OGJ Newsletter

Oil prices were holding steady at presstime, as the U.N. sought a fix for tensions between the U.S. and Iraq over weapons inspections.

As Baghdad continued to defy the U.N.'s mandate to continue cataloging and destroying Iraqi chemical weapons, U.N. Sec. Gen. Kofi Annan urged both sides of the conflict to drop "purist or fundamentalist positions" and indicated U.N. willingness to relax the rules over weapons inspections. He said Iraq's leaders had "...painted themselves into a corner, and we need to work with them to get them to back down; but I think we should not insist on humiliating them."

U.S. and U.K. forces have been building up in the region, with Kuwait last week playing host to anti-Iraq forces for the first time since the Persian Gulf war. Australia and Canada have reportedly promised to join any U.S.-led attack.

Oil traders have watched the growing hostility between Washington and Baghdad with interest, as the prospect of blocked Iraqi oil exports is currently providing the only upward pressure on oil prices (OGJ, Feb. 9, 1997, p. 28).

Last week, prices in London trading were stable after weeks of turbulence. Brent crude oil for prompt delivery closed at $14.63/bbl on Feb. 10, while March delivery Brent closed at $15.13/bbl.

Middle East Economic Survey said that, while interruption of the flow of Iraqi oil to international customers could stabilize oil prices, the diplomatic solution envisioned by the U.N. could only lead to a price collapse.

"If Annan's proposal for a 150% increase in the value allowable for Iraqi oil sales to $5.2 billion every 6 months is smoothly translated into reality within the next month or so, we must brace ourselves for a deluge of fresh oil supply far greater than an already saturated market can possibly absorb," said MEES. "As a result, prices would crash-there could be no other outcome."

To help abate a price collapse, Venezuelan President Rafael Caldera has proposed a meeting between OPEC and non-OPEC oil ministers to discuss ways to restore price stability. The proposal was made during a telephone conversation with Iranian President Mohammad Khatami.

Venezuela's Energy and Mines Ministry said, "President Caldera raised the issue that pricesellipsetranscend the limits of OPEC." He told Khatami that Venezuela wants OPEC to revise its strategies, "given the new realities of the international oil market." The average export price for Venezuela's oil basket has plunged nearly $2/bbl since December, to $13.05/bbl for January.

The ministry also said that Khatami had invited Caldera to visit Iran and that the invitation was reciprocated. No dates have been set for the proposed visits.

Purvin & Gertz's Ken Miller agrees with Caldera's market assessment: "Crude production capability far exceeds demand growth. Reduced OPEC output will be necessary if a further price collapse is to be averted."

PanCanadian Petroleum says it will lay off 10% of its staff and cut production in response to a downturn in oil prices. CEO David Tuer said current low oil prices, increased differentials between light and heavy crude, and export pipeline bottlenecks are all factors in the decision to cut about 200 staff.

Most analysts do not expect widespread industry layoffs unless there are steady declines in oil prices.

Meanwhile, Husky Oil and Alberta Energy Co. (AEC) are reconsidering the timing of their $400 million Lakeland heavy oil pipeline project in northeastern Alberta as a result of falling crude prices.

An AEC official said the current price environment gives the companies breathing room to decide on the project, which is contingent on forecasts of increasing heavy oil production.

Thailand's economic woes have hit petroleum players differently, some seeing a chance to nab cheap assets, others suffering financially.

Total is looking for more Thai acreage, convinced of the kingdom's long-term economic robustness. Total E&P Pres. Daniel Valot said the company is looking at prospects for operating blocks in the Gulf of Thailand as part of a strategy to boost reserves in Asia.

Valot acknowledged that Thailand has limited potential for massive gas reserves: "It is unlikely you can find a new elephant in Thailand. There are still some small discoveries to be made and these can be economical, providing there is not too much CO2 and they are close to existing pipelines."

On the other end of the spectrum, Rutherford-Moran is considering selling its stake in gas-prone Block B8/32 in the Gulf of Thailand. R-M hired Morgan Stanley, Dean Witter, Discover & Co., and Chase Securities to explore various "strategic alternatives," including merger or sale of its Thai subsidiary.

