Newsletter

Ripples soon may be seen in the currently placid waters of international oil markets, as tempers rise in central Asia.

Before OGJ presstime, Baghdad's limited return to oil markets appeared imminent, and Iran's new leader was wondering what Washington's next step would be regarding U.S. economic sanctions imposed on his country (see related article, p. 19; Watching Government, p. 26).

U.N. officials last week were studying an oil pricing plan submitted Aug. 5 by Baghdad involving re-start of its oil-for-aid program. The next step is approval by the U.N. Security Council's sanctions committee, which had 48 hr to approve the plan or it would become valid automatically. Once approved, Iraq may resume sales of as much as $2 billion in oil for a 6-month period.

Iraq, which says it will sign new oil supply contracts as soon as the plan is approved, had delayed submitting its pricing structure and now must sell $1 billion in oil by Sept. 8.

Iraq objected but reduced the price of oil under the plan being reviewed by the U.N. New SOMO rates call for Basrah light to the U.S. to be priced at $4.50 fob below WTI for August. Kirkuk to Europe was priced at $1.90 under dated Brent and $3.50 under WTI for U.S. delivery.

Iranian President Mohammed Khatami is awaiting what the Clinton administration will do about new industry plans for investment in Iran.

Iran says Canada's Bow Valley has agreed to develop Balal oil field in a deal valued at $212 million, according to the Middle East Economic Survey (OGJ, Aug. 4, 1997, p. 31). U.S. sanctions allow the White House to choose from a variety of punitive measures against non-U.S. firms if they invest more than $40 million/year in Iran's oil and gas sector.

So far, the White House has not enforced terms of the Iran-Libya Sanctions Act, despite Tehran's deal with Turkey and Turkmenistan-as well as with a German bank involving a loan to an Iranian firm-for a field development project in Iran.

Iran warns, "Any unilateral action in this respect should be avoided."

In 1995, Total signed a $600 million field development deal with the National Iranian Oil Co. covering Sirri E and A gas fields, and Total and Royal Dutch/Shell are leading negotiations for a $3.5 billion development of South Pars gas field. An award is expected shortly.

Iran's northeastern neighbor, Turkmenistan, plans an international tender for oil and gas development on the Caspian Shelf, including Kyapaz field, subject of a recent Caspian Sea territorial dispute.

Azerbaijan says Turkmenistan is laying claim to the entire field, which Azeri officials say is in the middle of the Caspian and straddles territory claimed by both littoral states.

Azerbaijan President Heydar A. Aliyev tells OGJ that joint development of Kyapaz was planned and that Turkmenistan was in agreement on the split before becoming dissatisfied (see stories, pp. 22, 24).

At issue is division of the resource wealth of the Caspian and how that will be determined legally.

The situation recently saw the withdrawal of Russia's Rosneft as a Kyapaz project participant with partners Azerbaijan, Turkmenistan, and Russia's Lukoil.

Lukoil, however, says it will abide by the agreement.

Caspian International Petroleum Co. is drilling its first well on the Karabakh prospect off Azerbaijan.

KPS-1, 125 km east of Baku, is being drilled by Caspian Drilling Co.'s Dada Gorgud semi in 180 m of water. Total depth is projected to about 4,200 m to test the same geologic structures found in Azeri/Chirag/Gunesh* complex about 20 km south.

Russia, participant in another deal calling for the safe movement of oil through Chechnya via the northern route "early oil" pipeline (see map, OGJ, Aug. 4, 1997, p. 22) from Azerbaijan to the Black Sea port of Novorossiisk, now says it's considering building a pipeline bypassing Chechnya.

Officials say it would take as long as 2 years and $250 million to lay 160 km of new pipeline via the neighboring region of Daghestan.

Moscow says it's having difficulty negotiating with Chechen officials over refurbishment of the existing pipeline segment.

In Hungary, government-imposed price-ceiling increases on gas and power networks are raising the hackles of industry.

