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Refining squeeze sends crude price to new high

Crude oil prices shot up to a new, all-time high on the New York Mercantile futures market during June 17, 2005, reaching $58.47/bbl. That figure eclipsed the previous high set on April 1 at $58.28/bbl. As OPEC officials and numerous analysts noted, the problem underlying the upward price movement is not so much crude supply as it is refining capacity, particularly in the US. There, and in other key markets, demand for refined products continues to increase, yet new capacity is not being added. A secondary factor reinforcing traders’ jitters is a belief that spare oil production capacity is thin, and therefore, a relatively small disruption could have a large impact on the global market. However, price is still far below the inflation-adjusted record of above $90/bbl in 1980. Adding further to market security have been fears that potential refinery glitches could occur during this summer’s hurricane season in the US.

OPEC action draws praise from US energy secretary

OPEC’s raising of official output limits last month by 500,000 bopd, or 1.8%, was the responsible thing to do, said US Energy Secretary Samuel Bodman. “We think their actions are well-justified,” said Bodman. “They have been responsible and responsive.” However, oil market traders and analysts saw the action as merely symbolic, given that oil markets were already well supplied, as well as the fact that member countries were producing in excess of the new quota before it was announced. Effective July 1, OPEC production was officially 28.0 million bopd, up from 27.5 million bopd. Members also agreed on a new market pricing basket of 11 different crudes, up from the seven crudes used previously. They hope the enlarged basket will be more reflective of the market diversity that affects pricing levels. Responding to OPEC comments about US refining capacity Bodman said the Bush administration has proposed building refineries on closed military bases.

Russia, Norway agree on broad energy partnership

The Russian and Norwegian governments signed a broad, general agreement last month, to cooperate on developing their respective energy resources. Russian President Vladimir Putin and Prime Minister Mikhail Fradkov met with Norwegian Prime Minister Kjell Magne Bondevik and Oil and Energy Minister Thorhild Widvey at the Kremlin in Moscow. Reuters news service quoted Putin as telling Bondevik, “We have good prospects in the field of oil and gas. I just got the plans for your sea pipeline yesterday. We know the quality, experience and potential of your (Norwegian) oil and gas companies. If we can merge this with the potential of our (Russian) reserves, our interests in Europe, it could have a very big impact....” The agreement coincides with interest by Norway’s Statoil and Norsk Hydro, along with other Western companies, in courting Russia’s Gazprom for a share in development of the 3.2-Tcm (113-Tcf) Shtokman gas field in the Arctic Barents Sea. Shtokman’s reserves are twice as large as those of Norway’s Troll field in the North Sea.

Weatherford acquires unit from Canada’s Precision

Weatherford International Ltd. signed a definitive agreement to buy Precision Drilling Corp.’s Energy Services Division and International Contract Drilling Division. Terms of the deal call for Weatherford to pay about US$2.28 billion, including 26 million Weatherford common shares and roughly US$900 million in cash, based on current exchange rates. Precision’s Energy Services Division is a global provider of cased hole and open hole wireline services, drilling and evaluation services, and production services. The International Contract Drilling Division is an international onshore rig contractor. It became a sizeable player in the global market after acquiring the worldwide land drilling assets of Global Santa Fe Corp. in May 2004. The unit has a particularly strong presence in the Middle Eastern/ North African market. In the 12 months ending Dec. 31, 2004, the two units had combined revenues of C$1.1 billion. The transaction should be completed during third-quarter 2005 and is subject to regulatory approvals.

FTC accepts Chevron’s Unocal plan, CNOOC challenges

Pending public comment, the US Federal Trade Commission (FTC) has accepted the acquisition plan drawn up by Chevron for Unocal. FTC acceptance was received after Chevron and Unocal agreed to settle litigation issues relating to Unocal’s US reformulated gasoline patents. The FTC acceptance did not rule out further action by China National Offshore Oil Corp. (CNOOC), which made a last-minute $18.5-billion bid for Unocal, in an attempt to outmuscle Chevron’s $17 billion-to-$18 billion offer for the firm. The hostile CNOOC bid came more than a week after the FTC’s acceptance of Chevron’s plan, setting up a potential confrontation with US politicians. Assuming that CNOOC does not succeed, the next step in the approval process will be a review of the preliminary Form S-4 filed by Chevron on May 26 with the US Securities and Exchange Commission. The form is necessary to issue shares of Chevron stock that are part of the acquisition consideration. Chevron stock rose more than 10% in anticipation of the takeover, while Unocal shares were up more than 15%.

