OGJ NEWSLETTER

The world oil market continues to scramble to contain supply and price dislocations in the wake of war in the Persian Gulf. Oil companies must cope with the unthinkable, war over oil in the Persian Gulf, followed by an even more surprising imponderable, an oil price collapse amid that war.

Jan. 21, 1991

7 min read

The world oil market continues to scramble to contain supply and price dislocations in the wake of war in the Persian Gulf.

Oil companies must cope with the unthinkable, war over oil in the Persian Gulf, followed by an even more surprising imponderable, an oil price collapse amid that war.

Nymex crude for February delivery, mirroring Brent's record 1 day drop in London (see story, p. 19), plummeted to $21.44/bbl at Jan. 17 closing, a drop of almost $11 from the day before and the lowest price since Aug. 1, the day before Iraq invaded Kuwait. Nymex gasoline plunged about 220 on the day to close at 60.29/gal. Product prices in Europe followed Brent down. Premium gasoline closed at $312/metric ton before the Jan. 16 allied air strikes and then slipped to $255/ton the following day. Gas oil slumped to $265/ton from $335/ton.

Many European companies had been preparing gasoline price rises to reflect a $6/bbl rise in crude prices in the week before the outbreak of war. Hikes are now on hold, and in the absence of any war reversal that could push oil prices upward, most companies are expecting to cut pump prices.

Most major U.S. refiner/marketers froze prices at the wholesale level and at company owned stations while urging independent jobbers and dealers to also hold the line on prices.

Exxon and Sunoco cut wholesale prices by 5/gal, but the cuts essentially were rescinded price hikes.

Not all companies froze prices. Citgo said, given the rapid deflation in crude prices, "It appears there may not be any need to freeze prices." Ashland and Phillips also had not frozen prices as of presstime.

Phillips did, however, jump the surcharge in its wholesale supply management program to 25/gal from 10 to deter panic buying after news of war sparked a run on wholesale gasoline terminals.

U.S. companies in particular face a grim public relations task in the weeks ahead, if the war continues and oil and products prices rebound: reporting what are expected to be for many companies record profits (OGJ, Dec. 31, 1990, Newsletter).

Mobil CEO Allen Murray may have set the tone when he announced Mobil's products price freeze and emergency allocation controls, reiterating his company's support for U.S. policy in the Persian Gulf: "We pledged to show restraint at the time Iraq invaded Kuwait, and we can do no less now."

Smith Barney sees majors' fourth quarter profits up 69% from a year ago and 87% from third quarter 1990.

The increase will be paced by a 124% year to year jump in upstream earnings, more than offsetting a 20% slide in chemicals and 7% in refining-marketing, the analyst projects.

Environmental concerns and a related oil supply threat facing the oil industry are part of the Persian Gulf war fallout.

Richard Golob, publisher of Golob's Oil Pollution Bulletin, Cambridge, Mass. warns of the threat to the marine environment and strategic facilities if Saddam Hussein elects to attack directly or via sabotage pipelines, terminals, storage tanks, refineries, tankers, and production facilities in the southern gulf, causing massive oil spills and fires.

A series of blowouts caused by such attacks could develop into history's worst oil spill, clogging water intakes at seaside industrial plants, Golob says. Saddam could also disrupt tanker traffic with missile attacks, as occurred in Iran-Iraq war.

U.S. search for energy self-sufficiency continues.

ARCO Alaska has let contract to Ralph M. Parsons Co. for engineering and support services on the $1.1 billion second phase of the Prudhoe Bay gas handling expansion project.

The project will hike output of Prudhoe crude and NGL by 100,000 b/d after completion in 1995. Installing 4,000 ton compressor modules and associated gas handling facilities, to be sealifted to Alaska's North Slope in 1993-94, will boost Prudhoe gas handling capacity to 7.5 bcfd from 5.2 bcfd.

U.S. output of the gasoline octane booster MTBE is expected to jump to 122,950 b/d by 1993, projects SRI International.

That compares with MTBE production of 73,350 b/d in 1988 and 6,400 b/d in 1980. Consumption of ethanol as a gasoline component reached 55,375 b/d in 1988 and is expected to climb to about 59,215 b/d in 1993.

Pointing to the extent of U.S. lead phaseout, elemental lead in gasoline fell to 3.9 million lb in 1989 from 462 million lb in 1969, SRI says.

EPA has launched a voluntary lighting efficiency program, dubbed "Green Lights," that has the goal of cutting national electricity demand by 10%.

It signed agreements with 23 companies, including Amoco, Phillips, and Bechtel, under which they will upgrade facilities the next 5 years with energy efficient lighting products, if the products are economic and maintain or improve lighting quality. EPA will seek similar commitments from hundreds of other firms.

DOE has launched a 5 year, $55 million R&D project to reduce costs of manufacturing photovoltaic systems. First phase will be to develop more efficient manufacturing processes, the second to solve problems with those processes.

The rush to sign up joint ventures in Communist and formerly Communist countries continues.

China will allow the first foreign oil company to explore in the Talimu Pendu basin of western China. Japan National Oil Corp. will undertake a geological survey in the area in cooperation with China National Oil & Natural Gas Corp.

The Chinese believe there is considerable potential in this area and had not planned to allow foreign companies to participate in E&D, but a lack of funds changed their minds.

Tass reports Ralph M. Parsons and the U.S.-South Korean private venture Palmco Corp. have proposed to local officials a project to develop Lunsky gas field off Sakhalin Island with an unspecified number of platforms, constructing a north-south pipeline across the island, and constructing a plant "to prepare raw gas for export."

Gulf Canada Resources says it is close to signing a joint venture EOR project covering several oil fields with reported reserves of 3-4 billion bbl in the northern U.S.S.R. west of the Urals. The company says a decision to proceed will be made by the end of the first quarter or early in the second quarter.

C. Itoh will participate in renovation of the Lenin oil refining/petrochemical complex at Ufa in the Soviet Union.

The Japanese company is expected to invest about $100 million in the 300,000 b/d refinery to hike capacity by about 20%. It will be paid in petrochemical products. As part of the agreement between C. Itoh and complex operator Bash Neftekihn Zavody, Neste Oy will cooperate in marketing products from the unit.

The Kuwaitis are mulling buying a stake in Hungary's refining industry. A feasibility study is under way to upgrade and operate one of Hungary's state owned refineries.

Kuwaiti Oil Minister Rashid Salim al-Ameeri says the investment would not be less than $100 million but the exact figure would depend on which refinery was chosen. Products would mostly sell domestically, but there could be some exports.

Meantime, a chain of Q8 gasoline stations will open in Hungary as part of a deal between Kuwait Petroleum International and Hungary's Afor Petroleum and Technoimpex. The venture, KPI's first in eastern Europe, will be undertaken through Kuwait-Afor and operate 17 gasoline stations carrying the Q8 brand.

The Kuwaitis will invest $6.5 million for its 50% stake in the new company, with Afor holding 45% and Technoimpex 5%.

Canadian Oil Minister Jake Epp wants NEB to study possible closure or reversal of Interprovincial's Sarnia-Montreal pipeline that moves crude from western Canada to Montreal refineries. Epp says a declining supply of light western Canadian crude, more economic imported supplies for Montreal refiners, and long transit times are contributing to uncertainty about the system.