OGJ Newsletter

U.S. Industry Scoreboard 4/6 [44,578 bytes] Continued uncertainty over OPEC's ability to cut oil production and thus boost prices amid the current supply glut has U.S. producers scratching their heads over why the U.S. government is proceeding with a mandated sale of crude from the country's Strategic Petroleum Reserve. Energy Sec. Federico Pe?a claims he is searching for ways to avoid the sale but says he has few options because Congress's required $207 million in SPR sales is

April 6, 1998

7 min read

U.S. Industry Scoreboard 4/6 [44,578 bytes]

Continued uncertainty over OPEC's ability to cut oil production and thus boost prices amid the current supply glut has U.S. producers scratching their heads over why the U.S. government is proceeding with a mandated sale of crude from the country's Strategic Petroleum Reserve.

Energy Sec. Federico Pe?a claims he is searching for ways to avoid the sale but says he has few options because Congress's required $207 million in SPR sales is necessary to pay for the reserve's operation.

Thanks to intense lobbying by independent producers, the Senate late last week put into an emergency spending bill a provision authorizing the president to cancel the SPR sale if prices remain low.

The amendment, offered by Sen. Frank Murkowski (R-Alas.), would postpone the sale of oil valued at $27/bbl in the current market, where it would bring as little as $13/bbl. The provision awaits final House and Senate action. If passed, Congress or the Energy Department still would need to find the $207 million in operating funds.

The lingering effects of low crude oil prices have U.S. independents scrambling to cut costs, improve efficiences, and force a little belt-tightening on the parts of their E&P divisions.

Oryx reports it will slash $100 million from its 1998 spending plans. The company's E&D investment will be cut at least 17%, and it is trimming its estimate of 1998 production by 6-7%.

"We are reflecting current price and production reality in making these changes," said Oryx Chairman Robert Keiser. "Longer term, we continue to see annual production growth in the 7-8% range and strong rates of growth in the reserve base, given our high potential exploration program."

The company's high-profile exploration projects-most notably in the deepwater Gulf of Mexico, Kazakhstan, Ecuador, and Australia-will not be affected by the decision to reduce 1998 expenditures, Keiser says.

Service and supply companies are weathering the current crisis better, according to firms attending the Howard Weil energy conference in New Orleans last week, but shortages of skilled personnel may worsen.

Service firms said a boom in offshore E&D has them clambering to meet demand for drilling rigs and support vessels. The statements were punctuated by independent E&P firms, who, one after another, outlined their offshore drilling plans, most of which include the deepwater Gulf of Mexico.

Global Marine chairman Russell Luigs told the conference that rig utilization is effectively 98-100% worldwide. The number of idle rigs is only 47, and this includes 42 that are in preparation or being mobilized. The other 5 are "cold-stacked junk," said Luigs. He pegged the number of operating offshore drilling rigs at 366 jack ups, 143 semis, and 23 drillships.

Glomar's day rates averaged $62,000 last year, and Luigs expects them to reach an average $80,000 in 1998.

William O'Malley, chairman of supply vessel firm Tidewater, said "Virtually all our vessels available for hire are at work." The firm's U.S. utilization is 92-93% vs. 87-88% outside the U.S. Day rates are averaging $8,000 in the U.S. and $5,500 elsewhere.

Luigs said high utilization may be complicated by a lack of skilled personnel in the industry. While the industry has failed to hire entry-level people, downsizing has caused experienced personnel to opt for early retirement.

In an effort to combat this lack of specialist engineering and operations personnel, Baker Hughes Solutions and OGCI Management Services formed a joint venture, Petroleum Consulting Resources International (PCRI). Houston-based PCRI will provide temporary services for drilling, completion, and production operations. The firm will offer the services of drilling and production engineers, wellsite supervisors, project team leaders and coordinators, project managers, and, to a limited extent, reservoir engineers and geologists.

PCRI official Steve Nowell said, "A whole generation of experienced people is missing as a result of downsizing and not recruiting during those years. There simply are not enough people in our industry with the full range of skills required to meet today's exploration and production challenges."

