Newsletter

Look for jittery oil markets in the short term now that Baghdad's dispute with U.N. inspectors trying to log Iraq's arsenal has flared anew.

As OGJ went to press, Saddam Hussein had banned all Americans in the U.N. inspection team from Iraq, giving them 1 week to leave the country. The U.N. immediately suspended its weapons inspections.

Washington said the move had "potentially grave consequences" and set out to rally support for a U.N. Security Council statement condemning Baghdad. The U.S. also called for Iraq to resume full cooperation with the U.N.

Crude oil traders in London and New York reacted by bidding higher prices. They are concerned over the future of the U.N./Iraqi oil-for-aid deal, under which about 1 million b/d of Iraqi oil reaches world markets.

In response, Brent December crude rose 31¢ to close at $19.74/bbl Oct. 29. The same day, Nymex December crude jumped 25¢ to close at $20.71/bbl.

Baghdad's intransigence is seen in Washington as an opportunity to rebuild a united front in the Security Council against Iraq. U.S. diplomats apparently believe Baghdad was encouraged to lash out when France, Russia, and China abstained from a vote on tougher measures against Iraq. These countries all want sanctions lifted quickly, so they can get to work on massive oil field developments promised by Baghdad.

Total Chairman and CEO Thierry Desmarest has set the record straight on his company's dealings with Iraq.

Recent press reports quoted an Iraqi petroleum ministry official as saying that an agreement with Total on the Nahr Omar field was imminent. In response to those reports, Desmarest told reporters in Paris that Total has signed nothing with Iraq, but negotiations are continuing. Desmarest stressed that no work can start in Iraq until international sanctions are lifted. Regarding Total's much ballyhooed deal with Iran, he said that Middle East countries want to normalize relations with the country and, as a result, view anything that contributes to this end-such as Total's South Pars contract-as favorable.

Non-U.S. firms are hitting it big in nations targeted by U.S. sanctions.

A group led by Lasmo has disclosed a possible giant oil strike on Libya's Block NC 174, roughly 470 miles south of Tripoli. Lasmo is operator, with equal partners Agip and a South Korean group led by Pedco.

A Lasmo official told OGJ the exploration team anticipated finding a reservoir with several hundred million barrels of oil reserves when drilling began: "We are still saying reserves are several hundred million barrels, with upside, based on one well and seismic."

Pedco had estimated reserves for the discovery at 1 billion bbl of oil and said that production is expected to begin early in 1999.

The F1 well was drilled to test the Elephant prospect and cut more than 300 ft of net oil pay at a depth of more than 5,000 ft. Lasmo said well test rates were equipment-constrained to a total 7,500 b/d of 38? gravity oil.

Lasmo claims that reservoir pressure data indicate this well could initially produce at 10,000 b/d of oil if it were completed for production. Next to be drilled is a wildcat on Falcon prospect, after which Lasmo will return to Elephant for appraisal drilling. The Lasmo official said a simple development of the new find is possible. A producing field on nearby NC 115 concession, operated by Repsol (see related story, p. 19), has an oil export pipeline going to the coast.

"We have a good chance of accessing spare capacity in that export line under Libyan law," said the spokesman. "There is little associated gas in the oil, so we don't anticipate that gas handling facilities will be required."

China continues efforts to build a global reserves portfolio.

Kerr-McGee Corp. and Overseas Oil & Gas Corp. (OOGC), a unit of China National Offshore Oil Corp., have formed an alliance covering seven blocks in the Gulf of Mexico. OOGC America will acquire interests from Kerr-McGee and participate in at least five exploratory wells on the blocks, which cover more than 30,000 acres in 36-360 ft of water.

A San Diego Superior Court judge has summarily dismissed a lawsuit against nine oil companies. Plaintiffs in the class-action suit claimed the companies had conspired to fix prices in the California Air Resources Board-spec Phase II RFG market (see related story, p. 33). The judge said the plaintiffs failed to raise "a reasonable inference of a conspiracy."

