OGJ Newsletter

U.S. Industry Statistics 8/26 [70580 bytes]

Oil prices are holding at unexpectedly high levels despite the imminent prospect of 700,000 b/d or more of Iraqi crude returning to world markets.

While some market indicators suggest a bearish outlook, London's Centre for Global Energy Studies says a closer look reveals high oil prices are in line with market fundamentals.

CGES reasons that oil stocks are lower than expected, with OECD company inventories trailing year-ago levels nearly 100 million bbl, mostly because of refiners' inventory strategies.

Chances appear unlikely industry will be able to rebuild refined products stocks by the fourth quarter because of strong demand and OECD refining bottlenecks. In fact, the shortfall could widen as refiners focus on maximizing gasoline output for summer driving.

The success of depleting stocks to improve financial efficiency depends on refiners being able to rebuild inventories at short notice.

CGES says this has proven more difficult than many assumed because oil production has not increased as rapidly as expected.

North Sea production this year through third quarter likely will average about 300,000 b/d less than expected, and U.S., Australian, and Asian oil output all have failed to meet expectations.

That in part explains why, when news broke of the accord reached on the U.N.-brokered plan allowing limited sales of Iraqi oil, crude prices in London trading hardly faltered (OGJ, Aug. 19, Newsletter).

After dipping briefly below $20/bbl, Brent for October closed Aug. 20 at $20.68/bbl. WTI spot at Cushing closed Aug. 21 at $22.13/bbl, down 75/bbl on the day, but more than $4/bbl above the price a year ago.

CGES expects global oil demand in the fourth quarter to average 73.6 million b/d, up nearly 3 million b/d from estimated third quarter consumption of 70.7 million b/d.

The London think tank predicts the call on OPEC crude at about 25.9 million b/d, up from 24.5 million b/d in the third quarter but still well below estimated OPEC output of 26.4 million b/d and crude capacity of 30.2 million b/d.

API says U.S. oil production in July declined 1.4% to 6,359,000 b/d from a year ago.

Lower 48 output almost matched year-ago levels, but Alaskan production continued to decline. U.S. July imports averaged 7,688,000 b/d of crude and 1,874,000 b/d of products, together jumping 7.9% from July 1995.

U.S. oil production in the first half declined 3.1% vs. a decline rate of 1.5% a year ago. U.S. petroleum products supplied to the domestic market in July rose 5.5% vs. a year ago, "more than double the 2.5% average growth in deliveries over the last several months," API said.

U.S. refineries in July operated at 93.2% of operable capacity.

Since approval of the U.N.-Baghdad oil deal, Turkey has agreed to meet all Iraq's food needs in return for Iraqi oil.

Although likely to irritate Washington, which is mulling actions against Baghdad over disregard of ceasefire terms agreed after the Persian Gulf war, the U.S. likely will avoid punitive actions because Ankara is a valued ally.

Some large European petroleum companies might not be as lucky if-or when-Washington begins carrying out threats of reprisals against foreign firms doing a certain level of business with Iran and Libya, nations the U.S. says are bankrolling international terrorism (OGJ, Aug 19, Newsletter).

U.S. officials aren't tipping Washington's hand, but the list of companies that could be slapped with economic sanctions for doing more than $40 million in business with Iran or Libya reads like a who's who of European majors and includes Agip, Elf, Total, Petrofina, Repsol, Veba, and OMV.

The European Union repeatedly has expressed outrage since President Clinton signed the sanctions bill, threatening retaliation and asserting the U.S. antiterrorism law violates World Trade Organization rules.

EU says officials will take up the matter at a September meeting. Until then, they plan to approach Clinton administration officials to find out what kinds of sanctions might be applied, since the law allows Washington to choose from a list.

Petronas, for better or worse, has bought into the diplomatic discord, taking a 30% stake through its Carigali unit in a Total deal with Iran to develop Sirri A and E fields in the Persian Gulf.

