OGJ NEWSLETTER

Will an "April surprise" in Iraq jolt oil prices down in 1992?

Referring to earlier strategically timed developments in an election year, some analysts expect a spring push by the Bush administration to directly support an Iraqi uprising to oust Saddam Hussein, citing survival of Saddam's leadership as a continuing thorn in the side of Bush's reelection chances. Saddam's departure would pave the way for a significant resumption of Iraqi oil exports into an oversupplied market, the thinking goes.

Merrill Lynch contends creation of a crisis atmosphere in the Middle East may help deflect U.S. public attention from the beleaguered domestic economy at a time when Bush's political star is slipping.

Possible actions include a show of U.S. military force in the event of a Shiite-Kurdish uprising in Iraq or selective air strikes if Iraq continues to hinder U.N. efforts to identify and destroy chemical and nuclear weapons facilities. Deploying massive forces to Iraq is unlikely, however.

Statoil, Norsk Hydro, and Saga will discuss cooperation on E&P in Iran with National Iranian Oil Co. this month in Tehran. NIOC wants closer ties to foreign companies and is interested in Norwegian technology and finance. Direct Norwegian investment in Iranian operations is a possibility.

Mongolia is stepping up efforts to attract foreign investment in its oil sector. Effective Jan. 1, Mongolia's state oil company MGT was incorporated into the State Geological Centre, and the agencies have renewed a call for cooperative oil E&D in the former Soviet satellite.

SGC/MGT recently signed an agreement with Amgol Inc., Houston, to establish oil production in the Zuunbayan and Tsagaan Els areas in southeastern Mongolia beginning in 1993. Mongolia's government also ordered SGC to begin work toward construction of a refinery using feedstock from Zuunbayan and Tsagaan Els oil fields. Exploration Associates International of Texas Inc., Houston, is marketing Mongolian data packages.

Chaos reigns in the Commonwealth of Independent States' oil sector with fallout for nations still heavily reliant on it for energy needs.

Moscow continues to lose control over regional economies. Even within the Russian federation, severe problems have developed because relatively small autonomy-minded areas control production of a vital commodity. North of the Caucasus Mountains, a retired general has become president of Chechen-Ingush republic, where a key refining center at Grozny provides 92% of all aviation lubricants produced in Russia. The conflict between Moscow and Chechen-Ingush has at times turned violent, with Russia accusing republic leaders of trying to form a nationalistic, Islamic regime. Av lube shortfalls compound problems caused by tight jet fuel supplies.

Republics also are wary of each other in foreign trade. Kazakhstan is working on a deal to export crude via pipeline to the Russian Black Sea port of Novorossiisk. But some Kazakh officials contend this would put its oil exports hostage to a "foreign" city, so Kazakhstan is mulling a pipeline south through Turkmenistan and Iran to the Persian Gulf. Talks are under way with the U.K.'s Lewis & Peat Ltd.

Russia has cut off all gas supplies to Poland, idling much of Polish industry and reneging on a $2.8 billion barter deal calling for delivery of oil and gas in exchange for food and machinery. Russia last month halved gas deliveries to Poland (OGJ, Jan. 20, Newsletter). When Yeltsin's decree gave companies more independence, it also freed them from commitments to Poland under the deal. Polish officials hurried to Moscow to renegotiate the deal, and Russia is expected to resume gas deliveries this week.

C.I.S. chaos isn't slowing the rush of foreign companies into oil and gas ventures in the former U.S.S.R. Conoco has become the first major integrated U.S. oil company to participate in registering a Russo-U.S. oil company in the Russian federation. Details are sketchy, but Tass reports Conoco and Archangelskgeologia have formed Polar Lights Co., Archangel City, near the Arctic Circle on the White Sea. Although many licenses and agreements still must be obtained, tentative plans call for Polar Lights to develop oil and gas reserves in Timan-Pechora region, including Ardalin field.

