OGJ NEWSLETTER

Are oil markets about to repeat the plunge of late 1985 and early 1986? Not likely, say some industry observers.

In no way is the current environment similar to the situation in 1985, says Wood Gundy. The analyst believes basic fundamentals surrounding oil are stronger than currently reflected in markets.

Wood Gundy predicts spot WTI will average $18/bbl in 1994, a slight drop from $18.30/bbl in 1993 but a big jump from current levels.

And Chevron Corp. Chairman Ken Derr sees WTI rebounding to $16-18/bbl by midyear with a 30% chance of further decline from current levels before the rebound comes. With Kern River crude at $8/bbl, where it was in late January, it's impossible to earn a profit or justify new investment in production of heavy crude in the San Joaquin Valley, Derr said, noting Chevron produces 100,000 b/d in the region.

However, Derr contends industry is better prepared to deal with the downturn in prices than it was in 1986, citing increased competition, improved efficiencies, and technological advances. Chevron has sliced its lifting costs by $2.50/bbl since 1990 in its western production unit.

On a more bearish note, Kidder, Peabody has WTI recovering by $1-2/bbl from the current $15/bbl level early in the year, then drifting down through most of 1994 and averaging about $15/bbl for the year.

Kidder, Peabody also sees Henry Huh, La., spot natural gas price at an average $2.15/MMBTU, up from 1993's $2.11/MMBTU, with U.S. gas demand growing 2.5-3% this year.

A bigger than average drop in the U.S. active rig count is likely in the first quarter, warns Salomon Bros.

U.S. drilling permits totaled an adjusted 2,256 last December for the 29 states the analyst tracks, about flat with November. Permits were down by an adjusted 23.2% from December 1992. The 1992 count was distorted by inflated activity from Section 29 drilling, but the December 1993 permit level also is below that of four of the preceding five Decembers.

Salomon Bros. says lower oil and gas prices will fuel a 5% drop in E&P spending this year. Non-U.S. spending could fall as much as 10%, while U.S. spending could increase slightly for the year.

At least two companies bear out that prediction, and neither seems especially worried about low oil prices.

Union Texas, with a strong emphasis on non-U.S. development projects, set 1994 capital spending at about $160 million, down from about $192 million in 1993 outlays. The company, with a strong emphasis on development spending in the U.K. North Sea and Indonesia, said the reduction mainly reflects lower development spending in the U.K. However, even if current low oil prices continue through the year, UT says it does not expect to cut capital outlays during the year.

Anadarko, earmarking 85% of its 1994 budget for drilling and related projects in the U.S. Midcontinent, Gulf of Mexico, and Texas Gulf Coast, jumped its 1994 budget to $370 million from $264.5 million. The company says it is "excited about the opportunities that are available for Anadarko to generate excellent returns, even at these low crude oil prices."

Despite becoming a net gas exporter in recent months, Mexico nevertheless will be a lucrative market for U.S. and Canadian gas companies in years to come. That's the view of speakers at a Mexico City conference of U.S., Canadian, and Mexican gas associations last month.

Chevron sees Mexico at the least facing a shortfall of 8 tcf during 1994-2010. But structural impediments, such as a virtually unlimited supply from Pemex of cheap high sulfur fuel oil and an inadequate gas pipeline infrastructure in Mexico, must first be overcome.

Canada's Natural Resources Minister Anne McLellan won't rule out a possible carbon tax but stressed the government has made no decisions on options to increase federal revenues. McLellan was responding to questions from Preston Manning, leader of the Calgary based Reform Party, which holds a large block of seats in parliament. Manning said a carbon tax could have a disastrous effect on oil producing provinces.

McLellan noted federal Finance Minister Paul Martin plans prebudget consultations with oil industry officials in Calgary. The Liberal government in Ottawa is preparing a new budget that will he unveiled late this month.

Oil industry leaders are nervous because a previous Liberal government devised the National Energy Program in the early 1980s, which industry and Alberta condemned as a discriminatory tax grab.

Government fuel formula mandates continue to skew U.S. markets.

Mobil is supplying kerosine to many of its U.S. Northeast terminals for the first time in many years. That's because new IRS rules on taxation and sale of clear, red, or blue diesel fuels have led many of Mobil's distributors to demand tax free kerosine rather than taxable No. 1 fuel oil for their home heating customers. No. 2 heating oil may be sold tax free under new IRS rules, but it isn't suitable for certain heating applications, especially if stored outside above ground in extreme weather.

OK Petroleum AB has launched a grade of low emission gasoline in Sweden. The company received approval from the state environmental authority for the new fuel, which it claims reduces emissions of sulfur oxide, nitrogen oxide, and carbon dioxide by as much as 50%.

