OGJ NEWSLETTER

The new year begins with a gloomy outlook cutting across all sectors of the petroleum industry.

A year that began with war in the Middle East imminent and oil prices hovering near $30/bbl ended with crude futures for near term delivery trading at levels not seen-outside of a few days in late February-since before Iraq's August 1990 invasion of Kuwait.

Weak oil and gas demand stemming from lingering economic malaise and warmer than expected weather is squeezing producers as well as refiner/marketers. Although Nymex crude for February delivery rose almost 50cts on the day to close Dec. 31 at $19.12/bbl, that's still nowhere near the $21-24/bbl levels seen most of the second half.

After trading much of the late fall and early winter near $2/Mcf, Nymex natural gas futures have plunged about 50cts since mid-December, closing for next month delivery at $1.34/Mcf Dec. 31, about flat with last winter's disappointing level.

Gasoline prices have continued their steady trek south, taking refiner/marketers' margins with them. Nymex near term unleaded the closing days of December fell to the lowest level since December 1989. The way Merrill Lynch figures it, Gulf Coast refiners' gross margins for the fourth quarter up to mid-December averaged only $1.05/bbl, down from $2.25 in the third quarter. Although marketing margins improved in December, Merrill Lynch says it's apparent overall fourth quarter margins for Gulf Coast refining and marketing will fall below the third quarter levels and below expectations.

With yearend stocks about 4 days higher than normal, a bigger than usual drawdown is expected in the first quarter, putting more pressure on crude oil prices. Pronouncements ahead of the Feb. 12 ministerial meeting don't augur well for OPEC cohesion.

Kuwait says it won't trim its 1.5 million b/d quota by a single barrel and wants that quota raised if OPEC hikes the overall ceiling.

Oil Minister Hamoud al-Ruqbah says if Kuwaiti and Iraqi supplies are fully restored to the market, the quota system should return with new arrangements to accommodate their rebounding production.

Kuwait is producing 400,000 b/d and targets 700,000 b/d in the first quarter and 1.5 million b/d in the fourth quarter.

The depressed market continues to pull down the active rig counts. The Baker Hughes annual tally has plummeted to a 50 year low, with a 1991 average of 860 the lowest since 1942's count of 761 and down almost 15% from 1990 and 1% from 1989. The past 5 years the Hughes count has averaged 922. The Hughes weekly count Dec. 27 dropped 27 units on the week to 770, down 29% from a year ago and matching the second lowest level of the year. Using a different criterion, Smith's rig count hit a record annual low of 922 in 1991. Its weekly count fell 91 units to 746 vs. 1,146 a year ago and the lowest since July 4, 1986. Canada's 1991 active rig count fell 11% from a year ago to 164 and rig utilization to 33%, making it the worst year for drilling there since 1989. Current budgets reflect the downturn as well. Shell Canada has pared its capital and exploration budget to $835 million (Canadian) in 1992 from $1 billion spent in 1991.

Here's a couple of historic milestones for U.S. industry:

As of Jan. 1, only unleaded gasoline can be sold in California, completing a 10 year program by the state to phase out leaded gasoline.

And ARCO Alaska has plugged Prudhoe Bay's first development well. Because maintaining it proved too costly, ARCO plugged DS 1-1, leaving a Christmas tree, in place as a historic marker. The well, which started flowing in December 1970, at first provided crude for a North Slope topping plant and produced more than 19 million bbl.

BP has agreed to pay Alaska $185 million, about half what the state was seeking, to settle a 14 year old lawsuit over disputed North Slope oil royalty payments. In 1977, Alaska alleged 12 North Slope producers under-valued their oil and overvalued transportation costs.

ARCO paid $287 million last summer to settle its case, and six other original defendants have settled out of court. The state is preparing to go to trial in April against Chevron, Exxon, Mobil, and Texaco.

Nineteen Japanese oil companies will cut imports of Mexican crude because of a dispute with Pemex over pricing and delivery terms.

Effective this month, contract volumes of 180,000 b/d negotiated under a deal cut through Mexican and Japanese governments will fall to 100,000 b/d.

The Japanese group has been lifting the oil under an arrangement to repay a $500 million loan to Pemex in 10 years. Nikkei Weekly said because of currency fluctuations the Japanese companies have been losing 300/bbl on the deal. The Japanese companies also claim that Pemex does not operate a proper pricing formula and changes volumes available for Japanese buyers to suit its own convenience. In addition, the amount of heavy Mayan crude is increasing at the expense of light Isthmus crude.

A Leipzig court has ordered Wintershall not to carry out its threat to halt Soviet gas supplies to VNG as expected last week (OGJ, Dec. 30, 1991, Newsletter). The threat stemmed from the eastern German gas distribution company's refusal to pay higher prices for gas imports Wintershall and Gazprom supply from the former U.S.S.R. The court order extends through the first quarter and is likely to be challenged by Wintershall in higher courts.

Intera Information Technologies Ltd., Henley-on-Thames, England, has won exclusive rights from the Polish governments to acquire aeromagnetic data over parts of Poland and the Polish sector of the Baltic Sea. Intera expects to mobilize equipment in February to acquire about 242,000 line km of data. Poland's Enterprise for Geophysical Research and Intera will invite international participation in all or part of the project.

BP has proposed to Kazakhstan joint development of Karachag area gas fields, reports Tass. A BP delegation arrived in the former Soviet republic last week to conduct negotiations.

Pakistan is trying to line up gas supplies from the former Soviet republic of Turkmenia.

The interest was expressed last month when a delegation to Ashkabad signed a memorandum of understanding for Pakistan to offer general economic development assistance to Turkmenia shortly after the five Central Asian republics agreed to join the Soviet successor Commonwealth of Independent States. Turkmenia produces about 3 tcf/year of gas and is seeking markets outside the former U.S.S.R. Any deal will hinge on whether Afghanistan exports to other Central Asian republics will resume (see story, p. 27).

Russia will require Cuba to pay market prices in cash for its oil, a major blow to Cuba, which faces a severe shortage of hard currency.

In a meeting with Russian Foreign Minister Andrei Kozyrev, anti-Castro Cuban American National Foundation Chairman Jorge Mas said the measure, part of a policy shift including an end to loans and subsidies to the Communist nation and accelerated military withdrawal, is "the beginning of the end for Fidel Castro."

Petrobras will invest almost $19 billion in Brazil's oil sector in 1992-95: E&P $13.3 billion, refining $2.6 billion, and transportation $1.5 billion. The state oil company hopes to boost production to 1 million b/d and 1.4 bcfd by 1994. Brazil currently produces 640,000 b/d, about half its demand.

British Gas has agreed to a new deal to boost competition in the U.K. industrial gas market. Under a tentative settlement with Office of Fair Trading, BG will cut its share of the U.K. contract market for firm and interruptible supplies from to 40% by 1995 from the current 90-95%.

And to pave the way for new competitors to take up the slack, BG will release as much as 50 bcf of North Sea gas reserves contracted for Oct. 1, 1992-Sept. 30, 1993, and additional volumes to 1995-96. Further, BG has agreed to spin off its U.K. transmission system as a separate unit. The agreement also could lead to new gas import contracts with Norway in an effort to inject still more competition. However, U.K. Director General of Gas Supply won't accept tariff adjustments under the agreement, and BG won't accept the whole deal without tariff changes. With a mid-January deadline for the agreement, the three parties are trying to hammer out an accord.

Netherlands Ministry of Environment has chosen Arthur D. Little to determine an integrated approach to cut sulfur dioxide emissions of oil products in Europe. The study would provide guidance for talks on future European Community SO2 initiatives.