R-M has production from the block and expects to spend $110-120 million this year to push output higher. CFO David Chavenson said, "That is one of the problems-we are a victim of our own success. We have found an awful lot of gas and need to figure ways to develop it."

The Asian financial crisis will not prevent Singapore from going ahead with one of the world's most ambitious projects.

Battling back from a bad case of the Asian market flu, Singapore's Economic Development Board (EDB) will continue with its plan to merge seven islands into a site for a huge petrochemical complex (OGJ, Aug. 14, 1995, p. 39). The $4.2 billion project will increase its land use to 3,459 acres from 2,417 acres.

Jurong Island will become the country's flagship chemical complex, sporting Mobil's $800 million naphtha cracker as well as other petrochemical plants and refineries.

EDB may be planning to take a substantial equity share in the project-more than its usual 30%-to demonstrate confidence in the region's economy.

As another testament to confidence in the region's eventual rebound, Shell has denied reports that it is planning to shut down a 110,000 b/d crude unit at its Singapore refinery (OGJ, Feb. 2, 1998, Newsletter). The company said that, while it continuously reviews its options, it has no plans to mothball any of its Singapore distillation units. In fact, the refinery is operated at 85% capacity, says Shell.

According to a consultant in the region, although cuts are expected, given the current operating climate there, such a big move would be taking a pessimistic long-term view of the region.

Royal Dutch/Shell expects next week to sign agreements for development of the proposed $4.5 billion Nanhai petrochemical complex at Daya Bay in China's Guangdong province.

China has approved a feasibility study for the joint venture project. A framework agreement for finalization of the contract is expected to be signed in the Netherlands on Feb. 16. Germany's BASF also recently was given a green light for its world-class petrochemical complex in China (see Industry Briefs, p. 38).

Partners in the project are Shell Nanhai 50%, China National Offshore Oil 25%, China Merchants Holding 20%, and Guangdong Investment & Development 5%. The plant is slated for completion in 2003, with capacity to produce 800,000 metric tons/year (mt/y) of ethylene, 450,000 mt/y of polyethylene, 320,000 mt/y of ethylene glycol, 240,000 mt/y of polypropylene, 560,000 mt/y of styrene monomer, and 250,000 mt/y of propylene oxide.

Philippines President Fidel Ramos has signed a law deregulating the oil industry, replacing a law the Supreme Court struck last November (OGJ, Jan. 19, 1998, p. 22). The measure sets a 5-month transition to the free market and a standard 3% import tariff on both crude and products.

Ramos said the law would help 32 firms that want to compete with the Philippines' three large refiner/marketers. It also allows him to spend $72.5 million to subsidize petroleum product prices during the transition, if necessary.

Thai protests over construction of the Yadana pipeline from Yadana gas field in the Gulf of Martaban off Myanmar to a power station at Ratcha Buri, southwest of Bangkok, will not prevent its completion, says the country's prime minister.

PM Chuan Leekpai sidestepped complaints about the pipeline's route through western Thailand after Myanmar officials warned a construction halt would cost the Petroleum Authority of Thailand $125,000/day. Chuan said construction should go ahead, as the government has signed contracts with its French and U.S. partners, as well as with Myanmese officials.

Pdvsa unit Pdvsa Petroleo y Gas has signed a letter of intent to purchase 50% of Hess Oil Virgin Islands Corp.'s 545,000 b/d refinery on St. Croix for $625 million, payable over 10 years. The move ups Pdvsa's net global refining capacity by 272,500 b/d to more than 2.76 million b/d.

As part of the deal, Pdvsa and Amerada Hess will sign a long-term supply contract for 270,000 b/d of Venezuelan oil, to be bought at competitive prices. The joint venture plans to invest in a 45,000 b/d deep-conversion coker at the refinery. The unit will substantially increase the plant's ability to process Venezuelan heavy crudes.