"No other petrol in Europe can match these figures," OK said, "and Sweden moves close to the rules in California, which has the toughest legislation in the world."

There is no way California refiners will come close to meeting the demand for California Air Resources Board Phase II gasoline in March 1996, even if there had not been an earthquake in the Los Angeles area. says John Dosher of Pace Co., Houston. It could easily turn into a fiasco such as when low sulfur diesel was introduced into California, he says (OGJ, Jan. 24, p. 17). That's because time essentially has run out to carry out the $6-7 billion worth of refinery projects needed to produce allowable gasoline components. Such a volume of work would press even the much larger U.S. Gulf Coast construction industry. Further, even if all necessary units could be built, West Coast refiners would find it almost impossible, Pace studies show, to make CARB II spec gasoline on a day to day basis. It has to be low in sulfur, volatility, aromatics, and olefins, mid almost benzene free.

MMS reports none of the 23 platforms off California appear to have suffered structural harm during the Jan. 17 quake. MMS said the earthquake triggered safety systems on platforms, and production operations were suspended without major incident. The agency has ordered all offshore operators to make formal inspections and report back by Feb. 7.

MMS said Platform Hogan spilled 1,260 gal of treated process saltwater contaminated with about 2 bbl of oil into the ocean because a power outage caused an onshore system to fail. The oil was quickly recovered.

Malaysia has joined neighbor Indonesia in offering deepwater acreage for a new bidding round with sweetened terms for frontier investments (OGJ, Jan. 31, p. 29). After awarding the first two deepwater production sharing contracts (PSC) to Mobil, Petronas is eyeing other blocks in more than 200 m of water off Sabah for the bid round, expected to open soon.

One of the two blocks awarded to Mobil lies in waters 1,000-1,800 m deep. Record water depth for a Malaysian well to date is 180 m off Sabah.

Petronas sees significant oil and gas potential in the deepwater region, with some structures prospective for 500 million bbl reserves.

Onshore and offshore acreage in western Greece is expected to be offered to international bidders this year by state concern Public Petroleum Corp. of Greece (DEP). New legislation on oil and gas exploration is expected to be passed by Greece's parliament in late spring, leading to an offering of blocks in the Epirus region and the Ionian Sea. The new laws will give DEP the right to take a minority interest in PSCs in Greek territory.

Seismic studies in Epirus yielded encouraging results, while drilling has confirmed oil shows in the Ionian Sea.

North Aegean Petroleum Corp. is continuing drilling in the northeastern Aegean Sea's Prinos field, where production fell to about 8,000 b/d in 1993 from 26,000 b/d of oil in the early 1980s. A $5.3 million gas lift project is under way using gas from nearby South Kavalla field. This raised output by 4,000 b/d and could lead to another increase of 2,000 b/d.

U.K. North Sea oil production in December reached its highest level since the Piper Alpha platform blast in 1988, reaching 2.33 million b/d.

Oil output for all of 1993 also was the highest in 5 years at 1. 98 million b/d. Output in fourth quarter 1993 jumped 14% from the 1993 period.

Offshore gas production also reached a new high, averaging 6.255 bcfd for 1993 as a whole, up 23% from the previous high in 1991.

Slower than expected production of construction drawings has led to delays in building a condensate plant at Statoil's refinery at Kalundborg, Denmark. Statoil expects the plant to go on stream in second quarter 1995 rather than the earlier projected fourth quarter 1994.

Project costs have also climbed, from an original 2.2 billion Danish kroner ($320 million) to 2.6 billion Danish kroner ($380 million). Kalundborg refinery is being converted to run condensate feedstock to boost the plant's products quality and use secure supplies from Statoil's Sleipner gas/condensate fields (OGJ, Nov. 15, 1993, p. 23). Construction work at the site has reached the halfway stage. Process modules are half completed, building work is in progress, and tie-in to existing facilities is on schedule.

Inner Mongolia is pressing a major expansion of its petrochemical sector. The northern China autonomous region plans to invest at least 32.02 billion yuan ($5.6 billion) to develop six major petrochemical complexes this decade. The region's petrochemical output is expected to show average growth of 17.5%/year during 1991-95, climbing to a value of 8.8 billion yuan by 2000 from 2.3 billion yuan in 1993.

Fresh on reports of an imminent peace agreement between Israel and the PLO, Qatar has confirmed for the first time publicly that it is negotiating construction of a $1 billion pipeline through Israel to Europe (OGJ, Nov. 8, 1993, Newsletter). First must come a feasibility study and greater progress in an Israel-Syria peace accord - a development currently in the making. With the confirmation, Qatari Foreign Minister Sheik Hamad also said his government may take steps to seek formal lifting of the decades - old Arab boycott of Israel.