OGJ NEWSLETTER

The man who as much as any advanced Saudi policies that drove the 1986 oil price collapse sees another one coming.

April 26, 1993

8 min read

The man who as much as any advanced Saudi policies that drove the 1986 oil price collapse sees another one coming.

Ahmed Zaki Yamani, former Saudi oil minister who engineered the netback sales scheme to recapture lost Saudi market share-which unleashed a flood of crude on world markets in 1985-86-sees little prospect for a significant strengthening in oil prices to 2000. Yamani, currently head of the Centre for Global Energy Studies (CGES), London, cites a persistent supply overhang and a new focus by OPEC members on volume vs. price to boost revenues. That view was echoed at a CGES conference in London by another former OPEC minister, Algeria's Nordine Ait-Laoussine, who cited Algeria's new emphasis on boosting volume vs. price through greater foreign participation in E&D. Yamani said, "OPEC is heading toward serious trouble without any light at the end of the tunnel."

CGES' Fadhil Chalabi sees $10/bbl or less by third quarter 1994 if Iraqi oil exports resume at 1.5 million h/d next year and rise to 2.5 million h/d by yearend, especially if the Saudis insist on producing 8 million b/d.

So reports Merrill Lynch, which attended the conference but disagrees with Yamani's view. The analyst cites claims by OPEC Pres. Alirio Parra and Sec. Gen. Subroto of a heightened awareness within OPEC of the need for improved production restraints. Merrill Lynch thinks Iraqi exports can be accommodated in 1994 by an expected rise of at least 1.5 million b/d in demand and a drop in non-OPEC flow of at least 500,000 b/d.

One of the positive market factors Merrill Lynch cites is a stabilization of consumption in the former U.S.S.R. Russian officials see resuscitation of the nation's fuel and energy complex as the linchpin to survival of economic reforms. Despite extensive media coverage, says Minister for Fuel and Energy Yuri Shafranik, the Russian public underestimates the importance of the industry to the economy: employing 4 million people, accounting for 10% of total industrial output and 20% of capital investment, and providing 60% of hard currency revenues. Yet fuel and energy enterprises are owed 1.8 trillion rubles while their own liabilities total 1.1 trillion rubles.

"As a result, workers are not paid promptly, and social tensions are growing," Shafranik said. "The fuel and energy complex is a litmus test of the Russian economy. If the recession in the fuel energy complex is not overcome, basic industries may fall to pieces.

A definite market downside is the energy/carbon tax juggernaut, which Yamani sees as reining the call on OPEC crude to less than 32 million b/d by 2000 and thus undermining ambitious plans by OPEC members to ump productive capacity by 8.2 million b/d.

President Clinton has pledged the U.S. will reduce CO2 emissions from burning fossil fuels to 1990 levels by 2000, overruling Treasury Sec. Bentsen and Energy Sec. O'Leary. Clinton last year pledged to sign a multinational treaty to limit emissions believed to contribute to the greenhouse effect. He plans to draft a program to limit CO2 emissions by August.

Kidder Peabody notes 1992 was not a vintage year for production replacement or finding costs. For a group of eight companies, the analyst found they replaced only 60% of U.S oil and gas production and 69% worldwide. By comparison, 30 large producers in 1987-91 replaced 84% of U.S. production and 115% worldwide. And finding costs are on the rise for the group of eight, $7/BOE in 1992 vs. $4.70/BOE-including net purchases and revisions-for the group of 30 in 1987-91. That bodes ill for non-OPEC producing provinces such as North America and the North Sea facing inadequate returns says Kidder Peabody, but points to higher oil prices and greater reliance on OPEC as non-OPEC drilling is discouraged.

Amoco's Central Area Transmission System pipeline has been pressured up and is ready for operation. In late April it will carry first gas from Block 22/9 Everest field, with first gas from Block 23/21 Lomond field due in May (OGJ, Nov. 9, 1992, p. 30). A spur to Forties pipeline for liquids export to Cruden Bay is ready for start-up. Amoco is completing commissioning in Everest. Lomond work was delayed a few weeks by bad weather and temporary loss of the Safe Supporter accommodation vessel when anchor handling equipment was damaged (OGJ, Mar. 1, p. 38).

