OGJ Newsletter

The Iraq/U.N. oil-for-aid deal appears to be under threat once more, as Baghdad continues to interfere with weapons inspections.

Oil prices recovered a little from their recent low as conflicting stories emerged about the status of negotiations.

Brent crude oil for March delivery hovered above $15.50/bbl, while prompt-delivery Brent wavered around $15/bbl last week. Market analysts expect a further fall as Iraqi exports return, however (see Watching the World, p. 41).

Middle East Economic Survey (MEES) says the third round of oil exports under the Iraqi/U.N. deal has been lined up, with 29 sales contracts to international firms being agreed on for the 6 months ending June 2.

MEES says Iraq's contracts continue to favor countries that have supported Baghdad during its spats with the U.S. Russia, France, and China have secured the bulk of exports, while Shell and BP have been frozen out.

Markets may be overemphasizing declining oil prices while underestimating the effects of growing oil demand, says Global Marine CFO John G. Ryan. He said the margin of error between oil supply and demand is incredibly small, approaching 96-98% of deliverability.

In a sign of the continuing robustness of the oil service/supply sector, Global Marine's 1997 worldwide summary of offshore rig economics (Score) rose 17.9% for the year. Score is used to track current offshore day rates as a percentage of estimated day rates required to justify new building (for an explanation of Score, see OGJ, Sept. 22, 1997, p. 57).

The December Score registered a 1.4% rise from November to 71.3, a 101% increase from 5 years ago.

Despite financial-market concerns about near-term oil and gas prices, Global's Ryan is optimistic that 1998 will be another strong year. Most of the world's premium rigs are committed well into 1998, and E&P capital outlays are expected to rise by 10% from 1997's $85 billion, according to announced spending plans that Global cited.

Day rates rose 42% in 1997, outpacing the rate increase required to justify new rig construction, which rose 21%. In 1997, shipyards worldwide received orders for 27 deepwater mobile drilling rigs, bringing the total number of competitive deepwater newbuilds and conversions on order to 37 at yearend.

Ryan says that offshore rig supply is close to demand. Every rig that can be working, is. Ten years ago, 340 rigs were idle-more than half the then-available rigs. Today, that number is 52, with 42 rigs getting ready, 7 cold-stacked, and 3 ready-stacked.

In another sign of the service/supply sector's health, Global Marine reported 1997 net income of $270 million, or $1.58/share, on revenues of $1.1 billion. This is the company's highest annual revenues ever.

An international group is set to explore the Kazakh sector of the Caspian Sea. Offshore Kazakhstan International Operating Co. (Okioc)-which includes BP, Statoil, Shell, Mobil, Total, Agip, BG, and Kazakhstan-CaspiShelf-completed a 3-year seismic survey of the area last year.

"It is going to be a great challenge to get the wells drilled," said BP's Mike Devey. "The water is shallow (2-8 m); the area is iced over in winter; it is environmentally sensitive, as it is an important breeding ground for migrating birds and caviar-producing sturgeon; and it is a remote location with limited existing infrastructure.

Devey says the wells will be deep and high-pressure, with high gas and H2S contents. The first well will be drilled this year from a swamp barge modified to cope with ice. The barge is being refurbished in the U.S.

Plans to link gas-rich Russia with Northeast Asian demand centers are progressing nicely.

Russia and China have been studying the possibility of building two pipelines: one from Russia's Irkutsk region via Mongolia to China's Shandong province on the Yellow Sea, with a possible extension to South Korea and Japan; the other from western Siberia to Shanghai via the Xinjiang autonomous region.

Sources say China has reached agreements with both South Korea and Russia. Japanese energy authorities and private firms have reportedly applied to China and Russia to join the programs.

The proposed pipelines would have a combined length of 3,500 km and would cost $8-10 billion, according to Chen Jiqing, director of CNPC's pipeline bureau. The lines would transport as much as 20 billion cu m/year and may take 8-10 years to complete.

U.S. refiners have done almost everything possible to increase profitability, says Cambridge Energy Research Associates (CERA).

Refining margins have improved modestly in recent months, CERA's Kevin Lindemer told an International Association of Energy Economics meeting in Houston last week, but "there aren't any industry solutions."

Fifteen percent of U.S. distillation capacity is owned by producer countries, 18% is involved in or has recently completed a major alliance, 20% is pursuing heavy oil projects with Venezuela, and 25% has changed ownership.

"Two thirds (of U.S. refiners) have done something fairly significant to move down the cost curve, but gross margins continue to erode," Lindemer said.

The reason, says Lindemer, is that the benefits of these maneuvers are passed on to consumers. What this means for refiners, said Lindemer, is that "you always have to be doing something to restructure, you always have to be changing, you always have to doing something a little faster or a little better."

