May 1998


Lowered expectations, violence and goofy logic abound

May 1998 Vol. 219 No. 5 

Kurt S. Abraham, 
International Editor  

Lowered expectations, violence and goofy logic abound

While the decline in oil prices is hardly touching the U.S. Gulf of Mexico (see page 13), it is affecting upstream projects elsewhere. For instance, Saudi Aramco reassessed its 1998 program and postponed several oil production projects. Ditto for Abu Dhabi National Oil Co., although that emirate will proceed with gas developments. Saudi Arabia, of course, was a key player in driving down prices before the "Riyadh deal" to cut OPEC and non-OPEC output by 1.5 million bopd was reached around March 22 – 23.

Shell cites other reasons, but the firm's $3-billion, Camisea gas field development in Peru appears to be another casualty. Shell exercised a clause in its contract with Perupetro to ask for a six-month extension before approving the project's start-up. Shell said it did so to study further what proportions of gas and condensate can be produced, and to redesign a $2-billion infrastructure. Nevertheless, as Reuters quoted one Perupetro official, the delay "is a kick in the stomach. This project was practically starting up." In Canada, Exxon's Imperial Oil reacted by suspending development work at Cold Lake heavy oil field. Oryx Energy also cut E&P spending by $100 million.

Low oil prices forced several nations to revise their national budgets. OPEC member Qatar cut spending for 1998/1999 by 4.4% and lowered its forecast oil revenue by 7.7%. Fellow OPEC member Indonesia revised its oil price forecast to $14.50/bbl, down from $17/bbl. Indonesia's oil revenue may shrink 14.7%, to $4.234 billion. Outside of OPEC, Mexico cut $1.8 billion from its $101.6-billion federal budget in January and trimmed another $1.8 billion in late March. In Yemen, President Ali Abdullah Saleh's 1998 budget deficit will more than double to about $230 million.

Violence endangers Colombia's E&P. Colombian officials worry that violent acts committed by guerrillas and drug barons threaten future upstream activity. On Feb. 6, guerrillas again blew up a section of the Caño Limon export pipeline, spilling 18,000 bbl of oil into the Magdalena River. This was followed by the taking of 30 hostages at a roadblock on or about March 23. Most of the hostages were released, but three Americans and an Italian were still being held captive. On March 26, a bomb exploded at a BP rig site in the Cupiagua area, injuring one American and two British workers. Five days later, three BP contract workers were kidnapped on their way to the town of Yopal after leaving a construction site at Cupiagua.

Colombian President Ernesto Samper admits his army is not winning the war against guerrillas. Meanwhile, production costs are rising, crude prices are falling, and new discoveries have plummeted. Some companies have reached a breaking point — Triton Energy said it will sell or lease its 12% stake in Cusiana and Cupiagua fields. Shell plans to sell a 25% holding in the Caño Limon pipeline. LASMO also ceased exploration after a series of rebel threats.

Look out for Volkswagen taxis. Violence also is on the rise in Mexico, albeit not on a scale with Colombia. A U.S. citizen was shot to death in Mexico City last December in an apparent taxi robbery. As a result, the U.S. State Department issued a travel advisory to Americans, urging them to only use radio-dispatched and fixed-site taxis that can be summoned by telephone. "In particular, Volkswagen 'bug' taxis are to be avoided," said State, which has extended its advisory through June, because taxi robberies (in Mexico City) "are becoming more frequent and violent."

Pena    Fahd

Federico Peña

King Fahd

Flawed logic. Given his recent attempt to begin selling Strategic Petroleum Reserve oil, perhaps it is just as well that Federico Peña is leaving his post as U.S. Energy Secretary on June 30. Insisting that the timing was necessary to satisfy a September 30 congressional mandate, Peña said on April 1 that he was initiating bidding to sell $207.5 million of oil. However, that oil was procured in the 1980s at an average $27/bbl, so a sale now would result in a $175-million loss to taxpayers. Faced with protests from IPAA, several U.S. senators, and the governors of oil and gas states, Peña melted quickly. On April 8, he postponed bidding for one month while three lawmakers try to find a way to rescind the sale. Nevertheless, because he even contemplated conducting this "fire sale," Señor Peña is hereby gifted with a quarterly "Energy Lunacy Award" (formerly the Federal Energy Dartboard Award).

Also receiving an Energy Lunacy Award is Saudi King Fahd, recognized for inexplicably undermining the "Riyadh deal" (that props up oil prices) by immediately turning around and cutting Saudi crude prices by a range of 15 to 40 cents/bbl. This widened the differentials between Saudi crudes and West Texas Intermediate to record levels. WO

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