OGJ Newsletter

U.S. Industry Scoreboard 1/8 (72616 bytes)

Look for oil prices to remain roughly flat and gas prices to strengthen considerably this year.

Edinburgh analyst Wood Mackenzie, after surveying 25 E&P companies, found industry expects the price of Brent crude to average $16.50/bbl this year.

Wood Mackenzie affiliate Natwest Securities conducted a similar survey, finding a consensus prediction by E&P companies of $17/bbl Brent in 1996, rising by 50-75 in 1997. Natwest, more bullish than its sister company or survey respondents, predicts average Brent prices of $19/bbl in 1996, $18/bbl in 1997, $20/bbl in 1998, and $21/bbl in 1999. Natwest pegs Brent at $17.50/bbl in 1995 vs. $15.96 in 1994.

Although oil prices can fall to low levels as they did in first quarter 1994, said Wood Mackenzie, the stabilization of real oil prices in the $10-15/bbl range as suggested by some forecasters depends on several unlikely conditions.

The analyst contends a first false assumption is that governments in consuming countries will not control demand growth or protect domestic companies. The second is that key producers will allow their political and social stability to be put at risk by a long period of low oil prices. The third unlikely condition is the high level of E&P spending will continue.

In view of these arguments, it would not take much to push the oil markets to the top of the $13-23/bbl price range that has existed since 1986, said Wood Mackenzie. If the 1996-97 period is characterized by relatively strong worldwide economic growth, and non-OPEC supplies begin to reach their upper limits, the likelihood of recovery in crude oil pricing is high.

Natwests 1997 projection assumes a resumption of oil exports by Iraq, causing a $1/bbl dip in average oil price for the year.

Of course, the impact could be more than this in the short run, said Wood Mackenzie, but it is unlikely that the overall shock to the market would be significant, because it seems that oil is already trading at some discount in anticipation of the return of Iraq to the markets.

On the gas side, analysts are scrambling to notch up their forecasts of U.S. gas prices in the wake of surprising recent strength in gas futures.

They cite storage levels at yearend 1995 almost 15% below the prior year, cold weather, and lower than expected growth in U.S. imports of Canadian gas.

Merrill Lynch hiked its prediction for 1996 Henry Hub spot gas by 11 to $1.75/Mcf vs. $1.50 in 1995, Dean Witter upped its 1996 forecast by 5-10 to $1.85-1.90, and Salomon Bros. jumped its prediction for average U.S. 1996 spot gas 20 to $1.80.

Some of the bulls are especially aggressive. Mike Smolinski of New Yorks First Albany sees Texas/Gulf Coast spot gas soaring to $2.20/MMBTU in 1996 from $1.42 in 1995. Smolinski contends the market overreacted to 1995s mild weather and a surge in storage and electric utility demand will underpin overall U.S. gas demand growth of 6% this year.

Taking a contrarian stance with an industry consensus that gas prices have topped out at about $3/MMBTU, Smolinski predicts U.S. gas prices will peak at an average $5 in 2002-2007.

For now, the deep freeze and storms gripping much of the Northern Hemisphere are keeping a prop under recently strong oil and gas prices.

Adding to oil price firmness is market skittishness over a transfer of power in Saudi Arabia. Ailing King Fahd, recovering from a recent stroke, last week handed the reins of government to his more conservative, price hawk brother, Crown Prince Abdullah.

Nymex crude hit a 7 month high after Mexico suspended oil exports from three ports because of storms in the Gulf of Mexico last week, with the February contract closing Jan. 3 at $19.89/bbl, up almost 40 on the week. Nymex February gas closed that day at $2.986/MMBTU, up about 12 on the day and on the week.

Spot gas prices are starting to catch up with futures as well. Natural Gas Clearinghouses survey of U.S. spot gas prices rocketed to $2.57/MMBTU for January, up 54 from December and $1.03 from a year ago.

The push by FERC to develop a standard electronic bulletin board (EBB) for marketing gas in North America is gathering momentum.

Members of the Gas Industry Standards Board (GISB) business practices subcommittee are meeting this week in Washington, D.C., to draft a working list of standard practices to propose to GISBs executive committee meeting Jan. 11.

