OGJ Newsletter

U.S. Industry Scoreboard 3/25 [72659 bytes]

Oil prices have broken $25/bbl the first time since the Persian Gulf war.

Refiners maintaining just in time stocks amid heavy late winter demand and traders gambling Iraq would be allowed to sell some oil soon were keys to a startling bull run in oil markets in recent weeks.

Coupled with expiration of the Nymex April contract Mar. 20, oil prices had one of their wildest rollercoaster rides in recent memory last week.

Nymex crude rocketed to $25.60/bbl Mar. 20, then plummeted $3.40/bbl before settling at $23.06/bbl, down $1.28/bbl on the day but still $3.40 more than the previous week's average. Brent for May closed at $18.61/bbl Mar. 19 after hovering at $18.50-19.10 for some weeks. The previous day May Brent rose $1.15 to $20.47/bbl, the first time it topped $20/bbl this year. On Mar. 20, Brent settled at $18.68.

Most of the volatility can be blamed on the inconclusive end last week to a second round of talks between Iraqi and U.N. officials over allowing a $2 billion sale of Iraqi oil for humanitarian supplies. Talks are to resume Apr. 8 with a number of problems still to solve but showing some signs of progress.

The main hurdle is the question of who delivers food and supplies to Kurds in northern Iraq. London's Centre for Global Energy Studies (CGES) says overall settlement can't be reached until a political solution is found to this problem, and that depends on Iraq's ruler. "Saddam Hussein has rejected Resolution 986 in the past," said CGES, "because it specifies that the U.N. should distribute supplies to the Kurds, a stipulation that the U.S. still insists must be met."

Yet Baghdad appears desperate to return to oil exports, says CGES, now that Jordan has decided to cut oil imports from Iraq and Turkey has signed a deal with Iraq to boost mutual trade once sanctions are lifted. The Iraqi oil export pipelines into Turkey have been inspected and are in good repair, and Iraq has apparently repaired oil installations damaged in the war, says CGES.

"There is nothing to stand between Iraqi oil and the market, except a flushing of the twin export lines and, crucially, the consent of the Iraqi leader. Although he is notoriously unreliable, there is a growing belief that too much is at stake now, especially the understanding with Turkey, for him to reject Resolution 986 again."

New statistics from the U.K. Health and Safety Executive (HSE) show Britain's offshore industry has made a huge improvement in safety standards the past 6 years, says U.K. Offshore Operators Association (Ukooa).

U.K. offshore operators have spent about 5 billion ($7.5 billion) to meet new safety requirements arising from a public inquiry into the 1988 Piper Alpha platform blast (OGJ, Feb. 14, 1994, p. 25). Ukooa said, "Over the 6 year period 1988-89 to 1994-95 there has been a 48% reduction in injury frequency, and the HSE has estimated that the risk of a major disaster offshore has been reduced by 90%."

Canadian drilling looks to be strong in 1996, with predictions of a 10% increase from earlier estimates to 11,300 wells.

The projected total by the Canadian Association of Oilwell Drilling Contractors (Caodc) would be the third year in a row of more than 11,000 new wells.

Caodc says strong oil prices, low gas storage levels, drilling technology advances, and a healthy investment climate are factors underpinning a forecast average of 284 active rigs this year, up from a forecast last fall of 274.

China continues to pursue oil business opportunities outside its borders.

Serbian state oil firm NIS has signed a $1 billion barter deal with China's Sinochem, marking the biggest Serbian oil transaction since the U.N. lifted economic sanctions in November 1995. Terms call for Serbia to receive crude oil and refined products from China in exchange for food, chemicals, and fertilizer. Some details still must be ironed out, but NIS is said to be capable of producing 7.7-9.1 million bbl/year, leaving Serbia to import about 14 million bbl in 1996 to meet demand of 21-24.5 million bbl.

U.S. independents continue to chase opportunities outside the U.S. (OGJ, Mar. 4, p. 31, and Mar. 11, p. 33). Triton, aggressively expanding its international portfolio (see related story, p. 27), has signed its second production sharing contract for acreage off China. It will explore the 8,900 sq km Contract Area 16/03 in the Pearl River Mouth basin in the South China Sea. The block borders CA 16/22, where Triton expects to spud its first wildcat off China this year (OGJ, May 29, 1995, p. 59). Water depths for both blocks are 100-200 m.

MMS is trying to correct reports in the Mexican press that a record water depth wildcat a Shell group plans in the Gulf of Mexico may be in Mexican waters (see map, OGJ, Mar. 18, p. 36).

