OGJ NEWSLETTER

Carbon and energy taxes proposed in the U.S. and Europe will upset oil markets and crimp future oil demand growth. That's the warning from a joint meeting of energy ministers from OPEC and non-OPEC exporting countries last week in Muscat.

April 19, 1993

8 min read

Carbon and energy taxes proposed in the U.S. and Europe will upset oil markets and crimp future oil demand growth.

That's the warning from a joint meeting of energy ministers from OPEC and non-OPEC exporting countries last week in Muscat.

"Petroleum products already carry a tax as high as $95/bbl in some countries, compared with the price of crude oil, which is about $18/bbl," the ministers said in a joint statement. Tax increases would "reduce oil producing countries' income and their relative ability to undertake their own share of necessary upstream, midstream, and downstream investments."

The ministers agreed to set up a joint working group to study the long term energy outlook and ways to ease the effects of fiscal measures on members' economies.

Meantime, OPEC is caught on the horns of a dilemma, says Centre for Global Energy Studies (CGES), London. If members don't hike capacity, they risk an oil price in the 1990s that would harm OPEC's long term interests. If OPEC does add capacity, it would have to restrain its use. Members also must solve the problem of funding capacity expansion.

CGES predicts demand for OPEC oil will rise to 36.7 million b/d by 2000 if oil prices remain steady, calling for 39.2 million b/d installed capacity to maintain a 7% cushion. Such a capacity increase of 13.1 million b/d would cost $66.3 billion in addition to about $52 billion required to maintain current capacity to 2000. CGES pegs OPEC revenues from the additional capacity at $74.3 billion by 2000-about $8 billion more than the cost of the added capacity. But planned environmental taxes would rein the call on OPEC oil to 31.8 million b/d by 2000, with a corresponding capacity of 34 million b/d. In this case, new capacity would cost $39.5 billion.

"The drop in oil consumption as a result of higher consumer prices is not offset by higher prices for the producers, and revenues from the additional capacity installed would only be $41.6 billion, a paltry $2.1 billion more than the cost of installing the capacity," said CGES.

"No wonder OPEC has vehemently objected to the proposed imposition of carbon taxes in the consuming countries."

As much as 600,000 b/d of idled Russian oil productive capacity could be quickly restored for less than $1,000/b/d, according to consultants Troika Energy Services, Dallas. In a study for U.S. DOE, Troika assessed the number of idle wells in Russia, why they are idle, and how much oil they could provide at what cost. Troika developed a database-which it expects to release to industry soon-of producing and idle wells that breaks the wells out by types of repairs needed and estimates of postrepair productivity without stimulation. The most striking conclusion, says Troika, is that most production lost to idle wells is associated with wells needing only minor repairs that could be made fairly inexpensively, quickly, and restore a significant volume of production to Russia. "Directing effective investment and aid to repairing idle wells in Russia presented a more promising picture than previously thought," the consulting firm said.

Nigeria is mulling a cut in its petroleum tax from the current rate of 85% to stimulate investment in the country's oil and gas E&D. The proposed tax cut-how much was uncertain at presstime-is part of a package of fiscal incentives to oil companies to help Nigeria meet its new target of boosting oil reserves to 25 billion bbl by 1995-vs. a previous goal of 20 billion bbl and the current 18 billion bbl-and oil productive capacity to 2.5 million b/d vs. the current 1.97 million b/d. The government also has ordered all buyers of Nigerian crude to participate in oil exploration in the country or have their contracts revoked. Lagos plans to offer new acreage to accommodate any new exploration participants spawned by the directive.

It's becoming routine in Yemen: another big oil strike. Total's 2 Kharir flowed a combined 12,000 b/d of 310 gravity oil, with rates of 350-5,700 b/d from several zones. Plans call for delineation wells on the East Shabwa permit Block 10, including 3 Kharir under way 3 miles northeast. The 1 Kharir also found hydrocarbons and is being tested. Interests are operator Total, Shell Oil, and Unocal 28.57% each and Kuwait's Kufpec 14.29%.

