OGJ NEWSLETTER

Oil markets are anxiously waiting for the other shoe to drop.

OPEC's surprising refusal to cut production at its Nov. 23-24 ministerial meeting in Vienna (see story, P. 26) has industry price and market projections cutting a wide swath. Market observers are taken aback at the sight of OPEC ministers blandly predicting continued near term price declines as a result of their actions.

The group is gambling on rising winter demand to absorb the market surplus and thus buoy prices while at the same time renewing its call for non-OPEC producers to share in output cuts. Iran has singled out the U.K. and Norway for "destabilizing" the market and wants an emergency meeting should oil prices fall further. Iraq warns of a return to $10/bbl oil.

Omani Oil Minister Said ibn Ahmad al-Shanfari dismisses OPEC's claims against other producers, saying OPEC is to blame and could fix the problem. He notes OPEC production has steadily increased since 1988 at the expense of non-OPEC producers, Agence France Presse (AFP) reported.

Oman's stance adds pressure to OPEC, because it has been the linchpin in earlier efforts to coordinate production cuts among certain non-OPEC producers in conjunction with OPEC cuts.

Brody White & Co. analyst Peter Beutel contends OPEC's decision will weaken the group's control over the world oil market.

"This is nothing short of being a watershed event maybe for the -rest of our lives the way oil is priced, " AP quoted him as saying.

Bearish expectations caused oil prices to fall by almost 500/bbl the day before the meeting, leading some to see the market's response to OPEC inaction as overreaction. "I think the selloff is excessive, and we may he nearing a point where the weather patterns may take over as a factor in the demand on crude," AP quoted George Gaspar, an analyst with Robert Baird & Co. Inc., Milwaukee, as saying. Evidence of that can be seen API's report of a 5.7 million bbl U.S. stockdraw the week ended Nov. 17.

Purvin & Gertz similarly sees an overreaction when market fundamentals are encouraging. It contends current production levels are adequate to stabilize markets and pegs spot WTI at $18 by January.

DRI International, Paris, predicts spot WTI at $15.10-15.90 the next 4 months, climbing to $17.50 in April and $18.90 in May, citing flat OPEC output and a 3.1% jump in demand among the seven leading economies the next 6 months vs. a year ago. Salomon Bros. sliced its forecast for spot WTI in 1994 by $1.50 to $18.50/bbl.

Although OPEC has embraced the status quo on production levels the group's secretariat trimmed its projection of the call on OPEC oil in the fourth quarter by 280,000 b/d to 25.14 million. That compares with a current output quota of 24.52 million h/d and reports of overproduction at -- out 330,000 h/d (OGJ, Newsletter, Nov. 29). It estimates the call on OPEC oil at 25.59 million b/d in the first quarter and 24.98 million h/d for all of 1994. It's an especially ticklish situation for Persian Gulf producers that

rely on oil for more than 90% of their income. AFP reports the 1993 budget deficit of the six member Gulf Cooperation Council (GCC) is projected at $13.14 billion. Although down from a 1992 deficit of $17.11 billion, GCC spending is expected to jump almost 13% in 1993 from 1992 levels.

There remain some glimmers of hope for salvaging oil prices that markets may be overlooking.

For one, Iraq remains as truculent as ever despite its apparent agreement to accept long term U.N. monitoring of its arms industry. A top Iraqi official says his country will not accept long term monitoring until ban on its oil sales is lifted. The U.N. Security Council insists on maintaining a monitoring program for 6 months before moving to lift the oil embargo.

Another is the likely deflation of the Russian oil exports balloon in the weeks ahead in expectation of an especially harsh winter.

Russian Fuel and Energy Minister Yuri Shafranik suggests Russia cut its oil exports by 120,000 b/d in order to ensure adequate domestic supplies.

And the threat of strikes is spreading across Russia's energy sector as coal miners and oil and gas workers protest nonpayment of wages.

U.K. oil output in October reached its highest monthly average since 1988, an increase of 10% from September to an average 2.24 million b/d.

