OGJ Newsletter

U.S. Industry Scoreboard 2/17 [69980 bytes]

Industry's optimism is tempered by caution, despite many companies reporting record profits for 1996 and stepped-up capital spending plans for 1997 (see Capital Spending Outlook, p. 34).

Talks given at Cambridge Energy Research Associates' (CERA) annual conference in Houston last week left the impression that, for all the positive trends today, the downturn spawned by the 1986 oil price crash still weighs heavily on everyone's mind.

Among them, OPEC Sec. Gen. Rilwanu Lukman predicts oil prices will remain near 1996 levels in 1997: "Most of us believe the era of $15/bbl oil is over," Lukman said. However, producers in the world's emerging E&P hot spots may be able to "flood the market" before long, driving down prices and tossing economies of producing nations worldwide "into chaos," he said.

Far from expecting OPEC's demise, Lukman said OPEC is discussing admitting major new or growing oil producers as members.

These include nations of the former Soviet Union, but Lukman declined to identify those discussing this option.

Because of continuing market instability, Lukman is confident OPEC-or a comparable body-will have a role in the energy world of the future.

"If OPEC disappears tomorrow, someone will inevitably fill the same role," Lukman said. "There has always been a need for someone to take concerted action to balance supply and demand to make sure the market is healthy."

The oil industry will be challenged as never before, as unusual circumstances combine to push oil demand to record levels, warns CERA and Arthur Andersen in their annual report on world oil trends.

Critical challenges at hand include exploiting enough oil to keep pace with burgeoning demand, particularly in Asia, the report says.

Although many high-potential areas are being explored and developed, industry's ability to respond could be constrained by rising costs, tight rig supplies, and shortages of skilled personnel. Other major challenges include meeting continually higher environmental standards and coping with political uncertainty in many of the world's most prolific oil and gas regions.

Underscoring market instability, oil prices seesawed last week, plunging to the lowest levels in months. London Brent plunged by $1.08/bbl Feb. 10 to $20.87/bbl and remained close to that level at midweek last week.

UBS analyst Geoff Pyne attributes the slide to stockbuilds on both sides of the Atlantic: "Crude stocks are beginning to do what was expected."

Other factors putting downward pressure on prices include the return of limited Iraqi oil supplies to market and accelerating OPEC output-now more than 1 million b/d over January 1996 levels.

Stronger inventories and higher output are prompting the market to take less notice of Saddam Hussein's continuing political maneuvers, Pyne said: "If the market were tighter...(Hussein's) antics would provide an excuse for speculation, but with the market as it is, they'll continue to ignore him."

Prices may be easing, but storm clouds are nonetheless gathering to impose new taxes on energy. The European Commission (EC) is nearing completion of a plan that would nearly double excise duties on diesel fuel and gasoline and impose taxes on electricity for the first time.

The proposal, which requires endorsement by all finance ministers of European Union nations, would raise the excise duty on diesel to $412/1,000 l. from $295/1,000 l. by 1998 and tax electricity at a minimum rate of $1.20/MW-hr. Kerojet would be exempt from excise duty until an international pact is approved.

But EC's policy-crafting efforts go beyond taxation.

A long-awaited natural gas policy may emerge this year, following last year's accord on electricity, predicts EC energy policy director Dominique Ristori.

He hopes more northern European countries will support such a plan, adding, "These countries should be more inclined to take into account the importance of an energy policy, if only to respond to objectives that go beyond energy policy, such as environmental objectives."

Meanwhile, Gaz de France-riding on the wave of record 1996 profits and cash flow exceeding debt for the first time in the company's history-is stepping up international development.

Among the latest ventures: GdF agreed with Elf to lift 2-3 billion cu m/year-about 10% of France's overall gas supply-from Elf's Elgin/Franklin field in the North Sea. Further production-sharing agreements are being considered with Elf, Total, Statoil, and Unocal. And, poaching on Gazprom territory, GdF signed a contract with Hungary's MOL to deliver 400 billion cu m/year taken from the French firm's "basket of supplies" around Europe, part of a new strategy it hopes to duplicate elsewhere. In North America, underscoring the convergence trend, GdF inked a partnership agreement with Hydro Quebec to develop electricity supplies in eastern Canada, U.S., and Mexico.

