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Vol. 225 No. 4 |
| KURT S. ABRAHAM, MANAGING/INTERNATIONAL EDITOR |
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Oil prices soar as OPEC hints at keeping output steady
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Spurred by dwindling gasoline prices and growing demand, and exacerbated by heavy speculator activity, oil futures prices for West Texas Intermediate crude shot past $38/bbl on the New York Mercantile Exchange. This was a 13-year high for WTI, a level not seen since October 1990 in the run-up to the Persian Gulf War. Given the low, US crude and gasoline inventory stocks, plus growing demand (up to 8.9 million bpd of gasoline in the US) and competition for supplies from countries like China, prices were not expected to go down any time soon. Gasoline prices averaged near $1.75/gal across the US, and predictions for the summer driving season averaged $2/gal or higher. At the same time, Venezuelan Energy Minister Rafael Ramirez told attendees at an industry conference in Cairo that “we have the consensus to cut (output) in April,” a reference to OPEC's February decision to lower its ceiling.
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IEA revises global oil demand forecasts sharply higher
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Oil prices were also pushed higher by news that the International Energy Agency (IEA) had made significant upward adjustments in its various oil demand forecasts for 2004. For the April-June quarter, IEA raised its demand growth figure by 390,000 bopd, to 1.97 million bopd vs. the same period in 2003. For 2004, overall, IEA hiked its outlook for global oil demand growth by 220,000 bpd, to 1.65 million bpd. The single largest factor in the growth adjustments is China's booming economy. During January, Chinese oil demand hit a record 6.09 million bpd, and is now second to only the US. In its March report, the IEA said, “Structural shifts in Chinese oil demand set the stage for continued expansion.”
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More oil companies cut reserves in wake of Shell's action
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BP became the latest significant oil company to trim its own estimate of its oil and gas reserves. The firm reduced older holdings by 2.5%, or equal to 445 million boe, effective Jan. 1, 2003. Nevertheless, BP said that discoveries and acquisitions made last year were more than enough to offset the revision. BP's action followed a 41% reduction made by El Paso Corp. in February. El Paso sliced its reserve base, effective at the end of 2003, to 2.64 Tcf of natural gas equivalent from the previous 4.46 Tcf. Meanwhile, there was more trouble at Royal Dutch/ Shell, whose 20% cut in reserves (3.9 billion boe) on Jan. 9 prompted other oil companies to reduce their estimates. After sacking Chairman Sir Philip Watts and E&P CEO Walter van de Vijvr, Shell on March 18 announced a second revision. The firm cut its 2002 reserves another 250 million boe and reduced the 2003 number by 220 million boe.
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Alabama judge scolds ExxonMobil, rejects new trial motion
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State Circuit Court Judge Tracy McCooey decided not to order a new trial over an $11.9-billion judgment that Alabama won against ExxonMobil last November. She also scolded the firm for not supplying its final natural gas price forecast for 1993, a document that McCooey said was vital to determining whether the company had cheated Alabama out of royalties from gas wells in state waters around Mobile Bay. “I cannot tell you how irritated I am,” McCooey told company attorneys, who protested that they did not know that the forecast applied to a state's attorney's request for economic analysis of the wells. McCooey said that she would not throw out the jury verdict and would decide on March 29 whether to retain, lower or increase the amount. This was the second go-around for the case. Alabama officials first sued ExxonMobil in 2000, resulting in a $3.5-billion jury verdict that was overturned.
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Canadian firm's stock tumbles after offshore wildcat halted
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Canadian Superior Energy suffered on the Toronto Stock Exchange after its partner, El Paso Corp., pulled out of a costly exploration well offshore Nova Scotia before it could be tested. After El Paso exited the US$30-million well, Canadian Superior's stock fell 62% from C$4.28 per share on March 10 to only C$1.62 on March 22. During 3-1/2 months of drilling, El Paso paid two-thirds of the well costs to earn a 50% stake. Canadian Superior President and CEO Greg Noval said, “the Mariner I-85 well encountered gas pay in multiple zones, as targeted,” but whether quantities were commercial was undetermined. Canadian Superior reluctantly went along with El Paso's decision to forego testing and completion operations, to keep the well on budget and on schedule.
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UK officials create new license type, announce next round
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British Energy Minister Stephen Timms revealed the new Frontier License, available only for the West of Shetlands region. Like the Promote License, Frontier permits cut the rental fee by 90% for the first two years, compared to traditional Production License rates. Timms also said, “I am pleased to announce this latest licensing round for the UKCS, which is the most extensive of its kind since 1965, proof of the government's strong commitment to the region. Today's licensing round has opened all of the UK onshore area (12th Round), and 1,039 blocks and part blocks in the offshore area (22nd Round).” Full details are available at www.og.dti.gov.uk.