Gas companies are plunging headlong into power marketing.

As part of Enron's push to become a recognized energy brand name, Enron Energy Services will offer California residential customers free electricity for 2 weeks. After the free period, Enron's rates will be 10% less than in 1997. Enron guarantees its rates will stay low for 2 years.

Enron also has acquired Bentley Co.-an energy services, engineering, and management firm. The acquisition will give Enron inroads into California's commercial and industrial energy markets.

Meanwhile, Williams Energy Group has purchased Continental Energy Associates' Hazleton, Pa., power plant. Williams plans a Dec. 1 restart for the 130-MW, gas fired, combined-cycle plant, which was idled in January.

Williams will use the plant initially as a 63-MW peaking facility, then add 250 MW of capacity by mid-1999.

Mobil, Pdvsa's Lagoven unit, and Veba have signed a joint agreement on the Cerro Negro extra-heavy oil upgrading project in Venezuela's Orinoco belt (OGJ, Sept. 23, 1996, Newsletter).

Mobil and Lagoven will each own a 41.7% stake in the venture, with Veba owning the remaining 16.6%. The group will invest $1.9 billion on the upstream portion of the project, including the upgrader.

In a related deal, Mobil and another Pdvsa subsidiary, PDV Chalmette, formed a 50-50 joint venture, Chalmette Refining LLC, to own and operate Mobil's 176,000 b/d refinery at Chalmette, La., where the upgraded crude will be processed. Value of the refinery and related assets is pegged at $600 million.

Cerro Negro production is scheduled to begin in 1999 at 60,000 b/d and increase to 120,000 b/d in 2001. Chalmette Refining's share of upgraded crude (100,000 b/d) will be processed at the refinery, which requires only minor modifications to enable it to process the heavy crude. The remaining 20,000 b/d of production that is Veba's share will be processed in its German refineries-in which Pdvsa also holds interests.

Bad news for Asian refining margins: Japanese refiners are expected to increase crude runs in the second half 5-7% from a year ago.

"They clearly aim to cut costs by raising capacity utilization and lessening their dependence on imports, which could accelerate the decline in gasoline and kerosine prices," an industry analyst pointed out.

Japan Energy plans to process an average 524,000 b/d in the second half, up 31,000 b/d, or 6%. An increase in the utilization rate will allow Japan Energy to reduce kerosine imports this winter by 6,900 b/d. As a result, kerosine refining costs may be lowered ?2/l. from last year, company officials said.

Nippon Oil Co. and Idemitsu Kosan Co. both expect to increase processing 5% for the same term.

Japanese refiners' capacity utilization rate has been capped at about 80% because of a possible supply glut in the domestic market. But the companies are now free to export excess supplies of gas and fuel oil since the liberalization of petroleum product exports in July.

While Japan has long been a major downstream force, it is expected to further its move upstream.

During an upcoming trip to Saudi Arabia, Japanese Prime Minister Ryotaro Hashimoto is expected to ask for an extension of a Japanese company's drilling rights in Al-Khafji oil field in the Persian Gulf. The rights are to expire in 2000, and the two countries are negotiating a possible renewal.

Arabian Oil Co., Japan's largest oil producer, obtained drilling rights in the oil field, off the Neutral Zone between Saudi Arabia and Kuwait, in 1957. The field produces about 300,000 b/d of oil, 70% of which is shipped to Japan. Al-Khafji crude accounts for 5% of Japan's total oil imports.

Although the Al-Khafji project has long been considered as a symbol of friendship between the two countries, Saudi Arabia has implicitly threatened recently to deny an extension of the drilling rights unless more Japanese private companies invest in the kingdom.

Norwegian producers have received more bad news following the election of a government that puts the environment ahead of development.

New Energy Minister Marit Arnstad says the government is committed to cutting oil and gas flow to a "somewhat lower level" than the present 3 million b/d-plus. While the government will not order output cuts, Arnstad confirmed plans to postpone offshore licensing rounds and delay projects not yet approved.