OGJ Newsletter

U.S. Industry Scoreboard 8/19 [71423 bytes]

Oil and gas related strife last week contributed to diplomatic tensions around the world.

Among the highest profile events, Turkey signed a $23 billion gas deal with Iran-targeted with Libya by a week-old U.S. law aimed at punishing alleged sponsors of international terrorism (OGJ, Aug. 12, Newsletter)-and guerrillas disrupted oil operations in Colombia's Putumayo basin by bombing the Trans-Andean pipeline.

U.S. State Department says Turkey's 23-year agreement to buy Iranian gas, starting with 105 bcf/year in 1999 and rising to 350 bcf/year in 2005, sends the wrong signal to Tehran. But State insists Ankara is a staunch NATO ally and the gas pact won't cause a major rift in relations.

U.S. Secretary of State Warren Christopher says Iran shouldn't be given resources to carry out desperate acts.

"The main thing we would say to the Turks is that, in dealing with Iran you have to recognize them for what they are: a country that does protect terror and is an enemy of the peace process," he said. The U.S. hopes to persuade Turkey and other allies "it's not good international citizenship at this point to deal with Iran."

Turkish officials maintain the Iran-Libya Sanctions Act does not apply to the gas deal because Turkey would be making investments only in its own territory. U.S. allies in Europe and Asia have denounced the U.S. law.

While the U.S. was content to decry Turkey's deal with Iran without threatening to invoke sanctions, London's Financial Times newspaper reports some doubt the 820 mile pipeline from Tabriz to Turkey needed to deliver the gas supplies would be built. Analysts contend it could take years to complete the $1.2-2 billion pipeline, even if funding could be arranged.

Meantime, Middle East Economic Survey reports Ankara asked the U.N. sanctions committee for an exemption to buy Iraqi oil because Turkey's economy has been hard hit by sanctions against Iraq.

MEES says Ankara reckons it has lost $27.3 billion the past 6 years, including $400 million/year for halting Iraqi oil exports through Turkish pipelines and loss of potential exports to Iraq worth $2 billion/year.

Turkish Prime Minister Necmettin Erbakan said his country needs 200,000 b/d of Iraqi crude for its own use.

Tehran earns about $16 billion/year from crude oil and refined products exports-90% of its hard currency earnings. But whether U.S. antiterrorism sanctions eventually will cripple Iran's economy by blunting oil and gas investment is open to question.

With the world's second largest gas reserves after Russia, Iran also is courting big export deals with Pakistan and Europe.

Karachi and Tehran late last year agreed to start work this year on a $3.5 billion, 1,000 mile pipeline to transport 1.6 bcfd of Iranian gas to Pakistan's Sindh province and on to India, although many doubt that schedule. BHP confirms talks with Tehran about the project but has not committed to firm plans. Still less likely is Tehran's goal of making Europe a major market for Iranian gas.

Already among the world's top five producers, Iran also aims to boost its crude oil production capacity to 5 million b/d by 2000, mainly by repressuring aging onshore fields with gas injection projects and developing more offshore fields. Iranian officials estimate developing even a small field off its coast would cost as much as $100 million. Persian Gulf economists and other oil industry sources agree U.S. sanctions could slow but not derail the country's ambitious oil development plans.

While many express doubt about Iran's gas export plans, Indian and Omani officials have raised some eyebrows by assuring their plans still are on track for a $5 billion project to lay an 800 mile gas pipeline from Ra's al Jifan, Oman, through parts of the Arabian Sea more than 10,000 ft deep, to Rapar Gadhwali, Gujarat, in western India. Indian Petroleum Minister T.R. Balu says the two nations in September will form a group to study project feasibility. As first proposed, work was to have started this year on the gas line.

Amidst international speculation about possible repercussions of the Turkish-Iranian gas deal, officials of National Iranian Oil Co. and the government of Kazakhstan have met in Almaty to ink a crude swap deal in which Kazakhstan is to ship 40,000 b/d of oil to Iran's Caspian coast and Iran is to make the same volume available to Kazakhstan at Iranian ports.

