OGJ Newsletter

U.S. Industry Scoreboard 7/29 [71604 bytes]

Prospects are brightening again for oil and gas investment in the former Soviet Union (see related stories, pp. 37-38).

Russian officials are predicting a fresh infusion of investment in that country, notably in the petroleum sector, in the wake of President Boris Yeltsin's reelection. Russian Prime Minister Viktor Chernomyrdin and U.S. Vice President Al Gore this month concluded the seventh meeting of their jointly chaired bilateral commission on an up note, predicting a surge of U.S. investment into Russia.

"We are on the verge of a new period of history in which investment capital flows into Russia in very large quantities," Gore said. He added that the U.S. government is supporting billions of dollars worth of investment in Russia through the Overseas Private Investment Corp. and Ex-Im Bank and is working to remove regulatory hurdles to greater Russo-U.S. trade.

Chernomyrdin noted the U.S. now leads the world in volume of direct investment in Russia with about $2.5 billion/year, accounting for almost a third of all foreign investment in Russia. In first half 1996, U.S. investors poured $360 million into Russia, Chernomyrdin said, or 41% of all foreign investment.

The Gore-Chernomyrdin Commission's Energy Policy Committee said major U.S. financial organizations are willing to provide Russia with an $8 billion credit to develop the fuel and energy sector. The U.S. side hailed Russia's work on the production-sharing law, absence of which was a major obstacle to U.S. investment in the oil and gas sector. At the same time, U.S. officials note the opening of a U.S. credit line to Russia is being held up by flaws in accounting, taxation, and business legislation. Russian Fuel and Energy Minister Yuri Shafranik says that by 2000 Russian fuel and energy companies will receive about $12 billion worth of U.S. investment. In order to encourage investment in Russia, the Gore-Chernomyrdin Commission will continue work on creating a special working group at the New York Stock Exchange.

Tajikistan and Uzbekistan have signed a natural gas agreement that could resolve a major bilateral trade problem.

Tajikistan is heavily dependent on Uzbekistan for supplies, something Uzbekistan has used to its advantage in bilateral relations. In winter 1995, Uzbekistan cut back gas supplies to Tajikistan forcing Dushanbe to implement drastic rationing measures. Uzbekistan claimed it had received only 3% of what it was owed for gas deliveries for 2 years. The new agreement confirms Uzbek shipments of gas to Tajikistan in exchange for the right to ship goods through Tajikistan. Uzbekistan also promises to consider lowering gas prices.

Russia is scrambling to keep its oil and gas customers.

Gazprom officials met with Ukraine President Leonid Kuchma this month to talk about how to improve the current system of supplying gas to Ukraine and further transporting it across Ukraine to eastern Europe. Talks included prospects for mutual investment in the Russian and Ukrainian gas industries.

Russia's gas and oil industry officials worry Ukraine is seeking alternative sources of energy, citing proposals to trade Iraqi oil for Ukrainian food.

As the U.N. moved to to allow Iraq limited oil sales for humanitarian aid (see story, p. 48), the U.S. Senate approved a bill imposing economic sanctions on foreign firms investing more than $40 million/year in the energy sectors of Iran or Libya, two countries Washington has accused of fomenting terrorism.

Sanctions proposed against non-U.S. companies exceeding the investment limit include barring their imports into the U.S. and forbidding U.S. banks to loan the firms more than $10 million/year.

Critics of the proposal warn that, rather than forcing Iran and Libya to cease supporting terrorists, the proposal could goad countries targeted for sanctions into retaliating with measures aimed at punishing U.S. firms.

Earlier this month, some analysts were suggesting the $4 billion acquisition by El Paso Natural Gas of Tenneco Energy likely marked the last megamerger inspired by the confluence of U.S. gas and electric power markets (OGJ, July 1, p. 44). Then last week, Enron agreed to acquire Portland General Corp. in a deal uniting North America's largest gas marketer with the largest independent marketer of wholesale electricity. The combined companies would have more than 5.9 million kw of power capacity, more than 37,000 miles of gas pipeline, and a book value of about $12.5 billion.