And Premier Consolidated Oilfields, Santa Fe Energy Resources. and Grynberg Production have signed a letter of intent to study feasibility of onshore and offshore E&P in Kalmykia, a sovereign republic within Russia along the western Caspian Sea. Offshore portion covers about 2.75 million acres, and the onshore area is expected to be of comparable size. The letter of intent comes after years of Kalmykian opposition to oil work by Soviet agencies because of environmental concerns. The companies expect to begin reprocessing seismic data within a few weeks.

Rationalization of big companies' property portfolios is creating a strong market for mergers and acquisitions in Canada. Sayer Securities estimates value of Canadian M&A deals rose 8% in 1991 to $3.36 billion (Canadian). There was a total of 73 sellers at yearend 1991 vs. 43 the year before. Median acquisition price fell to $4.38/barrel of oil equivalent in 1991 from $4.61/BOE in 1990, $4.67/BOE, and $5.30/BOE in 1988.

Only Chevron Corp. among U.S. majors last week acknowledged curtailment of gas production because of low spot prices (see story, p. 28).

Chevron, at 2.8 bcfd output the biggest U.S. gas producer in 1991 didn't disclose extent of curtailments, only saying they were substantial.

In the past Chevron has shut in as much as one third of its capacity in response to low prices. Chevron said spot prices at Henry hub in 1991 averaged $1.34/Mcf, dipping to as low as $1.15/Mcf in mid-July. Last month, Nymex gas futures dropped to about $1/Mcf for February contracts, about half the level during a normal heating season. Chevron Chairman Kenneth Derr said, "The famous gas bubble that has been forecast as nearly gone every year for the last 5 years is looking stronger than ever."

Curtailments could get tougher. Oklahoma Independent Petroleum Association reports in its December newsletter that in Pack vs. Santa Fe Minerals et al., an appeals court upheld a lower court decision terminating Santa Fe's leases because no gas sales were made for 60 days. Santa Fe had stipulated the wells produced most of the allowable in winter when gas prices were higher and were shut in during summer when prices were low. The Oklahoma Supreme Court has agreed to review the case.

U.S. spot gas prices for February 1992 deliveries averaged $1/MMBTU, the lowest in the 7 year history of Natural Gas Clearinghouse's monthly survey and at a fall of 61cts/MMBTU from January's average the survey's biggest monthly decline.

As bad as things are in the gas industry, that segment can't he blamed for the plummeting U.S. rig count any more. Baker Hughes' tally of active rigs the week ending Jan. 24 plunged another 30 units on the week to 686. That's the lowest since July 14, 1986, the record low since Baker Hughes began keeping track in 1942. Almost all of last week's fall came in Texas, and the drop of more than 100 rigs since the first week of December has been 90% driven by oil. Using a different criterion, the Smith rig count slumped 47 units to 675, down 39% from a year ago.

And the U.S. seismic crew count marked its sixth consecutive monthly decline in December, falling to 85, the lowest since Society of Exploration Geophysicists began keeping track in 1974.

Louisiana has dropped its legal efforts to halt Gulf of Mexico federal lease sales unless it gets a bigger piece of the offshore revenue pie. Gov. Edwards ordered litigation efforts dropped as the state signed off on the next Central Gulf of Mexico OCS sale under the MMS comment period.

FERC officials are unsure whether President Bush's 90 day moratorium on new federal rules that could hinder economic growth will delay "mega-NOPR," the pending rule requiring pipelines to unbundle service costs. Bush ordered agencies to execute "a top to bottom review of all regulations, old and new, to stop the ones that will hurt growth and speed up those that will help growth."

Industry has lost a strong advocate at DOE. Bush has named Deputy Energy Sec. W. Henson Moore deputy chief of staff in the White House. There is no word on Moore's successor.

EIA predicts U.S. oil demand will increase to 19-22 million b/d by 2010 from 17 million b/d in 1990. Falling domestic production will jump U.S. oil imports to 10-15 million b/d in 2010 from 7 million b/d in 1990. That's 53-69% of U.S. consumption. Oil will remain the primary U.S. energy source in 2010 but lose some share of the energy mix because of increased energy efficiency, fuel substitution, and advances in transportation technology.

EIA pegs U. S. gas production at 19-21 tcf in 2005 vs. 18 tcf in 1990.