OGJ Newsletter

Industry Scoreboard - due to a holiday in the U.S., data for this week's Industry Scoreboard are not available.

Realignment is the watchword on world oil and gas markets as companies jockey to match new supplies with regional markets expanding at uneven rates.

BP estimates world oil consumption increased about 1.2% in 1995 to 67.93 million b/d (see related story, p. 28). Gas use was up 2.5% to more than 202.5 bcfd. Oil demand grew fastest in Asia at a rate of 4.6%, led by Malaysia, Philippines, Thailand, Taiwan, and Singapore. Gas demand in Latin America increased 9.4% to 7.55 bcfd and in Europe 7.4% to nearly 36.49 bcfd.

Energy consumption has increased most in emerging market economies (EMEs). Hungry for fuels to drive economic expansion, some EMEs are willing to consider all options, including some that set the stage for novel relationships. But competition is also hot to serve expanding demand in industrialized countries.

Among the more unusual ideas, Taiwan's Chinese Petroleum Corp. is mulling plans to diversify its oil supply sources by providing loans to Iraq in exchange for oil purchase deals and/or setting up an oil exploration venture. CPC, which recently became the first non-U.S. firm to buy Alaskan North Slope crude after the U.S. lifted a 21 year ANS crude export ban, aims to strike a deal with Iraq after the U.N. and Iraq resolve details of their oil for food agreement.

In late June, officials in Seoul said South Korea could start importing U.S. crude to reduce its dependence on Middle East oil, while smoothing trade ties with the U.S. Hyundai Oil Refinery Co. recently agreed to buy 630,000 bbl of ANS crude from BP. About 78% of the 600 million bbl of oil South Korea imported in 1995 came from the Middle East. South Korea's International Trade and Industry Ministry has budgeted $22 million to subsidize domestic refineries' oil import shipping costs in 1997, up from about $9.3 million this year.

A project to sell ANS gas to markets in Asia could turn a profit, despite its $18.4 billion price tag, concludes CS First Boston in a new study.

Profitability hinges on finding buyers willing to sign 30 year agreements in which the price of gas would start out about 12% greater than current prices and escalate about 3%/year. Since gas prices often are tied to oil prices-which generally are projected to track inflation in real terms-finding customers comfortable with long term commitments to such high priced gas could be difficult.

But CSFB says a 3%/year escalator was used to model a recent gas project in Qatar, and similar approaches likely will be needed to bring on line other big gas projects under consideration.

ANS gas could find a hungry market in Thailand, which could become totally dependent on foreign gas early in the next century.

Thailand's Department of Mineral Resources estimates the country has consumed about 2.9 tcf of gas the past 15 years, nearly 40% of its proved gas reserves. With the country's gas demand still rising, the department estimates Thailand in the next decade could deplete the remaining 3.8 tcf of its reserves.

Thailand is considering an LNG receiving plant and plans to buy gas from Middle East producers, with some agreements to kick in after 2007. It also is lining up supplies from Myanmar via pipeline. About 90% of Thailand's gas supply since 1981 has come from fields in the Gulf of Thailand.

Kazakhstan eventually could become a power on world oil markets, as well as a key gas supplier in Central Asia, if early reports prove reliable of a potentially huge new offshore oil and gas province in the northeastern Caspian Sea. Kazakh officials say new seismic data collected on a 100,000 sq km part of the Caspian shelf by a group led by KazakhstanCaspiyShelf (KCS) indicates estimated crude oil resources of as much as 73 billion bbl.

KCS estimates the area's gas potential resources at 70 tcf. Other members of the group-which includes Agip, British Gas, BP, Statoil, Mobil, Shell, and Total-caution that no drilling as yet has occurred on the acreage and cite a more likely working estimate for oil resources of about 29 billion bbl.

Norway's Storting, or parliament, has approved a Statoil group's plans to develop oil and gas fields in the Haltenbanken's Aasgard unit under a $7 billion project. First oil is slated for fall 1998, with first gas in 2000. Production is expected is reach more than 1 bcfd of sales gas and 200,000 b/d of liquids.

The massive project will include a converted semi that will serve as the world's biggest gas handling facility on a nonfixed platform, 60 subsea production and injection wells, 145 miles of infield flow lines, and a floater designed to store more than 900,000 bbl of oil and inject about 600 MMcfd of gas in a gas lift project. Gas will move via a 450 mile pipeline to Karsto for processing before further transport to continental Europe.

The U.S. has rejected Iraq's plans for distributing food and medical aid purchased from sales of oil as the U.N. still grapples with other details.

Washington says Baghdad is trying to drive trucks through loopholes in U.N. Resolution 986, to which Iraq agreed in May. Middle East Economic Survey says further talks will be dominated by two issues: How much of the money should be allotted to development work in the Kurdish region of northern Iraq, rather than to buying supplies; and what system should be used for food distribution-ration cards as presently in use, or another system.

"Taking into consideration these pending problems," said MEES, "not to mention appointment of various U.N. monitors, inspectors, and overseers and the preparation of the necessary logistics for them inside and outside Iraq, one can safely assume that Iraqi oil exports are unlikely to start before the end of July."