BP will seek a declaration of commerciality for Colombia's giant Cusiana field in Colombia next month. The company expects no problem with the application, which will take state owned Ecopetrol 60 days to review. Ecopetrol is to take a 50% stake in the project, allowing BP to recoup half of its development costs, pegged at $2/bbl (OGJ, Nov. 2, 1992, p. 40). BP puts reserves at 2 billion bbl of oil in Cusiana and nearby Cupiagua field, plus significant volumes of gas that mostly will be reinjected. Oil production is expected to reach 150,000 b/d by 1995. Plans call for $300 million in pipeline work to take Cusiana crude to the Covenas terminal on the Pacific coast, including a new 20 in. Cusiana-El Porvenir line and expansions of the Oleoducto de Colombia line to Covenas and possibly the Cano Limon line.

Colombia's embryonic gas grid has a green light. Ecopetrol will invite tenders for foreign companies to build, operate, and earn tariffs from a 435 mile, $260 million, north-south gas trunkline to form the spine of a national gas grid. Foreign firms also would bid for three regional pipelines expected to cost a combined $250 million. British Gas and Gaz de France are among 10-15 companies expected to bid. Ecopetrol wants to tie in gas fields on Colombia's northern coast with Cusiana/Cupiagua gas to supply Bogota and future electric power projects in Central Colombia.

That ought to cheer Hondo Oil & Gas, which may have a giant gas strike in Colombia's Middle Magdalena Valley (OGJ, Mar. 29, Newsletter).

France's government in September will choose the operator of the 630 km, 51,700 b/d products pipeline in northern France the U.S. Army is relinquishing. Built in 1955-56 to supply U.S. forces in the former West Germany, the line no longer serves a military purpose and has been used partly for French civilian purposes. Trapil, an association of majors and the French government that operates other pipelines in France, currently operates the line. Paris in February called a tender for bids to revamp and operate the line after relinquishment in September.

A grim market outlook is forcing French companies to slash refining investments. Esso SAF Pres. Jean Verre, citing "catastrophic margins," says his company will slash refining outlays to 530 million francs in 1993 and 510 million francs in 1994 vs. 800 million francs in 1992 and has cut runs as far as possible. Esso will start up in mid-May a 350 million franc, 4,000 b/d alkylation unit that will make it independent of the Exxon products network and its need for MTBE to produce premium unleaded. Meantime, Elf Atochem postponed construction of an 800 million franc, 6,400 b/d alky unit at Elf's Lavera refinery, where BP started up in mid-1992 an 8,000 h/d isomerization unit. The two were to exchange products, but BP says the delay poses no problem because it will purchase supplies elsewhere.

Elf has confirmed it is talking with Saudi Arabia's private company Nimr Petroleum to take a stake in the 200,000 b/d refinery it plans in Leuna, eastern Germany. Elf, talking with other prospective partners, wants to he operator and take a one third interest in the project. Work at Leuna is to get under way in 1993 and be complete by 1996, followed by closure of the existing Leuna refinery (OGJ, Sept. 7, 1992, Newsletter).

Petrochemicals are undergoing a simultaneous boom and bust in Asia's Far East, depending on the country.

Two chemical affiliates of Nippon Steel and Mitsui will form a joint venture to produce polystyrene at a cost savings amid the slump in Japan's petrochemical sector. Nippon Steel Chemical (NSC) will produce 20,000 tons/year for Mitsui's Daicel Chemical plastics line. Daicel, in turn, will postpone plans for its own polystyrene plant in Hyogo prefecture. NSC says Japan's petrochemical industry will need this kind of partnership to survive.

Meantime, Mobil has granted its first ethylbenzene licenses in China, scene of a petrochemical building boom (OGJ, Jan. 18, p. 12). Sinopec licensed the technology, developed jointly with Badger, for its Daqing refining/petrochemical complex and its new ethylbenzene/styrene plant in Guangzhou. Sinochem licensed the process for its Panjin chemical plant.

Viet Nam's giant offshore Dal Hung oil field could be on stream within 15 months. Under a contract signed Apr. 15, first stage work calls for appraisal/development drilling and installation of semisubmersible production platform. Interests are BHP 43.75%, Petronas Carigali 20%, Petrovietnam 15%, and Total and Sumitomo 10.625% each.