Royal Bank of Scotland says total U.K. oil and gas production for October climbed by more than 20% to an average 3.38 million b/d of oil equivalent. Shell Expro fields provided most of the increase: Brent up 77,000 b/d, or 42%, Tern 61,000 b/d, or 200%, and Gannet 8,000 b/d, or 22%.

U.K.'s Health & Safety Executive (HSE) last week was expected to receive safety cases for all of Britain's offshore installations by the Nov. 30 deadline. Under laws arising from the 1990 Cullen Report into the Piper Alpha platform explosion, U.K. operators must submit a document detailing safety features of each fixed and mobile installation to HSE for approval.

Operators were required to submit by Nov. 30 safety cases for existing installations and those reaching design stage by May 31, 1993,

After a 2 year transition period, no installation will be allowed to operate in U.K. waters without a safety case. HSE said the transition is intended to ease assessment of an expected 220 safety cases. It will also allow time for discussion on remedial action programs required before safety cases are accepted, particularly for older installations. Any company whose safety case has been rejected by HSE's offshore safety division can ask for that decision to be reviewed by the HSE director general and two deputies.

As Nigeria's government is reshuffled by new dictator Gen. Sani Abachi, Oil Minister Donald Etiebet is one of the few cabinet members to be retained from the brief civilian rule of Ernest Shonekan.

Under Shonekan, domestic fuel prices rose as much as 600% as gasoline subsidies were removed. Now Abachi has cut prices in a deal with trade unions aimed at curbing unrest. London's Financial Times reports Abachi hinted at a clampdown on corruption in oil and other industries.

Oil production and plans for an LNG export project on Bonny Island were unaffected by Abachi's coup (see Watching the World, p. 31).

Royal Dutch/Shell plans to spend more than $1 billion in Argentina during 5 years beginning in 1994. Outlays are earmarked for increasing Shell Capsa's E&P interests, upgrading its refinery, and expanding retail operations. Capsa has had little success in Argentine exploration and is now operator of only one onshore block, the 6,000 sq km CCy B14 General Alvear concession in Mendoza Province. Last year Capsa said it intended to acquire farmouts on exploration licenses in a bid to build production to meet 60% of its refinery's crude oil needs (OGJ, Dec. 14, 1992, p. 27). Capsa operates a 122,000 b/d capacity refinery on the outskirts of Buenos Aires. A $300 million upgrade is planned to improve margins and environmental and safety measures. Shell noted the company's investment in Argentina has grown since 1986, reaching $50 million in 1990 and $190 million in 1993.

Mexico will allow foreigners to invest in Mexican oil and gas drilling contractors and pipeline construction contractors under the country's proposed new foreign investment law, Reuters reports. The law, which President Carlos Salinas de Gortari sent to Mexico's congress last week, restricts foreigners to minority stakes in such companies in normal circumstances but allows stakes of more than 49% if approved by regulators. The new law, expected to receive quick approval in a congress dominated by Salinas' PRI party, continues to bar foreign and private investors from owning Mexican oil and gas reserves. Pemex says its operations won't be affected. The law delivered less in the way of liberalizing the oil and gas sector than some government officials and disclosures to news media had suggested. Officials had said the government was considering allowing foreign and private companies to build and operate natural gas pipelines for their own use and transport their own gas vs. depending on Pemex (OGJ, Aug. 16, p. 26).

The U.S. Congress continues to tinker with energy initiatives as industry awaits President Clinton's omnibus energy initiative package.

Rep. Phil Sharp (D-Ind.), chairman of the House fossil fuels subcommittee, has filed a bill that calls for a 30% increase in U.S. energy efficiency by 2010. The legislation would shift $1 billion of DOE funding into efficiency, conservation, and renewable energy programs the next few years, with the goal of having renewable energy technologies account for 20% of the overall U.S. energy mix by 2010.

Ninety-nine congressmen have joined in a letter to Clinton opposing special treatment for ethanol in the U.S. reformulated gasoline program. The letter was prompted by reports Clinton may issue an executive order that would include ethanol in the program. The lawmakers said such an action would not only violate the Clean Air Act, "It would turn the very purpose of the act-to provide healthy air-on its head."