OGJ Newsletter

March 1, 1999
Energy companies are continuing to refocus, restructure, and retrench as they seek shelter from an extended period of depressed demand and low prices (see stories, pp. 23, 27).
Energy companies are continuing to refocus, restructure, and retrench as they seek shelter from an extended period of depressed demand and low prices (see stories, pp. 23, 27).

Royal Dutch/Shell has announced plans to shed some of its petrochemical assets in an effort to improve profitability in that sector. Shell will sell its stakes in two Japanese chemical joint ventures because of poor performance. The businesses are a 50-50 epoxy resin JV with Mitsubishi Chemicals and a thermoplastic rubber plant owned equally by Shell and JSR Corp. The move is part of a broader plan Shell unveiled in December to sell 40% of its chemical assets and focus on basic petrochemicals related closely to oil.

Shell subsidiary Montell Polyolefins will close its 170,000 metric ton/year slurry polypropylene (PP) plant at Berre, France, in response to polyolefins overcapacity in Europe. Montell said the plant's higher fixed and variable costs, compared with more modern PP processes, make it "unsustainable in the very competitive polypropylene environment." Montell official Colin Main said, "It is inevitable that other producers operating similar high-cost plants will have to follow the same route in the short term in order to improve their competitive position."

Three Canadian companies are focusing intently on gas in an attempt to gain relief from low oil prices.

Anderson Exploration says 92% of its planned 1999 capital budget of $277 million (Canadian) will be spent on natural gas projects unless oil prices improve. The company's 1998 sales were composed of more than 60% gas.

Alberta Energy Co. will spend two thirds of its $750 million (Canadian) 1999 capital budget to expand its natural gas business. It will cut spending on oil development by $100 million from 1998 levels. AEC plans to drill about 600 wells this year, with 85% targeted on natural gas.

Talisman Energy is allocating 75% of its total domestic capital spending and 90% of its exploration budget to natural gas in 1999. By comparison, about two thirds of its 1998 spending was directed at gas.

Meanwhile, Mitchell Energy has completed its previously announced workforce reduction and set its capital budget (OGJ, Dec. 21, 1998, Newsletter). The company cut 235 workers, a reduction of 21%. It also set its fiscal 2000 capital budget at $137 million vs. $205 million in fiscal 1999 (ended Jan. 31). Two thirds of its $113 million E&P budget is earmarked for drilling primarily low-risk gas development wells. Chairman George P. Mitchell said, "This reduced capital program allows the company to prudently manage its capital resources during this period of reduced cash flows." Mitchell said the firm will conduct "limited testing" of exploratory drilling prospects identified by a 3D seismic program begun last year. "Once prices rebound, we have the ability to quickly step up the drilling program and continue the previous growth in production."

Clark USA is seeking to separate its refining and marketing businesses in the hopes of strengthening results. "In taking this action, Clark will increase its focus on the continued improvement and expansion of its refining business," said the company. Clark will solicit buyers for the marketing operations, which include about 700 company-owned stores, 200 independently owned stores, and the Clark brand. Clark is also offering its wholesale business.

Norwegian state firm Statoil has reorganized itself into five business areas: E&P Norway, International E&P, European Gas, Nordic Energy & Retail, and Industry & Trading. The revamp is intended to give Statoil greater control of its financial performance, better strategic management of E&P and European gas operations, and a more focused approach to the Nordic energy market. Statoil disclosed an operating profit of 7 billion kroner for 1998, down 10 billion kroner from the previous year, and says it must shed 1,500 jobs by the end of 2000.

Investment in Norway's offshore sector will dry up unless both costs and taxes are tackled, the London branch of Commerzbank AG warns (see related story, p. 32). With a marginal tax rate of 78% and one of the highest cost environments in the world, Norway comes a long way down the league table of attractive hydrocarbon regimes, says the bank.

DOE is still working on several tax-relief options for the U.S. oil industry, including tax credits for marginal production, says Energy Sec. Bill Richardson. "Such relief would have to be cost-effective and would require budget offsets," he said. "Any tax relief proposal would require the concurrence of the rest of the administration and passage of legislation by Congress."

For the first time since 1951, there are no drilling rigs operating in North Dakota, says the Independent Petroleum Association of Mountain States.

