OGJ Newsletter

Due to a holiday in the U.S., data for this week's Industry Scoreboard are not available.

IEA has revised its 1999 global oil demand forecast downward.

In its latest monthly oil market report, IEA predicted oil demand would increase only 1.5%, or 1.1 million b/d, this year, to 75 million b/d. This is a 600,000 b/d decline from estimates made at the end of last year.

IEA also said it expects total 1998 demand to be less than previously thought-about 73.9 million b/d, down 400,000 b/d from December's forecast. The agency cited continuing economic turmoil in Asia as the principal cause of depressed demand, but said mild weather in the Northern Hemisphere in the fourth quarter also contributed to the decline.

Some of the economic factors will continue to weigh on 1999 projections, said IEA. Its forecast for 1999, however, assumes normal winter weather conditions and demand patterns.

World oil demand will increase by less than 1 million b/d in the first quarter to 75.6 million b/d, a reduction of 700,000 b/d from earlier forecasts. Second quarter demand projections have been shaved by 500,000 b/d to 73.3 million b/d. Third-quarter reductions are even sharper, with IEA expecting demand of 74.4 million b/d-900,000 b/d lower than December projections. And demand in the fourth quarter is expected to be 76.9 million b/d, about 300,000 b/d off from the earlier forecast but a 2.0% increase from fourth quarter 1998.

IEA attributes much of the expected 1999 demand increase to North America and says more than 60% will come from OECD countries.

IEA also revised down its forecast for non-OPEC supply, citing potential "lower output projections for the U.S. and the North Sea." Supply forecasts for non-OPEC countries have been cut by an average 400,000 b/d for 1999, to 45 million b/d. This is an increase of 400,000 b/d over 1998 levels.

"Sustained recovery in oil markets will require a re-establishment of Asian economic growth, and that does not look imminent," said IEA.

Experts are warning that low oil prices are leading to a production crisis in the North Sea.

In Brussels last week, a panel of oil industry experts said a major crisis could soon hit the U.K. North Sea oil industry. They noted that it now costs more to produce a barrel of North Sea oil than it can be sold for and said nearly 75% of the sea's prospective new oil fields are uneconomic.

OPEC News Agency (Opecna) reported that one expert said, "At currentellipseworld oil prices of around $12/bbl, only 12 of 40 new fields can now pay their way." Even with the cost-cutting programs now in place at oil companies, many new North Sea projects would not be economic, as average production costs are about $12/bbl-$2 above the recent selling price.

Some European oil industry analysts are even more pessimistic, suggesting that true North Sea production costs are closer to $14/bbl. One source told Opecna, "This is likely to prove a further deterrent to already declining North Sea investment, and production at the oil fields is expected to fall away much faster than previously expected."

Norway's Saga Petroleum is planning to hedge up to 50% of its anticipated crude oil sales for 1999 to protect itself against continuing low oil prices. So far, the company has hedged 12% of anticipated sales, equivalent to about 8 million bbl of oil. The price for this oil has been fixed at $12/bbl.

The Independent Petroleum Association of Mountain States says the oil depression is hitting hard in the Rocky Mountains. It surveyed 35 of its members, who said they had slashed their 1999 exploration budgets $135.6 million. They laid off 144 workers in 1998 and plan to pink-slip another 58 this year. And they shut in 1,131 marginal wells last year and expect to add another 491 this year, for a total loss of 777,796 bbl of oil in 1999.

BP Amoco may have slowed development of its Northstar offshore oil field development in the Arctic Ocean because of low oil prices, but Greenpeace has decided to try to jam the brakes on fully.

Last week, BP Amoco announced it had begun work on the ice road needed to build an artificial island 6 miles offshore, to carry drilling and production facilities for Northstar, but had suspended module fabrication work for 1 year due to low oil prices. This will put production start-up back to late 2001.

The environmental campaign group filed suit in Anchorage Jan. 19 in a bid to stop what it called the "illegal" construction of ice roads. It contends that BP does not have the permits required by federal and state law to begin road construction.

A spokesman for BP Amoco told OGJ: "We believe the Northstar project is environmentally sound and consistent with all the environmental rules required by U.S. law. We will review the legal brief filed by Greenpeace."

The median energy stock returned a negative 36.1% in 1998, according to a study by Houston-based consulting firm John S. Herold Inc. By contrast, the Dow Jones industrial average gained 18%.

"The year was nothing short of murderous for investors in the energy sector," said Herold Vice-Pres. Robert Gillon. The downturn took its hardest toll on E&P companies, especially those with undeveloped assets, he said.

"World crude oil fundamentals came unglued; losers overwhelmed gainers by a margin of 238 to 40, with one issue unchanged; and not a single issue doubled in price in 1998, compared to 9 (in 1997) and 30 in 1996, the last time oil prices were on the upswing," said Gillon.

