OGJ NEWSLETTER

The lid, if there ever was an effective one, is off oil production by OPEC members. Oil ministers last week, bowing to the wishes of oil superpower Saudi Arabia, placed a nominal ceiling of 23.65 million b/d on oil flow for the fourth quarter, about equal to present production, but set no limits for individual members. OPEC agreed to a ceiling of 22.3 million b/d last spring, but that has been ignored. The exporters still aim for $21/bbl for their reference basket of crudes, $1-2 more than

Sept. 30, 1991

7 min read

Is a "new world order" for oil markets already in place? Analyst Philip Verleger, speaking at Asia-Pacific Petroleum Conference in Singapore last week, contends there is and it's being run in the traditional role of a monopoly by Saudi Arabia. Saudi actions to manipulate the market will put a cap on oil price volatility in the near term, keeping oil prices at about $21/bbl the next 3-4 years, he predicted. Saudi Arabia's marketing practices, tying prices more into spot market movements with monthly adjustments, will keep its oil competitively priced without the Saudis having to act as swing producers. At the same time, however, Verleger warns, this low price regime will result in underspending in new crude productive capacity at the same time environmental concerns continue to squeeze refining, transportation, and storage capacity, thus spelling a return to price volatility after 1995.

Iraq declares it immediately will be able to export 1.18 million b/d of crude through its pipeline system across Turkey if it decides to accept the U.N. Security Council's authorization to sell $1.6 billion worth of oil during 6 months. The money would pay for food, medical supplies, and war reparations. What's more, the system could be back to its precrisis level of 1.6 million b/d by the end of first quarter 1992, the Baghdad newspaper Al-Thawrah reported. Iraq regards the U.N. action as an intrusion on its sovereignty. Under the plan, a U.N. committee would have to approve each oil sale. The U.N. would withhold 30% of the revenues for war reparations and 3-5% for administrative costs, then purchase and distribute food and medicine with the remainder. Lack of agreement on Turkey's transit fees could delay shipments.

Lots of changes--some of them wrenching for large and small companies alike--keep ripping through the U.S. industry. Here are some of the latest:

ARCO Chemical Co. disclosed a cost reduction program as part of an effort to maintain its competitive position and boost cash flow. It will focus on eliminating discretionary programs, realigning functions, and deferring some future commitments. In addition, about 150 out of 3,900 employees worldwide will be eligible for special termination programs.
Chevron U.S.A. Inc. will split into two companies. Chevron U.S.A. Production Co. will be responsible for exploration and production, while Chevron U.S.A. Products Co. will be responsible for petroleum products refining and marketing. The move is part of Chevron Corp.'s campaign to decentralize operations, set up strategic business units, delegate authority to lower levels, eliminate layers of management, and increase its customer focus.
Colorado brewer Adolph Coors Co. hired Dillon, Read & Co. Inc. to assist wit disposition of its Coors Energy Co. unit. The reason: "to redeploy our energy assets in businesses which we believe have good potential..."
Sage Drilling Co. Inc., Wichita, Kan., its seven rig fleet idle after being in business since 1950, filed for Chapter 11 bankruptcy.

Conoco Shipping Co. has decided to build two more tankers with double hulls, a troublesome feature o some in the industry (see story, p. 21). The vessels, each 95,000 dwt and capable of carrying 500,000 bbl of crude, are to be built at Samsung's shipyard on Koje Island, South Korea. That's where Conoco's first two double hull tankers--Patriot and Guardian--are under construction and scheduled for delivery early next year. Their sister sips are to be delivered late in 1993. All will carry crude to Conoco's 167,000 b/d Lake Charles, La., refinery. Conoco currently operates two VLCCs and two tankers comparable in size to those under construction. Its goal is a 1007, double hull tanker fleet by the end of the 1990s.

Robert Flynn, a broker with Mallory, Jones, Lynch & Associates, told an American Bureau of Shipping seminar in Washington the trend clearly is toward double hull tankers, and ships of 1 million bbl capacity will charter for $32,000/day, $5,000 more than single hull tankers. He said the U.S. Oil Pollution Act has not prompted an effective boycott of the U.S. trade. "The market here is just too big for owners and operators to avoid." But shipowners have started inserting "regulatory change clauses" in charters that enable the shipowner or charterer to cancel a charter if it is affected by new U.S. regulations.

A group of western Canadian producers proposes to reactivate Interprovincial Pipe Line Ltd.'s crude oil line between Sarnia, Ont., and Montreal to ship heavy oil. Saskatchewan Oil & Gas Ltd., Norcen Energy Ltd., and PanCanadian Petroleum Ltd. want to use the line to ship 25,000 b/d of heavy oil for 12-18 months to Petro-Canada's Montreal refinery. Interprovincial said it will work with the group if the project is economically feasible. But the proposal will not affect studies to reverse the crude line to move imported oil to Ontario or convert it to natural gas service (OGJ, Aug. 19, p. 25). The 497 mile line was mothballed last June for lack of demand for Canadian light crude in Montreal. PetroCanada is studying the proposal, which would expand markets for western Canadian heavy oil.

Start of construction for a $4.5 billion oilsands plant in northern Alberta isn't likely before 2000, Canada's National Energy Board says. The board said the OSLO project, planned by a combine headed by Esso Resources Canada Ltd., would require stable oil prices of $27 (U.S.)/bbl to be economic. It noted oil prices are difficult to forecast, but it expects a slow increase from the current range of $18-22. The OSLO project plans to produce 77,000 b/d of synthetic crude from leases next to an existing oilsands operation near Fort McMurray. The project has been in financial trouble since early 1990 when Ottawa withdrew commitments of $1.4 billion in loans and grants.

An NEB analysis said oil from the Canadian Beaufort Sea under the present price scenario could be produced for $24-27 (U.S.)/bbl, including pipeline tolls. NEB predicts arctic oil could flow by 2004 and arctic natural gas 2 years earlier.

In a long range forecast, NEB said Canada's oil production will remain about 1.5 million b/d or more, but light oil production will continue to decline with heavy oil accounting for more production. Canada will become increasingly reliant on imported crude.

U.S. petroleum product deliveries dropped in August, compared with the panicked market of August 1990.

The American Petroleum Institute reports deliveries fell 6.4% to 16.896 million b/d. Even without the year ago surge, this August's deliveries would have still declined by about 3%. Meantime, U.S. oil production slipped 1.1% to 78.204 million b/d from a year ago. Crude and products imports inched up 0.9% to 8.627 million b/d, their first year to year increase in 12 months.

The American Gas Association and Interstate Natural Gas Association of America asked the Federal Energy Regulatory Commission for another 30 days to comment on a pending pipeline service obligation rule. The associations are concerned about how the proposed rule can unbundle and repackage sale services without creating operational problems and how pipelines will recover transitional costs related to the unbundling. Sen. Don Nickles (R-Okla.) also asked FERC to give industry more time to respond to the rule.