OGJ Newsletter

The rush to impose mandates for alternative vehicle fuels in the U.S. is stumbling. As expected, it looks as if California Air Resources Board will scrap its rule calling for state quotas for electric vehicles of 2% in 1998 and 5% in 2001 but retain a 10% quota for 2003. Speculation this would happen followed studies that found the technology for a commercially acceptable zero emission vehicle (ZEV) is not available (OGJ, Dec. 11, 1995, p. 17).

Jan. 1, 1996

10 min read

The rush to impose mandates for alternative vehicle fuels in the U.S. is stumbling.

As expected, it looks as if California Air Resources Board will scrap its rule calling for state quotas for electric vehicles of 2% in 1998 and 5% in 2001 but retain a 10% quota for 2003. Speculation this would happen followed studies that found the technology for a commercially acceptable zero emission vehicle (ZEV) is not available (OGJ, Dec. 11, 1995, p. 17).

Under a rule proposed by CARB staff, automakers would get credit for about 19,000 ZEVs sold in the state under a voluntary program during 1996-98. They will be required to commit to further ZEV research and participate in a program to place 3,750 advanced battery ZEVs in the Los Angeles and Sacramento air basins by 2001 without benefit of credits. A draft of the CARB staff proposal will be released Jan. 30, and CARB will consider the revisions to its ZEV rule in March.

Environmentalist lobby groups called the proposal a sellout by California Gov. Wilson and capitulation to heavy lobbying by the oil and auto industries.

Nissan is encouraged by CARBs more reasoned, practical, market driven approach, but Ford remains wary: The positive news is that there is now official acknowledgment that the 1998 mandate will not work. CARBs new proposal leaves many important questions unanswered and lacks needed details. We are, however, prepared to continue discussions based on our mutual objective for a sustainable electric vehicle market. But there is still much to be clarified before we can endorse this proposal.

API wants EPA to roll back requirements for cutting summer NOx levels for the second phase of reformulated gasoline (RFG), slated for rollout Jan. 1, 2000. API contends EPAs RFG NOx reduction rule overstates air quality benefits, is not cost effective for controlling ozone, and is inconsistent with the 1990 Clean Air Act amendments (CAAA) and 1991 RFG regulatory negotiations.

API notes that since the RFG rule was promulgated in 1994, EPA has granted several states waivers from certain stationary source NOx reduction requirements. The basis of these waivers, says API, is the undisputed fact that NOx reductions in many areas do not help and may even hinder some areas in complying with federal ozone standards.

API criticizes across the board NOx cuts and claims EPA estimates of gasoline desulfurization costs and cost effectiveness of refiners NOx reductions are far too low because of flawed refinery modeling assumptions. EPA pegs NOx reduction costs at $5,000/ton vs. APIs estimate of more than $10,000/ton.

While the federal RFG program continues to falter with waivers and unexpected opt-outs by states, unleaded gasolinein a sense the first government mandated RFGnow reigns supreme. Effective Jan. 1, tetraethyl lead is banned from all U.S. gasoline under CAAA.

Some hydrocarbon based alternative vehicle fuels are doing nicely.

Ford plans to offer a propane fueled version of the best selling U.S. vehicleits F-1 Series pickup. Noting propane vehicles use about 5% more fuel than gasoline vehicles, Ford says the fuel costs 15% less than gasoline, thus resulting in a 10% fuel cost savings in addition to air quality benefits of the cleaner burning fuel. The first F-1 propane models will be available early this year.

Mazda is weighing plans to market a hydrogen fueled auto said to outperform electric vehicles.

One of the biggest remaining questions is when to start. Mazda says timing of the launch hinges on a government program to develop a hydrogen fuel distribution network. Japans MITI reportedly aims to have infrastructure in place to support widespread use of hydrogen as a transport fuel by 2010.

Mazda claims its hydrogen vehiclebased on a Wankel rotary enginehas a range of 230 km and a top speed of 150 km/hr. By comparison, the automaker says, electric vehicles typically can travel no more than 180 km without recharging and achieve top speeds of 130 km/hr, while gasoline fueled cars have ranges as high as 590 km and top speeds of 183 km/hr. Germanys Daimler-Benz built the worlds first hydrogen powered car 20 years ago.

U.S. demand for gasoline remains strong, rising sharply last November from the prior year.

API estimates U.S. gasoline demand at 7,847,000 b/d in November, up 5.1%. For the first 11 months of the year gasoline demand rose 2.8% from the year before. U.S. crude oil production dropped again in November, falling more than 100,000 b/d, or 2% from the prior year, to 6,628,000 b/d.

Total U.S. crude and products imports, falling year to year in 7 of the prior 10 months, jumped 8.3% to 9,429,000 b/d in November from a year ago.

Meantime, API contends that contrary to widespread views, oil imports are not a major factor in the U.S. negative trade balance.

API notes oil imports the first 9 months of 1995 cost the U.S. $41.7 billion, only 6.2% of the $671.1 billion spent for all imported goods and services in January-September. That compares with outlays the first 9 months of 1995 of $163.4 billion for imported industrial machinery and other capital goodsincluding $68.5 billion for semiconductors, computers, and accessories$95.5 billion for imported automotive vehicles and parts, and $39.4 billion for imported apparel.

API estimates the U.S. cost of U.S. petroleum imports for all of 1995 at about $50 billion vs. $78.6 billion spent on imported petroleum in 1980.

