OGJ Newsletter

July 12, 2010

General Interest— Quick Takes

API slates ads against bill to end tax breaks

The American Petroleum Institute will begin running new 15-sec and 30-sec television commercials this month explaining why new oil and gas taxes are a bad idea since the industry supports 9.2 million jobs in the US and represents 7.5% of the country's gross domestic product.

"While the focus of our industry is on helping BP stop the [Gulf of Mexico] spill and clean up the crude oil, we cannot ignore the fact that imposing significant new taxes on the oil and gas industry will have severe economic consequences and job impacts," API Pres. Jack N. Gerard said July 3 as he announced the campaign.

The ads will run in 10 target states, namely Colorado, Maine, Michigan, Missouri, North Carolina, North Dakota, Ohio, Pennsylvania, Virginia, and West Virginia, starting July 6, API said. The commercial messages will feature working Americans' responses to proposed new oil and gas taxes that the Obama administration proposed in its fiscal 2011 budget request, API said. Some members of Congress consider such taxes a good way to support alternative and renewable energy technology research and development.

API said opposition to higher taxes remains high among voters and has been cited as a factor in several primary elections and in recent opinion surveys.

"Americans have historically been suspicious of taxes on the industry that produces most of the industry they consume," Gerard observed. "They deserve to be informed about new proposals that would increase those taxes by many billions of dollars a year. The ads are part of the national debate on energy and tax policy. We hope they will help ensure decisions affecting our economic and energy security are not made in a vacuum or are based on incomplete information."

Resource tax moves onto onshore, shelf projects

Australia's new Prime Minister Julia Gillard has dropped the Resources Super-Profits Tax for coal seam methane projects proposed by former PM Kevin Rudd and has instead extended the existing Petroleum Resource Rent Tax (PRRT) to cover all onshore oil and gas projects in the country as well as the offshore projects not already covered.

This will include the CSG-LNG projects and the offshore North West Shelf gas project. The tax rate will be 40%.

Companies may elect to use market value as the starting base for project assets and will be able to credit all state and federal resource taxes against current and future PRRT liabilities from a project. This avoids double taxation.

All other features of the PRRT such as the range of uplift allowances for unutilized losses and capital write-offs, immediate expensing for expenditure and limited transfer of the tax value of losses, will also apply.

A government statement stated that by placing all oil and gas projects under PRRT provides certainty for projects in the emerging CSG-LNG sector and will ensure equitable tax treatment between competing projects.

The changes do come at a price, as the company tax rate will be cut to 29% from 2013-14, but will not be reduced further. In addition the planned resource exploration rebate has been scrapped.

Federal Resources Minister Martin Ferguson and former BHP Chairman Don Argus will lead a policy transition group to oversee the transition to the new regime.

The new tax regime will also include a Minerals Resource Tax on the country's iron ore and coal projects. Other minerals remain outside the scheme.

Despite today's announcement, there is uncertainty about the future of the scheme because a Federal election is likely to be called within 3 months and there is no guarantee that the Labor Party will be reelected.

The Opposition Liberal-National Party Coalition does not support the new tax scheme.

India ending subsidies for gasoline, diesel

India, one of the world's top 10 oil markets, has removed price controls from gasoline and is phasing them out for diesel fuel.

The moves are part of a deregulation effort that began in 2002 when the government allowed private refiners to market directly to Indian customers and replaced its "administered price mechanism" with what it called a "market-determined price mechanism."

Until now, the government has continued to subsidize electricity and fuels and in late 2008 and early 2009 cut diesel and gasoline prices.

The end of price controls on at least gasoline and diesel was expected. The Ministry of Petroleum and Natural Gas said subsidies would remain in effect for public distribution system kerosine and LPG.

The International Energy Agency projects Indian oil consumption at 3.3 million b/d this year, up 1.9% from 2009, when consumption grew 5.6%.

