OGJ Newsletter

Industry Scoreboard 5/27 [37512 bytes]

Don't expect the bulk of Iraqi oil exports to reach world markets before July and possibly September.

That's the timetable given by Turkish officials, considering the repairs needed on the Iraqi pipeline through Turkey that will serve as the main conduit for Iraqi oil exports. Last week, Iraq and the U.N. ended months of haggling with an agreement on limited sales of Iraqi crude to pay for humanitarian aid in Iraq (see related story, p. 30).

The bulk of Iraqi exports must be shipped through an export pipeline to Turkey to the Mediterranean port of Ceyhan rather than through the Persian Gulf port of Mina al-Bakr. The deal authorizes Iraq to buy equipment immediately to repair the pipeline. Turkey says the pipeline could be ready within weeks, and a Turkish firm has a contract with Iraq National Oil Co. to repair a pump station on the Iraqi side of the border. The 613 mile pipeline can move 1.5 million b/d, but Turkish officials say it is unlikely to start up before July and possibly September.

Disclosure of the accord surprised market analysts when oil prices rose in response instead of falling, as many had predicted.

Markets last week continued to discount the prospect of Iraqi oil exports reaching world markets anytime soon and returned their focus to fundamentals: low stocks in the U.S. and the start of the summer driving season. Nymex July crude May 22 closed 77 higher on the day at $21.40/bbl.

U.A.E. is urging Arab and western nations to lift all sanctions against Iraq to alleviate the suffering of its people.

However, the U.N. has made it clear the limited sales accord is not a prelude to removal of sanctions that would allow full resumption of oil exports. Before full exports resume, the Security Council insists Iraq comply with all postwar resolutions, including proving it has dismantled weapons, returning stolen property to Kuwait, and accounting for 600 missing Kuwaitis. Iraqi exports have not been completely halted since the Persian Gulf war. The U.N. allows Iraq to export 70,000 b/d to Jordan, and unauthorized exports to other countries also have been rumored.

Ex-Sen. Robert Dole, the expected Republican presidential candidate, said the U.N., "at the prompting of the Clinton administration, has made Saddam Hussein an offer he could not refuse: a source of revenue that will reduce Iraqi domestic discontent with his reign of terror. In such circumstances, offering Saddam Hussein a lifeline to prolong his dictatorship is bad policy and bad strategy. Saddam Hussein's track record makes it clear that he can be given no room for flexibility on any sanctions relief."

Sen. Frank Murkowski (R-Alas.), energy committee chairman, also criticized the sale: "Our increasing reliance on foreign oil will make it very difficult for any president to turn off the Iraqi oil spigot in the coming years if Saddam Hussein fails to live up to the agreement or misuses oil revenue."

The U.S. Senate will resume debate in June on whether to repeal 4.3 of the 18.3/gal federal gasoline tax.

The House passed a repeal bill 301-108 last week. The legislation asks but does not require gasoline marketers to pass along the 4.3 cut to consumers. At least two refiner/marketers, ARCO and Tosco, have pledged to cut their gasoline prices by 4.3 if the rollback is enacted. The measure amounts to $2.9 billion for the rest of this year. Republicans want to make the tax cut permanent if they can find a way to replace the $4.3 billion/year in lost revenues.

The Senate debated the bill for several days in mid-May, but it was filibustered by Democrats who demanded a vote on a bill increasing the minimum wage. President Clinton will sign the gasoline tax cut bill only if Congress passes a bill increasing the minimum wage.

Sec. of State Warren Christopher has criticized some European countries for continuing to trade with Iran and declining to join the U.S. embargo against that country. Christopher says Iran continues to encourage militant groups to attack targets in Israel. He claims Iran is funding several groups, including as much as $100 million/year for Hezbollah, linked with terrorist attacks in Israel. "Some European nations continue to engage with Iran in what they call a 'critical dialogue.' We remain convinced that no amount of dialogue will alter Iran's policies unless the dialogue is accompanied by very real and strong economic pressure."

U.S. DOE is having trouble selling 12 million bbl of sour crude from the Strategic Petroleum Reserve (OGJ, May 6, p. 44). The Defense Fuel Supply Center (DFSC), which is handling the sale, rejected as too low all bids in a May 16 opening. In a second round May 20, DFSC said it will accept three bids totaling 1,075,000 bbl but asked some other bidders to consider revising their offers. Results will be disclosed later. A third round is scheduled June 3.

