OGJ Newsletter

U.S. Industry Scoreboard 2/3/97 [69929 bytes]

Uncertainties over Iraq's political regime have returned, giving oil prices a boost at a time when they have been otherwise trickling down.

Media reports at OGJ presstime suggested a power struggle within the family of President Saddam Hussein. Saddam has apparently placed his wife under house arrest, and his son Uday is reportedly paralyzed after surviving an assassination attempt in December. The rumor mill went into full churn with unconfirmed reports that Iraq was planning another invasion of Kuwait.

According to reports, Pentagon officials acknowledged there is a complex power struggle in Baghdad but are not aware of anything that would suggest Saddam is planning a new military offensive.

Brent March crude rose 37¢/bbl to close at $22.66/bbl in London Jan. 29 as the news broke. Oil prices have been mostly falling since Iraqi oil exports resumed under a U.N.-brokered oil-for-aid deal (OGJ, Dec. 16, 1996, p. 21).

Geoff Pyne, oil market analyst at UBS Ltd., London, thinks the Iraqi power struggle is of less importance to oil price prospects in the longer term than a growing inflexibility in the market's supply/demand behavior.

"Some people say the Iraqi stories are responsible for the current price rise," said Pyne, "but this seems to me illogical-why should prices rise because Saddam puts his wife under house arrest? It could be argued that he is consolidating his position. He's certainly done it in the past. And if Saddam did go, that would be bearish for the oil market."

Added Pyne, "I guess there has been little news around recently, and the markets have been looking for something to latch on to. The more you look at the fundamentals for 1997, the worse the market looks."

OPEC oil production was expected to average 26.8 million b/d in January, a big jump from 1996. Also, says Pyne, non-OPEC producers look increasingly likely to boost output above earlier forecasts and not fall short as in 1996.

"If you combine the most optimistic forecast for increased oil demand with the most pessimistic estimate for oil supplies, you would still come out with an overlap in late 1997," he said. "Current prices won't last."

More worrisome, said Pyne, is that in the past few years the oil market has lost its flexibility on both supply and demand sides. Many OPEC members are producing at full capacity, said Pyne, and would not be prepared to cut output during a period of oversupply. At the same time, increasing taxation by consumer governments is pegging back demand growth.

"There is now so much inflexibility in the supply/demand situation," said Pyne, "that the market is unable to correct for production surpluses." According to Pyne, this could be the next market scenario for late in 1997 and early in 1998.

Oil prices in 1996 were too low in real terms-even though the price of oil reached one of its highest nominal levels, says Arab Oil Institute.

The Paris-based institute says OPEC's "basket" price averaged about $20/bbl in 1996 but notes the value was only $5.61/bbl in 1973 dollars. Last year's price, it adds, was the equivalent of one third of the $17.15/bbl price experienced during 1982's boom.

"The decline in real oil prices after 1986 has not only undermined the gains of the so-called second oil shock but also eliminated around 43.1% of the price increase during the first oil shock in 1974," said Nicolas Sarkis, head of the institute.

Sarkis said the 1996 real price was lower because of inflation and the drop in the value of the U.S. dollar in relation to other currencies.

Iraq and Jordan signed an agreement Jan. 20 calling for Iraq to supply oil to Jordan in 1997 in return for Jordanian goods and services, Middle East Economic Survey (MEES) reports.

In the latest renewal of a trade, first established at the start of the Persian Gulf war, says MEES, Iraq will provide Jordan with 25 million bbl of crude oil and 7 million bbl of petroleum products, mainly liquefied petroleum gas, gas oil, and fuel oil. But the project is not expected to advance while U.N. sanctions against Iraq are in place.

MEES said the agreed-to crude oil price is $19.10/bbl this year vs. $15.25/bbl last year. Total value of the deal is about $625 million.

Because there is no pipeline between Iraq and Jordan, oil will be transported by about 2,000 Jordanian trucks. A feasibility study has been completed for construction of a pipeline from pumping stations at Haditha, Iraq, to Zarqa refinery in Jordan, MEES reports.

Since Iraq resumed limited exports of oil Dec. 10, 1996, it has shipped 11.5 million bbl of oil through the Mina al-Bakr terminal on the Persian Gulf (OGJ, Jan. 20, 1997, Newsletter). Iraqi oil is also being exported by pipeline to a terminal at Ceyhan, Turkey. Iraqi officials said 26 contracts have been concluded since U.N. Resolution 986 went into effect.

After more than 20 years of government control, Philippines President Fidel Ramos ordered total deregulation of the country's oil industry effective Feb. 8. Move ends a policy of state subsidies to the oil sector 1 month ahead of the original deregulation schedule.

Ramos' executive order said deregulation was needed because government funds used for the subsidies as buffers against fluctuating world oil prices and the exchange rate would be exhausted on Feb. 7.

Officials said implementation was timed to coincide with a decline in world crude oil prices and a stable exchange rate between the U.S. dollar and the peso. Deregulation has been under way since mid-1996.

China has established a third national oil company, the China National Star Petroleum Corp. (Cnspc).

Cnspc will commercialize the activities of China's oil bureau and research institutes under the Ministry of Geology and Mineral Resources and will compete with China National Petroleum Corp. and China National Offshore Oil Corp., responsible for onshore and offshore resource activities, respectively.

London's Financial Times said Cnspc will have a registered capital equivalent to about $350 million.

The new company is expected to develop both onshore and offshore oil and gas resources, focusing primarily on development of gas deposits for the growing industrial and residential markets and downstream gas projects. It is expected Cnspc's production will reach 4-4.5 million metric tons/year of oil equivalent by 2000 from developments in the East and South China Seas, Sichuan Province, and the far western Tarim basin.

The first totally gas-phase polypropylene production complex in China is planned at Yanshan, near Beijing.

Sinopec, Technip, and Amoco have signed contracts to build the 200,000-metric ton/year unit, the largest single-train polypropylene unit to be constructed in China. It will produce a full slate of products.

As oil spilled from a Russian tanker continues to spread in Japanese waters, another spill has occurred-this time off New Caledonia.

The tanker Nakhodka broke apart Jan. 2, spilling its cargo of heavy fuel oil (OGJ, Jan. 13, 1997, Newsletter). Now the spill has spread from Honshu and affects nine prefectures along the Sea of Japan.

Russia has increased its cleanup fleet to four vessels from two after being criticized by Japanese officials for slow response.

The main part of the ship sank. Its broken bow section drifted for 5 days before running aground off central Japan.

Off New Caledonia, about 120 metric tons of oil have spilled from a New Caledonian tanker, Konemu, which hit a reef about 12 miles southeast of Noumea Jan. 23. The ship did not sink. Divers plugged a hole in the hull, preventing further loss. Cleanup began the day after the incident, and the slick was partially contained with booms.

Mexico, stepping up its E&P efforts, is opening more of its oil and gas sector to foreign participation.

State-owned Pemex has let a three-well turnkey Gulf of Campeche drilling contract to Houston's Transocean. The $124 million program includes two delineation wells and one wildcat, each in as much as 600 ft of water, to be drilled by the Discoverer 511 drillship owned by Ghana National Petroleum Corp. and bareboat-chartered by Transocean for a minimum of 2 years.

An API task force will poll the group's membership to determine if it should proceed with a proposed multimillion-dollar public relations campaign to improve the oil and gas industry's image.

IPAA proposed a joint campaign with API and offered to fund half the $25 million/year cost (OGJ, Nov. 25, 1996, p. 29). API, trying to determine interest among its members, is expected to make a decision early in April.

"Right now, it's squarely up in the air," an API official said.