OGJ Newsletter

March 22, 1999
Oil markets are reacting positively to the news that key producing countries have agreed to further production cuts ahead of this week's OPEC meeting in Vienna (see story, p. 34). In London trading on Mar. 17, the price of May-delivery Brent crude rose to $13.32/bbl and dated Brent to $13.02/bbl, following reports that U.S. inventories were falling and that Saudi Arabia had begun informing customers of cuts in April deliveries. By presstime, May Brent had reached $13.53, the highest price
Oil markets are reacting positively to the news that key producing countries have agreed to further production cuts ahead of this week's OPEC meeting in Vienna (see story, p. 34).

In London trading on Mar. 17, the price of May-delivery Brent crude rose to $13.32/bbl and dated Brent to $13.02/bbl, following reports that U.S. inventories were falling and that Saudi Arabia had begun informing customers of cuts in April deliveries. By presstime, May Brent had reached $13.53, the highest price since October.

Observers agree, however, that complacency in response to the price rise is dangerous, and that much discipline, by OPEC and non-OPEC producers alike, will be needed to affect any lasting recovery (see Comment, p. 32).

MMS will hold three workshops with the U.S. oil industry to discuss possible improvements in its controversial royalty reform rule (OGJ, Mar. 15, 1999, p. 32). The meetings will be Mar. 24 in Houston, Mar. 25 in Albuquerque, and Apr. 6 in Washington, D.C.

The Canadian oil companies have received news of pending tax changes, while their U.S. counterparts met with White House officials last week to plead their case for tax relief and other fiscal reprieves (see story, p. 36).

The Alberta government says it plans changes to its royalty tax credit program for producers beginning Jan. 1, 2001. No details were given of possible changes to the Alberta program, which gives producers a credit of 25-75% on the first $2 million (Canadian) in royalties paid. It has been in place since 1974 and paid out about $242 million in the last fiscal year. An estimated $256 million would be paid out in the current fiscal year.

The Canadian Association of Petroleum Producers (CAPP) expressed concern at possible changes to the incentive program while the industry is grappling with low oil prices. CAPP says negotiations are needed.

The Small Explorers & Producers Association of Canada said it is the wrong time if changes are made that could really hurt the industry. Alberta Treasurer Stockwell Day said the plan is not to scrap the program but to make it "more efficient" for small and medium-sized companies.

A Calgary-based environmental group has called on Alberta to change regulations to eliminate most natural gas flaring operations.

The Citizens' Oil & Gas Council (COGC) said it wants tight regulation of both old and new gas wells and plants and elimination of grandfathering, which excuses existing sites from meeting higher standards. CAPP said a near-ban on gas flaring would be uneconomic and impractical and that the industry has cut flaring volumes by 13% in the past year.

The Alberta Energy and Utilities Board has proposed a 15% cut in annual volumes flared by the end of 2000 and an additional 10% by 2001.

COGC says that does not go far enough.

Petroleum industry legislation being formulated by the EU may be stalled by the mass resignation of the organization's 20 commissioners. The entire European Commission (EC) resigned after a report revealed that EU leadership had failed to prevent fraud and corruption in the EU because of lax management and ignorance of internal happenings. An EU official told OGJ that, while the commission had resigned, it was required by law to continue its duties. Although voting for new commissioners was not scheduled until January 2000, the official said, "An ad hoc meeting of the European Council was arranged for Mar. 24 and is now likely to discuss the selection of new commissioners."

A European Petroleum Industry Association (Europia) official told OGJ the association did not know as OGJ went to press how petroleum industry legislation would be affected by the turmoil. The Europia official said the EU is pushing legislation on ozone levels, emissions ceilings, and environmental liability, and that the commissioners would remain in place for the time being to continue this work. Within the next 2-3 months, the commission is also due to complete research under the Auto-Oil II program, due in place in 2005, which will formulate new fuel specifications with a view to reducing air pollution (OGJ, July 6, 1998, Newsletter).