MMS says Mexican newspapers interpreted the approximate location Shell provides as the exact location. MMS said the well will be 163.5 nautical miles from the U.S. coast, well within the 200 mile U.S. zone, and 22 nautical miles north of the maritime boundary Mexico and the U.S. set in 1976.

U.S. oil production dropped 4.6% in February to 6,450,000 b/d, API reports. While Alaska production fell 5.1% from a year ago, it was at its highest level, 1.5 million b/d, in more than 6 months. Total petroleum products supplied to the U.S. market increased 1.6% on the year to 18,640,000 b/d, and total imports of crude and products rose 1.1% to 8,447,000 b/d. Increases in demand were logged for gasoline 1% to 7,578,000 b/d, kerojet 9% to 1,653,000 b/d, and distillate 2.3% to 3,774,000 b/d, while resid fell 5% to 1,016,000 b/d. However, API notes that since early December resid deliveries have averaged more than 1 million b/d, or nearly 5%, more than last year due to increased purchases by electric utilities.

U.S. refineries operated at 89.5% of capacity in February vs. 87.7% a year ago. At the end of February total inventories of crude and products were 909,800,000 bbl vs. 953,700,000 bbl at the end of January and 1,011,500,000 bbl a year ago.

Politics and petroleum fuels remain a volatile mix.

EPA has issued a final rule that lifts the cap on summer oxygen content in reformulated gasoline (RFG) under federal clean air programs.

This allows ethanol to be blended with gasoline at 10 vol %, which will increase consumption of the subsidized oxygenate. EPA earlier kept the limit at 2.7 wt %, or 7.7 vol %, in the belief a higher level increased NOx emissions (OGJ, Oct. 9, 1995, Newsletter). EPA now contends data generated for development of a model show higher oxygen levels didn't increase NOx emissions.

Environmental Defense Fund (EDF) claims 15 of the biggest U.S. refiner/marketers are shunning Ethyl Corp.'s gasoline additive MMT (OGJ, Mar. 18, Newsletter). EPA opposes use of the additive, and in February EDF asked oil companies to pledge not to use MMT. Ethyl claims most major refiners have made no decision and contends EDF is exploiting the fact some refineries don't need octane boosters now in a soft market for them.

Petroleum marketers have blasted a provision in President Clinton's 1997 budget that would put a tax on kerosine. Petroleum Marketers Association of America (PMAA) called the proposal a "hidden tax" on millions of U.S. homeowners, farmers, and others that now purchase tax free kerosine for space heating or blended with home heating oil or offroad diesel fuel to prevent formation of wax crystals in cold weather, thus plugging fuel systems.

PMAA says the plan would mean a tax of 8-10/gal on winter home heating oil and offroad diesel and 24.3/gal for kerosine for space heating. The catch is that no tax is imposed if the kerosine is dyed, but PMAA contends logistical problems and limited demand means little dyed kersoine would be available.

The transition to second phase RFG in California is proving very smooth, however. All 13 refineries producing Phase II RFG met construction deadlines and began moving the new gasoline to market on schedule Mar. 1, says California Air Resources Board, the agency requiring the fuel, which has tougher specs than federal RFG (OGJ, Dec. 11, 1995, p. 21).

CARB found Phase II RFG being sold in service stations about 2 months ahead of schedule. Even at that, there were some price spikes for California gasoline in recent weeks because of weather related outages in the Los Angeles area and soaring crude oil and products futures prices. Flooding in the Pacific Northwest disrupted barge traffic, and rack prices jumped about 10/gal in Los Angeles. A few companies are beginning to post separate prices for Phase II RFG in the San Francisco Bay area, but that won't be significant until Apr. 15, when the fuel is required to be delivered to terminals. California Energy Commission says about 40% of state demand of 880,000 b/d for Phase II RFG had been delivered to the big Santa Fe products pipeline during 16 days in March.

Meantime, gasoline will continue to hold onto its transportation fuel market share in California, at least for the near term.

CARB will rule soon on a staff proposal to eliminate the first two of three deadlines for requiring sale of electric vehicles (EVs) in California.

The original deadlines called for automakers to provide EVs as 2% of their state sales in 1998 and 5% in 2001. Instead, they will be encouraged to help develop advanced battery technologies in the interim and make at least 3,750 EVs with advanced batteries by 2001. Automakers may be able to get credits against a 2003 mandate that calls for 10% of all cars sold in California to be EVs if they are produced sooner. Little opposition to the CARB staff proposal is expected.