OGJ Newsletter

President Clinton commanded center stage of the petroleum industry's attention at presstime last week, as he was poised to rattle a saber at a truculent Iraq and flourish a pen on the issue of climate change.

Clinton's decision to bolster U.S. forces in the Persian Gulf off Iraq breathed a little life into oil prices last week. U.S.

Defense Sec. William Cohen announced that time was running out for Iraq to allow U.N. arms inspection teams to resume their cataloging of President Saddam Hussein's weapons stores. On Nov. 10, Brent crude for December delivery closed at $12.04/bbl, up from $11.90/bbl the previous close. Brent rose again Nov. 11, closing at $12.11/bbl after hitting $12.45 at peak on the day. Nymex crude also was up a few cents on the day.

However, both Brent and Nymex had been down by about 50¢ on the week before the brief rally. That's because Saddam's usual upside effect on oil prices could not match the earlier negative influence of IEA's latest oil demand forecast. In its latest monthly report, IEA predicts that global oil demand will rise only 400,000 b/d in 1999, having risen only about 550,000 b/d this year, after rises of more than 2 million b/d each in 1995 and 1996.

The IEA announcement triggered a tumble from $12.35/bbl for December Brent at closing Nov. 6, to the $11.90/bbl prior to Saddam's latest warning.

Apparently, market supply/demand fundamentals are so weak, it would take a full outbreak of hostilities between the U.S. and Iraq to move oil prices much. Even then, traders probably would take a wait-and-see attitude over any genuine threat to oil supplies-most likely Iraq's own oil-for-aid sales, now running at about 1.7 million b/d-before bidding up futures prices again.

As for climate change, Clinton's signature on the Kyoto global-warming accord was imminent at presstime (see related story, p. 42).

Clinton administration sources last week said he planned to order U.S. officials negotiating in Buenos Aires to sign the treaty, hoping to spur further agreement on details of the accord. The Buenos Aires talks were expected to wrap up Nov. 13. Clinton administration officials acknowledged the signature would be largely symbolic, because it would still have to be ratified by the Senate-an unlikely prospect. The treaty's critics in the U.S. Congress warned Clinton not to sign the pact, saying that would bolster congressional opposition.

Giving more ammunition to Kyoto treaty opponents in Congress, the Alliance to Save Energy (ASE) claims the U.S. government is not meeting its own energy conservation requirements.

ASE, comprising 50 energy firms and groups, released a study claiming the government could save $1 billion/year and sharply cut air pollution and greenhouse gas emissions if it met building energy conservation requirements and bought energy-efficient heaters, coolers, and office equipment. It says the government spends $4.2 billion/year on energy for 500,000 buildings and facilities, using about 32% more energy per square foot than the U.S. average.

Despite its status as a chief culprit in greenhouse gas emissions, "Coal is the next global energy futures market," said Nymex Vice-Chairman Albert Helmig. The onset of electricity deregulation has helped develop a cash market for coal, says Helmig, citing proliferating reports of short-term coal buying. The Commodity Futures Trading Commission has approved a Nymex coal contract, and Helmig expects trading to begin in second quarter 1999.

Continuing consolidation in the petroleum industry has the rumor mill grinding over the next big acquisition target. Phillips Petroleum wants it known that the company doesn't plan to stay in anyone's crosshairs.

Phillips is "not seeking a suitor," claims Chairman and CEO Wayne Allen. "Phillips has long been known as fiercely independent," he said last week at the API meeting in San Francisco (see related story, p. 36), and "would fight" a takeover. For that reason, Allen said, "we are not high on many peoples' lists." Nor is GPM Gas, its midstream gas unit, for sale. "We want the liquids for our chemical business," said Allen. Chemicals and E&P will be growth areas in a "repositioning" strategy that includes plans for a refining/marketing joint venture with Ultramar Diamond Shamrock (OGJ, Oct. 19, 1998, p. 39).

Meanwhile, the bloodletting continues. Texaco plans to eliminate about 1,000 employees and contractors worldwide, saving $200 million/year in the process. It's part of a global upstream restructuring to cut costs and bolster its competitive stance amid low oil prices, placing greater emphasis on long-term production and reserves growth.

TransCanada PipeLines will cut 600 jobs by 2000, but about one third of the layoffs have already been made and some others will involve attrition and retirement. The company says the cuts in its payroll of 7,000 are part of a program to create efficiencies following its merger in July with Nova. Merger costs are put at $390 million (Canadian) before taxes and regulatory recoveries.