Ipams Executive Director Karyn Grass said, "Just 2 years ago, North Dakota was home to a thriving industry. An average of 18 rigs operated on any given day, drilling more than 260 wells/year and employing almost 10,000 people. While consumers celebrate the lowest gasoline prices ever, we must remember the high cost American oil workers are paying."

Meanwhile, a key Washington association is experiencing hard times.

The Natural Gas Supply Association has placed its president, Nicholas Bush, on administrative leave. NGSA filed a lawsuit alleging Bush had defrauded NGSA of $2,270,524 through bogus consulting contracts over the past 10 years. It also is seeking $5 million in punitive damages from Bush.

London's Premier Oil and Calgary's Bow Valley Energy have signed a contract with Iran to develop Balal oil field in the Persian Gulf off Iran. Premier would have a 75% stake in the $200 million project and Bow Valley 25%. The field has estimated reserves of 105 million bbl of oil. The firms plan to drill 10 wells in the next 2 years. Production of up to 40,000 b/d would begin late in 2000.

The U.S. State Department has said the companies could face sanctions under the Iran-Libya Sanctions Act, although trade sanctions have not been imposed against French, Russian, and Malaysian companies involved in Iranian projects. Ottawa says it would oppose any sanctions against Canadian firms, and Bow Valley contends it should be treated the same as others operating in Iran.

A leading Iranian analyst is urging Iran to pursue a trans-Asian gas pipeline to encourage peace and development in the region. A* Shams Ardekani says the project would embody the principles of the "new economic order" promoted by Iranian President Khatami. "If Iran wants to promote regional peace, we have to undertake oil and gas projects (with others in the region), so that our neighbors view us as guarantors also of their interests," he said.

The former government official envisions a route through Turkmenistan, Iran, Qatar, India, and Pakistan. Turkmenistan, Iran, and Qatar would be the main gas suppliers, providing about 150 million cu m/day of gas, he says. India and Pakistan, the main consumers, would get much needed gas at lower costs vs. setting up LNG plants in those countries, enabling New Delhi and Islamabad to save annually about $2.5 million and $1.5 million, respectively, he said. The proposed line would carry gas from Iran's South Pars and Qatar's North fields, as well as from Turkmen fields. Ardekani estimates project costs at $7-12 billion.

Pemex's ill-fated petrochemicals privatization efforts have finally come to naught, with the sole remaining participant-Alfa unit Alpek-opting not to submit a bid (OGJ, Feb. 8, 1999, Newsletter). The sticking point for Alpek, as with all parties initially interested in the Morelos petrochemical complex, was a lack of control due to Pemex retaining a majority stake in the plant.

The Wall Street Journal reported that Mexican Energy Minister Luis Tellez responded by saying, "We made our best effort with the mandate Congress gave us. We tried every possibility, but, clearly, the deal wasn't feasible."

The results of bidding rounds for upgrades on two of Mexico's state-run refineries, originally to be announced Feb. 16 and 19, will now be disclosed Mar. 10, Pemex says (OGJ, Jan. 18, 1999, p. 22). No explanation was given for the postponement. On Feb. 15, Pemex awarded a third refinery upgrade job, at the Ciudad Madero refinery (OGJ, Feb. 22, 1999, p. 30). The winning group-a combine of Mexico's Tribasa, South Korea's Sunkyong, and Germany's Siemens-which is also upgrading Mexico's Cadereyta refinery, beat out four other international groups with a low bid of $1.198 billion for the 31-month job.

The group will be responsible for arranging financing for the project. The upgrade projects at Pemex's Madero, Cadereyta, Tula, and Salamanca

refineries are part of a strategy to boost Mexico's ability to process heavy Maya crude by 460,000 b/d and to produce larger volumes of high-octane unleaded gasoline. Pemex plans to announce in mid-March whether it will let contracts for upgrades at the Minatitl n and Salina Cruz refineries.

The U.S. oil and gas sector appears to be in fine shape for preventing Year 2000 computer problems. In a survey by the oil and gas working group of the President's Council on Year 2000 Conversion, 94% of the 1,000 responding companies said they will be "Y2K ready" by Sept. 30. Eighty-six percent are in the final stages of fixing and testing business information systems, and 78% are in the final stages on hardware and embedded systems. Respondents also said embedded computer chips have been less of a problem than expected.

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