OGJ NEWSLETTER

The mounting food and energy crises in the dissolving Soviet Union (see story, p. 30) underscores the rationale behind Saudi Arabia throwing its weight around at last month's OPEC meeting in Geneva.

Oct. 7, 1991

6 min read

The mounting food and energy crises in the dissolving Soviet Union (see story, p. 30) underscores the rationale behind Saudi Arabia throwing its weight around at last month's OPEC meeting in Geneva.

Shortly before the Soviets announced, according to unconfirmed press reports late last week, a halt to petroleum products exports in light of growing domestic fuel shortages, Moscow signed barter deals worth $700 million with Poland, including one exchanging natural gas for food. A $500 million swap involves 53 bcf of Soviet gas for 600,000 metric tons of potatoes, 50,000 tons of apples, and 20,000 tons of onions by early 1992.

Another, valued at more than $200 million, entailed exchange of Soviet natural gas, iron ore, and cellulose for Polish pharmaceuticals and electrical machinery parts.

Meantime, Soviet authorities report chronic gasoline shortages jumped the value of black market gasoline sales to 1.2 billion rubles in 1990.

Factors include limited number of filling stations, dishonest filling station and fuel depot personnel, and distribution inefficiencies spurring illegal sales of gasoline from drivers of government and collective farm vehicles to private car owners.

Saudi resolve to maintain all out production and its share of OPEC output at 25%--pushing other OPEC members into a higher quota at the expense of a $21/bbl OPEC marker--reflects its concerns a supply shortage in the next few months could sharply spike oil prices.

Uncertainties over Soviet oil output and the resumption of Iraqi exports are spurring the Saudis to build stocks if demand jumps more than expected--say, due to a cold snap--and the world must turn to Iraq as the only country with significant spare productive capacity.

That leads analysts Salomon Bros. and Merrill Lynch to predict the OPEC marker remaining stable at $18-20, or $21-23 for WTI, through the fourth quarter, as the call on OPEC oil remains close to the current nominal ceiling of 23.6 million b/d.

The Saudis may be taking aggressive steps to sustain the oil supply/demand balance and thus rein prices at present, but the U.S. risks too much by staking its energy security on a special relationship with Saudi Arabia, contends a veteran Middle East observer. G. Henry Schuler, energy security analyst at the Center for Strategic and International Studies, notes both countries seem comfortable with "a perceived mutuality of interest" based on U.S. arms and Saudi oil.

Three preceding U.S. alliances based on Middle East oil--involving Libya, Iran, and Iraq--exploded in "bitter acrimony," Schuler reminded the Rocky Mountain Oil & Gas Association annual meeting in Denver last week.

He branded as "foolhardy" the assumption another pact-however loose--involving arms and oil will work better now.

Meantime, multinational oil companies may soon be lining up to develop new upstream relationships in OPEC nations that previously had spurned them--notably the two whose oil industries were devastated by the Persian Gulf war.

Kuwaiti Oil Minister Hamoud al-Ruqbah says BP is negotiating an equity stake in a new oil production operation in Kuwait.

Many hurdles are still to be overcome before an agreement is reached, he notes. BP was extremely cautious in its reaction to the minister's disclosure, saying only it had wide ranging discussions with the Kuwaitis under the long standing technical services agreement with Kuwait Oil Co. One of the original KOC partners, the company had its interests nationalized 17 years ago.

Iraq wants to revive plans for foreign companies to participate in E&D there. But to spur interest, it may have to offer production sharing contracts vs. its prewar proposal to repay E&D investment through discounts on future crude purchases. Iraqi Oil Minister Osama al-Hiti told Middle East Economic Survey big fields Majnoon, Halfaya, West Qurna, and Nahr Umar and new exploration acreage in western Iraq would be involved.

Japan's MITI will assist the U.S.S.R. in modernizing its oil industry, reports Japanese newspaper Nihon Keizai Shimbun. The program will focus on modernizing and upgrading oil refineries, stimulating production from western Siberia fields, and participating in development off Sakhalin Island. In return Japan wants to import more Soviet oil to diversify its portfolio.

Meantime, Showa Shell Sekiyu, one of the companies bidding for new Offshore Sakhalin work, has agreed to import crude from existing fields on Sakhalin Island. Oil from Ekhabinskaya field will be shipped from Moskalvo and refined at Showa Shell's Niigata refinery.

Japan's Institute of Energy Economics predicts 88 new LNG carriers will be needed by 2010 to meet fast expanding worldwide demand for gas imports.

Petro-Canada plans to raise $600 million (U.S.) in notes and debenture offerings to U.S. investors as part of its privatization effort. Petro-Canada wants approval to raise $300 million in notes due in 2001 and 6300 million in debentures due in 2021. The financing plan will allow it to repay almost half of $1.2 billion in debt Ottawa holds through the partly state owned company. Earlier this year, Ottawa sold a 19.57, interest in Petro-Canada to investors in a public share offering.

Restructuring, layoffs, asset sales, and budget cuts continue to cut a wide swath across U.S. industry.

As part of a continuing $1 billion cost cutting program, two Du Pont units will slash operating costs by more than $182 million/year the next 2 years, mainly through operating efficiencies and elimination of work. Du Pont Materials, Logistics, and Services will save more than $110 million in operating efficiencies, including reduced energy consumption, and elimination of 540 jobs. Du Pont Central Research & Development will save $72 million through loss of 545 jobs and improved efficiencies.

United Gas Pipe Line's restructuring will include elimination of about 350 jobs and several layers of management.

Oryx plans to raise about $400 million through asset sales and cut costs by about $100 million/year in a restructuring that includes a "significant" workforce reduction.

Citing lower gas prices and volumes, lower crude prices, and stubbornly high expenses likely to cause a third quarter loss of $40 million, Oryx wants to shed its U.S. gas processing business among other assets and shift focus from U.S. onshore to the Gulf Coast, North Sea, Indonesia, and other foreign prospects.

Operating companies are forming an information sharing group to tackle horizontal drilling and production problems in Pearsall oil field area of South Texas.

The group, which may include participation from Texas Railroad Commission and Texas A&M University, plans to look at such concerns as drilling fluid additives, lost circulation formation damage, drainage radius/spacing, and water production in upper Cretaceous Austin chalk. Next meeting is late this month, says Weber Energy Corp., Dallas.

Exxon Corp. has again filed settlements of about $1.1 billion with the U.S. and Alaska covering lawsuits related to the Exxon Valdez oil spill.

Although the agreement earmarks more settlement money to restoration of the sound than a previous settlement did, it immediately drew fire from environmentalist groups as inadequate. Net fines exceed by $25 million a previous settlement agreement U.S. District Judge Russel Holland and Alaska's legislature rejected in the spring (OGJ, May 13, Newsletter).

There was no report at presstime last week when Holland might rule on the new agreement. Alaska Gov. Hickel won't submit this settlement to legislators, saying it deals with many concerns they raised when rejecting the earlier settlement.