Will a bear oil market emerge this summer?
Signs are pointing to lower oil prices, especially with OPEC's apparent unwillingness to cut output as it accommodates return of Iraq to world markets.
Although the Iraqi matter still was unresolved as the ministerial meeting continued in Vienna at OGJ presstime last week, indications were that OPEC would raise Iraq's quota enough to embrace the accord on limited oil sales Baghdad struck with the U.N. to raise funds for humanitarian aid (OGJ, May 27, Newsletter).
Early reports indicated a possible increase in OPEC's quota of as much as 1 million b/d to accommodate Iraq's U.N. brokered oil sales as well as recognize its current level of production. However, OPEC currently is exceeding its group production quota by more than 1 million b/d.
This added production comes at a time when oil stocks are being rebuilt to normal levels. Drastically low U.S. oil stocks have been a key factor in oil price strength this year. U.S. crude oil stocks fell only 12 million bbl to 310 million bbl the week ended May 31, a decline of 15 million bbl from the same time a year ago, API reported. That compares with a year to year inventory decline of almost 35 million bbl the week ended May 17.
The convergence of these two bearish signals pulled oil prices down sharply.
On June 5, July Brent fell 70¢ on the day to close at $17.87/bbl, while Nymex July crude dropped 74¢ to close at $20.44/bbl.
The first day's business at the OPEC meeting June 5 consisted mainly of electing a new president, Rakadh bin Salem bin Hamed bin Rakadh, U.A.E. acting oil minister, who will serve 6 months. The meeting then adjourned and was scheduled to resume the afternoon of June 6. This was intended to leave ministers with a morning in which to debate key issues, informally and in private.
There was no talk of overall quota cuts by OPEC, but some ministers have called again for colleagues to adhere to production quotas.
Iraq is expected to export about 700,000 b/d of oil during 6 months under U.N. Resolution 986, but OPEC output recently has been more than 1 million b/d in excess of the group's ceiling. This is because some countries, notably Venezuela and Nigeria, have been chasing oil revenues in a bid to boost their flagging economies (OGJ, Mar. 18, p. 27).
The meeting is also expected to see a decision on Gabon's membership.
Gabon is a small oil producer and because of domestic economic problems has failed several times to pay OPEC membership fees, which are the same for all members. An OPEC official said Gabon had called for membership fees to be proportionate to oil production.
However, the implication of pro rata fees was said to be that countries that contribute less would have a lesser say in OPEC decisions, the official noted, adding, "We hope the Gabon issue will be resolved one way or another."
Gabon reportedly was a no-show at the conference, an omen that it probably will depart the group, as did Ecuador in 1992.
Top E&P companies in the U.S. are poised to prosper in the low oil and gas price environment expected through 2000, despite persistent economic hardship.
So says Arthur Andersen's Victor Burk, releasing results of a study of 35 public oil and gas companies, each with U.S. reserves of more than 150 million bbl of oil equivalent (BOE) at yearend 1995. New technology and more efficient operations have helped the 14 majors and 21 large independents surveyed cut the cost of replacing reserves from all sources to $3.91/BOE, 29% less than in 1991.
Similarly, the group's production costs last year averaged $4.05/BOE, a 20% decline in the past 5 years. Yet the companies surveyed have replaced only 69% of the oil they produced and 91% of group gas output the past 5 years.
Prospects remain dim that more efficient operators can spearhead a reversal of the U.S. oil and gas decline. But Burk said many companies, particularly majors, are just beginning to truly understand the costs of their U.S. E&P businesses, an essential for achieving still more cost cutting and productivity gains.
"The U.S. E&P industry has the capability to ensure that adequate gas reserves and deliverability will be available to meet the rising demand," he said. "To accomplish this, however, the industry must be given access to all-not just some-of the areas that offer the greatest potential for significant new reserve discoveries."
