OGJ Newsletter

Feb. 8, 1999
Major structural changes are afoot in Latin America's energy sector. Mexico has taken a key step toward ending the state monopoly on the nation's electric power industry. If the reform is successful, it will attract $25 billion in investments to develop 13,000 MW of new capacity needed in the next 7-10 years to meet power demand that is growing 6%/year.
Major structural changes are afoot in Latin America's energy sector.

Mexico has taken a key step toward ending the state monopoly on the nation's electric power industry. If the reform is successful, it will attract $25 billion in investments to develop 13,000 MW of new capacity needed in the next 7-10 years to meet power demand that is growing 6%/year.

On Feb. 2, President Ernesto Zedillo took the highly unusual step of announcing on national television and radio that the next day he would submit to the Congress proposals for the constitutional reform of Articles 27 and 28 dealing with energy. The reform would entail the complete reorganization of the electric power industry. Under the new vision, state-owned monopolies CFE and CLF would be gradually phased out and replaced with a network of independent power plants-including to-be-privatized generating plants currently under CFE control-and with private operators for power transmission and distribution. It also envisions open-access contracts among generators, marketers, and users. A two-thirds vote in the Lower House is required to pass the proposal.

Meanwhile, another Mexican privatization effort is in serious jeopardy. Mexico's Grupo Idesa has withdrawn its bid for a stake in Pemex's Morelos petrochemical plant because it was unable to find the required foreign bidding partner. Morelos is the first plant slated for partial privatization under a sell-off scheme that has been stalled for years (OGJ, Jan. 25, 1999, p. 44).

Idesa Director Arturo Garc!a said his company had spoken to several potential partners, but the fact that the government would retain a majority stake in the plant was enough to keep them out of the bidding: "The problem is the scheme itself, not Grupo Idesa as a partner. We have no partner, because the scheme is not attractive."

Idesa and Grupo Alpek were the only two Mexican companies registered to bid for a 49% stake in the complex. But Energy Secretary Luis Téllez says an unnamed third company is considering joining the bidding at the last minute. Téllez said the company would be given until Feb. 16 to submit all materials.

The results of the bidding are to be announced Feb. 19, and the winner will have until Feb. 26 to find a partner to form a consortium for the 49% stake.

At presstime, the international oil industry was expected to react favorably to the appointment of an oil industry veteran to head the Venezuelan national oil company. New Venezuelan President Hugo Ch vez named Roberto Mandini to replace Luis Giusti as head of Pdvsa. Most recently, Mandini was executive vice-president and director of Citgo, Pdvsa's U.S. refining and marketing subsidiary. He also served on the board of directors of Pdvsa subsidiary Lagoven and was president of Corpoven for 8 years.

Chávez also appointed Ali Rodriguez Araque as his energy and mines minister, replacing Erwin Arrieta. Rodriguez Araque is a prominent attorney who recently served as chairman of the congressional energy and mines committee. Both officials took office on Feb. 2.

Is Argentina's YPF the next major in play for a merger/takeover?

The rumor mill was grinding furiously last week amid speculation that Repsol Chairman Alfonso Cortina-who took a seat on YPF's board last week after the Spanish major acquired 14.99% of the privatized former state oil firm of Argentina for $2 billion-was to present a proposal to change YPF's bylaws to allow a 100% takeover of the firm.

Asia's economic troubles are taking a toll on the region's gas demand outlook and, as a result, some of its gas projects (see story, p. 23).

Construction of the Yetagun gas pipeline is on schedule, which means Myanmar and its Yetagun project partners are on track to begin selling 400 MMcfd of gas to Thai state firm PTT in first quarter 2000. This would be good news, were it not for depressed Thai demand that is severely curtailing PTT's ability to live up to its gas purchase agreements (OGJ, Nov. 16, 1998, p. 27).

Myanmar, through Myanma Oil & Gas Enterprise, holds a 15% stake in the Yetagun and Yadana gas projects, both of which are aimed at supplying Myanmar gas to Thailand via pipeline. A similar rift has arisen between PTT and the Yadana project group over PTT's inability to meet its contractual agreements.

"There is no question that (Myanmar) wants to make it clear from the outset that the (Yetagun) take-or-pay agreement is non-negotiable after the fact, regardless of the demand situation facing PTT," one source said. It is widely believed that PTT will be in no position to take Yetagun gas for at least 5 years.

Myanmar has reportedly borrowed money against future Yadana income.