U.S. strategic alliances and mergers seem to be strengthening the competitive position of companies in the otherwise-beleaguered downstream sector.

Recently-merged Ultramar Diamond Shamrock Corp., San Antonio, trimmed capital spending overall to $285 million in 1997 from the $430 million both companies spent last year, but the combined company plans to forge ahead with $85 million on capital projects in Southwest retail and wholesale marketing.

The merger, which closed Dec. 3, 1996, enabled the companies "to reduce capital expenditures and maintain our competitive position," said Jean Gaulin, vice-chairman, president, and CEO.

Enron is declining comment on reports by Middle East Economic Survey (MEES) that it's seeking equity participation in the Ras Laffan LNG megaproject in Qatar-one of three LNG projects in Qatar slated to use gas reserves from its giant North field.

According to MEES, Enron sent a formal request to join Ras Laffan Liquefied Natural Gas Co. Ltd.'s Rasgas project in return for placing all gas sales with India, where Enron is advancing power projects using LNG (OGJ, Dec. 9, 1996, Newsletter).

Rasgas is a joint venture of Qatar General Petroleum Corp. (QGPC) and Mobil.

Wire service reports cite QGPC officials saying talks were held with Enron in January. Enron reportedly planned to join Rasgas provided an agreement was signed before the end of February. Enron also reportedly held separate talks with Mobil and Japan's Itochu and Nissho Iwai.

Enron said only that it is continuing talks with QGPC to build a gas liquefaction complex as part of previously formed Qatar-Enron Liquefied Natural Gas Co. Qatargas is the third Qatari LNG megaproject that will use North field reserves, pegged at 380 tcf.

Meanwhile, reports from India quote Enron officials as saying the company plans to invest $10 billion on five to seven gas-fired power generation plants in northern and southern India and supply gas to various Indian states via pipeline. Enron, building a controversial 2,450-MW power plant at Dabhol in Maharashtra state, has come under fire from New Delhi recently for allegedly flouting environmental regulations and high power tariffs.

"Political uncertainties don't bother us anymore," Rebecca Mark, chairman and CEO of Enron International, was quoted as saying. "We have been through the worst of times in pushing through the Dabhol project."

Enron's ability to survive political uncertainties in the U.S. is being tested. On Feb. 14, the full Oregon Public Utilities Commission was slated to start public hearings on Enron's plan to merge with Portland General Corp.

So far, Enron's gotten less than a full blessing from OPUC's staff, which loaded the proposed merger with conditions Enron deemed unacceptable.

In Washington, D.C., FERC appears headed down the same road. NorAm Energy claims FERC is trying to frustrate plans to merge with Houston Industries (HI) by issuing an order requiring commission review under Section 203 of the Federal Power Act, although HI does not fall under FERC jurisdiction. Such delays may become commonplace, analysts say, as gas-electric mergers undergo their first tests in the regulatory arena this year (OGJ, Feb. 5, 1997, p. 19).

ARCO and Russian oil giant Lukoil have finalized their joint venture to invest as much as $5 billion in oil and gas projects in the former Soviet Union the next 5 years (OGJ, Sept. 23, 1996, Newsletter).

Plans call for spending as much as $400 million in 1997.

Elsewhere in the FSU, Turkmenistan and Azerbaijan are clashing over ownership of Caspian Sea oil. Turkmenistan says it owns Azeri oil field and part of Chirag field, both in a sector claimed by Azerbaijan.

In Russia's Siberia, the vast Priobskoye oil project-in which Amoco holds a key stake-is getting bogged down over lack of final parliamentary approval of production-sharing legislation. Bill is now is delayed over expected reshuffling of the government commission dealing with the issue.