OGJ Newsletter

• U.S. Industry Scoreboard 3/30 [44,502 bytes]

OPEC's extraordinary meeting this week follows market-moving announcements in Riyadh last week of proposed OPEC/non-OPEC oil output cuts (see story, p. 22). The Vienna meeting is sure to change prices, but the direction, extent, and duration of the change is, as yet, unknown. At presstime, Norway hadn't committed to cuts but remained open to the possibility. Meanwhile, markets were also bolstered by news that Russia would invite OPEC Sec. Gen. Rilwanu Lukman for talks on ways to cope with the plunge in world oil prices.

The news pushed Nymex crude for May delivery up 56¢/bbl to $16.48/bbl. April heating oil rose 1.07¢/gal to 45.12¢/gal; April unleaded gasoline increased 1.12¢/gal to 52.58¢/gal. Natural gas prices also rose, with contracts for April delivery firming at $2.365/Mcf, up 3.5¢/Mcf.

Although skepticism abounded about the deal's ability to bring the oil market more in line early last week, traders were more optimistic by midweek, perhaps cheered by news that Indonesia may cut about 70,000 b/d of production.

As the waiting continues, analysts are convinced oil prices will remain low over the short term but will begin rebounding next year as demand in Asia strengthens.

The Clinton administration apparently has fallen in line with mainstream thinking regarding the current oil price collapse.

Although U.S. Energy Sec. Federico Pe?a says oil prices have dropped $8/bbl since last October, to below $14/bbl, due to a 1.5 million b/d market glut, he did not shy from laying the blame at OPEC's doorstep.

"This oversupply is due to lower demand as a result of turmoil in Asia and a warm winter and to OPEC production quota cheating."

Pe?a said the extent and effects of changes in production levels will depend on the willingness of the key producing nations to honor their commitments. He added that his department does not anticipate an immediate rebound in oil prices but forecasts continued economic growth and low inflation.

Industry observers are viewing the Asian economic crisis as a comparatively short-term trend.

Asia's economic woes are a relatively temporary phenomenon, says Michael Boskin, chairman of the Consumer Price Index Commission. "This is a 1-3 or 1-5 year problem, depending on a variety of factors," Boskin told reporters at the NPRA annual meeting earlier this month.

Some of these factors, such as policy changes, are partly within the control of the countries involved. One example Boskin gave is so-called "crony capitalism." Other factors are external.

In 3-5 years, growth in Asia will resume at a reasonable pace, says Boskin-not 8-10%, as it was before, but at a pace more rapid than growth in the U.S. and Europe. "This is partly dependent on Japan getting its act together."

The decline in Asian petroleum demand is important but "not catastrophic," says Fereidun Fesharaki, director of the energy program at the East-West Center. He told the Middle East Petroleum & Gas Conference in Dubai earlier this month that oil demand growth in Asia this year would be half its 1997 level but would still be up 275,000 b/d.

"No matter how we squeeze the models, we cannot make it (Asian oil demand) go negative," Fesharaki said in a prediction more optimistic than some others at the conference.

Al Troner, managing director of Asia Pacific Energy Consulting, said Asian demand growth could be nil in 1998 and take time to recover. "What is clear is that the current recession affecting Asia-Pacific will last until 1999-2000 and will impact global demand growth," Troner said. "And if Asia-Pacific no longer sets the pace for global oil demand, who will?"

While oil price worries haunt producers on one side of the world, efforts continue to rekindle Russia's lukewarm industry.

The maiden steps of Russia's newest and biggest oil company are giant ones. In a move described as "a major strategic alliance," Elf has signed a protocol with Russian oil firm Yuksi for oil and gas development in Russia and for crude oil trading and distribution of petroleum products.

In a first stage, Elf will take a 5% stake in Yuksi for $528 million and will have the right to appoint a director to the company's board. Elf will have the option to adjust its stake when Yuksi is listed on stock exchanges in Moscow and the U.S. The alliance does not prevent Yuksi from signing similar agreements with other foreign partners.

