OGJ NEWSLETTER

There's a renewed sensitivity in oil markets based on fears of an imminent return of Iraqi oil supplies, compounded by OPEC overproduction.

Oil futures have plunged to their lowest level in about 18 months, with Nymex WTI falling below $18/bbl the first time since mid-January 1992.

Nymex light sweet crude for August delivery closed at $17.95 July 2 amid reports of possible compromise between U.N. and Iraq over a one time sale of $1.6 billion of oil for humanitarian reasons.

Middle East Economic Survey last week reported Iraq is willing to accept tough U.N. conditions for the oil sale because of its deteriorating economy. Prices rebounded briefly, however, upon signs of fresh Iraqi belligerence toward U.N. monitoring of weapons destruction. Nymex light closed at $18.29 July 6, but the rally was mostly erased the next day upon IEA reports OPEC production rose marginally in June to 24.3 million b/d from 24.2 million b/d in May, notably rebounding output in Kuwait.

Kuwait's reviving its downstream as well. Its Al-Shuaiba refinery, heavily damaged during the Persian Gulf war, is expected to start up again in October. Through-cut is slated to reach 130,000 b/d by yearend, pushing total Kuwaiti refinery runs to 660,000 b/d.

The near term market jitters notwithstanding, upstream prospects in the U.S. and Canada are brightening. U.S. E&P budgets are expected to climb 12% in 1993 vs. a yearend 1992 projection of only a 2.6% rise this year, according to a Salomon Bros. survey of 277 companies. Higher natural gas prices and sharp gains among independents are sparking the increase. Canadian E&P outlays are slated to jump 26% in 1993, while spending outside the U.S. and Canada is expected to slip 0.1% this year.

More than one fourth of the companies surveyed is underspending E&P budgets, and almost half expect to hike upstream spending in 1994.

Alberta Energy Co. Ltd. is turning its natural gas collection hub near Medicine Hat, Alta., into a major trading exchange for gas buyers.

AEC said the hub will handle as much as 1.1 bcfd when a major expansion is complete in January. AEC will handle gas trades between Alberta producers and buyers in Central Canada and the Northeast U.S. Gas will be shipped to TransCanada's system at Empress on the Alberta-Saskatchewan border, where buyers will take possession. AEC has firm delivery capacity on Nova's system, which connects with the TransCanada line at Empress. The AEC trading and delivery hub, which the company calls Direct Connection, will handle about 10% of Alberta's deliverable gas.

Alberta gas producers have rejected an initial offer in annual contract negotiations with Alberta & Southern Gas Ltd. A&S, a unit of Pacific Gas & Electric, says negotiations are continuing, and a new offer will be made to the 190 member supply pool. Current contracts call for a new agreement to he in place by Aug. 1. Producers currently receive an average $1.80 (Canadian)/Mcf in the first 10 months of the existing 12 month contract. Prices in the next contract will be influenced by an earlier agreement under which they will float to reflect indexes of U.S. Southwest gas supplies.

Although a federal judge has ruled the U.S. must prepare an environmental impact statement (EIS) before proceeding with the North American Free Trade Agreement (Nafta), to take effect Jan. 1, Clinton administration officials see no long delays. The administration immediately appealed and asked for an expedited process that could permit a circuit court ruling in September. Clinton said his administration has "an excellent chance of prevailing" because Nafta is a presidential action not subject to environmental laws. Meanwhile, Vice President Gore said even if a study is required, it would not take long because "almost all of the work required for that kind of an EIS has been done. "

Outside of environmental concerns, privatization of state petroleum interests may be the strongest force in the petroleum industry today.

India is pressing privatization of its petroleum sector. The government has promulgated an ordinance to convert Oil & Natural Gas Commission (ONGC) into a public limited company, Oil & Natural Gas Corp. Ltd. That would give ONGC flexibility to raise funds from capital markets for its ambitious expansion plans, notably some big ticket projects now simmering on the back burner. It plans the biggest public share offering in Indian history to fund expansion plans, with remaining funds to come from loans by World Bank, Asian Development Bank, Japan's Eximbank, and supplier credits.

Peru's congress is expected to pass legislation next month that will revise Peruvian hydrocarbon law, releasing wellhead prices to market forces, reducing oil and gas taxes, and opening the door for privatization within 18 months of state oil company Petroperu. Pending hydrocarbon legislation would transfer Petroperu's functions and contractual positions to a new state owned company, Perupetro, which would be allowed to operate essentially as a private enterprise. Hydrocarbons in place still would be owned by the state but once extracted would become property of licensees. Oil and gas exports would be free of duties and taxes. Peruvian officials later this month are expected to decide how to divide Petroperu into operating units, each of which then would be offered for sale to private investors. A complete legal framework based on the new law is to be in place by yearend.