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Barbados strives to boost output and reserves
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The Phase 2, six-well program begun by state-owned BNOCL will increase Barbados' reserves by 400,000 bbl of oil and 8 MMcfg, said Energy Minister Anthony Wood. Speaking at a drilling site, Wood said the wells would cost $6 million. In the next fiscal year, BNOCL will drill another 10 development wells and one wildcat, to boost output to 1,500 bopd and 2.5 MMcfgd. He said the program will push output to 25% of national needs and bring the production-to-reserves ratio to 10 years.
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Scores evacuated near New Mexico drilling site
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More than 1,200 people were evacuated from homes and businesses in Carlsbad, New Mexico, after a well under drill blew out on March 11. A crew drilling the well behind a city fire station on behalf of Midland, Texas-based Chi Operating Co. penetrated an unexpected gas pocket, prompting the blowout. None of the 10-man crew was hurt, although some nearby residents were treated for inhalation of fumes. Two days later, a Midland-based crew from Cudd Well Control began burning off the excess gas. However, officials estimated that it could take up to 30 days to cap the well, as crews drilled a relief sidetrack from a new angle. Carlsbad's mayor instituted a temporary, 90-day ban on drilling any additional wells within city limits.
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Oxy opens Tripoli office
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Eager to re-claim its Libyan holdings, Occidental Petroleum opened a new office in Tripoli, one day after talks between Oxy President Ray Irani and Libyan leader Moammar Khadafi. Irani said he was confident that US-Libyan relations are improving, after Khadafi last December dismantled weapons of mass destruction programs under international supervision. ConocoPhillips and Marathon Oil have also sent teams to Libya to negotiate their possible return to E&P operations, but any resumption of activity will require the US to lift its trade band against Tripoli.
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Azerbaijan racks up large output increase
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During the first two months of 2004, Azerbaijan's fields produced about 2.5 million t of oil, equal to around 305,000 bpd. This represents a 44% increase over the amount produced in the same period of 2003. Of the total amount, BP-led Azerbaijan International Operating Co. (AIOC) produced 1.03 million t (125,660 bopd), up 7.1% from a year earlier. AIOC's output comes from the Azeri-Chirag-Guneshli field complex in the Caspian Sea. State oil firm SOCAR produced the remaining 1.47 million t, equal to 179,340 bopd. Azerbaijan exported 168,000 bopd during the period, up 13%. 
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Opinion
If events during the first three months of 2004 are any indicator, the remainder of the year will be anything but boring for the global E&P industry. The next nine months will be entertaining, but also frustrating, as there are way too many factors over which upstream professionals have little or no control. Consider the laundry list in play: OPEC's hawkish attitude; high oil prices; President George W. Bush's preoccupation with re-shaping Iraq; booming oil demand (as in China); freaky weather patterns; oil companies reducing reserve estimates; an emboldened US Securities & Exchange Commission; elevated terrorist activity; and a polarized US presidential race.
Looking at oil demand, strong global numbers in January and February surprised the IEA, which underestimated the intensity of Chinese demand growth competing with the US for crude imports. Ironically, China's oil thirst (9.1% economic growth) comes from a manufacturing sector that exports goods to the US in record numbers. All those cheap goods bought by US consumers create a massive trade gap that puts money into the pockets of Chinese citizens, who are buying automobiles in record numbers. The trade gap (despite US exports being the second-highest on record in January) threatens the US economy, which endangers President Bush's re-election in November. You can almost hear Democratic challenger John Kerry (who pits consumers against producers) salivating at the prospect.
But the President, much like his father in 1992, seems oblivious to this danger, as he focuses on Iraq. Yet, his invasion of Iraq has sparked terrorist activity, which in turn, has spurred speculation by traders in oil markets, pushing prices higher. The traders are betting that terrorist activity will only grow and threaten the stability of Middle Eastern oil supplies. In another ironic twist, only the Middle East has any spare production capacity to address the global supply crunch, but OPEC members have picked this moment to be resolute (maybe) and hold down output. The reason they are doing this, which pushes oil prices higher, is because they can get away with it. OPEC countries have done their homework – they know that US oil demand is virtually inelastic. They also know that Western oil companies have not explored enough to develop sufficient, alternative output capacity. So, oil prices soar. Those same Western oil firms are frantically revising reserve figures downward, to hold off an SEC that has declared a new policy of “wildcatting.” This policy, which SEC defines as “exploring potential misbehavior in various industries,” is first targeting the very industry from which the term derives. Oh, and we haven't even considered how that wild card, weather, may turn markets upside down. Yes, it is going to be a wild ride for the upstream industry, indeed.
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