Observers note Chevron/Mobil's Tengizchevroil joint venture intends to be producing as much as 700,000 b/d of oil from supergiant Tengiz field by 2010.

Many U.S. oil officials reportedly believe a route through Iran is the least costly export option for Kazakh oil, but no one is willing to suggest the alternative for fear of incurring Washington's wrath.

Anti-oil protests have heated considerably in Colombia.

Ecopetrol says guerrillas in southern Putumayo province have attacked oil pipelines 21 times since Aug. 4. Two bombings Aug. 11 of the Trans-Andean pipeline forced officials to suspend shipment of 400,000 bbl of Ecuadorian crude to Colombia's Pacific port of Tumaco. Attacks by saboteurs also shut down 15 oil wells in the region, spilling more than 10,000 bbl of crude and trimming Putumayo oil output by 4,000 b/d to 9,800 b/d. While not reporting damage to wells in its Toroyaco, Linda, Mary, and Miraflor fields, Garnet Resources' Argosy Energy unit says damage to the pipeline forced it to halt flow for as much as 10 days, after which throughput could be curtailed for another 15.

Ecopetrol estimates total damage at about $2 million and says as much as 20 days could be needed to repair pipeline damage alone.

Contrary to expectations, approval of the U.N.-brokered plan to sell $2 billion worth of Iraqi oil in 6 months was met with higher oil prices.

After dropping briefly by 20/bbl on news Aug. 7 that U.N. monitors will be sent to Iraq to assure aid goes to those intended-enabling the oil-for-aid plan to go forward-Brent crude recovered in late trading in London to end at $19.48/bbl, down only 2/bbl on the day.

Since then, Brent for September delivery rallied to $20.74/bbl by closing Aug. 13, and brokers say the market is likely to remain strong.

Lehman Bros.' Lindsay Horne says most people are mystified as to why the crude oil price is so high, but prices possibly had strengthened because non-oil investors began entering oil markets on speculation that Iraq and the U.S. might go to war, following rumors the recent crash of TWA Flight 800 off New York could have been caused by an Iraqi bomb.

"Their speculative buying has pushed the market up, even though there is little chance of an Iraq/U.S. conflict," Horne said.

Another factor behind the price hike is that producers have been reluctant to sell crude, thinking the price will rise further still, while many traders are keeping short positions ahead of the start of Iraqi exports.

"Delays have meant the shorts have had to cover," said Horne, "and in the near term the price may go still higher, until the first Iraqi cargo is delivered, when traders could suddenly start going around like headless chickens."

Russian oil producers have begun speaking out against plans by the government to resurrect the state monopoly on oil exports as part of its campaign to combat organized crime in Russia.

Noting that Russian oil companies rely heavily on exports to underpin commercial bank credits, Lukoil Vice Pres. Viktor Fedotov says establishing a government oil export agency would be catastrophic because oil monopolies in the past had delayed hard currency payments.

He contends a government oil export monopoly can't be depended upon to act in the best interests of producers.

Although no restrictions are planned on oil exports, members of the Foreign Investment Advisory Council say as much as 20% of export volumes carried by Russia's Transneft are transported free of charge for the government.

Russia Aug. 1 began imposing excise taxes on crude exports, after scrapping all export tariffs in July as part of a $10 billion deal with IMF.

Mexico has awarded its first gas privatization license. Distribuidora de Gas Natural de Mexicali (DGNM), a partnership of units of Enova Corp., Pacific Enterprises, and Proxima SA, won the right to invest as much as $25 million the next 5 years to set up a local distribution network in Mexicali that eventually will serve more than 25,300 homes and businesses. Service is to begin next year. DGNM outbid offers by a Tenneco-Westcoast group and Repsol Gas de Saltillo.

Pemex, meantime, awarded Tenneco and Westcoast a 2-year contract to manage automation of Pemex Gas y Petroquimica Basica's gas and LPG pipeline grids.

The companies are to evaluate Pemex Gas' automation, Scada, and telecommunications requirements and supervise selection, installation, and commissioning of the new system.