Meanwhile, EEX and Aker Maritime have formed an alliance under which Aker will engineer, build, and install floating production systems to support EEX's worldwide E&P activities. The alliance will focus initially on EEX's deepwater Gulf of Mexico projects.

EEX says it hopes the deal will reduce field development times and improve project economics.

Other positive areas of the petroleum industry surfacing today are a refocused LPG sector and shifting petrochemical strategies.

Annual demand growth for LPG as a petrochemical feedstock will reach 7%/year by 2005, from nearly 4.5%/year in 1990-97, said Purvin & Gertz at its annual LPG seminar in The Woodlands, Tex., late last month.

North American LPG demand for petrochemical feed will grow to more than 35 million metric tons in 2005, from nearly 12 million tons in 1985. Middle East LPG demand for petrochemical feed will reach nearly 9 million tons in 2005, or 50% of total LPG demand, while Western European petrochemical demand for LPG will reach almost 11 million tons.

P&G forecast increased reliance on LPG supplies for export from sources west of the Suez Canal, especially from projected supply buildups in West Africa, the North Sea, and the Atlantic Basin-particularly Venezuela. East-of-Suez LPG supply for export will likely be restrained near-term by effects of the Asian economic crisis and increased petrochemical demand in the Middle East, especially Saudi Arabia.

Meanwhile, petrochemical consultant DeWitt & Co. says depressed Asian petrochemical demand may have unexpected benefits in Europe.

While DeWitt Vice-Pres. Rick Coles believes Asia will return to precrisis demand growth rates by 2000, Paul Hodges, another DeWitt VP, said the Asian flu has benefited Europe's petrochemical industry. Depressed oil prices following Asia's demand drop pegged Brent to about $15/bbl, which in real terms equalled pre-1973 prices-a time when the European petrochemical industry was profitable, says Hodges. He told the company's Petrochemical Review in Houston last week that more economically attractive, emerging markets in Eastern Europe may provide an alternative outlet for Asian supplies.

Chemical Market Associates Inc., Houston, estimates world ethylene demand will reach nearly 100 million metric tons by 2002-a growth rate of 5.3%/year during 1997-2002. Benzene demand, which grew 3.9%/year during 1992-97, is expected to grow 4.3%/year through 2002, to reach 33.5 million tons from the current 27.1 million tons.

Pemex has signed a contract with Clark USA calling for Clark to finance and build a 150,000-210,000 b/d refinery at Port Arthur, Tex. Pemex will supply the refinery with heavy Maya crude.

The refinery is to be completed by Jan. 1, 2001. The contract is part of Pemex's long-term aim of increasing the sales of its heavy oil.

A joint venture of Canada's Husky Oil and China National Petroleum Corp. is starting the first phase of field operations at Pucheng oil field in China's Henan province.

A test program to determine the potential incremental oil production from 25 wells is scheduled to begin in April, prior to full-scale development. The joint venture has opened an office in Puyang.

Husky said it is prepared, pending test results, to commit more than $150 million (Canadian) in development capital to the project, 342 miles south of Beijing. The company says it is the first full-field incremental oil recovery project to be operated by a foreign petroleum company in China.

A request by aboriginal groups that a hearing on the proposed Alliance natural gas pipeline be stopped until constitutional issues are resolved has been put on hold by Canada's National Energy Board.

A group of seven Treaty 8 Indian bands argued that the NEB cannot and should not make any decision on the planned $3.7 billion (Canadian) project until Ottawa and British Columbia have discharged their obligations. The group said the governments have a duty to consult Indian bands in eastern British Columbia on the effects of the pipeline on their traditional lands and how to mitigate those effects.

NEB reserved decision on the application and said the hearing will continue. Alliance said adjourning the hearing would put its application into a regulatory limbo and hurt the project financially and in other ways. Alliance said it is committed to meeting with native groups and governments on its project.

Alliance said earlier in March that regulatory delays could set back completion of its project by 1 year. It originally planned to have its pipeline on stream in late 1999 (OGJ, Mar. 16, 1998, p. 42).