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U.S. Industry Scoreboard 1/15 (72602 bytes) Look for price volatility for crude oil and products to last throughout the year, as refiners increasingly run with lower inventories and an increasing variety of product grades fragments the market.

Jan. 15, 1996

8 min read

U.S. Industry Scoreboard 1/15 (72602 bytes)

Look for price volatility for crude oil and products to last throughout the year, as refiners increasingly run with lower inventories and an increasing variety of product grades fragments the market.

Brent for February delivery closed up 20 at $19.19/bbl on Jan. 8, as fear of further blizzards along the eastern U.S. carried the benchmark crude to more than $19/bbl for the first time since April 1995. Yet February Brent closed Jan. 9 at $18.66 and Jan. 10 at $18.50. Geoff Pyne, oil market analyst at UBS Securities, sees two underlying reasons behind this seesaw behavior.

"The short term answer is that while bad weather is helping raise the crude oil price, the market is also overblown with distillates and is therefore volatile."

Pyne said a more interesting underlying trend-and one that will affect crude and products prices throughout 1996-is caused by refiners' changing attitude toward stocks and a proliferation in the number of grades of oil products.

"For the whole of this year," Pyne told OGJ, "there will be big oil and products price volatility in comparison with the last 3-4 years. One reason is that companies have made a move to running with lower inventories than before, which means there can be sudden spurts in demand.

"Also, it appears that in one way the industry is moving backwards in time. As new environmental rules are passed in piecemeal fashion around the world, we are once more getting a multiplicity of products grades.

"The proliferation of grades causes difficulties in storage and in trading, making for inefficiencies in the markets, the implication of which is that prices will become increasingly volatile."

Pyne said that while crude and products prices are increasingly likely to surge at any time, none of the highs will be sustainable. The underlying price trend is down, he said, because of an expected crude glut.

Helping stabilize oil markets today is reassurance over how the impending Saudi power transition will be handled, given the kingdom's calm in the wake of King Fahd's illness (OGJ, Jan. 8, Newsletter).

Middle East Economic Survey (MEES) reports Fahd's delegation of affairs of state to Prince Abdullah while he recovers from a November stroke is a clear signal the full transition of power, when it happens, will be smooth and uncontested.

"This should provide ample evidence to scotch further speculation about the Saudi succession," said MEES, "at least insofar as the next steps are concerned.

"There can also be little doubt that the main planks of Saudi Arabia's international policy, particularly its close relationship with the U.S. and other western allies and its seasoned moderate stance in oil affairs, are likely to remain firmly in place."

U.S. gas suppliers tempted to maximize sales from storage to take advantage of hefty spot market prices should beware of warmer weather in mid-January. So warns consultant John C. Cochener, Spring, Tex., based on his expectations of U.S. heating degree days (HDDs) the rest of this winter.

If weather throughout January were as cold as it began, Cochener says, it would be the coldest January in 65 years. However, Cochener expects a warming trend at midmonth, prompting still more sales from storage as suppliers scramble to capture waning withdrawal differentials. U.S. gas storage inventories currently lag ideal volumes by 10-15%. An added incentive in mid-January to draw more gas from storage in January-February could deplete storage so much by March that suppliers in some places might have to pull base gas from storage just to serve normal demand. A colder January would only accelerate the day of reckoning. Cochener sees U.S. HDDs from July 1995 through June 1996 normal on an annualized basis, with the January peak slightly warmer than average, February slightly colder, and March about normal.

U.S. sources confirmed last week that Conoco, Nova, and Canadian Hunter Exploration are seeking Mexico's approval of a proposal that-if allowed by Mexican leaders-would signal a historic shift in the country's petroleum policy.

The group has offered to assess and develop hydrocarbon resources in Northeast Mexico's Burgos basin under a service contract with Pemex as the first step in a long term program to include drilling, production, processing, and pipeline construction and operation.

Although Mexico is privatizing petrochemicals, power, and downstream parts of its natural gas sector, its constitution forbids foreign equity ownership of oil and gas. Foreign drilling contractors have drilled wells offshore for Pemex, but this latest proposal would represent the first E&P work by foreign operating companies since nationalization. Status of the proposal is extremely preliminary, to the extent that Mexico has not yet said it's willing to consider the plan. Burgos potential reserves are estimated at 45 tcf of gas equivalent.