Shell completes sale of assets in Greece

Royal Dutch Shell PLC has completed the sale of its retail, commercial fuels, bitumen, chemicals, supply and distribution, and LPG businesses and a lube oil blending plant in Greece to Motor Oil (Hellas) Corinth Refineries SA.

The $300 million deal includes formation of a marketing joint venture between the parties for the trade of aviation fuels under the name Shell & MOH Aviation Fuels AE.

ConocoPhillips sells truck stop interest

ConocoPhillips has sold its 50% partnership interest in CFJ Properties-Flying J truck stops to Pilot Travel Centers for $626 million.

The deal, part of ConocoPhillips's program to divest $10 billion in noncore assets, includes a long-term product-supply agreement with Pilot.

Industry Scoreboard

Exploration & Development— Quick Takes

UK's Cygnus tagged with 500 bcf-1.2 tcf of gas

Further appraisal success has confirmed GDF Suez E&P-operated Cygnus as one of the largest gas fields discovered in the UK North Sea southern gas basin, said Endeavour International Corp., Houston.

Endeavour said, "Analysis of the results from Cygnus well data combined with seismic data has led to a reserve estimate in the five appraised fault blocks ranging from a low case of 500 bcf to an upside of 1.2 tcf."

The 44/12a-5 appraisal well achieved a stabilized flow rate of 29 MMscfd of gas from 94 ft of perforations in the Permian Leman reservoir (OGJ Online, Apr. 15, 2010).

In addition, the Department of Energy and Climate Change has awarded Cygnus field participants interest in P1731 covering blocks 44/11b and 44/12b. This new license contains additional fault blocks that form a northerly extension of the Cygnus structure that are yet to be appraised by drilling.

"The additional fault blocks falling mainly in the new license could add material volumes once drilled," Endeavour added.

Cygnus interests are GDF Suez E&P 38.75%, Centrica 48.75%, and Endeavour 12.5%.

Besides its 12.5% interest in blocks 44/11a and 12a, Endeavour holds 17.24% in blocks 44/11b and 44/12b.

BHP gets nod for Macedon gas development

BHP Billiton Ltd. has received conditional approval from the Environment Protection Authority for its proposed Macedon gas development on retention lease WA-12-R off Western Australia.

EPA Chairman Paul Vogel said the predicted air quality is well within the set standards and greenhouse gas efficiency design features have been included in the project. He added that the oil spill risk is low as is the risk to turtles and whales.

EPA also said Macedon's impact in the Ashburton North Strategic Industrial Area was small compared to Chevron's proposed Wheatstone LNG project, which is considered to be the foundation industry. Thus Macedon is unlikely to be critical in a cumulative impact assessment that is being undertaken by EPA.

EPA's report on Macedon is now available for public comment.

Macedon gas is expected to go on stream in 2013 at rates of 200 MMcfd of gas. Front-end engineering and design studies were contracted to Clough Australia in September 2009.

The field was discovered in 1992 by a well called West Muiron-2. Appraisal work confirmed the discovery in 1994. It has about 800 bcf of gas reserves.

Macedon is 10 km from BHP's producing Pyrenees oil field.

BHP has 71.43% with Apache Energy, 28.57%.

Chevron has deepwater gas find off Australia

Chevron Corp. reported a deepwater gas discovery in the Carnarvon basin off Western Australia.

The Chevron Clio-3 well, in the WA-205-P permit area 90 miles northwest of Onslow, was drilled to 14,135 ft in 3,186 ft of water. It cut 260 ft of net gas pay.

Chevron said it's the third consecutive discovery on the Clio structure.

A Chevron subsidiary operates the permit with a combined 66.66% interest. Shell Development (Australia) holds the remaining interest.

BP developing Devenick field in UK N. Sea

BP PLC has let a key contract for development of Devenick gas-condensate field on Blocks 9/29a and 9/24b in the northern UK North Sea.

The company plans two wells linked to a subsea manifold, which will be tied back to Marathon Oil UK Ltd.'s East Brae platform. East Brae, 33.5 km south of Devenick on Block 16/03a, has been on production since 1993.

