OGJ NEWSLETTER

OPEC is scrambling to pull oil prices out of their steepest plunge in 3 years, and market signals are decidedly mixed.

After key marker prices slipped below $16 last week, OPEC said it will hold an emergency meeting in Vienna July 28 to "discuss the current soft state of the international oil market."

Concerns that Iraq and the U.N. were close to an agreement sanctioning Iraqi oil sales slashed the OPEC marker to $15.46/bbl at July 16 close. Brent fell below $16/bbl the first time since before the Persian Gulf war, reaching as low as $15.90/bbl July 19. This followed news of Iraq's acceptance of U.N. inspections of missile test sites, which now is seen as a prelude to approval of oil sales to fund relief work in Iraq and eased fears of more U.S. air strikes. U.N. officials earlier insisted there is no link between the two issues but backpedaled after U.N. Sec. Gen. Boutros Boutros-Ghali apparently did just that in public comments.

U.N. officials remain suspicious of Iraqi intentions but said a new team of weapons inspectors was to go to Iraq late last week.

"The possibility of an agreement between Iraq and the U.N., leading to the return of Iraqi oil exports to the world market in the near future, has added to the psychological pressure on prices," said OPEC.

"However, the extraordinary meeting will proceed, whatever the outcome of the present talks, to assess the broader market fundamentals."

OPEC's announcement that same day sparked an immediate revival, with IPE Brent for September delivery rebounding to $17.05/bbl.

Meanwhile, OPEC Pres. Jean Ping was to begin a tour of key Persian Gulf producers July 21 to seek views of other OPEC ministers on Iraqi exports.

Ping's comments on the situation caused oil prices to plummet again, wiping out the July 19 rally.

Spot WTI fell 65cts to $17.05/bbl July 20 after Ping said he saw no reason for Saudi Arabia to cut output in the third quarter to help prop sagging oil prices and instead called on "errant" members to stick to quotas.

Centre for Global Energy Studies (CGES), London, contends Iraq's bid to sell $1.6 billion worth of oil to fund humanitarian activities could hardly come at a worse time for OPEC.

"Having failed to reach an agreement that would accommodate Kuwait's output aspirations for the third quarter," said CGES, "OPEC now faces the unexpected prospect of an additional 500,000 b/d later this year should Iraq decide to accept U.N. terms."

Even if the market accepts higher OPEC production because of unrealistically low quotas, CGES says the resumption of Iraqi oil sales would put a further strain on a flawed agreement (OGJ, June 21, p. 35).

CGES believes fourth quarter demand could allow OPEC to raise output to 26.1 million b/d without depressing prices, as long as Iraq remains out of the market. With no Iraqi oil sales and increased seasonal output, CGES contends OPEC could produce 24.7 million b/d in the third quarter and 26.1 million b/d in the fourth to maintain OPEC's $17.70/bbl marker.

With Iraq beginning exports in September and a seasonal increase, CGES said OPEC could produce 24.9 million b/d in the third quarter with the marker remaining at $17.50/bbl, falling to $16.60/bbl in the fourth quarter with OPEC output at 26.6 million b/d.

Political disarray in Russia isn't stemming the tide of foreign investment in downstream or upstream ventures there.

U.K.'s Barclays Bank provided $1.1 billion in financing to renovate Novokiybyeshev refinery-recently privatized and one of Russia's largest.

And the Ufa refinery let a $140 million contract to Italy's Tecnimont to construct a 100,000 metric ton/year polypropylene plant in Bashkortostan.

Meantime, Russia's petroleum industry remains in "deep crisis, says Minister of Fuel and Energy Yuri Shafranik. He sees crude production continuing to plummet until it stabilizes in 1995.

Russian oil flow fell to a long time low of about 6.6 million b/d in June, down 2% from May and 13% from a year ago.

Russia's June gas output was down 5% from a year ago.