The protocol calls for the joint development of giant Sugmut field, in which each partner will hold a 50% stake. Located in western Siberia, the field has estimated reserves in excess of 700 million bbl of oil. Development costs are expected to be $1.5 billion. Elf hopes production could start in 2002.

Meanwhile, Yuksi has entered into a strategic alliance with Schlumberger in which the service company will take over all services for the next 5 years on selected Russian oil fields Yuksi is developing. The Russian firm spends about $2 billion/year on oil field services.

Petroecuador officials say the government is facing a budgetary dilemma.

Ecuador's oil export prices have dropped to $9.69/bbl on the U.S. Gulf Coast and $9.90/bbl on the U.S. West Coast. Those prices are far below what the small South American nation estimated its oil-based royalties would be in 1998.

The country's budget was calculated last year based on a $16/bbl export price, and then slashed again to $13/bbl. Petroecuador says each dollar decline represents an $80 million/year drop in revenues.

Ecuador is also being criticized by several foreign oil companies that are nearing production start-up of development projects there. Ecuador has cut back foreign firms' production quotas to make more room in the Trans-Ecuadorian pipeline for Petroecuador's increased production.

The state oil firm is boosting output in order to make up lost government revenues stemming from the decline in oil prices. To some extent, the problem will be ameliorated later this month, when Petroecuador injects drag reduction agents into the pipeline, which is expected to boost pipeline throughput by 25,000 b/d.

Development projects under way by Oryx, Occidental, Elf, and YPF are affected by Ecuador's decision. Also affecting the projects are the overdue payment of service contract fees totaling about $100 million to these four companies. The overdue debt will be renegotiated into long-term debt, because Petro- ecuador is unable to settle its accounts "on short notice."

These and other service contractors are stepping up efforts to renegotiate their contracts as production-sharing contracts (PSCs). YPF managed to do this a year ago. Elf is expected to try to convert its service contract to a PSC before selling its interests in Oriente Blocks 14 and 17.

Meantime, Petroecuador has increased its project cost estimate for expansion of the Trans-Ecuadorian pipeline, which extends from oil fields in the Oriente jungle region of eastern Ecuador to the export terminal at Balao on the Pacific Coast. Costs are now projected at $164 million vs. the $120 million originally earmarked.

Plans call for increasing pipeline capacity to 410,000 b/d from the current 330,000 b/d by 1999, in a phased project to be conducted by contractors under the supervision of the Ecuadorian military. A tender for that work is expected to be offered within 2-3 months. In a first stage of the project, about 30,000 b/d of additional crude oil will be transported from the Trans-Ecuadorian line to Colombia's OTA oil pipeline.

Pemex released revised estimates for hydrocarbon reserves in Mexico's southern region. The move is the second in a three-part reserves revision for the country's three major hydrocarbon producing regions.

Total reserves in the southern region are now thought to be 11.056 billion boe, compared with last year's figure of 11.862 billion boe. Pemex said the two figures are not comparable because different calculation methods were used to derive this year's estimate. Proven hydrocarbon reserves in the southern region are 7.669 billion boe, probable reserves are 2.057 billion boe, and possible reserves total 1.330 billion boe.

The southern region, comprising the states of Tabasco, Chiapas, and Veracruz, produces about 625,000 b/d out of a country-wide production of 1.88 million b/d. Oil in the southern region is mainly light crude.

Pemex released its revised figures for the offshore region last year and plans to release new estimates for the northern region in 1999.

The American Automobile Manufacturers Association will soon petition EPA to reduce the sulfur level in U.S. gasoline from the current average of 340 ppm (in 49 states) to California's standard of 30 ppm average, with an 80 ppm maximum. U.S. refiners have made a less stringent proposal of 150 ppm average (see story, p. 29). EPA is due to decide next year if more stringent standards are needed for model year 2004 autos. AAMA argues sulfur clogs catalytic converters and contributes to smog (OGJ, Feb. 2, 1998, p. 33).

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