OGJ Newsletter

U.S. INDUSTRY SCOREBOARD 3/8 [43,869 bytes]

A brief boost in oil prices was expected to subside at presstime, as news broke that an Iraqi oil export pipeline, briefly shut down as a result of a U.S. air strike, was restored to its full 1 million b/d capacity.

The U.S. is stepping up strikes against Iraqi military targets because Iraq is repeatedly violating no-fly-zone rules. Baghdad claims one of the strikes damaged a pipeline taking oil to Turkey, halting the flow of crude to the Turkish port of Ceyhan and halving Iraq's exports. The Pentagon denied that, saying its targets included an air defense command post, a radio relay station, and a surface-to-air missile battery near Mosul, 240 miles north of Baghdad.

Iraq's oil ministry said the planes hit a pipeline control center near Mosul and claimed one oil worker was killed and two injured. The news caused Brent crude for April delivery to jump 27¢/bbl on Mar. 2 to $11.00/bbl at close of trading, and 25¢/bbl on Mar. 3 to close at $11.25. Brent's response to the restoration of Iraqi exports was awaited as OGJ went to press.

Meanwhile, the U.N. said its oil-for-aid program in Iraq is failing to raise sufficient money to meet humanitarian needs. The U.N. blames low oil prices and falling Iraqi export capacity due to lack of spare parts.

Iraqi Oil Minister Amer Mohammed Rasheed says crude oil production could reach 2.5 million b/d if Iraq received the spare parts needed to repair its damaged oil installations. He claims Iraq is negotiating with international oil companies to increase its production capacity to 6 million b/d in the future, through developing 10 huge oil fields. Talks with French companies had reached an advanced stage, he said. Rasheed said Iraq received only $11 million worth of spare parts, out of $300 million allocated to rehabilitate the oil sector, as part of the fourth phase of the oil-for-aid program.

The U.S. Senate energy and foreign relations committees plan a joint hearing next week to explore how Iraq's oil-for-aid program is depressing world oil prices. The Clinton administration has proposed to broaden the current U.N. deal to allow Iraq to sell more oil for humanitarian purposes. Iraq now can sell up to $5.256 billion worth of oil every 6 months to buy food and medicine.

The U.S. State Department has criticized Elf and Agip for signing a new oil contract with Iran (see story, p. 31). An investigation is planned into whether the deal forged by the French and Italian oil firms violates the Iran-Libya Sanctions Act. The U.S. exempted from sanctions France's Total, Malaysia's Petronas, and Russia's Gazprom, which are involved in a similar deal with Iran (OGJ, May 25, 1998, p. 18).

Under terms of this latest contract, for Dorood field, the Elf-Agip combine will receive 40,000 b/d of oil, valued at $10/bbl, for 8 years beginning in 2001, as repayment for its $540 million investment.

Credit-rating firm Standard & Poor's has downgraded its so-called public information (PI) ratings of Nippon Oil and Mitsubishi Oil to BBpi from BBBpi. S&P said the downgrades reflect "meager profitability" and low margins, with little prospect for improvement, both related to Japan's deregulation and market oversupply: "Japan's refining and marketing sector has a below-average industry profile, characterized by excessive competition at both the refinery and service-station level," said S&P (see related story, p. 25).

"The merger (of Nippon and Mitsubishi) should pave the way for further rationalization," said S&P, "although this is unlikely to include such drastic, yet much needed, measures as closing refineries or shrinking the combined service-station network. Even if logistics and overhead costs can be cut, it is questionable whether the savings will translate into improved profitability, given the market's continued tendency towards price-based competition."

S&P affirmed four other firms' PI ratings: General Sekiyu and Showa Shell Sekiyu, both at BBBpi; Cosmo Oil at BBpi; and Japan Energy Corp. (JEC) at Bpi.

In an effort to boost sales and reduce overhead, Japanese refiner-marketers Idemitsu Kosan and JEC will separately open convenience stores at self-service gasoline stations-a new concept in Japan.