The Devenick manifold will have two extra slots for potential future production.

Devenick lies in 114 m of water, 187 miles southeast of Fair Isle and 234 km northeast of Aberdeen.

BP expects production to start in the second quarter of 2012 or earlier.

It expects annual average condensate production rates of 3,231 b/d in 2012 and 4,911 b/d in 2013, declining to 94 b/d by 2027. Peak throughput on East Brae will be 6,814 b/d in 2013.

Gas production will average 78 MMscfd in 2012 and 129 MMscfd in 2013, declining to 17 MMscfd by 2027 and peaking at 201 MMscfd in 2013.

BP let a contract to Technip for project management, engineering, fabrication, installation, and commissioning of the 33.5 km pipe-in-pipe production pipeline, with 16-in. carrier pipeline, 3-in. piggyback methanol line, and infield pipelines comprising various flowlines and umbilicals.

Separately, BP awarded Technip a 3-year diving repair and maintenance frame agreement contract covering all the operator's platforms, subsea fields, and pipelines in the UK North Sea.

Bridge maps steps to Idaho gas production

Bridge Resources Corp. and Paramax Resources Ltd. are in talks with gas purchasers and midstream companies regarding the start of gas production from discoveries near Boise, Idaho.

The ML Investments 1-10 discovery, named Willow field, has sweet, high-btu gas with 12 bbl/MMcf of condensate at 4,100 ft. Hamilton field, which includes the Espino 1-2 and State 1-17 discoveries, has sweet, high-btu gas at 2,000 ft.

The two companies drilled five exploratory wells in the Western Idaho basin during March through May that resulted in the three gas discoveries.

Drilling on a five-well development program at Hamilton should begin by Aug. 1, and a 2D seismic program on 6,000 acres is being permitted at Willow and should begin in early July with drilling to start by Oct. 1, Paramax said.

The combined Hamilton and Willow development project areas cover 30,000 acres. Bridge and Paramax hold 110,000 gross acres in the Western Idaho basin, and further exploratory drilling on other prospects is planned following the initial Hamilton and Willow development wells.

Hamilton field lies on the Williams Northwest Pipeline, thus providing an early production opportunity. The pipeline has 1.3 bcfd of spare capacity. Gas may be sold to western Idaho or US West Coast customers.

Drilling & Production— Quick Takes

Venezuela nationalizes H&P rigs

Venezuela has nationalized 11 oil rigs belonging to Tulsa-based Helmerich & Payne (H&P), making good on earlier promises to prevent international firms from "stymieing" the country's production of crude oil (OGJ Online, June 25, 2010).

"We reviewed the report from the oil ministry and consider the decision pertinent," said Jesus Graterol, president of the congressional energy commission, on National Assembly television.

Rafael Ramirez, who serves as minister of oil and president of Venezuela's state-run Petroleos de Venezuela SA (PDVSA), last week asked the National Assembly to take over the rigs after H&P declined to negotiate a new service contract, unlike other foreign firms.

Helmerich said the rigs were idled after Venezuela stopped paying for oil service activities and accumulated a debt of more than $40 million.

"This is a company which has refused to discuss the services contracts with [PDVSA]. Among the companies, only H&P has refused the conditions set by the Venezuelan law," said Graterol.

In May 2009, the Chavez regime enacted a law that reserves to Venezuela certain assets and services related to hydrocarbon primary activities. Under the law, reserved activities are to be performed by PDVSA or its affiliates, or through mixed companies under the control of PDVSA or its affiliates (OGJ Online, June 5, 2009).

Since then, Venezuela has nationalized the assets of several US companies, including Exterran, which said that "on June 2, 2009, Petroleos de Venezuela SA, or PDVSA, commenced taking possession of our assets and operations in a number of our locations in Venezuela."

Earlier, in 2007, Chavez forced international oil companies into joint ventures as minority partners, which landed him in international arbitration hearings with ExxonMobil Corp. and ConocoPhillips, which rejected revised terms.

