OGJ NEWSLETTER

The worldwide push for privatization of oil sectors gains momentum as a number of state oil companies grapple with financial crunches amid-weaker than expected oil prices and governments respond with privatization measures, budget cuts, or tax cuts.

July 8, 1991

8 min read

Pdvsa's original $5 billion 1991 budget will be cut by $491 million, with 56% of the cuts in operating expenses, 28% from capital outlays, and the remainder at Pdvsa's discretion. Venezuelan President Carlos Andres Perez plans to trim Pdvsa's tax bite the next 3 years from the current rate--more than 80%, of operating profits when all levies and royalties are included.

Cash strapped Petroperu plans to lay off one third of its staff and sell 74 service stations as well as closing a money losing 510 ton/day urea plant at Talara petrochemical complex.

Minister of Energy and Mines Fernando Sanchez wants Petroperu to pursue the role of a promoter, leaving refining/marketing and exploration to private companies. Despite repeated promises by successive governments to bolster Petroperu, the company still receives only one third of the revenues from domestic fuel sales, with the balance going for federal taxes.

Meanwhile, Petroperu is seeking private domestic or foreign investors for joint ventures with these subsidiaries:

Transoceanica SA, which operates four 25,000 dwt tankers moving crude and products between refineries and local ports.
Cia. Peruana de Gas-Sol Gas, which bottles and distributes domestic LPG and markets LPG stoves and heaters. Private investors hold about 20% of the company, which needs a cash infusion to move its bottling plant to Petroperu's 100,000 La Pampilla refinery from Callao port.
Serpetro, an oil field service company providing support mainly to Petroperu and its offshore unit Petromar.

Ecuador's oil sector continues to struggle. Although production costs in the Petroamazonas-Texaco joint venture area of the Oriente--source of about two thirds of the country's oil output--fell in second half 1990 by 6/bbl from 82/bbl in the first half, Petroecuador's 1991 budget was cut another 15%, with administrative overhead targeted. In fact, lower operating costs last year stemmed in part from a severe cut in expatriate personnel and some cuts in domestic staff, in addition to higher crude output and reinstatement of competitive bidding.

The government projects Ecuador's oil output will climb to 315,000 b/d from 295,000 b/d by yearend, broken out as Petroamazonas-Texaco 224,200 b/d, Petroproduccion 85,000 b/d, City Investing 4,500 b/d, Oryx 2,000 b/d, and Santa Elena Peninsula 850 b/d (see OGJ Backgrounder, Mar. 25, p. 25).

Meantime, bids for a possible EOR project in 100,000 b/d Shushufindi field will be delayed until yearend.

Petroamazonas let contract to Scientific Software for a complete reservoir simulation model to gather data to draft specs for the EOR tender, to be handled as a service contract vs. original plans calling for foreign investment.

India's ONGC will show a record drop in profits of $465 million to $616.5 million for-fiscal 1990-91 despite being exempt from taxes the first time in some years. Industry sources cite production losses and increased operating costs as the culprits.

ONGC crude output plunged to 560,000 b/d in 1990-91 from 640,000 b/d in fiscal 1989-90. After paying a corporate income tax of $264 million plus $66.5 million interest in 1989-90, ONGC was declared exempt from corporate income taxes in 1990-91.

ONGC claims a change in accounting procedures was the main reason for the drop in profits.

The World Bank will lend India $450 million for ONGC's proposal to eliminate gas flaring in offshore Bombay High oil fields. Plans call for adding two gas processing platforms.

Meanwhile, Gujarat state plans a $535 million gas pipeline to link Bombay High with the Pipavav industrial complex. Gujarat will consider tapping foreign investment for the project or raising funds from petrochemical, fertilizer, and cement industries at Pipavav that would use the previously flared gas.

Some state oil companies are joining private companies in the scramble for Soviet joint ventures. Pemex may participate in a revamp of the Baku refinery in the U.S.S.R., according to press reports of Mexican President Carlos Salinas de Gortari's trade mission to Europe to sign perhaps 20 trade and investment agreements. Gortari is to meet Soviet President Gorbachev this month to sign cooperation agreements. Others on his itinerary are Germany, Italy, and Czechoslovakia.

Meanwhile, BP has confirmed it and Statoil are talking to Amoco about participating in development of Azeri oil field in the Soviet Caspian Sea (OGJ, July 1, p. 26).