Meantime, Pemex is giving conflicting reports about its stance on stepping up gas E&P. After a Pemex official reportedly told a recent Houston conference that Mexico's economic crunch prohibits investment in gas E&P, the state company last month reported on efforts to hike gas production to 4.18 bcfd from 3.78 bcfd in November and 3.6 bcfd in 1994.

One study suggests that if newly privatized power projects proceed as planned, Mexican gas demand is likely to rise to 5.4 bcfd by 2010, presaging increased imports from the U.S. absent changes in Mexican gas output.

IPAA Chairman Lew Ward wants to clean up U.S. abandoned wellsites through a national surcharge on oil and gas production.

The program would be similar to one Oklahoma created in 1993 that used a 2/bbl assessment to raise $1.5 million in 1995 and clean up 50 sites.

Ward, president of Ward Petroleum Corp., Enid, Okla., says the national program would improve industry's image and help it achieve goals in Congress. Some independents and majors met recently in Dallas to discuss the idea. A study group is due to report in February on how to set up the program nationwide.

The latest oil spill in Russia may prove to be a big one.

An oil spill into the icebound Belaya River in Russia's Bashkortostan republic appears bigger than first thought. Workers have been struggling since the first of the year to contain oil leaking into the river area from a pipeline carrying crude oil from Siberia to Bashkortostan.

Rustem Khamitov, the republic's environment minister, was quoted in the Russian press as saying, "The pipeline's owner seriously violated the truth when it said that 100 metric tons of oil were lost. It has now become clear that we're dealing with a completely different scale." Later press reports quoted him as saying thousands of tons of oil had been spilled.

An area of 42,000 sq yd of the river was reportedly contaminated, and a cleanup team recovered 700 tons of oil/water mixture. A 1994 pipeline spill in the Komi republic involved as much as 2 million bbl of oil (OGJ, July 10, 1995, p. 35). Greenpeace claims 20-50 million tons/year of oil is spilled in Russia.

Viet Nam's first refinery may yet get off the ground.

Petrovietnam reportedly has asked Conoco, Malaysia's Petronas, and South Korea's LG Group to replace Total in undertaking the $1.2 billion project to build a 130,000 b/d refinery at Dung Quat Bay. Total pulled out of the project last year in a dispute with Hanoi over the refinery location in Central Viet Nam, which it considered too remote to be economically viable.

Petrovietnam and LG would each take a 30% stake, Conoco and Petronas a combined 30%, and original partners and Taiwanese firms Chinese Petroleum Corp. and Chinese Investment Development Corp. 10%. While Hanoi remains adamant about location, the new partners reportedly are pressing for other financial incentives to offset the expected 25% jump in project costs if sited at Dung Quat.

Another Middle East LNG project moves off high center.

Yemen's parliament has ratified an LNG project agreement with Total.

The French company plans to produce 5 million metric tons/year of LNG starting in 2001 at a cost of $3 billion. Total is talking with potential LNG buyers and competing bidders Exxon, Hunt, and Yukong to share project risks. Total holds a 70% interest in the project, Yemen's General Gas Corp. 30%.

An Enron group has managed to revive India's LNG fed Dabhol power project, seen as a litmus test for foreign energy investment in India.

Enron agreed to boost capacity to 2.45 million kw from 2.25 million kw, trim project cost to $2 billion from $2.8 billion, and cut Dabhol produced power costs to 5.2/kw-hr from 6.8/kw-hr. The new terms were approved last week by Maharashtra state government, which previously had blocked the project.

The Enron group cut Dabhol construction costs by recasting phase two of the project-a $400 million LNG regasification plant-as a separate, independently funded venture. Enron reportedly also agreed to trim its project interest to 50% from 80%, giving Maharashtra State Electricity Board a 30% share. Bechtel Enterprises and General Electric each will retain 10% interest. Construction is to resume within 90 days at a site about 120 miles south of Bombay.