Graterol's justification of the seizure of H&P's rigs echoes similar remarks made by Ramirez last week.

"There are rig owners that have refused to discuss with PDVSA the payment rates for services and preferred to hide the rigs for a year in Anaco, Anzoategui state," said Ramirez. "It's the specific case of H&P, a US multinational," he said.

Ramirez said "sectors opposed" to the Venezuelan government are trying to "stymie" the production of crude in the country, while PDVSA said that seizure of the H&P rigs "will foment national hydrocarbon production and strengthen the policy of full oil sovereignty."

"Our workers are now in control of the rigs," said Ramirez, who noted that Chevron Corp. could also lose up to five rigs. "We are not going to let the private companies stop work or boycott in any way our oil operations."

The US government earlier said Venezuela must compensate H&P if its seizure of the rigs goes through. "We would call on them if they did make such a move to compensate the owners of those wells," said Mark Toner, acting deputy spokesman at the US State Department.

In a terse rejoinder, PDVSA said it "categorically rejects the statements made by spokespeople of the US empire," claiming that Washington was "trying once again to complicate relations with our partners."

Ramirez said H&P will be compensated for the rigs despite the firm's "intransigent stand" in negotiating new fees and the only service company of 33 rig providers to refuse the terms offered.

Analyst BMI, which said Chavez's seizure of the H&P rigs is the biggest expropriation of drilling machinery in years, criticized earlier claims by Venezuela that it had provided compensation for oil and gas industry assets it had nationalized.

"Plenty of firms have clearly yet to see any money, and could soon be bidding goodbye to their assets as well," the analyst said.

Land drilling climbs as gulf rig count sags

Land drilling continued to increase while offshore drilling continued to dribble away this week with a total 1,557 rotary rigs working in the US and its waters, 5 more than the previous week and up strongly from 928 during the comparable week in 2009, Baker Hughes Inc. reported.

Land operations increased by 7 units to 1,529 drilling. Inland waters activity declined by 1 rig to 12 working. Offshore drilling lost 1 rig with 16 still making hole, all of them in the Gulf of Mexico.

Of the US rigs working, 960 were drilling for natural gas, an addition of 2 since the previous week. The number drilling for oil increased by 4 to 587. There were 10 rigs unclassified. Horizontal drilling jumped by 16 units to 849. Directional drilling dropped 6 rigs to 230.

Texas registered the biggest increase among major producing states, up by 9 rotary rigs to 680 drilling. New Mexico increased by 3 to 68. Oklahoma gained 2 for a total 128. Wyoming and Arkansas increased by 1 rig each to 44 and 39, respectively. Pennsylvania and Colorado were unchanged with respective counts of 83 and 54. North Dakota, California, and Alaska were down 1 rig each to 119, 35, ad 8, respectively. Louisiana lost 2 to 178. West Virginia dropped 5, with 23 rotary rigs still working.

Canada's rotary rig count jumped by 50 to 323 drilling this week, compared with 165 in the same period last year.

Processing — Quick Takes

LyondellBasell restarts crude unit after repairs

LyondellBasell reported it has returned a crude unit back to service on July 1 at its 268,000-b/cd Houston refinery.

The unit, one of two designed to run very heavy crude, was shut down on May 17 as a result of a fire, which was extinguished in less than 1 hr (OGJ Online, May 21, 2010).

The undamaged crude unit remained in operation while the damaged unit was repaired.

The fire was confined to the crude unit and no injuries resulted.

Transportation — Quick Takes

Holly to start construction of UNEV line

Holly Corp. and Sinclair Transportation announced July 6 the start of construction of the UNEV pipeline, a 406-mile, 12-in. OD pipeline with 118,000 b/d of refined products capacity extending from Salt Lake City to terminals in Cedar City, Utah, and Las Vegas.

The companies received necessary approvals from the US Bureau of Land Management and said construction would begin immediately on five of the line's seven spreads. Notices to proceed for the last two construction spreads should be issued as soon as preconstruction meetings with the BLM are completed over the next few weeks, according to the companies.

