alberta producers and California regulators.

The prospect of a gasoline tax increase continues to be the subject of much discussion in Washington. GM, Ford, and Chrysler advocate an increase in gasoline taxes, arguing that would be a better way to persuade customers to buy smaller, high mileage cars than would an increase in the Corporate Average Fuel Economy standards requiring then to make more fuel efficient cars.

In an interview with the Wall Street Journal, President-elect Bill Clinton said a 15/gal increase in gasoline taxes would be excessive. Clinton said, "I don't think you ought to raise the heck out of gas taxes unless you're going to give the middle class some kind of a break somewhere else."