Given the push to privatization in developing nations' oil sectors and the plight of the U.S. upstream oil and gas sector, it is no wonder U.S.companies' E&D dollars continue to migrate to foreign climes. Non - U.S. E&D by public U.S. companies hit a high in 1990 while U.S. reserves and production slumped to the lowest level in 5 years.

That's the chief finding of Arthur Andersen & Co.'s 1991 oil and gas reserves disclosure survey of 239 companies. Companies covered by Andersen's survey spent $20.9 billion, 53% of their total 1990 spending, to increase hydrocarbon reserves outside the U.S. by 39% from 1989 levels. That was almost twice the non U.S. reserves totals reported in 1986. Meanwhile, U.S. E&D spending rose by $2.4 billion in 1990, up 8% from 1986. U.S. independents hiked non-U.S. E&D spending in 1990 by 80%, or $800 million. But U.S. oil production for all companies in the survey in 1990 declined the fifth straight year, to 2 billion bbl, while their U.S. gas production increased the fifth straight year, to 10.3 tcf. Their U.S. finding costs were $5.03/bbl of oil equivalent in 1990, compared with non-U.S. finding costs that dropped 25% to $4.24/BOE, the lowest level since 1987.

U.S. independent producers aren't likely to get much relief soon on gas prices, and first half profits are expected to suffer as a result.

Natural Gas Clearinghouse reports another record low, as the U.S. average spot gas price fell another 140 to $1.07/MMBTU for July. In parts of Oklahoma and Wyoming, the price slipped below $1.

Salomon Bros. has cut its average wellhead gas price forecasts for 1991 by 10 to $1.45/mcf, 1992 by 10 to $1.65, and for 1993 by 5 to $1.80. Accordingly, it sees 1991-92 flow and earnings of a group of 16 U.S. independents it tracks.

PaineWebber, however, sees slightly improved second quarter earnings for some E&P companies with reserves weighted toward oil vs. gas, noting average crude prices for the quarter of about $19/bbl, 13.3%, ahead of a year ago. For the quarter, it sees cash flow for a group of 18 independents it tracks up an average 6.8%.

The slump in gas prices has some U.S. pipelines in hot water as well. Although some pipelines have troublesome lingering take or pay contracts, there are no others with the magnitude of TOP woes facing Columbia Gas System, says S&P CreditWire, which reviewed the industry in the aftermath of Columbia's announcement it faces potential $1 billion in losses and possible bankruptcy (OGJ, July 1, Newsletter). Overall, S&P believes the industry has mostly resolved its TOP problems by paying more than $10 billion in the 1980s to restructure gas supply and price contracts to be more market sensitive. Some pipelines with E&P affiliates are suffering under current depressed )-as prices, S&P says. It contends Columbia's problems stem from 3% of the company's high cost contracts not restructured in 1985 and from a tenfold jump in gas prices under low cost contracts decontrolled by later federal deregulation steps. Columbia's woes have been magnified by spot gas prices averaging $1.10-1.30/Mcf when its weighted average contract price is about $2.85/Mcf, and its customers are using the system for transportation only, S&P says.

Separately, S&P sees profits tumbling year to year for majors in the second half because of lower oil prices. For 1991 overall, however, S&P predicts a 5%, rise in profits vs. 1990 on the strength of exceptional international refining margins in the first half.

A likely big gainer in that 1990 profits picture is Occidental, which last week completed sale of its U.K. North Sea assets to Elf for $1.35 billion in cash and $130 million in bank debt assumption--putting its year to date total under a $3 billion debt reduction goal at $1.8 billion (OGJ, May 13, p. 26).

As expected, industry and environmentalists have failed to agree on rules for S. manufacture and sale of reformulated and oxygenated gasolines under 1990 Clean Air Act amendments.

Working in a new negotiate rulemaking process (neg-reg), negotiators did agree on parts of a framework for a rule. EPA can now proceed with a regulation on its own or ask the neg-reg group to keep trying. Final rules are due this fall.

Energy companies are spending as much as 20% of new plant capital on environmental controls and technology, says M.W. Kellogg Environmental Project Manager Randy. He sees total pollution control costs in the U.S. reaching $250 billion/year by 2000 from about $100 billion in 1990. Citing more than 10,000 pages of federal statutes and regulations and more than 100,000 pages of regional, state, and local rules on the environment, Horsak expects the environment to be a dominant corporate issue during the 1990s in Mexico as well as in the U.S.