OGJ Newsletter

Nov. 23, 1998
Are oil markets so depressed that even military action against Iraq would have caused only a temporary spike in oil prices? That's the view of London's Centre for Global Energy Studies (CGES), which says that any price hike from U.S. air strikes would be short-lived because fundamentals are so weak (see related story, p. 34).

Are oil markets so depressed that even military action against Iraq would have caused only a temporary spike in oil prices?

That's the view of London's Centre for Global Energy Studies (CGES), which says that any price hike from U.S. air strikes would be short-lived because fundamentals are so weak (see related story, p. 34).

Demand for oil is soft all around, but particularly in the Gulf of Mexico, where, for the first time ever, a cargo was dispatched to the U.S. West Coast through the Panama Canal last week. Third quarter global oil demand increased just 0.3% from a year ago, with Russian demand down, South Korea's falling 10% for September, and Japan's moving yearly average down 3%, said CGES.

"The worldwide stockbuild in the first half of 1998 was 442 million bbl. Instead of these inventories being drawn down in the third quarter," said CGES, "they increased by another 39 million bbl, putting yet more pressure on oil prices. More importantly than counting absolute barrels, (global) stock coverellipsehas increased from 81 days' worth of forward cover at the start of fourth quarter 1997, when dated Brent was $18.80/bbl, to 87 days' worth at the start of fourth quarter 1998. Is it that surprising to find dated Brent around $12/bbl? Stocks will come down, but it will take time." Brent for January delivery fell as low as $11.15/bbl on Nov. 18 but closed at $11.55/bbl and was showing a little strength early Nov. 19 as traders conjectured the market had bottomed.

CGES predicts that, with OPEC compliance with pledged cuts holding at about 95%, dated Brent would average $12.20-12.30/bbl through first half 1999. With a mild winter, however, fourth quarter dated Brent would average $12/bbl, first quarter $11.40/bbl, and second quarter only $11.10/bbl.

Meanwhile, Mexico says it will extend its output cuts, made under an accord with Saudi Arabia and Venezuela, through the end of 1999. After informal talks with other producer nations, Mexican Energy Minister Luis Tellez is reportedly confident that OPEC will follow suit. Tellez added, however, that, if OPEC opts not to extend its cuts, Mexico will reconsider its decision.

Low oil prices have pushed the average U.S. retail regular gasoline price to below $1/gal for the first time since Jan. 10, 1994, EIA reports.

On Nov. 16, the average cash self-serve price of regular gasoline was 99.6¢/gal, down 1.2¢ from the week before and more than 17¢/gal below the price a year ago. EIA says gasoline prices will not go significantly lower this year and will increase only a few cents on average in 1999, in line with a forecast of only slightly stronger crude oil prices (see story, p. 33).

The European Union has darkened oil producers' outlooks a bit further with plans to cut the floor for oil stock levels effective Jan. 1, 2000.

The EU Energy Council voted to revise its oil stocks directive, with member states being required to maintain oil products stocks equivalent to 65 days' consumption in the previous calendar year, rather than the 90 days' required today. U.K. Energy Minister John Battle says that, on average, U.K. refiners would see products stockholding trimmed by about 9 days, which he reckons could save the U.K. oil industry about £10 million/year.

Battle is making a mark upstream as well, getting appointed head of a new British task force to cut U.K. development costs further, beyond the earlier and much-trumpeted Cost Reduction in the New Era (Crine) program.

Battle told an Aberdeen conference, "There is now little or no margin between the cost of new production in the U.K. sector and the price of oil in the market. A market price is just that-a price that neither governments nor oil companies can control. What can be controlled is the cost of production.

"The task force will focus on achieving the cultural shift necessary to capture the value available from intelligent working and creation of new technological approaches," said Battle. It intends to reduce development costs further by "better management of the supply chain."

With majors spending 60-90% of project outlays on outside purchasing, Battle reckons suppliers can be squeezed harder without reducing their margins.

Major personnel cuts continue to mount, following recent announcements by Texaco and TransCanada, among others (OGJ, Nov. 16, 1998, Newsletter, and Industry Briefs, p. 40).

