NEWSLETTER

Will OPEC respond to the bear market in weeks to come?

Purvin & Gertz thinks that's a better than 50% chance and sees WTI at $14.60/bbl in January and $16 in February.

The price fall, says P&G, stems from a combination of oversupply and the need to absorb inventory overhang. OPEC had expected winter demand to absorb the overhang, but the surge in North Sea output makes it clear OPEC probably misread the market and should have considered cutting first quarter 1994 output by about 500,000 b/d, the analyst says.

Meantime, the ball appears to be in OPEC's court, and there is a disquieting silence from that comer-excepting Nigeria, which called for an emergency OPEC meeting soon. Oman's announcement it will cut production by 5-10% and U.S. plans to resume buying crude for the SPR in light of depressed oil prices scarcely rippled markets last week.

Nymex light sweet for February delivery closed Dec. 21 at $14.36/bbl, about flat with prior week January delivery quotes.

One factor is the big buildup in U.S. stocks, which API estimates rose 6.059 million bbl to 345.4 million bbl the week ended Dec. 10.

Other non-OPEC producers are holding firm.

Egypt says it will maintain output at current levels despite OPEC and Omani requests for non-OPEC cuts. It contends cutting its 300,000 b/d of exports won't affect markets much.

Falling oil prices are squeezing further an already beleaguered Russia, and it may compensate by ramping up oil exports. Russia, which earns 80% of its hard currency from oil exports, saw its export revenues the first 10 months of 1993 increase 6% to $7.1 billion from a year ago. Oil export volumes jumped 30% in the same period. However, Russian oil exports currently are earning $95/metric ton vs. an average $105/ton during January-October. Urals crude trades at about $1/bbl less than Brent. Russian exports also have been hindered by bad weather in the south, which virtually closed the nation's main tanker loading terminal at Novorossiisk. Russian Petroleum Investor's Sergehi Alexandrovich contends Russia can offset the revenue effects of lower prices by hiking oil exports, citing increased supplies available for export because of reduced military consumption and declining oil sales to other former Soviet republics unable to pay for Russian crude.

Plunging oil prices are making an early dent in U.S. petroleum company capital spending plans.

Oxy has slashed its 1994 capital budget by $150 million to $750 million to reflect lower oil prices and continuing pressure on chemical prices. Of that, oil and gas will get 70%, with emphasis on non-U.S. E&P.

Capital spending by companies dominated by natural gas operations is on the rise, however.

Equitable Resources upped capital outlays $4 million to $151 million for 1994, with hikes of 8% to $85 million for E&P and 7% to $47 million for pipeline work. Excluded are potential gas storage and pipeline projects in the Appalachian and Gulf Coast areas as well as acquisitions. Equitable overshot its 1993 budget by $200 million for acquisitions.

Sun plans 1994 capital spending of about $790 million, allocating $290 million for projects mainly in marketing, logistics, chemicals, and non-U.S. production. They include upgrading branded service stations, benzene and cyclohexane units, and potential acquisition of producing oil reserves. Another $230 million is earmarked for Suncor. Sun estimates 1993 spending at $600 million vs. a budgeted $730 million.

European petrochemical companies, under the auspices of the Brussels based Association of Petrochemical Producers in Europe (APPE) are trying to put together a restructuring program to recommend to the European Community. The European industry has been hit hard by a downturn in demand for its products and by increased imports from North America and the Middle East. APPE members want reform and restructuring that provide for EC funds to help with the social costs of unemployment. APPE acknowledges it will be tough to unite all members in a common front to the EC.

One official noted, "This will not be an easy meeting because some of our members, particularly the state owned petrochemical producers, will not agree to an across the board cut by the industry as a whole, because they are producing in areas such as southern Italy where there is already high unemployment." He also said members that have moved away from production downstream of ethylene argue they have already restructured and are unwilling to make further cuts.

Privatization continues its march around the petroleum world.

Six foreign petroleum firms reportedly have agreed to form a group to pursue E&D activities in Kuwait. That follows recent disclosure by Kuwaiti officials that the emirate is considering allowing foreign firms to participate in E&D with state owned Kuwait Oil Co. The six reported are BP, British Gas, Mobil, Royal Dutch/Shell, Total, and an undisclosed Norwegian firm.