The best-performing stocks were those of pipeline companies and diversified groups of companies. Montana Power, with a total return of 83.2%, was the best performing energy stock of those studied.

Rep. Joe Barton (R-Tex.), the new chairman of the House energy and power subcommittee, plans a hearing in early February on the pending Exxon-Mobil merger.

The U.S. Federal Trade Commission will decide later this year whether to allow the merger to proceed. The Wall Street Journal reported last week that the FTC had demanded more information from the two companies, mostly on refining and marketing of gasoline.

Mobil Oil Australia has announced that it is withdrawing from negotiations on a proposed Australian refining joint venture with Shell (OGJ, Sept. 14, 1998, p. 32).

"Based on a series of discussions with the Australian Consumer and Competition Commission, it has become apparent that the approval process for the joint venture would be protracted and uncertain, said MOA Chairman P.C. Tan. "As a result, the approval processes for both the Australian joint venture with Shell and the Mobil-Exxon global merger would overlap. Mobil, therefore, will not proceed with its proposed joint venture with Shell."

Tan expressed disappointment that the proposed JV was being canceled. "We do continue to believe that capturing efficiencies is critical to the viability of the Australian refining industry. So, while we will not be pursuing a joint venture with Shell, we are stepping up the self-help program within our own Australian refining operations."

The Royal Commission investigation into the Longford gas processing plant disaster, which cut gas and oil supplies to Victoria from Australia's Bass Strait last September, has been extended and is now likely to continue through mid-year (OGJ, Dec. 14, 1998, p. 34). This is several months and $2 million (Australian) more than the speedy result requested by Victorian Premier Jeff Kennett, when he set up the inquiry.

The commission has heard from employees of operator Esso Australia that a heat exchanger ruptured after becoming frosted over with ice. Local press reports on the investigation say that Esso employees have called into question maintenance spending and the thoroughness of hazard assessment studies, especially with respect to the low-temperature liquids section of the gas plant. An internal company report, however, states that Esso identified and assessed 390 risk scenarios for its offshore and onshore operations in the area.

Privatization efforts among state oil firms are pushing forward in many areas (see related stories, pp. 38 and 44).

Spain's Repsol inked a deal with Argentine national firm YPF to acquire 14.99% of its shares for $38 each. Repsol will pay about $2 billion to acquire almost 53 million Class A shares. The purchase will displace the government as YPF's largest shareholder and enable Repsol to choose two of the company's directors. The deal furthers Repsol's considerable holdings in Latin America (OGJ, Nov. 3, 1997, p. 19).

With greater political independence for Scotland agreed by the British government, it was inevitable the old question of who owns Scotland's oil would resurface. A study conducted for The Economist magazine by Prof. Alex Kemp of Aberdeen University suggested that Scotland would get 67% of U.K. North Sea oil and gas revenues at current prices, compared with 90% claimed by the Scottish Nationalist Party (SNP). The Scottish Labour Party pounced on this opportunity to get at the increasingly popular SNP, with MP Douglas Alexander stating: "This blows a massive hole in the Nationalists' economic policies. It shows they would not have the oil revenue they claim would balance their books."

A Canadian firm is setting up a subsidiary for investment in Iran.

Tracer Petroleum announced that it is in the process of incorporating a new unit, Tracer Petroleum International (TPI), in Bermuda for the purpose of pursuing oil and gas opportunities in Iran. TPI, to be owned 66.66% by the investment firm Mullins Group and 33.34% by Tracer, intends to acquire a majority interest in prospective petroleum assets in Iran, and then subsequently bring in a partner, or partners, said Tracer.

Mullins officials visited Iran on behalf of TPI in December 1998, and held several meetings with representatives of National Iranian Oil Co. and the government. Based on these meetings, Mullins says it is confident that TPI would be offered the opportunity to investigate and negotiate the acquisition of an interest in one or more petroleum projects in Iran.

Further meetings are planned during the next 30 days.

Two men have been charged with nine counts of criminal conspiracy and mischief in the bombing of an oil company road in Alberta. The charges relate to the bombing of a Union Pacific road near Hythe, Alta., last November. Wiebo Ludwig Sr. and Richard Boonstra are also alleged to have planned future attacks on installations in the Grande Prairie area in northwestern Alberta.

There have been more than 160 incidents of vandalism against oil company, utility, and forestry installations in northern Alberta (OGJ, Sept. 7, 1998, Newsletter). Charges of mischief endangering life were laid last August against Ludwig, his wife and son, and Boonstra after a bomb explosion at a Suncor Inc. wellsite. The charges were later dropped. Police say they could be reinstated because incidents are still under investigation.