BLM issued it final environmental impact statement on the project in April, amending an electric utility right-of-way to accommodate the pipeline (OGJ Online, Apr. 27, 2010).

UNEV Pipeline LLC expects mechanical completion of the pipeline in early 2011, with service to begin later in 2011. UNEV has said it will initially operate the pipeline at 30,000 b/d. Construction of the Cedar City and Las Vegas terminals are nearing completion.

Holly owns 75% of UNEV, with Sinclair holding the balance.

Tanker oil spills set record low in 2009

In the year before the massive oil spill created by the Macondo well blowout in the Gulf of Mexico, oil pollution from tanker accidents set a record low.

The International Association of Independent Tanker Owners (Intertanko) annual report said there were no major oil spills from tankers in 2009. It defines a major spill as one exceeding 700 tonnes.

More ocean oil spills result from tanker accidents than from blowouts of offshore wells.

Intertanko said the amount of oil pollution from tankers in 2009 was at its lowest level since International Tanker Owners Pollution Federation Ltd. (ITOPF) began keeping records in 1970. ITOPF was created in 1968 to administer a voluntary compensation system established in response to the Torrey Canyon tanker spill off the UK in 1967.

The small spills that occurred in 2009 tended to be bunker spills involving small tankers, Intertanko said.

Fatalities from tanker accidents totaled 15 in 2009, compared with 55 in 2008. The 2009 fatalities resulted from a bulk carrier that collided with an oil tanker, which then caught fire, in the Malacca Straits; a small tanker that exploded after a collision with a fishing boat in China; a tanker launching a boat that capsized off Greenland; and an explosion in the forecastle of a product tanker in ballast off the Netherlands.

Intertanko said the biggest change in incident type in 2009 was groundings, the number of which increased by 14 from the prior year to 64. Most groundings involved small tankers.

China, Kazakhstan sign accords for gas, uranium

Chinese President Hu Jintao and Kazakhstan's leader Nursultan Nazarbayev have presided over several agreements under which their countries will jointly construct a natural gas pipeline and strengthen cooperation on nuclear energy.

Under one agreement, Kazakhstan's state-owned KazMunaiGas and China National Petroleum Corp. will jointly finance and construct a 1,400-km gas pipeline across Kazakhstan.

The $3.5 billion Beyneu-Shymkent line will join the 1,800-km China-Central Asia gas line that opened in December 2009 and links gas fields in Turkmenistan, Uzbekistan, and Kazakhstan to northwest China's Xinjiang region.

The main China-Central Asia line eventually will have the capacity to deliver 40 billion cu m (bcm)/year of gas when it is completed in 2013 or 2014, while the new Kazakh pipeline will ultimately have a capacity of 15 bcm/year.

According to KazMunaiGas Pres. Kairgeldy Kabyldin, the first stage of the new line will be completed in early 2014, and will transport 10 bcm/year of gas.

Kabyldin said the line will enable Kazakhstan to provide energy security for its own southern regions, an area that now relies heavily on gas imported from neighboring Uzbekistan.

In addition to the gas line accord, Kazakhstan also said it would increase shipments of uranium to China after its state-owned nuclear company Kazatomprom agreed to a supply contract during Hu's visit.

Under the contract, Kazatomprom will supply uranium to China Guangdong Nuclear Power Corp. (CGNPC), which operates more than 40% of China's nuclear power generating capacity. Details of the amounts and prices were not revealed.

In April 2009, CGNPC said that it would jointly develop with Kazatomprom a uranium deposit in Kazakhstan with reserves of 40,000 tons. Altogether, reports indicate that China plans to import 24,200 tons of Kazakh uranium during 2008-12.

The two Asian neighbors also signed a third agreement which will allow for unspecified cooperation between them on "the peaceful development of nuclear energy."

Earlier this month, Hu and Uzbekistan's President Islam Karimov signed a number of agreements regarding the purchase of energy from Uzbekistan, including uranium and natural gas (OGJ Online, June 16, 2010).

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