OGJ NEWSLETTER

The market bears are on the prowl again, and once again Saudi Arabia holds the key.

Promised production cuts of 375,000-405,000 b/d from nine OPEC members received a skeptical response from crude oil markets last week.

Brent fell 70 in 2 days to close Jan. 22 at $17.40/bbl on news of the first proposed cuts, although prices recovered to $18.05/bbl as more members joined in. Markets were concerned about lack of detail in the proposed cuts and were left with the impression OPEC's Feb. 14 ministerial monitoring committee may find it difficult to agree on the minimum 5%, or 1.2 million b/d, in cuts needed to maintain market balance in the second quarter.

The Saudis' 100,000 b/d cut represents only about 1% of total production. That followed pledges from Venezuela, Nigeria, and Libya to cut output a combined 130,000 b/d and from Iran, Algeria, and Qatar calling for another cut of 70,000-100,000 b/d. The U.A.E. later came in with a 50,000 b/d cut, and Indonesia promised a 25,000 b/d cut.

Saudi Oil Minister Hisham Nazer says the 100,000 b/d cut was made to maintain a supply/demand balance in oil markets. Saudi Arabia is likely to push for across the board percentage cuts at the meeting, while most OPEC members want to see the Saudis carry a disproportionate share of any cuts. An exception: U.A.E., which offered to support a 5% across the board cut at the meeting. With current output at 24.2 million b/d, that calls for a 1.21 million b/d cut. However, OPEC is still working on a nominal ceiling of 23.65 million b/d, putting the cut at 1.18 million h/d.

Speculation is growing among analysts that the Saudis are committed to driving oil prices down to jump start the U.S. economy and thus boost President Bush's chances of reelection.

County NatWest's Adam Sieminski contends the Saudis believe "the worst possible nightmare is that George Bush is history after November 1992 but Saddam Hussein is not ... By keeping Iraqi oil off the market, they can neutralize Saddam. By keeping oil prices low, they can convince the world that Iraqi oil is not needed." Sieminski thinks the Saudis will push for $16/bbl or lower and pursue that policy until the economy shows signs of recovery or Saddam is out of the picture.

Salomon Bros. sees WTI dropping to or below $15/bbl the next few months but thinks chances are very good the Saudis will cut output by 1-1.5 million b/d in the spring--if it wins some concessions from others in OPEC, namely abandonment of the reference price concept and fewer formal meetings. C.J. Lawrence's Charles Maxwell sees WTI's low in 1992 at $16-17/bbl in April-July.

Contrarian views are held by Purvin & Gertz and Merrill Lynch.

P&G sees decisive action at the Feb. 12 meeting resulting in WTI recovering to $20 by the end of the quarter. Merrill Lynch contends a 1 million b/d cut will yield $20 for WTI by midyear.

Saudi Arabia continues to press expansion of its productive capacity to 10 million b/d. Saudi Aramco let a $50 million contract to Agap Arabia, a joint venture of Saudi and Filipino private companies, for a 1.35 million b/d seawater injection plant in the Hawiyah area of Ghawar field.

And Aramco let a $90 million contract to a joint venture of Saudi companies Al-Yusr Townsend and Bottum Co. and U.S. based United Engineers & Constructors International to expand the Qurayyah seawater treatment plant.

Iraq continues to make progress in restoring its war ravaged oil industry. Iraq's State Oil Marketing Organization says the Mina al-Bakr tanker terminal at the head of the Persian Gulf has been partly repaired with a throughput capacity of 400,000 b/d, expected to rise to 800,060 b/d by the end of January. Work is to continue on the terminal to restore the original capacity of 1.6 million b/d. It will, however, remain idle until Iraq and the U.N. reach agreement on resumption of exports. Iraq also has restarted full capacity operations at its 92,000 b/d Al-Doura refinery after repairs of damage during the 1991 Persian Gulf war. Iraqi oil officials told OPEC News Agency all production facilities in the north have been repaired, including the IraqTurkey pipeline, while repairs continue on oil facilities in the south.

