OGJ Newsletter

Iraqi dictator Saddam Hussein has emerged as an unwitting patron of his Persian Gulf War enemies. Baghdad's attack on Kurdish strongholds in northern Iraq not only buoyed world oil prices to post-war highs (see related story, p. 34) but also firmly blocked the U.N.-brokered deal to allow Iraq to begin exporting oil to world markets the first time since that was banned Aug. 6, 1990, by U.N. sanctions.

Sept. 9, 1996

9 min read

Iraqi dictator Saddam Hussein has emerged as an unwitting patron of his Persian Gulf War enemies.

Baghdad's attack on Kurdish strongholds in northern Iraq not only buoyed world oil prices to post-war highs (see related story, p. 34) but also firmly blocked the U.N.-brokered deal to allow Iraq to begin exporting oil to world markets the first time since that was banned Aug. 6, 1990, by U.N. sanctions.

After agreeing early last month to send U.N. monitors into Iraq to oversee implementation of the $2 billion oil-for-food plan, Sec. Gen. Boutros Boutros-Ghali last week decided to delay the deal because the deteriorating situation in the north made it impossible to assure U.N. monitors' safety.

Oil prices-already unexpectedly firm, mainly because of low heating oil stocks-surpassed last year's highs by $6/bbl when news broke that U.S. forces were pounding Iraqi military positions in the south with cruise missiles, sending jitters through the markets.

Oil prices by midweek had settled back slightly, with Brent spot in Europe closing Sept. 4 at $22.22/bbl and WTI at Cushing, Okla., at $23.23/bbl. But a senior OPEC official noted the pricing premiums were helping improve incomes of Baghdad's gulf war enemies, Saudi Arabia and Kuwait.

The price hikes haven't been as welcome in Asia, where major oil importers India, China, and South Korea voiced concerns about higher long-term oil import costs.

London's Centre for Global Energy Studies says world demand is so strong and stocks so low, the expected 550,000 b/d of Iraqi oil really is needed.

"Most people were looking for a correction in the oil price once Iraqi supplies returned," one analyst said. "That's now been postponed into 1997, possibly as late as spring."

CGES said, "The oil market is going into the winter with all the lights on red."

Most analysts expect renewed tensions in the Middle East will put off Iraqi oil exports until at least sometime next year. But Turkey and France aim to revive the oil-for-food deal as soon as possible.

Although acknowledging the decision is beyond its control, Turkey is trying to win approval of Ankara's Security Council allies Britain, France, and the U.S. not to impose an indefinite delay. Ankara repeatedly had said it hopes to start transporting Iraqi oil by Sept. 15 through the 616 mile pipeline from Iraq's Kirkuk oil fields to Turkey's Ceyhan terminal. "We will make efforts that it is to flow by Sept. 15, as we expected earlier," said Turkish Energy Minister Kutan.

Turkey estimates the value of its lost trade with Baghdad as a result of U.N. sanctions at more than $27 billion (OGJ, Aug. 19, Newsletter).

France, meantime, is calling for talks on a new U.N. oil sales plan to enable Iraq to raise money for food and medical supplies.

"Our aims are first to ensure peace in the region and to ensure that the Iraqi leaders are no longer in a position to harm their neighbors or their own people," France's Alain Lamassoure said. "After a period of tension, we should go back to peace and dialogue."

Britain-backed by the U.S.-has offered a Security Council resolution condemning Iraq's offensive against the Kurds, calling for a return to previous positions, asking Baghdad to cease interference in the north, and requesting feuding Kurdish factions to resume talks.

The proposal drew cool responses from France and China; Egypt asked why U.S. attacks on Iraq were not mentioned.

Russian envoy Sergei Lavrov blasted the measure and termed the U.S. role in events disproportionate and unacceptable. Lavrov contended the council should call on all parties to refrain from using force and opposed U.S. moves to delay Baghdad's oil sales for several months.

U.S. officials said the dashed oil-for-food plan was based on conditions no longer in existence.

U.S. efforts to economically isolate countries allegedly backing international terrorism are finding little support.

Iranian oil exports to South Africa figure to be high on the list of topics broached in Cape Town next week when President Mandela hosts President Rafsanjani during the latter's six-nation African tour.

In the years before South Africa escaped an international oil embargo by staging democratic elections in 1994, Tehran supplied 65% of Cape Town's oil imports. While oil companies since have begun diversifying crude purchases, South Africa-whose refineries are designed for light feedstocks-still gets most of its crude from Iran.

Meantime, National Iranian Oil Co. (NIOC) reportedly is confident of attracting more foreign oil and gas investment, despite U.S. threats of reprisals against companies trading with Tehran.

Oil Minister Aghazadeh says NIOC has received satisfactory proposals on nine oil and gas projects tendered last year and could sign contracts for some within 6 months. This doesn't include Sirri field development, which Total took up after Washington forced Conoco to withdraw (OGJ, July 24, 1995, p. 67).

