OGJ NEWSLETTER

Uncertainty continues to prevail in expectations for oil and gas prices.

Despite a recent period of remarkable stability in oil prices, markets are likely headed for more volatility, Merrill Lynch contends.

The analyst cites psychological vs. fundamental factors as buoying WTI at $20/bbl in an oversupplied market.

It expects oil prices to dip $2-3/bbl the next several months but tighten significantly by yearend and even more so in first quarter 1992 as demand rises sharply while Iraqi supplies remain curtailed even longer than first thought.

Expecting that to cause the call on OPEC oil to strain capacity, Merrill Lynch sees WTI at $25 by yearend.

The markets may already be reflecting that view, given the rise in tensions again in the Middle East with U.N. observers' claims Iraq is lying about its remaining nuclear arms program.

Talk of a new allied air strike against Iraqi nuclear R&D targets unsettled European markets last week. Together with a 1.5 million bbl crude drawdown in the U.S., that hiked Brent for 15 day delivery 70 on the week to close at $20/bbl July 17.

Traders said European crude price gains were limited by an overall weakness in product prices. Rotterdam premium was steady near $234/ton last week, the lowest seen this summer.

Purvin & Gertz, however, expects the inventory overhang to persist into late 1991 even if Iraqi output remains under sanctions and Kuwaiti production lags. It sees fourth quarter OPEC output at about current levels with only a moderate stockdraw.

That calls for a moderate firming in prices, with Dubai rising about $2 to $18/bbl in the fourth quarter.

The North American natural gas business faces a similar bad news now/good news later scenario.

Even with spot natural gas prices at their lowest in 12 years, PaineWebber still thinks everything's in place for a gradual recovery of the gas business. In addition to expectations of longer term demand growth, annual reserve replacement results are significantly below production and leading to a continued slide in deliverability, the analyst contends.

What's underappreciated in the profits outlook for gas producers are reduced operating costs driven by technological advances, says PaineWebber, citing a Burlington Resources/Dowell Schlumberger program in the West Texas Canyon sands--involving a new fracture technology using a delayed breaker system--that has added reserves at an incremental cost as low as 13/Mcf.

Canada's gas woes continue as well.

Nova tells Alberta producers to stop blaming the pipeline for their decisions to sell gas into record low spot markets, disputing claims surplus Nova capacity in the province is depressing prices.

Meantime, Alberta producers and FG&E's Alberta & Southern Gas still are at an impasse over prices after a producers' pool rejected A&S's price for California bound Alberta gas as too low (OGJ, July 15, Newsletter).

North American gas industry's dilemma notwithstanding, prospects for other international gas trade continue to be bright.

Sonatrach has signed a memorandum of understanding with Italy's state electric utility Enel for long term supply of Algerian gas via an expanded, 2.9 bcfd trans-Mediterranean line (OGJ, July 1, p. 21). Sonatrach also is talking with Austria, Czechoslovakia, Hungary, and Yugoslavia covering supply of LNG to a possible 176 bcf/year terminal on the Adriatic. Algeria wants to hike gas exports to 2.1-2.3 tcf/year by 2000.

South Korea continues to expand its LNG portfolio. By 1995, it plans to hike its imports of LNG by about 2 million tons/year from Alaska, Australia, Canada, Qatar, or the U.S.S.R. in addition to 4 million tons/year it gets from Indonesia. Korea Gas Corp. and Malaysia are at odds over prices under a stymied long term supply deal. KGC meantime is pursuing joint development of Soviet gas in Yakut, Sakhalin, and other regions to offset an LNG shortfall it projects at 3.97 million tons/year by 2000.

BHP has been invited to submit basic conceptual development and marketing studies for oil and gas fields off the U.S.S.R.'s Sakhalin Island. An undisclosed number of other foreign companies also were invited to bid by Sakhalin authorities by Aug. 10. BHP says blocks considered in the Sea of Okhotsk include the 500 million bbl Filtun-Astokhskoye oil and gas field and the 10 tcf Lunskoye gas field. BHP is mulling the invitation in partnership with other companies.

Invitations to bid for acreage in the once disputed Timor Gap between Australia and Indonesia's Timor Island have been issued by the Australia-Indonesia Joint Authority for the Timor

Gap Zone of Cooperation. Deadline for work program bids for production sharing contracts in the jointly administered Area A (see map, OGJ, Feb. 25, p. 25) is Oct. 7. Successful bids are expected to be announced by yearend or early 1992.

An eighth offshore licensing round will be held in the Netherlands next year. Ministry of Economic Affairs before Apr. 1 will open for bidding 144 blocks unlicensed as of June 6, 1991. Awards are expected by yearend 1992.

Industry's incursion into eastern Europe continues apace. Statoil will establish new crude and product trading offices in Warsaw and Singapore ii the fall. Talks with Polish authorities may lead to the opening of the first Statoil branded gasoline station in Poland in 1992.

Royal Dutch/Shell established a new company, Shell Bulgaria OOD, to assume responsibilities of state owned Pirin-Agency covering import and export of oil and chemicals for industry and agriculture. In addition to regular contacts with Bulgarian companies trading in chemicals, lubricants, and other oil products, Shell also has been discussing possibilities for oil exploration, establishment of Shell gasoline stations, and processing crude oil in Bulgarian refineries.

Spain's Repsol plans to spend $2.1 billion to modernize its ownstream operations to meet growing competition in the domestic market and a projected requirement for large quantities of superpremium high octane unleaded gasoline. It plans to add cokers at its Bilbao and Cartagena refineries and a hydrocracker at Tarragona. The Cartagena refinery will be linked by pipeline to the inland refinery at Puertollano.

Wild well specialists in Kuwait have capped the 200th wild well (see story, p. 112) there as competition for the work accelerates, with alternative--and unconventional--proposals for killing the wells pouring in from individuals, companies, and countries. Reuters quotes an unnamed oil industry official as saying the Kuwaitis have received about 1,500 applications "and thrown away 1,200 of them as nonstarters." Despite the skepticism of Red Adair and other well known wild well specialists currently working in Kuwait, the government continues to solicit participation by other countries in the firefighting effort. Xinhua News Agency reports Kuwait Oil Co . last week signed a contract with state owned China Petroleum Engineering Construction Co. to participate in the campaign. Talks also are under way for possible French, German, Romanian, U.K. and Soviet teams.

Veltmann Corp., Midland, Tex., has withdrawn its suit against companies cleaning up oil released by Iraq into the Persian Gulf (OGJ, July 15, p. 47). It canceled a hearing scheduled last week on a request for an injunction to bar cleanup teams from using a proprietary oil recovery process claimed by the firm. Veltmann officials offered no explanation for the action but said the company planned to refile, perhaps late last week, in a Texas court outside Houston.

The $2.5 billion Exxon Valdez spill cleanup is officially complete. The last manual/mechanical cleanup crews were demobilized July 13, leaving a helicopter strike force to watch for reoiling by subsurface contamination and a continuing bioremediation program this summer. Exxon's federal trial on criminal charges stemming from the spill is set for October.