Wood Mackenzie says the European Union's recent agreement to liberalize electricity markets will cause a "dash for gas" similar to Britain's, with gas fired electricity generation's share of EU power markets more than doubling to account for 22% of all power produced in 2010. Demand outlook for gas fired power is especially good in Italy, Spain, and Denmark and to a lesser extent Portugal, Belgium, and Austria. "However," WoodMac said, "whereas the U.K. experience was very much a dash for gas, Europe is more likely to witness a 'switch to gas,' since newbuilding is likely to be controlled through licensing or tendering procedures, rather than letting market forces prevail, potentially exacerbating the current overcapacity in power generation."

The rapid pace of oil and gas industry restructuring is beginning to reveal new strains for the affected companies as qualified personnel become scarce.

In London, a Texaco Overseas Holdings official earlier this summer said oil companies have gone overboard trying to cut costs, leaving themselves short of key engineering and scientific staff. While cost-cutting helps many companies bolster profits despite relatively low oil prices, increasing importance of technologies such as 3D seismic and horizontal drilling in tandem with a need for employees qualified to use them has blindsided many companies.

"Those companies that sold key assets, fired able staff, abandoned research, and castrated new ventures...will be a meal for the sharks," said Marlin Downey, former ARCO International president.

Yet a senior industry official says efforts among European refiners to become more competitive haven't gone far enough.

Esso SAF's Jean-Luc Randaxhe says closures and restructuring to date likely won't be enough to sustain improved margins found on European markets in first half 1996. While the improvement might be a sign 1995 marked the low point of refining profitability, Randaxhe cautions against hopes for a spectacular recovery. Esso SAF has trimmed operating costs 3%/year for the past 10 years, a rate Randaxhe contends it can sustain the next 5.

Sable Offshore Energy Project (SOEP) partners are advancing steadily toward start-up in late 1999 of commercial production from fields off Nova Scotia near Sable Island with estimated gas reserves of 2-4 tcf.

The group earlier this month let a $9 million contract to a joint venture of Brown & Root Energy Services, Houston, and Canada's Monenco AGRA for front-end engineering design on the $2 billion development plan (OGJ, June 10, p. 32).

The pact extends to the start of project construction in second half 1997 and requires that Brown & Root and AGRA help select alliance partners for main work, including fabrication, pipelaying, and installation of onshore and offshore facilities. It also enables them to prepare contracts and alliance agreements and allows for early procurement of some long lead time items such as offshore drilling templates and platform jackets.

Energy officials in Canada and Nova Scotia agreed to set up a joint review system to help streamline SOEP's regulatory reviews and avoid jurisdictional overlap and duplication, saying public input is crucial to the project's success. They plan to appoint a five member panel to oversee the joint review process and open an office in Halifax to assist panel members.

Meantime, a confrontation is brewing between proponents of two proposed international pipeline projects vying to transport gas from Sable Island to U.S. and Canadian markets. Partners in the $1 billion, 650 mile Maritimes & Northeast Pipeline want to move gas from Nova Scotia and New Brunswick to Boston via a route that would bypass Quebec.

However, Canadian Prime Minister Jean Chretien and Quebec Premier Lucien Bouchard reportedly favor the Trans-Quebec & Maritimes Pipeline, which would follow a route through northern New Brunswick to a connection in Quebec with a TransCanada gas line.

Canada's NEB approved the latter project a decade ago, but the sun has set on that decision. Each project group claims its project is based on solid economic footing and won't require government subsidies.

Surging offshore E&D is pushing day rates up for mobile rigs worldwide.

Global Marine says its summary of current offshore rig economics (Score) is the highest since December 1984. Jack up markets the past 4 months have been stronger than for semis, restoring a 2 year trend after a 9 month hiatus when semis were racking up higher Scores. As a result, many offshore drilling contractors are reporting significantly improved profits vs. a year ago.

For the quarter ended June 30, Glomar netted $24.1 million, up from $9.9 million last year; Marine Drilling Cos. more than $4.25 million vs. a loss of more than $1.75 million; and Rowan Cos. more than $12.66 million after a loss of $3.7 million.