Offshore projects under bid include phase two work at South Pars gas field, Soroush oil field renovation and development, development of Balal oil field and Salman Dalan gas field, and an injection program in Doroud gas field.

"Our cooperation and negotiations with foreign companies are going on very well and the response of the world to the U.S. sanctions is very clear," Aghazadeh said. "I do not think the U.S. precedent of issuing extraterritorial legislation is going to be implemented internationally. In my opinion the sanctions are...doomed to failure."

Industry related conflict also escalated last week on the legal front.

Unocal has denounced as "political" a lawsuit by a self-described Burmese government-in-exile stemming from the U.S. company's role in an international joint venture building a $1.2 billion gas pipeline in Myanmar (formerly Burma).

The National Coalition Government of the Union of Burma (Ncgub) and Federation of Trade Unions of Burma (FTUB) claim Unocal and partners Total, state owned Myanmar Oil & Gas Enterprise, and Thailand's PTT Exploration & Production used forced labor of tens of thousands of villagers, systematically destroyed villages along the pipeline route, and committed other human atrocities in the project. The groups seek an injunction against Unocal and unspecified monetary damages.

International activists for some time have targeted project partners as a way of protesting alleged human rights violations by Myanmar's military government, in power since 1988. Danish pension fund Kommunernes Pensionsforsikring in late July sold a $10.45 billion stake in Total over the issue, citing threatened boycotts of the company's products (OGJ, Aug. 5, Newsletter).

Unocal insists the project to deliver Myanmar gas to a Thai power plant has caused none of actions alleged by Ncgub-FTUB. Partners expect to begin laying pipe onshore in November.

Statoil has joined the chorus singing praise of gas as a fuel of the future.

Speaking at the IEA's gas conference last week in Berlin, Statoil's Kristian Hausken noted world gas supplies appear adequate to serve demand for the next 60-70 years-up from an estimated 50 year supply in the early 1980s-and reserves are growing all the time.

Eighty-two percent of gas produced worldwide is consumed in the country of origin, with 13.5% exported by pipeline and 4.5% as LNG. At the same time, reserves are concentrated in areas remote from major markets, such as Siberia and the Mideast, so international gas trade appears certain to increase.

Berlin Mayor Eberhard Diepgen says the city since reunification has emerged as a major gas player, with investment pouring into eastern Europe from around the world to develop gas markets.

Berlin boasts a unified citywide gas grid in which more than 50,000 leaks have been repaired and more than 300 km of pipeline rehabilitated.

German Economic Affairs Minister Elmar Becker says if gas market liberalization is to work across Europe, member states must take the first steps. To that end, Germany in September or October expects to approve a federal gas distribution initiative that should lower consumer prices.

In the past 41/2 years, Germany has spent more than $6.7 billion converting households to gas and boosting pipeline capacity. Gas accounts for about 20% of Germany's primary energy, a share expected to increase to 22% by 2010 and 24% by 2020.

In the U.S., Natural Gas Clearinghouse says spot gas prices this month will average about $1.68/Mcf, 45¢/Mcf less than in August and only 23¢/Mcf more than last year's comparatively weak prices.

The news comes as something of a surprise given warnings that low stocks last March combined with physical constraints on gas storage injections will keep U.S. gas supplies tight through winter 1996-97 (OGJ, Aug. 19, p. 34).

NGC says demand for gas to inject into storage remains strong and attributes the price decline to lower gas demand for cooling.

American Gas Association says some gas price softness could stem from a new perception that the U.S. doesn't necessarily need 3 tcf of gas in storage at the start of winter to prevent heating season problems.

According to AGA's estimate for the week ending Aug. 30, the U.S. had about 2.12 tcf of gas in underground storage, 347 bcf less than at the same time last year, with most of the deficit in seven gas producing states.

On the regulatory front, Columbia Gas System pipelines have asked FERC for permission to take part in a pilot program in which prices for some secondary gas transportation services will be set by market forces rather than by regulation.

Proposed by FERC in late July, the program will allow shippers to charge competitive prices for capacity released for gas deliveries to qualifying LDC markets. Currently, FERC rules cap the price that holders of capacity in such markets can charge for spare capacity.

The problem of how to handle capacity turnbacks-spawned in California in the wake of U.S. gas industry deregulation-is expected to spread into other states in years to come (OGJ, Sept. 11, 1995, p. 18).

Meantime, natural gas vehicle (NGV) acceptance has received a boost from a Ford Motor plan to sell 1997 gas-fired Econoline vans through yearend at the same price as equivalent gasoline powered units. The offer amounts to savings of $3,250 on a 5.4 l. van equipped with a four speed automatic transmission with overdrive and an 8.5 gal equivalent fuel tank.

Ford also is lowering the NGV-gasoline price differential on its F-250 trucks to less than $2,000 and on Crown Victoria sedans to $3,255, a decrease of almost 50%.

NGV Coalition (NGVC) hails Ford's program as a major price breakthrough.

"Although savings in operating costs frequently provide rapid payback of that premium, many fleet managers have perceived the higher first cost as an obstacle," NGVC said.