Canada's gas pipeline construction outlook continues heating, as Canadian producers clamor for bigger roles on expanding U.S. markets.

Among projects in the offing are two large diameter systems, each capable of boosting gas deliveries to the U.S. by more than 1 bcfd.

Projects sponsored by PanCanadian and NOVA are competing to add capacity to serve markets in eastern Canada and in the U.S. Midwest. PanCanadian says it has enough commitments from producers to fill its proposed 1.1 bcfd Palliser gas export pipeline, a 149 mile system through Central Alberta to an export point at Empress, Alta., that would bypass NOVA's pipeline system.

For its part in challenging the Palliser project, NOVA says it has commitments for another 500 MMcfd on its line, to be connected with a planned expansion of Northern Border pipeline.

PanCanadian says gas on the Palliser line will move to export markets on the new Northern Border capacity and TransCanada's system. PanCanadian and Westcoast Transmission are 50-50 partners in Palliser. PanCanadian says shippers committing for 20 years will pay about half of current NOVA tolls. NOVA charges about 25¢ (Canadian)/Mcf to transport gas from anywhere in Alberta under a postage stamp toll system. Alberta regulators ruled in June that the postage stamp system, challenged by PanCanadian, is still in the public interest.

NOVA has also challenged the economics of another bypass project, the proposed $3.4 billion Alliance pipeline from Northeast British Columbia to Chicago. NOVA says the Chicago market is already close to saturation with gas from existing Canadian and U.S. pipelines, but the 17 member Alliance group plans an open season this summer with first shipments late in 1999. Alliance group members could take as much as half the system's proposed 1.1 bcfd capacity.

Meantime, Canadian Energy Research Institute says U.S. demand for Canadian gas will increase 2%/year the next 15 years, with exports rising 3.7 tcf by 2010 from 2.7 tcf. CERI forecasts Canadian production will jump in the same period to 7.1 tcf/year from 5.3 tcf, while prices ramp up to $1.78 (Canadian)/Mcf in 2000 and $2.45/Mcf in 2010 from the current $1.34/Mcf.

CERI warns Canadian producers will have to pace development drilling to avoid big deliverability surpluses that have plagued producers in western Canada recently. The institute also says pipelines will be much harder to finance if shippers have to pay for expansions without benefit of tolls from existing shippers on a line.

On the oil side, CERI says a chronic shortage of high sulfur fuel oil has supported world oil prices since 1990 but tighter global restrictions on middle distillate sulfur content, increased production of sour crudes from deepwater and subsalt fields along the U.S. Gulf Coast, and a seasonal surplus of fuel oil from Russia could threaten oil pricing.

"By June 14," CERI wrote, "the price differential between high and low sulfur cracked fuel oil had widened to $30/ton in the Mediterranean-a $20/ton increase over the level reported on May 27." CERI predicts the return of Iraqi exports will "recalibrate" the sweet/sour spread.

Clean fuel regulations in North America continue to face an uncertain future.

Canada's parliament has recessed for the summer without passing a bill to ban use of gasoline additive MMT. Automakers support the bill because they say the additive impairs emission control equipment. Refiners support use of MMT and say a ban would trigger huge costs to retrofit refineries. The Canadian Automobile Manufacturers Association had asked the government to pass bill C-29 but now say they might not be able to honor warranties on pollution control equipment on 1998 models, which could be on sale next spring.

In the U.S., EPA soon will issue guidelines allowing states to withdraw areas from the reformulated gasoline (RFG) program, if the Clean Air Act does not require their participation.

The new rules will apply only to regions that opt into the RFG program then decide to opt out. Following confusion last year about whether areas voluntarily taking part in the RFG program would be required to stay, refiners had complained that they needed time to sell RFG they already had shipped to the areas.

EPA said the procedures generally will allow distributors and marketers 90 days to dispose of existing RFG supplies before the opt-out becomes effective. The agency also formally approved pending opt-out requests for 9 New York, 28 Pennsylvania, and 2 Maine counties, which had never sold RFG, since EPA let them suspend the program before it began in 1995.

Pending plans for constructing more deepwater oil ports in the U.S. could find new support if a bill approved in late June by the House transportation and infrastructure committee becomes law.

It would amend the Deepwater Port Act of 1974 to eliminate duplicative or unnecessary federal rules that bar the Louisiana Offshore Oil Port and possible future deepwater ports from making business decisions needed to compete with other ways of shipping oil into the U.S.

The act also addresses safety and environmental problems arising from excessive tanker traffic on coastal and inland waterways, including risks of accidents and oil spills and effects of continual dredging.

Bill sponsor Rep. Jimmy Hayes (R-La.) said the 2 decade old deepwater port law envisioned an import market dominated by deepwater ports. "Not only do current conditions not bear out this prediction," Hayes said, "the fact that LOOP is the only deepwater port indicates how limiting the current law is."

Hayes said his legislation would assure federal oversight of crude oil movements by deepwater ports proven adequate by "LOOP's outstanding performance record."

The committee in reporting out the bill said proposed changes retain environmental protections while simplifying "a cumbersome mix of regulatory requirements" by various federal agencies.