Gas demand growth is far outstripping the rate of overall U.S. energy demand growth. AGA reports U.S. 1995 gas demand growth outpaced the growth rate for total U.S. energy consumption by almost three to one. It estimates 1995 U.S. gas demand rose at least 3.9% from 1994 vs. a gain of 1.4% in overall energy demand, despite 1995 being slightly warmer than normal.

AGA sees U.S. gas demand jumping 5% in 1996 to a record 23.48 quadrillion BTU. Electric power generation has been a major contributor to gas demand growth, AGA notes. During the first 8 months of 1995, oil consumption by U.S. electric utilities, largely in dual fuel gas/oil power plants, dropped 41% from the prior year while gas use climbed about 8%.

The long term outlook for Canadian natural gas producers is good despite current price weakness. So says Calgarys Canadian Energy Research Institute (CERI), which estimates Canadian demand for gas will grow at twice the rate of the U.S. the next 15 years. CERI says strong industrial demand for gasspurred largely by mineral processing and pulp and paper productionwill help boost Canadian producers gas sales by 2.2%/year to reach 3 tcf in 2010. Increased U.S. demand for Canadian gas is on the horizon but wont register until pipeline capacity constraints are overcome.

A yearend surge in oil and gas demand owing to cold weather, along with other factors, continues to buoy oil and gas prices.

The short lived U.S. record for gas futures (OGJ, Dec. 25, 1995, Newsletter) was shattered late last month, with the January contract soaring to $3.72/MMBTU Dec. 21 before closing at $3.448, up almost $1 in 4 days.

Nymex gas then seesawed, plunging to $2.368 for February delivery Dec. 26 before rebounding 50 the next day upon AGAs report of another drop in U.S. gas storage to 2.257 tcf, down 15% from a year ago.

The volatility in gas futures led Nymex to hike gas futures margin requirements three times during Dec. 18-22. Meanwhile, a group of Nymex traders has complained to the Commodity Futures Trading Commission about Nymex Chairman Daniel Rappaportnot seen in the trading pit since his election to the chairmanship in 1993trading in gas futures, which they called inappropriate. CFTC is looking into the matter, and Nymex claims Rappaport did nothing improper.

Strong demand for heating oil in the U.S., Europe, and India coupled with a refinery outage in Singapore has helped sustain a 2 month rally for crude oil that has added $2.50/bbl to near term futures contracts.

Brent for February delivery shot up 53 to close at $18.35/bbl Dec. 27, the highest in 6 months. Those factors came on the heels of several other bullish aspects propelling the yearend oil market, including low levels of onshore stocks, a drop in OPEC production, Frances industrial strike, and rumors about Saudi King Fahds health.

Those short term bullish trends run counter to Purvin & Gertzs long term view of no real change in global oil market fundamentals.

The Houston analyst still sees a weakening market and pegs WTI at $18.30/bbl this month and $17.70 in February.

Papua New Guineas second hydrocarbon export project may be back on track but in a new guise.

International Petroleum Corp., Vancouver, B.C., plans a feasibility study of a $300 million development of Pandora gas field in the Gulf of Papua.

The 12 month study will assess feasibility of laying a pipeline from the field to North Queensland via the Gulf of Carpinteria. Gas from Pandora, a 1988 discovery, would feed power plants, mines, and other industrial projects in the Australian state. Reserves are estimated at 1.57 tcf. Gulf of Papua gas earlier had been eyed as the basis for an LNG export project, although that proved uneconomic. Papua New Guinea joined the ranks of crude oil exporters in 1992.

The prospect of a lasting peace is drawing more petroleum investment to Israel. Storage firms Germanys Oiltanking and Netherlands Van Ommeren are negotiating with an Israeli state firm to store Bahraini, Kuwaiti, and other Persian Gulf crudes in Israel. The gulf producers want to cut storage costs and bolster security. Israel uses only 60% of its oil storage capacity.

Israel recently became the focus of proposals for an Enron led LNG project, a gas pipeline from Egypt, and an Amoco led gas transmission/storage/distribution venture (OGJ, Dec. 25, 1995, p. 32).

Look for a flurry of interest in gas joint ventures between Sonatrach and foreign oil and gas companies on the heels of BPs $3.5 billion contract with the Algerian state firm covering E&D in Algerias In Salah region.

The contract was signed Dec. 23 (OGJ, Dec. 25, 1995, p. 26). Involved are a potential 10 tcf of gas and a BP-Sonatrach venture to export as much as 350 bcf/year of gas to Europe beginning in 2002-03.

BP CEO John Browne said, This is a landmark agreement that could increase BPs worldwide gas production by 30%. It is the first major gas joint venture a foreign company has signed with Sonatrach, the sole gas producer in Algeria for the past 30 years. It has the potential to open a new era of gas production in Algeria and, from the next decade onward, to give European consumers greater choice in their sources of gas supply.

Meantime, Exxon is to begin negotiations with Sonatrach over a gas project in Southwest Algeria, near the In Salah license area.

Ammar Makhloufi, Algerias industry and energy minister, claims Algiers wants to see two or three major gas projects emerge in the In Salah region, which he said holds promise of big gas discoveries.

Algeria is keen to expand its gas marketing beyond southern Europe, where it dominates, in pursuit of a share of Europes largest gas market, Germany. The government is especially interested in attracting U.S. and U.K. firms to Algeria, where French and Italian companies have been most active in the past.