Hungary's Ministry of Trade and Industry recently disclosed results of a long-awaited price review requested by foreign investors. Adjustments are 11% for gas and 4% for power, effective July 1. Annual inflation is 20%, so the raise represents a freeze for gas distributors and a net drop for power.

Hungary's MOL has lashed out at the price increases.

CEO Zoltan Mandoki criticizes the gas increases. He says MOL wanted a permitted hike in excess of 20%, adding that Energy Office price calculations incorrectly assume MOL pays at least 10% less than it does for imported Russian gas, or 0.273¢/cu ft, instead of 0.313-0.318¢/cu ft, the correct figure for 1997.

MOL, meanwhile, may not get an interest in the Adria pipeline from Croatia.

Second thoughts threaten MOL's planned acquisition of 12.5% of the Adria pipeline from Croatia's privatization fund.

The sale had been approved at various levels by Croat privatizers, but the sale price has been questioned by ministers and government officials in the northern ex-Yugoslav republic as being too low.

The pipeline has strategic value, linking landlocked Hungary with the Adriatic and giving it an alternative supply of Russian oil through Ukraine and a small amount of German oil through Austria.

But the line is not yet economically viable. Russian suppliers have kept their oil several cents cheaper than alternative supply available through the Adria line, so the pipeline is used infrequently. Austria's OMV previously pulled out of the same deal, saying it was overpriced.

In the U.S., BTU convergence is gaining momentum, but regulators and companies are finding solutions to related issues slow in coming.

"The onion is being peeled," said Mark Pocino, a senior vice-president with Reed Consulting Group, Pasadena, Calif. "Every function that does not have a natural monopoly is open to competition."

Pocino says one issue needs careful attention: who will serve the residential customers with low-load factors that "no one wants to serve." He says that concern is paramount on the minds of state regulators-as well as companies-as gas/electric deregulation advances.

"In the last 15 years, we have seen more change than in the first 125 years of the gas industry," said PaineWebber gas analyst Ron Barone.

"Bottom line...we are moving very rapidly toward customer choice," he said. "Companies will not just be able to be in 'pipes' or in 'wires,' they're going to have to offer a full menu of services."

Barone predicts the pace of BTU convergence will continue to accelerate. Price reliability and convenience will be key, and company size will be crucial.

That's borne out in a 1-year residential/commercial customer survey by Wisconsin Gas, the state's largest gas utility.

Respondents say changing gas suppliers is easier than switching long-distance telephone carriers, indicating that companies will have to pursue customers relentlessly and provide an increasing mix of services, or customers will switch suppliers.

San Francisco's PG&E has completed its planned $1.5 billion merger with San Antonio's Valero Energy, creating one of the leading energy marketing firms in the U.S. (OGJ, July 21, 1997, Newsletter).

The acquisition adds more than 8,000 miles of gas and gas liquids pipeline, eight gas processing plants, and about 13 bcf of gas storage capacity to PG&E's existing gas holdings.

California's utility commission has adopted sweeping regulatory changes to promote gas competition. Called the Gas Accord, the plan provides broader customer choice and resolves disputes over PG&E's stalled efforts to build an intrastate gas pipeline from Alberta to near Bakersfield.

Powerful alliances can occur without a formal merger.

Atlanta's Southern Co. and Houston's Vastar Resources' gas/power marketing arm will team in a joint venture. Southern Co. Energy Marketing LP will be in the top 10 of both gas and power marketers.

Southern will pay $40 million for Vastar's gas production, now around 1 bcfd and committed for 10 years to the combined entity.

Vastar will hold 40% initially, tapering to 25% in mid-2001. Southern is giving Vastar guarantees so earnings can't fall below a certain level.

But the combo won't limit itself to energy trading.

It will hedge energy prices against prices of finished products in highly cyclical, energy-intensive industries, such as pulp/paper and industrial metals.