Yemen's oil prospects continue to brighten. A Total group is working on development plans to determine commerciality of the Kharir oil discovery on Yemen's East Shabwa Block 10 in Central Yemen, reports interest owner Unocal. The group drill stem tested two appraisals that followed the 2 Kharir discovery well, which in April flowed 12,000 b/d of 13 gravity oil with no water from four lower Cretaceous sands at 5,500-5,900 ft (OGJ, Apr. 19, Newsletter). The 1 Kharir flowed 3,450 b/d of 32 gravity oil from one test of lower Cretaceous sand at 5,722-73 ft. The 3 Kharir, 4 miles northeast, flowed a combined 10,700 b/d of oil on four tests of Cretaceous pay at 5,622-6,824 ft. Rates were 300-4,800 b/d, and gravities 30.5-34.

Taiwan, one of the top prospects for LNG marketers, has a pair of sizable offshore natural gas discoveries. State owned Chinese Petroleum Corp. says preliminary tests indicate a strike 113 km off the island's southern coast could hold as much as 210 bcf in about 150 m of water.

A second find, off Mailiao, is believed to hold about 70 bcf.

Taiwan's Ministry of Economic Affairs wants two big refinery/petrochemical projects to merge in a cooperative venture. The ministry contends that if Tuntex and state owned Chinese Petrochemical Corp. proceed with their projects, each calling for a refinery and big naphtha cracker, their eventual combined output could far outstrip demand. The ministry says it would hesitate approving two $4 billion projects if that seems the case.

Elf Aquitaine and chemical giant Rhone-Poulenc are on the list of the first four French companies-the other two are banks-to be privatized this fall if market conditions permit.

The French government currently has a 50.79% stake in Elf, trimming its holding in recent years. The state is likely to retain a "golden share" and maintain other prerogatives, such as choice of Elf's president.

Pemex has postponed until at least 1994 privatization of 60 petrochemical plants as a result of weak market conditions and uncertainty over the effect of possible environmental accords being cobbled onto the North American Free Trade Agreement. The plants' book value is pegged at $6 billion, but analysts think they could net only about half that, and Pemex Petrochemicals Pres. Jaime Willars told El Financeiro International weekly, "The government has no intention of giving away its petrochemical plants."

North American first half earnings reports are beginning to trickle in, and the results are generally bright upstream and weak downstream.

Pennzoil's oil and gas segment operating income more than doubled in the second quarter due to higher prices and production, allowing it to almost triple first half net income to $29.5 million. Others reporting big first half earnings increases year to year were Canadian Oxy 130%, Panhandle Eastern 44%, and Enron 21%. However, Diamond Shamrock cites a $1.1 million hit by inventory devaluation from falling crude and product prices in reporting a 32% slide in second quarter profits vs. a year ago.

California has certified two ARCO diesel formulas to meet the state's new standards, which take effect Oct. 1 and call for major cuts in sulfur and aromatics content. The state's new specs are tougher than the federal standards, also to take effect Oct. 1. ARCO recently completed a $70 million revamp at its Carson, Calif., refinery to allow it to begin producing about 20,000 b/d of the new diesel. The new state specs have sparked fears of diesel shortages in the state this year (OGJ, June 21, p. 22).

U.S. natural gas demand is expected to continue to grow in 1993, increasing to 20.8-21.2 quadrillion BTU, unless fourth quarter weather is extremely warm.

AGA Pres. Mike Baly said, "During the past 7 years, natural gas demand has grown about 22%, from 16.7 quads in 1986 to 20.3 quads in 1992, and this trend should continue as the nation's economy picks up strength.

Increased gas demand and prices continue to buoy U.S. drilling.

Drilling rig utilization in the Gulf of Mexico remains at its highest level in 2 years. Offshore Data Services in mid-July reported 121 offshore units under contract in the gulf, up from a low of 60 in May 1992. It puts rig utilization steady at 81.2% vs. 39.9% 1 year ago.

Global Marine is mobilizing two 300 ft, independent leg, cantilevered jack ups owned 50-50 with Transocean Drilling AS, Norway, to the gulf from the North Sea. Both rigs, zero discharge units equipped with top drives, have contracts. Under its joint venture agreement with Transocean, Global is to market and operate the rigs in the gulf.