Total's July 1995 deal with National Iranian Oil Co. covers all development activity in the two fields through delineation and production start-up, expected in 1998. Output is to peak at 120,000 b/d of oil.

The Malaysian state company's share of outlays will total about $180 million, well above the investment threshold specified in the U.S. law.

Total, which long has been seeking partners for Sirri development, says Washington can't apply sanctions to it or Petronas over the deal because the law can be implemented only against new deals and is not retroactive.

Tension between Washington and Tehran, anxiety over Baghdad's halting return to world crude markets, and recent deadly attacks on U.S. troops in Saudi Arabia are stirring apprehension in Kuwait.

Although other Arab gulf states collectively are watchful of threatening moves by Iran and Iraq, Kuwaitis reportedly fear their sultanate's volatile combination of huge oil reserves and friendly relations with the U.S. make them a prime target if war erupts in the Middle East.

"What's brewing in the region is a Kuwaiti nightmare," one diplomat said earlier this month.

Adding to the country's misgivings, Kuwait and Pakistan no sooner finalized plans for a 90,000 b/d refinery in Baluchistan (see Industry Briefs, p. 24) than Pakistan disclosed it had agreed with Iran to set up a $1.2 billion refinery in the same Pakistani province.

Karachi and Tehran also are cooperating on a $3.5 billion gas pipeline project (OGJ, Aug. 19, Newsletter).

Middle East Economic Survey says Kuwait Petroleum Corp. is shutting down its 59,000 b/d Stigsnaes, Denmark, refinery and will convert the plant to an import terminal by April 1997 as part of a strategic restructuring of its western Europe downstream business.

The closure leaves KPC with only one refinery in Europe, the 75,500 b/d Rotterdam plant, which processes mostly Kuwaiti crude. KPC in 1993 shut down the 100,000 b/d Kuwait Raffinazione E Chimica plant at Naples.

Still, KPC plans a 300,000 b/d increase in its European processing capacity and is talking with Agip about acquiring a 50% stake in the latter's 300,000 b/d Milazzo, Sicily, refinery (OGJ, Apr. 15, Newsletter). MEES says KPC also is looking for other acquisition candidates in western Europe.

In South America, some U.S. producers are being reminded that Washington's strident diplomacy isn't the only source of international woes.

Ecuador, apparently prompted by serious financial difficulties, has suspended operations in the country of a group led by Dallas-based Maxus.

Until Quito called its activity to a halt, Maxus was producing about 30,000 b/d of oil on Block 16 in the Oriente region, including 6,000 b/d under a service contract and 24,000 b/d under an operating contract covering Tivacuno and Bogui-Capiron fields and adjoining areas. The agreements require the government to reimburse the Maxus group for investments and operating costs, plus pay service or operations fees.

Problems have arisen for Ecuador because payments to Maxus on Block 16 have increased to the point that the state has been losing money on the deal.

Sources say Maxus will not be allowed to resume operations until it is willing to convert the contracts into production sharing agreements that allow Quito a share of production from the acreage.

Intervention comes only a few days after government officials appeared in New York seeking more U.S. investment in the country.

A court battle is brewing in the U.S. over a 1979 take-or-pay contract that requires Tenneco's Tennessee Gas Pipeline unit to pay several producers more than $8/Mcf for gas from Bob West field in South Texas.

Coastal, KCS Energy, and Tesoro hailed a Texas Supreme Court decision earlier this month that denied Tennessee Gas a rehearing in the case. The producers say the refusal opens the way for them to collect payments withheld pending settlement of litigation.

Tennessee says the court's finding confirms its claim the producers acted in bad faith by excessively ramping up Bob West gas output, a position it vows to pursue vigorously before a jury.

Natural Gas Clearinghouse, meantime, says U.S. gas spot prices in August will average $2.13/Mcf, compared with $2.37/Mcf in July and $1.26/Mcf in August 1995.