Survey shows C$61 billion to be spent on oil sands

A new PriceWaterhouseCoopers (PWC) survey has found that Canadian energy companies plan to spend C$61 on oil sands projects in Canada from 2004 to 2013. Responding firms said that high crude prices last year had boosted their cash holdings significantly, allowing them to consider major oil sands expansion projects. Angelo Toselli, head of PWC’s Canadian energy practice, said gross average revenues in Canada’s energy sector rose 12.4% during 2004, totaling C$1.05 billion for conventional companies. Income trust revenues shot up 30.5%, to C$372 million. The C$61-billion figure is more than double the C$28 billion spent on oil sands projects between 1996 and 2003.

Florida senators extort concessions in Senate energy bill

Threatening to filibuster and shut down US Senate business, Florida Sens. Bill Nelson (Democrat) and Mel Martinez (Republican) extorted a promise from New Mexico Sens. Pete Domenici (Republican) and Jeff Bingaman (Democrat) that the massive energy bill under debate will preserve a drilling ban along Florida’s coasts until 2012. During Senate debate, Nelson repeatedly asked Domenici for the legislative language that the latter senator had promised, which would preserve a drilling moratorium in the eastern Gulf of Mexico. After 6 1/2 hours with no response, Nelson threatened to “talk all night” and hijack Senate business unless Domenici and Bingaman responded. When Domenici finally showed the moratorium renewal plan, which included a 4.5-million-acre exemption from the ban off western Florida, Nelson threatened to filibuster again, while Martinez warned his fellow Republican of grave consequences. Eventually, Domenici and Bingaman gave in, so that they could preserve the majority of the energy bill. Environmentalists were naturally thrilled, while oil companies noted that this action merely preserves the status quo, that they could not lose something (some small access offshore Florida) that they did not have in the first place. A nervous Bush administration has vowed not to let the energy bill be “strangled.”

Russian government to acquire control of Gazprom

The world’s largest natural gas producer, Gazprom, said Russia’s government will pay 203.5 billion rubles ($7.13 billion) to gain direct control of the firm. This move is part of Russian President Vladimir Putin’s plan to establish more state involvement in the energy industry. At the stated price, government officials will add a 10.7% share to their current, direct holding of 39.4%, to create a 50.1% majority. Gazprom’s board approved the recommended price, to allow Putin to deliver on a two-year-old pledge to end limits on foreign ownership of Gazprom’s domestic shares. That way, Putin can begin to lure back some of the $9.5 billion that leaked out of Russia last year following the dismantlement of Yukos Oil Co. Russia’s economy and business confidence have suffered in the wake of the probe into Yukos and its former CEO, Mikhail Khodorkovsky, who was sentenced to nine years in prison last month. The Russian Central Bank projects a net capital outflow of $7 billion this year, amid concerns about property rights. The government already owns a majority of oil firm Rosneft. For more details on Russia’s economic woes, turn to page 21 in this issue.

Oil output falling like a rock in Britain’s North Sea

A fresh report has found that the UK suffered the steepest drop in oil production of any country last year. London-based oil giant, BP, said North Sea output fell 10% last year, resulting in a 230,000-bopd drop that exceeded individual declines experienced in all other countries. In its annual statistical survey, BP also noted that the UK became a net importer of natural gas for the first time last year. And, adding to the bad news, governmental figures showed that the UK fell into an oil deficit for two months last autumn, for the first time since 1991. Kjell Aleklett, president of the Association for the Study of Peak Oil, told British media that the UK government’s forecasts now show oil production falling one-third from the peak by 2020. “The UK produced most of its oil when it was cheap, and they sold it for cheap money,” said Aleklett. “Now, they need to buy it back at more than twice the price they sold it at.” Such a dramatic change is bound to cause budget balancing problems for the administration of Prime Minister Tony Blair, who is still smarting from the close election results suffered in May. According to World Oil’s sources, Blair’s advisors are already cutting spending for various government departments.