Prosperity is at hand for some of the integrated companies as a bullish second quarter winds down. Unocal expects its adjusted first half earnings will about equal adjusted profits for all of 1995. It cites a dramatic rise in R&M margins and strong gasoline sales. Unocal's newly revamped service stations, incorporating convenience stores and car washes, are averaging a 40% jump in gasoline sales vs. preremodeling levels. Unocal also cited strong gas production and firm oil and gas prices compared with last year.
MMS proposes eliminating a requirement that exploratory drilling on leases in 400-800 m of water must begin in the first 5 years of the 8 year term.
MMS says lessees need added flexibility for deepwater exploration. The change would affect only future leases.
MMS has indefinitely postponed a planned Gulf of Alaska/Yakutat offshore lease sale due to lack of industry interest.
Sale 158 had been scheduled for mid-1997. MMS will consider offering the sale in 2001 as part of the next 5 year leasing plan it is drafting.
The Clinton administration continues to sell strategic oil supplies as oil prices drift down. The Defense Fuel Supply Center (DFSC) has accepted Basis Petroleum's bid to buy 470,000 bbl of SPR crude for $18.07/bbl. DOE is selling about 12 million bbl for budgetary reasons (OGJ, June 3, p. 30). DFSC plans to accept bids every Monday until Sept. 30 or until $227 million is raised.
FERC is butting heads with EPA over FERC's electric industry restructuring rule. EPA appealed the rule to the President's Council on Environmental Quality (CEQ), arguing it could lead to increased use of coal, resulting in more NOx emissions along the U.S. East Coast.
FERC objects to the CEQ review, saying EPA has made contradictory statements on the issue and offered "little rationale to support a referral."
A bill by Sens. John Chafee (R-R.I.) and Joe Lieberman (D-Conn.) would give tanker owners an incentive to convert their fleets to double hull vessels.
Current law requires all tankers and barges to have double hulls by 2015, but the bill stipulates that shippers converting to double hulls by 2010 would not be liable for damages in excess of $5 million, unless gross negligence or willful misconduct contributed to the accident. U.S. Coast Guard opposes the measure, saying it would just encourage parties suffering damages from oil spills to enhance their claims by claiming negligence or misconduct.
Canada's National Energy Board is examining current rules for export of crude oil under long term sales contracts.
The review was requested by federal Energy Minister Anne McLellan who said rules for contracts of more than 2 years need clarification. She asked NEB to study whether the present export license policies for gas and electricity should be used for long term crude contracts. Canadian gas has been sold under long term contracts, but oil is sold on the spot market without contracts. A federal spokesman said potential foreign investors in oilsands projects want assurances they will be able to export oil under long term deals. Canadian Association of Petroleum Producers says it will assist NEB in gathering data but contends there is already an efficient market for selling oil in Canada and the U.S. and any additional regulation must be warranted. NEB wants comments by July 12.
Asian LNG growth looks like a juggernaut.
Demand for LNG in Asia will more than double by 2010, says IEA in a new study. It projects LNG demand in the region will jump to almost 125 million metric tons/year from a little more than 50 million tons/year in 1994. Most will be traded under long term take or pay contracts, with spot contracts accounting for a small share of the market. By 2010, as much as 40% of LNG traded in Asia will come from outside the region, despite growing concern about security of supply-notably with much of the new supplies coming from the Middle East. IEA also warns this growth will depend on investments required in Asian countries' domestic and transnational pipeline systems. It conservatively estimates the cost of the planned gas infrastructure in the Asean countries alone at $20 billion by 2000.
Total has begun a feasibility study of an LNG project in India.
Total and Hindustan Petroleum Corp. extended a cooperative agreement focusing on LPG projects to LNG projects. Plans call for a 50-50 venture to build and operate a $1 billion, 2-3 million metric ton/year LNG receiving terminal feeding 1 million tons/year of regasified LNG to a 1 million kw cogeneration plant. The rest of the gas would be sold to Indian industry.
The LNG would come from one or more of four Middle East LNG projects Total is involved with or from Indonesia's Bontang LNG complex. The project would be completed about 2000 and possibly expanded later to 6-7 million tons/year. The two venturers would like some large Indian industrial firms as partners.
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