OGJ Newsletter

U.S. Industry Scoreboard 9-30 [66219 bytes]

With the heat taken off the Iraq/U.S. standoff, oil prices have seesawed, but the only potential short-term threat to current strong prices appears to be the unlikely demise of President Saddam Hussein.

At close of London trading Sept. 25, Brent crude for November stood at $23.19/bbl, up 24¢/bbl on the day. During the last 5 trading days prior to presstime, closing prices for November Brent saw a rise of 50¢/bbl, followed by a fall of 33¢/bbl and then three consecutive increases totaling $1.05/bbl.

Lehman Bros.' Lindsay Horne told OGJ the recovery in prices after a fall of almost $2/bbl the week before shows the recent bull run is still intact.

Horne said that with limited Iraqi oil exports out of the picture at least until next year, OPEC members are maximizing production, with the exception of Saudi Arabia and Kuwait.

"Oil prices are now $4/bbl above the Saudis' budget figure," said Horne, "which for them is a lot better than a poke in the eye with a blunt stick." He said the Saudi dilemma over whether to increase output is a nice problem to have.

Horne reckons North Sea producers have looked at every puddle of oil still undeveloped there with a view to quick development. "The time required for developments now is incredibly short," said Horne. "The current high prices will certainly affect developments this year and next."

Horne said it is difficult to foresee what could bring markets down again in the short term, with consumer markets booming: "The oil market is technically off to the races. There's a good chance it will stay this way at least until after the U.S. presidential election."

One reason behind the brief mid-September fall in crude prices, says Middle East Economic Survey (MEES), was a news agency report that the U.S. government had asked Saudi Arabia to raise oil output to replace the 600,000 b/d expected from Iraq under the U.N. oil-for-aid deal. MEES says the report was immediately denied by Washington and Riyadh.

MEES notes the only OPEC producers with spare capacity are Saudi Arabia, with 2 million b/d of capacity unused, and Kuwait and U.A.E., each with about 300,000 b/d idle.

"Whatever happens about the supply/demand balance this winter," said MEES, "it is clear that all the OPEC producers-Saudi Arabia as well as all the rest-are very happy with prevailing price levels, and none of them is going to do anything to jeopardize this favorable market or rock the boat in any way.

"Quite a few analysts now believe that the crude price range may have taken a step up from $15-20/bbl, in which it has been stuck for some years, to around $18-23/bbl, for what might turn out to be an extended period."

Forecasts of shortages of heating oil supplies this coming winter (OGJ, Sept. 23, Newsletter) have triggered concern in the U.S. Congress.

A bipartisan group of 21 senators and 20 members of the House has written Energy Sec. Hazel O'Leary to see if there's a way to head off possible problems.

The lawmakers questioned whether refiners would be able to rebuild stocks to normal levels by the end of November and asked if DOE could exchange SPR crude to create a heating oil stockpile in the Northeast.

U.S. crude and product imports are still on the rise, while domestic output keeps declining.

API says imports of crude oil rose 7% and petroleum products 9% in August compared with a year ago. Also contributing to U.S. supplies were 4 million bbl of SPR crude the government sold.

U.S. oil production fell 0.7% to 6,405,000 b/d in August from a year ago. It rose 1% in the Lower 48, but Alaskan production continued to drop.

For the year to date, U.S. output has fallen 2.6%, or about 170,000 b/d.

Deliveries of petroleum products to the U.S. market were 18,130,000 b/d in August, up a 0.5% from a year ago. Shipments of distillate, kerojet, and resid climbed, but gasoline deliveries dropped. Total inventories of crude and products rose 6 million bbl from July to 964,500,000 bbl at the end of August. Refineries operated at 94% of reported capacity in August, the same as a year ago.

Day rates for offshore drilling rigs keep climbing.

Global Marine's summary of current offshore rig economics (Score) for August showed sustained improvements in every region. The day rate indicator-expressed as a percentage of estimated day rates needed to spur speculative construction of new rigs-rose to 58.1% worldwide, one third higher than a year ago. The North Sea topped all regions with a Score of 68%, or rates two-thirds of maximum levels. In the Gulf of Mexico, the Score reached 50.4% last month, the first time the indicator for this region has moved above the halfway point to maximum day rates since November 1982.

Consolidation continues among U.S. natural gas associations to reflect changes within industry. The Natural Gas Supply Association will cut its staff from 15 to nine, and its nine working committees will dwindle to six in order to save $1 million/year. This year's budget is $3.5 million/year. American Gas Association underwent major restructuring and staff cuts early this year (OGJ, Apr. 8, p. 24).

Interstate Natural Gas Association of America also has downsized its operations.

In Australia, creation of a true national gas market took a step forward with the Sydney utility, Australian Gas Co. (AGL), opening its New South Wales pipelines to third party users. AGL says the biggest contract customers are likely to gain access rights this year for gas purchased from another party, while smaller players will get similar rights over the next 3 years.

Several groups are pressing plans to increase gas pipeline capacity from western Canada to U.S. markets.

Alliance Pipeline has started an open season on its proposed 1,900 mile gas pipeline from western Canada to the U.S. Midwest (OGJ, June 17, p. 26). The bid will remain open until Oct. 31 for shippers willing to pay $1.03/Mcf for capacity to the Chicago market under 15 year terms.

Alliance said tolls are competitive with existing pipelines, and shippers will save if the line moves more than 1.25 bcfd of gas.

Alliance is a venture of 18 producers, marketers, and pipelines that say Canadian gas producers need additional and alternative export pipeline capacity.

Meanwhile, Palliser Pipeline will file with the National Energy Board by Nov. 15 and has completed design and transportation agreements.

The proposed $300 million line in Southeast Alberta would move about 1 bcfd of gas from near Calgary into southern Saskatchewan. Palliser is a venture of PanCanadian and Westcoast. Palliser claims tolls 20-50% lower than those charged by NOVA, which owns the main intra-Alberta gas pipeline system.

Palliser plans to begin shipping gas in 1998 to the U.S Midwest on expansions planned by TransCanada and Northern Border.

Express Pipeline is facing higher costs and legal challenges on its $530 million (Canadian) project for a crude oil pipeline from Alberta to Casper.

Express, a venture of TransCanada and Alberta Energy, has already received FERC tariff approval (OGJ, Sept. 23, p. 40) and started construction.

The pipeline now has agreed to pay at least $15 million (U.S.) to Wyoming for a right-of-way across Wyoming in return for any loss in revenue from state oil producers. The tally could rise to more than $15 million if imported crude from Canada results in steeply reduced payments to Wyoming from state producers.

Express said any costs under the agreement will be paid by TransCanada and Alberta Energy, not by shippers on the line.

Meanwhile, a Montana district court judge said Express does not have the right of eminent domain to cross a section of a rancher's land unless it can prove the necessity of the line. Express has a number if options, including rerouting the line, appealing to a higher court, or settling out of court.

In Wyoming, several groups have moved to overturn regulatory rulings giving Express access to federal lands. The Wyoming Independent Petroleum Association and the Independent Petroleum Association of Mountain States have asked the U.S. District Court in Cheyenne to force federal land regulators to rule on a request ordering a halt to pipeline construction.