Ecuador replaces energy minister and Petroecuador head

Ecuadoran President Alfredo Palacio named Iván Rodríguez and Carlos Pareja as energy and mines minister, and president of state oil firm Petroecuador, respectively. The appointments follow the resignations of former Minister Fausto Cordovez (who resigned on June 8) and former Petroecuador President Robert Pinzón (who quit on June 3). Cordovez resigned after serving just one month, claiming that his efforts to clean out corruption from the ministry were being interfered with. Pinzón quit after information emerged in the media that he had been jailed for two weeks in 2001 on charges of fraud. Both Rodriquez and Pareja bring engineering backgrounds to their new positions.

Kipper partners apply for production license

Santos Ltd. confirmed that an application has been made to the Victorian state government for a production license covering Kipper gas field in Bass Strait, offshore eastern Victoria, Australia. This application follows the resolution of access arrangements for processing of gas and liquids from Kipper through Esso and BHP Billiton infrastructure and processing facilities in Gippsland, Victoria. Memoranda of understanding were signed between the RL2 JVs and the Gippsland Basin JV to unitize Kipper, provide services, and transport/ process gas and liquids. Subject to funding and final approvals, output from Kipper should begin in 2009. The field’s proven-plus-probable reserves are about 620 Bcf of recoverable gas, and 30 million bbl of condensate and LPG.

Commerciality declared for Yemeni tract

Calvalley Petroleum advised Yemen’s Ministry of Oil and Minerals in Sana’a that commercial oil discoveries have been made on Block 9 at Hiswah, Al Roidhat, Auqban and Qarn Qaymah. Per its PSA, the firm, in conjunction with its JV partners, requested conversion of much of Block 9 into a development area. Calvalley is awaiting the ministry’s approval of the application. The declaration of commerciality followed an exploration and appraisal program that drilled 11 wells. The firm’s first step is to begin early development of Hiswah with several wells.

Pebercan succeeds with Cuban work

Canadian firm Pebercan said that results from its Seboruco 11 well have prompted it to continue intensive development of Seboruco oil field in northern Cuba, east of Havana. Seboruco 11 was completed to a 4,855-m (15,928-ft) depth after penetrating three reservoirs. The well produced 3,500 bopd during a 48-hr test. Two new development wells will be drilled in the next couple of months. Seboruco 12 will be spudded 340 m (1,119 ft) east of Seboruco 11. Seboruco 102 will be drilled about 400 m (1,312 ft) west of Seboruco 103, which showed signs of a new reservoir.

Russian CGBS journeys to Sakhalin

The concrete gravity base substructure (CGBS) for the Sakhalin II Phase 2 project’s Lunskoye A platform began a 16-day journey last month. Towed out of drydock in Nakhodka near Vladivostok by three ocean-going tugs, the CGBS is the first of its kind to be built in Russia. After covering a 1,765-km (1,097-mile) distance, the structure will be installed 15 km (9.3 mi) northeast of Sakhalin Island in a 48-m (157-ft) water depth. It will support drilling facilities, accommodation and minimal processing facilities. It will be able to produce 1.8 Bcfgd and about 50,000 bcpd. Total height of the entire structure is 69.5 m (228 ft).

Brazilian gas plan okayed

Federal environmental protection agency, Ibama, has authorized Petrobras to begin a $409-million development of Manati offshore gas field in the Camamu Almada basin of northern Brazil. This project in shallow waters aims for initial gas output as early as January 2006. Manati’s reserves total 23 Bcm (812 Bcf) of gas, or about 50% of Brazil’s northeastern region. Manati’s expected peak output is 6 MMcmgd (212 MMcfgd).

Nigeria wavers on flaring

Nigerian officials said they may waive the 2008 deadline for operators to end gas flaring in the Niger Delta. The deadline’s purpose was to preserve gas resources and improve the environment. Local media quoted presidential energy advisor Edmund Daukoru as saying, “The 2008 deadline was just a pragmatic date in which we wanted to see as many projects geared toward ending gas flaring from oil fields as possible.” Shell, Total and ENI have all said that they cannot stop the flaring before the end of 2009.

Non-OPEC at capacity

Officials from Mexico and Norway said there is nothing that they can do to ease oil prices by increasing supplies. After a day-long meeting, Mexican Energy Secretary Fernanco Elizondo and Norwegian Petroleum MInister Thorhild Widvey said that neither country has any spare capacity. Mexico produces about 3.3 million bopd, while Norway is stuck at about 3.0 million bopd. 

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