Argentina's courting of private company participation in its upstream is paying off. Santa Fe Energy Resources, Houston, X-1 Sierra Chata wildcat in the Neuquen basin flowed 11 MMcfd of gas and 40 b/d of condensate through a 1 in. choke with flowing bottomhole pressure of 2,187 psi and a CAOF of 78 MMcfd from Cretaceous Mulichinco at 5,800-30 ft.

More testing of this and another Mulichinco zone is expected the next few weeks as well as some delineation wells. The strike is 18 miles from a pipeline to Buenos Aires and near a proposed gas line to Santiago, Chile. Interests in the well and the surrounding 1.1 million acre Chihuidos block are Santa Fe 22.56%, BHP 35.29%, Monument Oil & Gas 22.56%, Chile's state oil firm Sipetrol 15.67%, and Argentina's CGC 3.92%.

Pemex has begun work on a $100 million petroleum products tank farm and terminal near Guadalajara to replace the La Nogalara storage site shut down last year after the Apr. 22 explosion that ripped through a 20 block area of Guadalajara, killing more than 200.

Pemex maintains the La Nogalara site had nothing to do with the explosion but that it was shut down in response to public outcry and at the request of President Carlos Salinas de Gortari. The new facility, at Juanacatlan 20 km southeast of Guadalajara, will have capacity of 350,000 bbl of gasoline and diesel, be complete by July 1994, and have safety features including closed circuit television monitors, retention dikes, and a leak detection system for the 16 in., 290 km pipeline serving the site.

The Clinton administration has dropped its push for an oil embargo against Libya because it can't get the votes it would need in the U.N. Security Council (OGJ, Apr. 12, Newsletter).

U.S. petroleum imports surged the second consecutive month in March to 8,163,000 b/d, up 16% from the same month a year ago, says API.

Imports averaged 8,090,000 b/d the first quarter, up 13.4% from the same period a year ago. U.S. crude oil production in March was down 5% at 6,940,000 b/d and down 5.3% at 6,941,000 b/d for the first quarter.

Oil and environmental groups have asked EPA to abandon the Bush administration's plan to grant preferences for ethanol in gasoline, which they say violates a government-industry negotiated rulemaking agreement. They contend the ethanol program "cannot be justified on environmental, economic, or legal grounds. It will impose additional costs on consumers because refiners will be forced to make costly reductions in the volatility of their fuels in an attempt to compensate for the higher volatility of ethanol blends."

Will petroleum company earnings rebound strongly in 1993?

They will, if first quarter tentative results are any indication, says Merrill Lynch. The analyst projects a 20% jump in profits from first quarter 1992's depressed levels for a group of six international majors it tracks.

Strength in U.S. natural gas and Far East downstream operations is offsetting continued weakness in U.S. and European refining/marketing and weaker than expected oil prices. Merrill Lynch pegs combined 1993 earnings for the group up almost 25% vs. 1992 and a further 15% in 1994.

For its group of 20 large companies, Kidder Peabody projects first quarter 1993 income up 29% vs. a year ago, noting, however, a decline of 12% from fourth quarter 1992 levels.

Paine Webber sees continuing strength in upstream natural gas buoying U.S. independents' ability to raise capital and boost profits, notably certain adept niche players attracting a broader investor audience. It contends excellent fourth quarter and yearend results, better than expected gas prices, and depleted storage plus steady crude prices are contributing to a broader embrace of our idea that a trough in the natural gas business was passed in 1992 and that the prospects for independent production companies are significantly better than those discounted by the equity market."

One such niche independent is looking to grow. Nahama & Weagant (N&W), Bakersfield, Calif., hired Rauscher Pierce Refsnes to advise it on acquiring oil and gas companies and producing properties valued at $550 million. N&W, with a focus on California's San Joaquin and Sacramento valleys and Oregon's Mist gas area, has jumped proved reserves of leases recently acquired from ARCO and Benton Oil & Gas by 85%. "The current industry environment will continue to present attractive acquisition opportunities," said Pres. Rod Nahama. "The majors and most independents are deemphasizing oil and gas exploration and development on the West Coast."