Europia is awaiting clarification on how the changes will affect the Auto-Oil II work and fears being caught up in a power play between the European Parliament and the EC. Before the leadership crisis, EU ministers met but failed to agree on how to legislate for the use of emissions permit trading by members as a means of meeting EU commitments to reduce greenhouse gas emissions. The EU wants a ceiling on trading so that more-industrialized countries would have to meet the bulk of their commitments by reducing emissions internally rather than by trading permits with less-developed countries.

The ministers considered setting percentages of emissions that must come from internal reductions, but several countries complained these were too rigid.

Royal Dutch/Shell is driving hard to compete effectively with the newly formed and pending industry megamergers (see related story, p. 42). The firm has clipped the wings of its U.S. subsidiary Shell Oil, removing the unit's power to decide on exploration and production and downstream gas and power investments. In the future, all the Anglo-Dutch giant's E&P and gas and power strategies will be decided in The Hague and London, under a continuation of the company's drive to streamline its operations (OGJ, Dec. 21, 1998, p. 31).

Shell E&P Chief Phil Watts said, "These important changes are being implemented to clarify accountability and improve our effectiveness in managing Shell's businesses around the world. The changes are also aimed at reducing costs and enhancing decision-making in this difficult business environment."

Iran is moving forward with further development of its giant South Pars gas field in the Persian Gulf. National Iranian Oil Co. (NIOC) is slated to begin accepting tenders for the next two development phases this week under its buy-back scheme. The work will reportedly involve installation of two offshore platforms and drilling of at least 10 wells.

Gazprom has already said it plans to participate in the tender. The field contains an estimated 8 trillion cu m of gas.

Work on Phase 1 of South Pars development was launched by Iranian firm Petro Pars. To be completed within a year, production from this phase is expected to reach 1 bcfd of gas, 40,000 b/d of condensate, and 200 tons/day of sulfur. The second and third phases were awarded to a consortium of Total, Petronas, and Gazprom. That $2 billion buy-back deal with NIOC envisions output of about 2 bcfd of gas, 80,000 b/d of condensate, and 400 tons/day of sulfur starting in 2001.

Look for closer ties between South African synthetic fuels maker Sasol and refining and marketing rival Engen as a result of a memorandum of understanding (MOU) between Sasol and Malaysian state firm Petronas, Engen's owner. Sasol said the MOU allows the companies to "define opportunities for future cooperation and realization of synergy and to enter into negotiations to formalize commercial arrangements as they are identified."

Sasol and Petronas see the potential to create a strong South African oil company that could play a leading role throughout Africa.

South Korea's Fair Trade Commission is reviewing the potential acquisition of a stake in Ssangyong Oil Refining by fellow refiner SK Corp. The Ssangyong Group plans to sell its 28.41% stake in the refiner to SK in order to raise funds to improve the financial health of its affiliates. If the deal is approved, it will reduce the number of players in South Korea's oil refining market to three: SK, LG-Caltex, and Hyundai Oil-Hanwha Energy.

The FTC must examine the possibility of a market monopoly and the status of Ssangyong Oil as an affiliate of the SK Group or as a separate entity after the takeover. The SK Group wants to avoid making Ssangyong Oil an affiliate, however, because Aramco Overseas, the international arm of Saudi Arabia's national petroleum company, owns a 35% stake in Ssangyong Oil.

Under South Korea's Fair Trade Law, monopoly is defined by a market share of 50% or more. While the FTC does not have the latest data on the companies' market shares, in 1997 SK held 35% and Ssangyong 13-14%. If the deal is judged to restrict competition, the FTC can apply an exception clause, under which it can approve the acquisition if the benefits of improved efficiency outweigh the costs of restricting competition (or if the firm to be acquired is insolvent).

Azerbaijan President Haydar Aliyev has agreed to allow a proposed Turkmenistan-Turkey gas pipeline to traverse his country (OGJ, Oct. 26, 1998, Newsletter). The announcement is a coup for backers of the trans-Caspian line-which include the U.S.-because Azerbaijan and Turkmenistan have yet to resolve a dispute regarding littoral boundaries in the Caspian Sea, and therefore ownership of certain Caspian reserves.

Meanwhile, Aliyev and Turkmen President Saparmurat Niyazov have agreed to meet in April to settle their littoral dispute.

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