Shell Europe Oil Products plans to cut 3,000 jobs over 12-18 months beginning next year. The losses represent about 20% of the unit's work force and will include those due to closure of the Shell Haven refinery in the U.K. and a reduction in operations at the Berre refinery in France. A Shell official told OGJ the losses will occur across the board in every country in which the unit operates.

The move is intended to make the unit more "customer-focused," organized in business groups rather than by country. The official said reductions will be achieved through redeployment, attrition, and eliminating redundancies.

As the oil and gas industry's tough times continue, Russian giants Lukoil and Gazprom are reportedly preparing to join forces to cut costs and boost output on developments at home and abroad.

Lukoil Vice-Pres. Leonid Fedoun was quoted in London's Financial Times last week as saying he hoped a strategic agreement for collaboration between the companies would be signed "in the next few days."

The deal was expected to involve production-sharing, with Lukoil handling oil from Gazprom's fields and Gazprom taking care of gas from Lukoil's fields.

Oil industry privatization and liberalization efforts are gaining steam in selected countries.

Ecuador's President Jamil Mahuad hopes to boost his country's oil production to as much as 700,000 b/d by 2002-about double current output-with the help of foreign investment. Reforms to the country's hydrocarbon law are being prepared to provide new contract terms for exploration and to facilitate foreign participation in several sectors of the oil industry, said Mahuad at the opening of a joint office in Quito by Burlington Resources and Benz Energy. The combine entered Ecuador before securing contracts but says it is willing to invest $1 billion in Ecuadorian oil development.

Saudi Arabia plans to pursue full integration of its petroleum industries next century, says Mutlaq Hamad Al Morished, president of Saudi Petrochemical Co. The move would allow the participation of private firms in new projects, mostly in the downstream sector, said Abdul Razzak B. Alsamdan of A.H. Al Zamil Group. Beyond the basic integration of state petrochemical firm Sabic-needed for its continued existence, said Al Morished-are more scope for optimization and improved disposition of feedstocks, fuel, and utilities. Sabic also will set up R&D units to support market penetration and integration efforts.

Meanwhile, bureaucratic delays have led India's petroleum ministry to put off by 2 months road shows to promote 48 exploration blocks to be offered under its New Exploration and Licensing Policy, or NELP (OGJ, Aug. 31, 1998, p. 70). The shows-planned in Houston, London, Singapore, and Perth-are now scheduled for mid-January, said Petroleum Minister Santosh Kumar Gangwar.

Gangwar said the petroleum ministry is awaiting clearance from the finance ministry on its petroleum tax code. The NELP would provide tax holidays of up to 10 years. Of the 48 blocks offered under NELP, 26 are in shallow waters, 12 in deep waters, and 10 are onshore.

Three "macro" technology trends will shape the E&P industry, and independents especially, said Microsoft's Scott Fawcett earlier this month at the Emerging Technologies Energy Conference, an adjunct of the Independent Petroleum Association of America's annual meeting (see related stories, p. 36).

One trend is "knowledge management"-business-speak for improving the efficiency of an organization by sharing best practices, training employees, and developing effective pathways for moving information around the organization. Another is business process improvement, the objectives of which are optimizing finance and administration, reducing production costs, minimizing drilling risks, maximizing utilization and yields, and reducing cycle times.

The final trend is electronic business transactions or "e-commerce," which can allow better integration with customers, suppliers, and partners and improve efficiencies, says Fawcett.

The downturn arrived in the petrochemical industry "with a vengeance" in second half 1998, says Bill Parker, vice-president of downstream for Phillips. "What has happened in Asia, we're really seeing a ripple effect here in the Americas," Parker told journalists in Houston last week (see related story, p. 21). Ethylene margins that were 5-6¢/lb have fallen to 1¢/lb, and HDPE margins have fallen to 12¢/lb from 16¢ at midyear.

Taiwan's Ministry of Economics reportedly is preparing to open bidding for construction of an LNG receiving terminal in northern Taiwan. Mobil has been considering building the terminal for some time (OGJ, Aug. 3, 1998, p. 32), but other potential bidders include Royal Dutch/Shell, Total, and Taiwan's Tuntex Group.

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