British Gas and market regulator Ofgas have ended their dispute over how the financial effects of increased competition in the industrial gas market should be handled. Ofgas will review the BG tariff formula when requested by the company, and BG will proceed with measures agreed with the Office of Fair Trading to facilitate growth of competition in the industrial market. BG will cut its share of the contract market to 40% by 1995 from 90-95%, spin off its gas transmission business into a separate arms length unit, and release as much as 50 bcf of North Sea reserves contracted for Oct. 1, 1992-Sept. 30, 1993, and additional volumes to 1996-97.

Netherlands' eighth North Sea licensing round has opened. Companies can submit offers for any unlicensed acreage in the Dutch North Sea during Jan. 1-Mar. 31. Awards are expected by yearend.

Portugal hopes to raise about $967 million by selling a 90% interest in state oil company Petrogal. The government will seek competitive bids for sale of the first 25%. Foreign shareholders will be limited to a 40% stake. The government also has decided 20% of the equity will be reserved for Petrogal employees, 10% for Sonangol, Angola's state oil company and a major supplier of crude to Portugal, and 9% for the Gulbenkian Foundation.

Will China follow in the former U.S.S.R.'s footsteps to attract more foreign investment in upstream oil and gas ventures? China Petroleum Corp. (CPC) Pres. Wang Tao says Beijing will expand cooperation with foreign companies in the oil industry this year, official Xinhua News Agency reports. Eleven provinces in southern China plan a major international tender covering joint venture exploration the next 2 years. And China plans to invite some foreign companies to participate in exploration and enhanced recovery projects in selected mature oil producing areas. Incremental oil produced by joint venture enhanced recovery projects will be shared between Chinese and foreign companies, similar to the approach some early joint ventures have taken successfully in the former U.S.S.R. CPC also notes it signed three loan agreements and two exploration agreements with foreign companies and imported $1.1 billion in foreign technology and equipment in 1991.

U.S. refining margins won't return to satisfactory levels for at least

2 months, says Merrill Lynch. With profits squeezed by continuing sluggish demand and rising inventories, the analyst expects processing levels to decline soon. Gasoline stocks surged 2.9 million bbl on the week and 4.3 million bbl from a year ago.

Speculation continues about whether U.S. refiners can produce enough reformulated gasoline to meet Clean Air Act standards (see story, p. 21). Ashland Oil, estimating U.S. refiners will have to spend more than $41 billion by 2000 to implement CAA rules, contends as much as 13% of U.S. refining capacity could be lost by 2000 because many small refiners will choose not to make the investment to produce reformulated fuels. Ashland Chairman John Hall said, "It is ironic that, at the same time the government is requiring this unprecedented level of investment, Congress is considering several versions of legislation to raise fuel economy standards. That could significantly reduce the market for these expensive new fuels."

Early earnings reports for fourth quarter and full year 1991 just add to the current gloom over U.S. industry.

Smith Barney estimates majors' fourth quarter earnings from operations will be down 51% from the year before and up only 4% from a weak 1991 third quarter. Citing a "washout quarter for the oil industry across the board," the analyst projects earnings declines of 53% upstream, 76% chemical, and 10% refining/marketing. Here are a few 1991 earnings reports: Texaco down 11% to $1.3 billion, Amoco down 37% to $1.2 billion, Burlington Resources down 4.4% to $197 million, Union Pacific Resources down 14% to $207 million, and Diamond Shamrock down 52% to $37.1 million.

While many are bemoaning the U.S. gas surplus, some companies are doing something about it: creating more demand. GE, CMS Energy, Bechtel, and Long Lake Energy will combine to convert the idled Shoreham, N.Y., nuclear power plant to natural gas. They will submit a proposal to the Long Island Power Authority, which recently put out a tender for bids for such a project. CMS led the world's only conversion of an idle nuclear plant to gas, the mammoth cogeneration complex at Midland, Mich.