FERC wants industry to develop a set of business practices on which to base a standardized gas marketing EBB. Under GISBs schedule, the executive committee beginning Feb. 2 will circulate a draft of proposed practices for industry commentwith a Mar. 4 comment deadline. Executive committee members will vote Mar. 7 on the proposal andsubject to approval by GISB membersrecommend a final version to FERC by Mar. 15.

The AFL-CIO has endorsed a budget bill provision that would permit E&P on the Arctic National Wildlife Refuge Coastal Plain in Northeast Alaska.

The labor union urged President Clinton to include the provision in any compromise on the budget reconciliation package.

It said, The economic benefits of leasing the Coastal Plain are tremendous. Studies show that oil exploration and production on the Coastal Plain has the potential of creating 250,000-735,000 jobs nationwide.

U.S. Occupational Safety and Health Administration has targeted the oil and gas well drilling/servicing industry as one of its top 18 priorities for attention.

However, OSHA plans a nonregulatory approach. It will work with business and labor to identify safety and health needs and establish plans to deal with them. The agency said, In some cases, interventions may involve OSHAs use of its existing authority, as well as program initiatives recently announced by President Clinton that provide incentives to employers who effectively find and fix hazards.

Long Beach independent refiner Ultramar claims to be the first California refiner to make commercial scale Phase II reformulated gasoline (RFG) required under state law. By Mar. 1, all large California refiners must produce Phase II RFG, the worlds cleanest gasoline (OGJ, Dec. 11, 1995, p. 21). Ultramar produced in December about 2 million gal of Phase II RFG.

It recently completed a $120 million revamp of its 70,000 b/d Wilmington refinery to produce the new spec fuel.

Meantime, RFG regulations have sharply cut U.S. gasoline imports, says EIA, and those imports are arriving from fewer countries at fewer ports of entry.

While Europe continues to account for a large share of U.S. gasoline imports, imports from Europe have been at relatively low levels.

EIA says this suggests the restrictive regulatory requirements for RFG have changed arbitrage thresholds. Some companies prefer importing gasoline blending stocks to facilitate compliance with the new regulations.

Is Nigeria beginning to buckle under harsh international criticism that has threatened to spawn an embargo of the OPEC nations oil exports?

Nigerias military regime reportedly has released four political detainees, including Wariebe Agamene, former leader of oil workers union Nupeng.

Nigeria has been in crisis since annulment of elections in 1994 that were meant to end 10 years of military rule. Nupeng led a strike in 1994 to campaign for release of Moshood Abiola, who claimed to have won the elections. The release contrasts with the regimes recent executions of other political prisoners who have campaigned against Nigerias oil industry (OGJ, Nov. 20, 1995, p. 37).

Kuwait Oil Co. (KOC) has found a major oil field in the Karaa Al-Marou area of Kuwait west of Kuwait City.

Reserves are estimated at 350 million bbl. OPEC Bulletin quoted Oil Minister Abdul Mohsen Medaj Al-Medej as saying it is the first major oil find in the emirate since February 1994. The find is the first in the Karaa Al-Marou region since KOC began exploring there in August 1990.

Egypt and Israel expect this year to sign a natural gas delivery agreement, which could lead to Egyptian gas being used in Israel by late 1999 or early 2000.

Egypts Oil Minister Hamdi Al-Banbi told Middle East Economic Survey (MEES) monthly talks at ministerial or technical levels are being held in Cairo and Tel Aviv. Banbi told MEES the aim is to conclude technical talks by mid-1996 and sign sales and purchase agreements by yearend for initial delivery of 250 MMcfd of Egyptian gas to Israel. Egypt also reportedly plans to supply 250 MMcfd of gas to Jordan and 50 MMcfd to Palestinian settlements.

Egypt estimates its gas reserves at 22.3 tcf, with domestic gas demand of 1.3 bcfd last year. Gas is used mainly for electricity generation and industry in Egypt, and demand has risen at 10.3%/year the past 8 years.

Banbi said 7 tcf of gas reserves, mostly Mediterranean finds by Amoco and Agip, would have to be dedicated to meet Israeli, Jordanian, and Palestinian supply needs.

Banbi said, Both Amoco and Agip have already issued comfort letters to the Egyptian government, saying they have the necessary gas for the project.