In its latest move, PTT has now offered a new interpretation of its Yadana take-or-pay contract that would leave the gas in the ground until demand warranted extracting it, with PTT delaying payment until eventual receipt but paying a surcharge plus interest.

Under the proposal, PTT would still take and pay for all gas contracted for but would shift the terms of the contract forward in exchange for paying more.

Tokyo Electric Power, the world's single largest LNG importer, is preparing to cut LNG import volumes by up to 10%, or 1.6 million metric tons, in the coming fiscal year. The firm accounts for nearly 31% of Japan's LNG imports and 20% of the total volume traded globally.

In its fiscal year 1998 ending Mar. 31, 1999, the company anticipates weak electricity demand growth of about 0.7%. For fiscal 1999, Tokyo Electric is to cut its projection of electricity demand growth to 1-2% from an earlier forecast.

Another Russian major oil company has fallen victim to that country's financial chaos (OGJ, Jan. 25, 1999, p. 27; and Feb. 1, 1999, p. 20).

Sidanco faces bankruptcy proceedings-still a rarity in Russia. Beta-Eko, a creditor of the energy giant, has filed suit in Moscow against Sidanco, said to be the largest Russian firm ever to end up in bankruptcy court.

Sidanco's financial troubles have grown rapidly since a 10% stake in the company was sold to BP for more than $500 million in late 1997. U.K. publication Eastern Bloc Energy said of Vladimir Potanin, an "oligarch" who owns a controlling interest in Sidanco, "After he had made his fortune at the expense of the British companyellipsePotanin concluded that there was no further point in wasting his money on Sidanco's oil production enterprises."

Yearend 1998 financial reports for energy companies are revealing major earnings declines from 1997. Defying this trend so far are drilling contractors and energy companies with a strong presence in the power market.

A comparison of 1997 and 1998 earnings for a sample of firms follows, with 1998 results listed first, in millions of dollars, and losses shown in parentheses: Exxon 6,370 vs. 8,460, Chevron 1,976 vs. 3,256, Duke 1,252 vs. 974, Enron Corp. 703 vs. 105, Diamond Offshore 383.7 vs. 278.6, Vastar 136.4 vs. 240.5, Petro-Canada 95 vs. 306 (Canadian $), Halliburton (14.7) vs. 772.4, Ultramar Diamond Shamrock (78.1) vs. 154.8, Santa Fe Energy (98.7) vs. 23.2, Gazprom (1,960) vs. 1,500.

Another sign of an industry in trouble, the Baker Hughes U.S. rig count fell to 562 for the week ended Jan. 29, with only 119 rigs seeking oil.

The weekly count was the lowest since Baker Hughes or its predecessor began keeping the weekly rig tally in 1949.

The monthly average in January was also a record low, at 594.

Saga reportedly has received two permits to produce oil in Iran.

Early this year, Saga requested permission to begin negotiating with Iran for participation in Dehl Uran and Cheshmeh-Khosh fields (OGJ, Jan. 18, 1999, Newsletter). It has been in talks with National Iranian Oil Co. for months regarding the proposal, but now says it will decide in the first half whether to use the permits.

The oil and gas export pipeline contests in the Central Asian nations of the former Soviet Union have seen more posturing and politicking in recent weeks.

U.S. Energy Sec. Bill Richardson told reporters at the World Economic Forum in Davos, Switzerland, that he does not expect to see a final decision on the oil pipeline route until late this year. The U.S., Turkey, Azerbaijan, and Georgia favor the Baku-to-Ceyhan option.

Turkmenistan Foreign Minister Boris Shikhmuradov said a proposed gas pipeline from Turkmenistan to Pakistan will go ahead despite Unocal's withdrawal from supporting group CentGas (OGJ, Dec. 14, 1998, Newsletter). Turkmenistan and Pakistan remain keenly interested in the project. "Companies may come and go, but the national interest is decisive," said Shikhmuradov.

Meanwhile, Gazprom and ENI have signed a memorandum of understanding to undertake the so-called Blue Stream Project, a 400-km subsea gas pipeline connecting the Russian and Turkish Black Sea coasts and a compressor station at Dzubga, Russia. The firms will take equal interests in the line, which will have capacity of at least 560 bcf/year and be installed in waters as deep as 2,100 m. ENI unit Saipem will handle pipelaying.

ENI and Gazprom also agreed to continue their commitment to studies of joint E&P in Russia's Astrakhan region, and to pursue a possible acquisition by ENI of Gazprom's share capital.

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