OGJ Newsletter

The market was sending signals that crude oil prices had bottomed, following recent agreements on production cutbacks by OPEC and some non-OPEC producers (see related story, p. 36).

In International Petroleum Exchange trading, Brent for May delivery closed at $13.48/bbl, up 3¢/bbl, on Apr. 15. The same day, Nymex crude for May delivery closed at $15.46/bbl, up 34¢/bbl.

Sliding oil prices in recent months have taken a toll on oil profits for Persian Gulf nations. Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, and the U.A.E. reported combined first quarter profits fell to a 10-year low of $15 billion. The producers exported 12.5 million b/d during first quarter.

Ziff Energy says increasing oil price volatility and a looming flood of Canadian natural gas into the Midwest U.S. will require Midcontinent gas producers to more closely scrutinize operating costs and practices.

"The past several months' significant oil price drop and the on-schedule November 1998 expansion of the Northern Border gas pipeline from Western Canada to Chicago represent trends beyond the control of Midcontinent producers that can swiftly plunge marginal operations into red ink," said CEO Paul Ziff.

A joint analysis by Arthur Andersen and John S. Herold of 1997 U.S. E&P activity, released last week in Houston, shows that U.S. upstream capital spending by the largest oil and gas firms was $30.4 billion-a 43% increase over 1996 and a record for the 1990s.

The increased spending boosted domestic proved oil reserves of the 49 largest companies by nearly 5% to 19.1 billion bbl, the highest level since 1992.

Property acquisitions also showed large year-to-year increases (see related story, p. 41), with purchases of unproved properties, primarily undeveloped leases, more than doubling to $3.5 billion. Leading purchasers were Texaco, Conoco, Union Pacific Resources, and Shell.

Less encouraging is that proved U.S. natural gas reserves were essentially unchanged in 1997, despite a 24% increase in extensions and discoveries to 10.1 tcf, the highest level of drillbit gas reserve additions in the 5-year study period. Andersen and Herold remain concerned that U.S. gas reserves additions may not be enough to meet demand increases.

Merger and acquisition fever is continuing to spread.

Pennzoil and Quaker State have agreed to a stock-for-stock deal merging Pennzoil's motor oil, refined products, and franchise operations with Quaker State. The firms expect to save $90-125 million/year as a result.

Pennzoil's shareholders will own 61.5% of the new company, yet to be named, and Quaker State's will own 38.5%. Pennzoil shareholders will continue to hold their existing Pennzoil shares and will receive one share of the new company for each share held. Quaker State shareholders will receive 0.82 shares for each existing share.

Annual sales are expected to exceed $3 billion, says Pennzoil, whose E&P business will continue to operate under the Pennzoil name.

Giant Industries and Holly Corp. also have agreed to merge. The new company will retain the Giant Industries name and will own four refineries in New Mexico and Montana, with a combined capacity of 105,000 b/d.

Each Holly shareholder will receive 1.33 share of Giant stock per Holly share, plus about $2.90/share in cash. The deal includes service stations, pipelines, and product terminals, plus Navajo Refining Co., Phoenix Fuel Co., and Navajo Western Asphalt Co. The companies expect to save $20 million/year.

Meanwhile, PaineWebber says it is expecting Triton Energy to be sold this year at a price of $45-50/share.

"The data room with any and all information on Triton opened yesterday in London," the analyst said on Apr. 15. "Over 50 companies have expressed an interest in reivewing the data, with the intent of bidding on all or part of the company" (see Industry Briefs, p. 44).

Fallout from Kyoto continues as conflicting reports emerge on the issue of emissions trading.

Environment ministers from the Group of Seven leading industrialized nations and Russia agreed not to trade spare emissions quota capacity as a means of avoiding "painful" domestic greenhouse gas policies.

European Union ministers feared the U.S., Japan, and Canada would avoid major reduction programs at home, in the wake of the Kyoto climate change agreement in December, by making deals with Russia, which has a comparatively lenient emissions target (OGJ, Dec. 15, 1997, p. 17).

Their fear may be justified, however. Japan's Kyodo News Service reported that Russia had accepted a Japanese proposal to hold talks on the possible sale of unused portions of Russia's emission quota for greenhouse gases. Russia is also considering a Japanese proposal to invest in Russian projects to cut emissions and subsequently count the reduced greenhouse gases in Russia as part of Japan's emissions cut.

Meanwhile, API has blasted the U.S. Council of Economic Advisors' cost projections for implementing the Kyoto Protocol and criticized the Clinton administration for "letting U.S. climate policy get far ahead of climate science." API Executive Vice-Pres. William O'Keefe said, "In almost every instance, the administration has chosen worse-case assumptions when analyzing possible climate impacts on the environment or commerce, then assumed unrealistic benefits for early action."

Anxiety over the future of Indonesia has stalled talks between the country's leaders and IMF representatives, leading some U.S. oil companies to offer up-front cash in exchange for future Indonesian crude oil production during the next 5-10 years, according to regional press reports.

The financial carrot could provide $500 million-2 billion in immediate funds for the country. By monetizing crude reserves, the scheme potentially provides an economic lifeline for Jakarta and some local cash-strapped companies with upstream assets.

Companies working on the monetization deals are hoping to secure financing for parcels ranging from 20,000 b/d to 80,000 b/d of production. In all, 36.5-146 million bbl of reserves would be exchanged for immediate cash.

Enron has pulled out of a $6 billion hydroelectric-power project in Nepal, putting the project on indefinite hold.

The decision to shelve the 10,800-MW Karnali-Chisapani plant, proposed by Enron International Renewable Energy, is just one more example of investor uncertainty over Asia's stalled economies.

Forecasts of slower growth for China, a key market for the output, raised concerns about the project's financial feasibility. The project would have been the largest foreign investment in south Asia and one of the biggest engineering tasks in the world, an Enron spokesperson said.

Gas Authority of India Ltd. (GAIL) is exploring the possibility of importing natural gas via pipeline from neighboring countries to the east, including Myanmar, according to GAIL Chairman C.R. Prasad.

Prasad told reporters in New Delhi that the gap between gas supply and demand in the country was one of the main areas of concern for GAIL. He said issues relating to import pipelines from Oman and Iran remained to be solved.

Although the ban on self-service pumps in Japan has been lifted, analysts say that petroleum retailers will set up only a few such facilities and operate them only on a trial basis, because of industry fears that self-service could further soften gasoline prices.

Nippon wants to try self-service at three stations. Idemitsu Kosan is seriously considering one station in Tokyo's Hachioji district. Cosmo Oil is looking at Funabashi, Chiba prefecture, and Japan Energy Corp. at Yokohama.

Fear for the safety of foreign oil workers in Nigeria has re-emerged after a British oil terminal foreman was killed as he lay sleeping in a compound in the oil town of Eket in the east of the country.

The U.K. Foreign Office said Mark Davey, who was working as a subcontractor for Mobil Producing Nigeria, was killed by a gang who overpowered a security guard. Eight other Britons escaped without injury and were flown back to the U.K. The attackers took petty cash and fled.

Mobil said it was working with a local company to improve security.

Shutdowns of Shell's 48,000 b/d fluid catalytic cracker at Wood River, Ill., and Phillips's 65,000 b/d FCC unit at Sweeny, Tex., may crimp U.S. gasoline supplies, depending on the duration of the outages.

API statistics showed that U.S. gasoline demand was holding strong at 8.6 million b/d. On the same day the outages were reported (Apr. 15), Nymex gasoline futures for May delivery closed at 51.45¢/bbl, up 1.4¢/bbl.

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