Idemitsu will team up with Yamazaki Baking to turn its 300 manned gas stations into self-service outlets with convenience stores by fiscal 2003. It will overhaul management of all its 7,100 affiliated stations starting in April. Those that do not have stores added will offer additional services such as automobile safety checks. Idemitsu set up a test self-service station in Hachioji, Tokyo, last April, when the ban on such outlets was lifted.

JEC plans to install self-service stations at sites where affiliated firm am/pm Japan Co. sets up new convenience stores. It aims to establish 10 such complexes during fiscal 1999.

Caltex and BP have ended negotiations on forming a joint venture to operate their Australian refineries and associated oil supply and shipping sectors. The announcement comes barely 2 months after the firms announced the start of negotiations and only weeks after Shell Australia and Mobil Oil Australia broke off their refining merger talks (OGJ, Jan. 25, 1999, Newsletter).

Caltex and BP cite an inability to agree on a commercial arrangement that creates satisfactory value for both parties as the reason for discontinuing the merger proposal, but neither would comment further.

The failure of both the Shell-Mobil and Caltex-BP proposals puts all the companies back to square one, with regarding to coping with increasing competition from product imports into Australia from much larger refineries elsewhere in Asia. Although Australian refiners say they will take action to ensure their long-term competitiveness, many observers feel that some refineries in the country will be forced to close in the not-too-distant future, or at least concentrate on specialty products and target niche markets.

Indonesian Foreign Minister A* Alatas has confirmed that the Timor Gap oil and gas treaty with Australia will have to be renegotiated if Indonesia grants independence to East Timor later this year.

Following Indonesia's change of stance on the independence issue, energy ministers from both Australia and Indonesia are expected to set a timetable for these negotiations, expected to begin in the near future. It is likely that exploration in the region will continue unabated, however, and that the interests of existing companies will be protected in any renegotiation.

Attendees at last week's Gas Processors Convention in Nashville were reminded, as if they needed to be, that the energy business in general, and the NGL business in particular, are global. That was the message of former U.S. Energy Sec. Federico Pe?a in his keynote speech. Pe?a has taken a job in global project financing since leaving government and likened the energy sector to the world's financial markets in how events in one region immediately affect markets on the other side of the world.

Citing U.S. EIA forecasts, he said current depressed conditions in energy are only a bump in the road to a 60% increase (114.7 million b/d) in world oil demand by 2020. Pe?a further decried the growth in U.S. imports of oil that by 2010 will likely make up 60% of U.S. oil use.

ARCO's campaign for maximizing its Alaskan oil production-dubbed "No Decline After '99"-is within reach due to the start-up of Alpine field in mid-2000, said the company (OGJ, Aug. 24, 1998, p. 20). Alpine is expected to boost ARCO's Alaska output to 325,000 b/d in 2000 from 317,000 b/d in 1999, and further to 347,000 b/d in 2001. The company's goal is to increase its North Slope production to more than 330,000 b/d in the near future and hold it steady.

"Despite record-low oil prices and the resulting spending cuts, we can still achieve our Alaskan production goal," said ARCO Alaska Pres. Kevin Meyers. "However, the oil price environment has led to a lower level of production turnaround than we previously expected."

ARCO's capital spending plan for 1999 was cut by $120 million to $450 million-Alpine represents about 50% of the 1999 budget. One of the projects placed on hold was the development of Alaska's West Sak heavy oil pool. ARCO also, along with partners Exxon and BP Amoco, slowed development drilling at Prudhoe Bay, Point McIntyre, and Kuparuk.

Russian firm Yukos and Chinese National Oil & Gas Corp. inked an agreement to conduct a feasibility study for a 3,000-km oil pipeline from the Siberian field Angarsk to northeastern China, according to local press reports. About a third of the pipeline's 550,000 b/d of shipments would be exported from Chinese ports to other countries in the region.

The Clinton administration has objected to legislation that would restrict lawsuits that customers could file against companies with Year 2000 computer problems. The administration, which had opposed similar bills to limit punitive damages in product liability lawsuits, said the Y2K legislation would limit consumers' legal rights and would be a disincentive for companies to fix Y2K problems.