OGJ Newsletter

U.S. INDUSTRY SCOREBOARD 12/28 [44,167 bytes]

With crude oil prices dipping to the single digits following the U.S.-U.K. air strikes in Iraq (see story, p. 24), Iraqi oil exports continuing unabated, and no price relief in sight, oil producers are looking for a break anywhere one might be found.

In an effort to boost sinking prices, Venezuela's President-elect, Hugo Ch vez, promised to comply fully with pledged production cuts when he takes office Feb. 2. He admits Venezuela has fallen short of its promised 525,000 b/d cut. After compliance is achieved, said Ch vez, Venezuela and other producer states will reassess whether the strategy has worked, with a view to extending pledged cuts through 1999 and possibly even increasing them.

Meanwhile, London's Centre for Global Energy Studies is pessimistic about compliance with pledged cuts. "Many member states are keen on further cuts," said CGES. "However, key OPEC players such as Venezuela and Iran, plus non-OPEC Mexico, must pull their weight. Will they? The omens are not favorable, for Iran is still arguing about starting points (for cuts) and the new populist Venezuelan government will have to lay off oil workers to comply. On balance, prices should remain weak well into 1999," said CGES.

If OPEC cuts output by 1 million b/d, said CGES, oil prices could top $16/bbl by fourth quarter 1999. However, this would require a level of commitment to cuts that OPEC has not shown. If OPEC members surpass 80% compliance with their pledged 2.6 million b/d of cuts, dated Brent could average $10.80/bbl in first half 1999, $10.70/bbl in the third quarter, and $11.50/bbl in the fourth quarter, predicts CGES. A cold winter, adding 300,000 b/d to world oil demand, would help, but not much. In that event, Brent would average $11.30/bbl in the first quarter, $11.60/bbl in the second, $11.90/bbl in the third, and $13.10/bbl in the fourth.

Chÿvez has also called for the formation of a multinational South American conglomerate, which he calls Petroamerica. The enterprise, as he sees it, would involve Venezuela, Brazil, and Colombia.

He offers no details on how it might be created or structured but says it is intended to unify E&P and marketing activities in the three countries.

Petrobras and Pdvsa have reportedly been discussing a strategic alliance that would allow each to operate in the other's domestic market.

Brazil has formally opened its first oil and gas license round, which is expected to attract about $1.2 billion in investments.

On Dec. 18, David Zylbersztajn, director general of Brazil's National Petroleum Agency (ANP), kicked off the historic round by unveiling 27 blocks up for bid proposals by oil companies, with bidding expected to get under way in January.

The first round will comprise 27 blocks, including 23 in seven offshore basins, of which 12 are in the Campos and Santos basins. Zylbersztajn said, "The areas also present different types and scales of business opportunities, ranging from deep waters in frontier and proven basins to shallow-water gas plays, as well as onshore gas plays in the largely unexplored Parana basin and low-risk exploration in the onshore Potiguar basin."

Independents are leading price relief efforts in the U.S., where the Interstate Oil & Gas Compact Commission has called for emergency measures to stabilize oil prices, among them the purchase of U.S. crude oil for the Strategic Petroleum Reserve (see stories, pp. 24-25).

Meanwhile, the Oklahoma Independent Petroleum Association has called on the state to adopt several measures to help the oil industry, including the virtual repeal of the gross production tax. OIPA wants the state to substitute a three-tier tax system for the current 7% gross production tax. Under the system, taxes would be 7% when oil is trading at more than $18/bbl, 3.5% when it is $14-18, and only 1% when prices fall below $14.

As further evidence of the downturn, the Baker Hughes U.S. rig count has fallen to 642, the company announced Dec. 18. This is a drop of 25 from the previous week, and 377 less than the same period a year ago.

Times are tough in Canada, as well.

PanCanadian plans to slash capital spending by $220 million (Canadian) in 1999 from 1998's level of $870 million. It will monitor oil prices and may hike spending on oil projects if there is a sustained price recovery.

PanCanadian is focused mainly on natural gas development in Western Canada. The company has hedged the sales price on about 360 MMcfd of its 1999 gas production at a field gate price of about $2.60/Mcf.