A common response to this problem is to increase efforts, not to improve the profitability of the refinery, but to add value to the system. This is done by, for example, leveraging to chemicals production, improving distribution, and increasing focus on marketing and logistics.

Some of the key drivers in the future, says Lindemer, will be feedstock sources and composition, further privatization and deregulation, improved technologies, and additional environmental pressures.

Australia's downstream petroleum industry faces substantial job losses and refinery closures if the government doesn't counter the threat of cheap fuel imports from Asia in the next few months, according to a report by ACIL Economics & Policy.

The report, commissioned by the Australian Institute of Petroleum (AIP), says the sector has reached a crisis point. Refiners BP, Caltex, Mobil, and Shell face tough challenges as new independent retailers are able to import cheap gasoline from Asian refineries, where the fuel is in oversupply.

AIP is urging Australia to amend legislation such as the Petroleum Retail Marketing Franchise Act and the Marketing Sites Act. AIP says the entry of independent retailers such as Burmah, Liberty Oil, and supermarkets has made the legislation outdated because the independents are subject to different rules.

The recent downturn in foreign exchange rates has exacerbated the problem.

AIP says there is a real threat that at least one of Australia's refineries will close. Shell has cut 500 jobs and BP plans to shed 100.

Deregulation of the U.S. electric power market has moved into full swing, with telecommunications giant Pacific Telesis signing a power supply agreement with Enron Energy Services (EES). Pacific Telesis-parent company of Pacific Bell-has become the largest U.S. customer to switch electricity providers in the deregulated market, according to Enron.

EES will supply power and implement energy efficiency projects at about 8,000 Pacific Telesis facilities. The 4-year purchase deal includes retrofitting existing equipment, consolidating billing, and managing energy-related assets.

EES will begin installing wireless meters at Pacific Telesis sites this month.

The Brent spar saga will culminate on Jan. 29, when Shell U.K. Exploration & Production unveils its chosen disposal plan.

After Greenpeace-led protests halted the original move to dump the derelict buoy in deep water off Northwest Britain in 1995, Shell has taken great pains to make public its steps in the choice of an alternative plan. This involved inviting several contractors to submit disposal plans. Short-listed ideas were then subjected to independent safety analysis (OGJ, Oct. 27, 1997, p. 34).

Shell is being tight-lipped about the winning proposal ahead of the announcement. A Shell official told OGJ, "We've said all along there will be no surprises when the chosen option is announced."

U.S. and Argentine independent oil and gas companies and officials of both countries' governments will meet Jan. 27 in Houston for the first of two meetings to discuss potential business opportunities in the two countries. A second meeting is planned for August in Buenos Aires.

Sponsors include Argentina's Energy Secretary, U.S. DOE, IPAA, and Instituto Argentino del Petroleo y del Gas.

The Houston meeting will inform U.S. independents about Argentina's energy industry, geology, business practices, and energy department. Speakers will include Alberto Fiandesio, Argentina's deputy energy secretary; Manuel Requelme, the secretary's E&P director; Dante Ruben Patritti, Astra-Repsol's E&P director; Jorge J. Valmitjana, president of Corp. Technica del Sur; Miguel Kohan, YPF's strategic planning manager; and Sandra Waisley, a DOE deputy assistant secretary.

DOE said that, in the next decade, more than 5,000 miles of natural gas pipelines and thousands of megawatts of new electric power capacity will be built to serve South America's expanding energy demand.

Venezuelan state petrochemical firm Pequiven says its 1997 production was the highest in its 20-year history.

Pequiven, in the midst of a $5 billion expansion program, last year produced 5.1 million metric tons of olefins, industrial products, and fertilizers, up 15% from 1996. Venezuela's petrochemical industry as a whole produced 7.9 million tons in 1997, up slightly from the previous year.

Pequiven's own facilities are approaching maximum capacity. This year Pequiven will choose the technology to be used in a $1.6 billion olefins complex it will build with Mobil. The company expects to conclude negotiations with Mitsubishi and Italy's Ecofuel to double methanol capacity at its Jos? complex.

In alternative-fuel news, Princeton University has been granted a U.S. patent for a non-petroleum gasoline substitute called P-series.

The fuel-a blend of ethanol, NGL, and a co-solvent-is composed "as much as 70% from renewable sources," says licenser PureEnergy Corp., which is exclusively licensed to commercialize the product.

P-series is designed for use in flexible-fuel vehicles. PureEnergy says the fuel will be cost-competitive with gasoline (presumably taking into account the ethanol subsidy) and will meet the requirements of the Clean Air Act amendments of 1990.