Saudi Aramco plans to modernize the Philippines' biggest refinery after paying the winning bid of $502 million for a 40% equity interest in state owned refiner/marketer Petron. Manila will retain a 40% stake and put the remainder up for a public stock offering. The deal is expected to he wrapped up next month. Aramco pledges to invest more than $300 million in 5 years in Petron. On tap is a likely $357 million hydrocracker to boost output of unleaded gasoline and low sulfur diesel at Petron's 147,000 b/d Limay refinery. Petron controls 42% of the domestic market, with Caltex and Shell splitting the rest. Petron parent Philippines National Oil Co. plans to use proceeds for geothermal and petrochemical expansions.

Pemex and Japanese firms Mitsubishi, Mitsui, and Itochu are studying three financing options for the proposed grassroots 150,000 b/d, $1.4-2 billion refinery at Salina Cruz, Mexico, to process Maya crude into refined products for the domestic market.

Mexican President Salinas was expected to disclose the project memorandum of understanding last week in Tokyo (OGJ, Dec. 13, Newsletter).

According to a senior Pemex financial officer, the options are:

• A financing package similar to the "ecological package" Pemex used to upgrade fuel quality at other refineries. The Japanese group would be general contractor with Pemex having to obtain financing and having some say over subcontractors. This option is least likely because it would absorb almost 40% of Pemex's investment allocation the next 2 years.

• A build-lease-transfer plan wherein the Japanese group would handle financing and turnkey construction. Upon completion, Pemex would lease and operate the plant until transfer costs are paid. Also, an adjoining power generation plant would be put up for international tender.

• A deal similar to the Pemex-Shell joint venture involving the Deer Park, Tex., refinery. Pemex and the Japanese group would create a Mexican company that would borrow the capital for construction on a short term basis. Pemex E&P would supply the new firm 150,000 b/d of Maya crude, and Pemex Refining would agree to buy finished products and to operate the plant. After start-up, the new firm would refinance project debt for the long term backed by refinery revenues.

Whichever option is taken, "The amount of (Japan's) ExIm Bank monies used must be maximized," the Pemex official said.

Revenues from sale of Alberta petroleum rights in 1993 will be more than $500 million (Canadian) for the first time in 5 years.

Alberta reports sales of 7,166,000 acres of oil and gas rights in 1993 at an average price of about $420/acre compared with 3,706,450 acres in 1992 at $244/acre. Canadian Association of Petroleum Producers expects some drop in sales and prices in 1994.

CAPP cites much optimism in 1993 with stable oil prices and rising natural gas prices but notes a cooling off the past several months.

Canadian demand for natural gas will increase by 30% by 2005, says Canadian Gas Association. The forecast estimates demand will increase to 3.1 tcf from a current 2.4 tcf/year. Current production is about 4 tcf/year. CGA notes the largest increase will be in industrial markets, where gas is gaining market share at the expense of electricity and fuel oil. Industrial demand is expected to increase 38% in Central Canada for factory operations and cogeneration plants. Growth in the home heating market is expected to be curtailed by conservation efforts and increased appliance efficiency.

About 44% of Canadian homes are currently heated by natural gas. There is no service east of Quebec City because of the cost of building a pipeline to provinces in Atlantic Canada. CGA predicts increased demand in western Canada by 2005, ranging from 1%/year in Manitoba and Saskatchewan to 2.5%/year in Alberta.

The U.S. Natural Gas Supply Association is advising state public utility commissions to develop contingency plans in the event local gas distributors (LDCS) experience shortfalls this winter.

NGSA expects no problems but contends states should develop emergency plans in case LDCs have problems operating in the new market environment under FERC Order 636.

A coalition of natural gas producers, pipelines, and LDCs is launching a campaign to ensure U.S. northeastern states, in implementing 1990 Clean Air Act amendments (CAAA), give gas equal treatment with other fuels.

The Coalition for Gas-Based Environmental Solutions says some northeastern states have significant regulatory impediments that restrict gas use.

ARCO Alaska has received EPA's first offshore air pollution control permit issued under CAAA. The permit will allow ARCO to continue exploratory drilling in the Beaufort Sea off northern Alaska. It controls various air emissions and limits ARCO to operating no more than two drilling vessels, each serviced by no more than seven support vessels, at one time.

MMS has scheduled a Jan. 11 hearing at Cleveland's Marriott Society Center Hotel in Cleveland on its oil spill financial responsibility rules. The rules, required by the 1990 Oil Pollution Act, would ensure offshore operators have sufficient financial resources to pay for spill cleanup costs. Meeting details were published in the Dec. 20 Federal Register.

Meanwhile, the U.S. Coast Guard will hold a Washington, D.C., hearing Jan. 20 on its rules requiring double hulls on oil tankers, issued under the same law. It announced that meeting in the Dec. 16 Federal Register.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.