AGA has no plans to sever ties with the U.S. gas transmission industry, AGA Pres. Mike Baly told the association's operations conference in Montreal last week. This stance appears to run counter to consultant Towers Perrin's recommendation that AGA narrow its focus and become more LDC oriented. Baly says LDCs and integrated gas companies contribute 93% of AGA dues income. AGA decided this year to reshape its mission to focus on LDCs-including limiting full voting membership to LDCs-in part because gas companies increasingly find themselves at odds on issues they previously agreed upon (OGJ, Apr. 8, p. 24).

Nevertheless, Baly said, AGA is "hard at work trying to devise a dues and membership formula that will maintain the (membership) status quo with respect to nonadvocacy programs." These include AGA committees and conferences as well as programs on best practices, measurement standards, financial analysis, and legal issues, and many other AGA services "that have long served both pipeline and LDC members."

Amoco Canada says western Canadian producers have a dilemma deciding how much to spend on E&D.

CEO Dave Newman says western Canada producers still face a gas surplus and inadequate export pipeline capacity. The glut has resulted in a spread since February of least $1 between prices Alberta producers get and those U.S. Gulf Coast producers receive. Newman says there is potential for another boom/bust cycle before 2000 similar to the one in 1993-95 if prices rise in 1998 as some analysts expect when additional pipeline capacity comes on stream. He contends markets are growing, and with new pipeline capacity producers will have to work even harder to raise production to new levels while controlling costs.

Meanwhile, Petroleum Services Association of Canada (PSAC) has hiked its forecast of Canadian drilling activity in 1996 to 10,700 wells, up 19% from its forecast for the period last October. PSAC says a cold winter boosting gas demand and higher than expected oil prices underlie the forecast increase.

A pair of oil and gas megaprojects off far eastern Russia's Sakhalin Island are marking progress. Sakhalin Energy Investment Co. Ltd. (SEIC), the Marathon led venture set up to develop the Sakhalin II project, will start work 30 days after contract approval by the Kremlin. Sakhalin II involves development of Piltun-Astokhskoye and Lunskoye fields, which have estimated combined reserves of 1 billion bbl of oil and 13 tcf of gas. The $10 billion project includes an LNG export plant. Sakhalin II's production sharing contract (PSC), the first in Russia, was signed in June 1994. Disclosure of a start time for the PSC follows granting of licenses to SEIC for the project earlier this month. SEIC partners are Marathon 30%; McDermott, Mitsui, and Shell, 20% each, and Mitsubishi 10%.

The venture is one of several major projects held back by slow progress of PSC legislation through Russia's parliament (OGJ, Oct. 30, 1995, p. 12). SEIC says the legislation must be completed before development work can begin.

Meantime, Exxon has completed negotiations on separate PSCs for its Ayashskiy and East Odoptinskiy blocks that were part of the 1993 Sakhalin III tender.

The PSCs will be submitted to the Kremlin and Sakhalin oblast for review and approval. Exxon could spend more than $300 million exploring its Sakhalin III area. The blocks are in less than 100 m of water and cover about 9,000 sq km surrounding the Sakhalin I and Sakhalin II areas.

If legislation is in place and the PSCs are approved this year, exploration could begin during the summer weather window in 1997.

Dayrates for offshore drilling rigs worldwide in the past year-expressed as a percentage of the estimated dayrates needed to spur speculative construction of new rigs-have shot up 38%.

That's according to the summary of current offshore rig economics (Score) calculated monthly by Global Marine. The ninth straight monthly increase boosted worldwide dayrates in April to a Score of 52.5% from 38.1% in April 1995. North Sea rigs posted a Score of 63.1% in April, the highest surveyed. Gulf of Mexico rigs showed the lowest regional Score in April, 43.6%, but posted the greatest year to year gain, up 42% from April 1995. Global CEO C. Russell Luigs says too few rigs are available in the gulf to meet demand caused by strong U.S. gas prices: "As a result, dayrate increases are accelerating, and the region is seeing term contracts of 6 months to a year or more for the first time since the early 1980s." Global estimates new construction dayrates as the sum of daily cash operating costs plus a capital recovery of $700/day/million dollar invested.