Brazil's Petrobras complains it's facing its worst fiscal crisis because of continuing heavy products subsidies. "The government has required Petrobras to make a tremendous sacrifice that wouldn't he necessary if it were a private sector company, 11 said Mining and Energy Minister Paulino Cicero. He cites $4.7 billion in subsidies for ethanol and petroleum products that must be sold at an average loss of 42% to Petrobras. The state company I s short term debt now totals $3 billion, and in 1992 it spent $700 million on debt service alone. Cicero is negotiating with Finance Minister Fernando Henrique Cardoso--the fourth finance minister in President Itamar Franco's 8 month old administration--to outline a new price policy for oil products.

Elf currently finds itself high on the French government's list of potential privatization campaigns to begin this fall. Elf Pres. Loik Le Floch-Prigent recently cited a 25% drop in operating income in first half 1993 from last year's level of 7.9 billion francs, a 10% spending cut this year from last year's 30 billion francs, and stepped up asset sales of 5 billion francs. Elf reports poor results in oil and gas, refining, and petrochemicals-especially fertilizers, where it cut 755 of 3,000 jobs.

Total confirms it's restarted negotiations with Saudi Aramco over a possible Saudi stake in Total's French downstream operations.

Talks had begun 2 years ago but were shelved. Total says current negotiations are preliminary and have not reached the stage of "major principles of partnership." Similar talks were under way with Elf, but a French oil industry executive told OGJ those talks broke down because the Saudis considered the price put on their participation too high.

Taiwan's petroleum sector continues to mushroom as privatization there accelerates (see related story, p. 39). Tuntex Group plans to build a $3.3 billion refinery/petrochemical complex and is negotiating with the government to acquire a 400 acre tract in the Yunlin special economic zone for the project. The refinery would process 150,000 b/d of crude. Plans call for production of purified terephthalic acid, paraxylene, and polyester valued at $3.4 billion/year. Tuntex is looking for foreign partners for the venture and reportedly has met with several U.S. majors, including Exxon and Mobil.

Part of petrochemical producer Tuntex's rationale for promoting a refinery is the government's moves to allow oil imports by private companies, ending state owned Chinese Petroleum Corp.'s (CPC) monopoly.

New draft legislation by Taiwan's Ministry of Economic Affairs, to take effect in 1995 after parliamentary approval, will allow private firms to build refineries of at least 100,000 b/d capacity, import crude oil and refined products for processing and sale domestically or for export. The government, which now controls domestic oil prices, would no longer directly regulate production or prices but monitor the industry and retain the right to intervene in an emergency. At the same time, Taiwan will allow private companies to engage in sale and marketing of LPG for home use, ending another government monopoly. New rules are to he devised within 6 months.

Japan's recession continues to take its toll on petrochemical producers there. Mitsubishi will suspend operations at one of three low density polyethylene (LDPE) trains at its Yokkaichi plant--recently running as low as 70% utilization--in October pending market recovery. It will be the first LDPE operation to shut down in Japan because of the current recession, accounting for 24,000 metric tons/year of total plant output of 145,000 tons/year.

A Phillips group has outlined long term measures it may take to solve safety problems in giant Ekofisk field in the Norwegian North Sea.

"In addressing the Norwegian Petroleum Directorate's concerns regarding safety issues at Ekofisk, we are considering a comprehensive plan to build new facilities called Ekofisk H," said Knut Aam, Phillips Norway managing director. The most economical long term solution may be 'Lo construct Ekofisk II facilities outside the area currently affected by subsidence. This could provide maximum independence from future subsidence and the best use of resources. The plan, for which details are being worked out, could involve outlays of 20-28 billion kroner ($3-4 billion) for projects in Ekofisk and related fields. A detailed plan is to be submitted to Norwegian authorities by yearend. Phillips expects the plan to be discussed by Norway's Storting during its 1994 spring session in order to meet the planned 1998 start-up.

Russia continues to take a tough stance toward other former Soviet republics on nonpayment for oil and gas supplies, according to Russian press reports. Russia's Lentransgaz threatens to cut off gas supplies to Latvia unless the latter pays its debt of $4.5 million, plus penalties. Latvia's government at presstime last week was expected to obtain financial assistance to make payments. Russia also cut off gas supplies to Estonia, citing an unpaid debt of $5 million. Russia's parliament is calling for sanctions against Estonia to retaliate for the Baltic republic's new law to require its Russian minority to obtain Estonian citizenship or residency permits or risk being expelled in 2 years. In all, the Baltic republics owe Russia 60 billion rubles for gas deliveries. And Russia's Gazprom threatened to halt gas supplies to Belarus over nonpayment of 76 billion rubles.

Russo-Ukrainian relations are warming, however, as recent talks have led to a free trade accord, a 250 billion ruble credit to Ukraine to be repaid in 3 years, and Ukrainian cooperation in developing Russia's oil and gas industry. A sticking point remains differences over gas prices and tariffs, which recently spawned cutoffs of supplies to Ukraine. Russian officials contend Russian gas prices must rise to world market levels by Jan. 1.