And Remington Energy says it is now up for sale because of low oil prices and high debt loads. The company projects 1999 cash flow of $50 million (Canadian) and has debt of more than $300 million. Remington has substantial assets in the West Stoddard area of British Columbia.

Despite comparable woes in the downstream side of the petroleum industry, some refiners and petrochemical producers are still planning major expansions amid a capacity glut.

The Shell-Pemex joint venture refinery at Deer Park, Tex., plans another upgrade and expansion to enable it to process additional extra-heavy, sour Mexican Maya crude. Following a similar move earlier this decade, the firms envision a $300 million expansion, this time to include Foster Wheeler's Sydec delayed coking technology.

Meanwhile, Exxon has decided to proceed with a $2 billion petrochemical investment in Singapore, despite the Asian economic crisis. Expected to come on stream in fourth quarter 2000, the 247-acre complex on Singapore's Jurong Island will include an 800,000 metric ton/year ethylene unit and several downstream derivative units. In light of Exxon's pending merger with Mobil, the status of Mobil's planned $1.4 billion petrochemical investment in Singapore is unknown. The project had already been postponed 2 years to 2003 because of the regional downturn, but the merger may make it redundant.

Japanese refining and marketing consolidation continues apace (OGJ, Dec. 21, 1998, p. 26).

The megamerger of Exxon and Mobil is spurring a combination of operations among their Japanese R&M affiliates Esso Sekiyu, General Sekiyu, Mobil Sekiyu, and Kygnus Sekiyu. Merging the four would create a firm holding more than 20% of Japan's gasoline market, compared with the 24.5% share that will result from the impending merger of Nippon Oil and Mitsubishi Oil.

The amalgamation could also involve Tonen Oil, in which Exxon and Mobil each holds a 25% stake, and is tentatively slated for 2001-but could be accelerated, depending on how the Exxon-Mobil merger proceeds.

While Russia and France continue to chastise the U.S. for its sanctions targeting Iran, petroleum companies from both countries continue to forge stronger ties with Tehran.

Total is pursuing yet another upstream project in Iran as it prepares to bring a major Iranian oil field on stream next month. Despite the potential for conflict with the U.S.-owing to the Iran-Libya Sanctions Act (ILSA), which provides for sanctions against U.S. firms or companies that operate in the U.S. if they invest at a certain threshold in Iran's petroleum sector-Total is negotiating a long-term exploitation license for the three-field onshore Ahwaz oil complex. Total told the French press agency AFP, "With 10% of the planet's oil reserves and 15% of the gas reserves, Iran is central to our development strategy. We reject sidelining this country because of political reasons."

Meanwhile, Total has four wells in Sirri E oil field off Iran ready to start flow of 10,000 b/d in January, with another 15 wells slated to start up in March, bringing field output to 50,000 b/d. By December 1999, start-up of another 31 wells will boost production to about 100,000 b/d. Total started up another nearby offshore field, Sirri A, in October at 7,000 b/d, and expects to boost that to 20,000 b/d by 2000. Total snatched up the Sirri projects after Conoco was sidelined by the U.S. sanctions policy toward Iran.

The last time Total defied ILSA proscriptions, it won an exemption from the Clinton administration after jawboning by the European Union. That incident involved proposed development of South Pars gas field off Iran by Total, Russia's Gazprom, and Malaysia's Petronas (OGJ, May 25, 1998, p. 18).

Gazprom also has stepped up its involvement in Iran, forming a joint-venture contract drilling company with National Iranian Oil Co. (NIOC). Interests will be held by NIOC's drilling unit Naftgaran Engineering Services Co. 51% and Gazprom's drilling subsidiary Burgas 49%.

Germany's Ruhrgas-one of Gazprom's biggest customers-has won a bidding round for a 2.5% stake in Gazprom with a bid of $660 million, a notch above Moscow's floor price.

Italy's ENI, which had been reported as interested in buying the Gazprom stake, denied participating in the bidding but says it may also seek to buy an interest in Gazprom in the context of a strategic alliance it has with the Russian firm. Royal Dutch/Shell also was reportedly involved in the Gazprom auction. Shell and Ruhrgas also have signed strategic alliance accords with Gazprom.