The pressure to cut costs also could undermine prospects for a hot E&D play. Petro-Canada says any expansion of operations off Canada's East Coast will be closely related to its ability to trim operating costs.

It is developing Terra Nova oil field, second in the region after Hibernia field, now in production (OGJ, Oct. 19, 1998, p. 25).

Gary Bruce, Petro-Canada vice-president of offshore development and operations, says there could be a long dry spell before a third field development emerges in the area, if the firm and its partners can't compete in oil markets. Bruce contends that the odds are strong that there will be a third field development, but with oil prices low, operating costs will be key to determining when and how new fields are developed.

Petro-Canada insists the cost-effectiveness of its projects be in the top 25% of comparable projects worldwide. The breakeven price for Terra Nova crude is put at $10 (U.S.)/bbl, when the field starts up in 2000. The firm expects to decide by 2000 which of several fields could be developed after Terra Nova and whether that next one will be developed as a satellite or stand-alone field.

Another watershed offshore development faces an undetermined shut-in time. On Nov. 9, the bow of BP's Schiehallion FPSO in U.K.'s West of Shetland play was ripped open by a 60-ft wave, forcing the operator to airlift 30 nonessential crew members to the nearby Stena Dee semi. Continuing storms over the next 2 days prevented BP flying the nonessential crew to shore and flying an investigation team out to the ship to estimate damage thoroughly.

A BP official told OGJ there are three tears in a section of the ship's superstructure, the largest of which is 3 ft long, about 50 ft above the water line. The crew reckons the tears can be welded when the weather improves, without the need to take the ship into dock for repairs. The official said the ship was shut in at the time of the storm because a turbine tripped out. There was no threat of pollution, he said, and the damage presents no threat to the ship's stability.

Despite weakness in petrochemical markets worldwide, BP plans major capacity expansions at its Grangemouth complex near Edinburgh and at Hull, England. Costing a combined £500 million, the expansions are the latest step in a plan to increase capacity in a variety of products, and follows the start of work on new polyethylene and polypropylene plants at Grangemouth (OGJ, May 4, 1998, p. 56). New projects at Grangemouth are: a 270,000 metric ton/year capacity expansion of one of the ethylene crackers; construction of a 110,000 ton/year ethanol plant; and a cogeneration plant.

Agreement on a preferred export option for Caspian crude has stalled again. A consortium of companies that are the main upstream players in Azerbaijan postponed to Dec. 4 from Nov. 11 a meeting in which they were to recommend to the Azeri government their preference for a pipeline route, with three main options in the running (see map, OGJ, Oct. 26, 1998, p. 29).

Even that date is not solid, and further delay is possible on the meeting, first scheduled in October. The dilemma is that the option preferred-for largely political reasons-by Azerbaijan, Turkey, Kazakhstan, Georgia, and the Clinton administration is a pipeline from Baku to Ceyhan that is also the most costly, and the consortium will be picking up the tab.

A number of oil companies outside North America have released data on their recent financial performance, revealing mixed results.

A sampling follows, with 1998 results first, followed by 1997, with losses in parentheses: ENI (first half) 3.65 trillion lira vs. 2.62 trillion, Hindustan Petroleum (fiscal first half) 4.3 billion rupees vs. 3.44 billion, Indian Oil (fiscal first half) 13.86 billion rupees vs. 9.04 billion, Mitsubishi Oil (first half) (¥2.8 billion) vs. (¥11.1 billion), Neste (first 9 months) 1.03 billion markka vs. 1.3 billion, Nippon Oil (first half)¥1.5 billion vs. ¥3.9 billion, Norsk Hydro (third quarter) 3.29 billion kroner vs. 4.34 billion, India's ONGC (fiscal first half) 12.58 billion rupees vs. 11.27 billion, OMV (third quarter) 1.59 billion schillings vs. 1.35 billion, Petron (first 9 months) 2.8 billion pesos vs. 1.4 billion, Royal Dutch/Shell (third quarter) $896 million vs. $2.06 billion, Sabic (first 9 months) $464.5 million vs. $954.1 million, Saga (first 8 months) (971 million kroner) vs. 340 million, Santos (first half) $84.2 million (Australian) vs. $102.3 million, and YPF 159 million pesos vs. 226 million.