MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JUNE 21, 1998 (4)
TOP STORIES
Heat is turned up for this summer's oil prices
While crude oil prices rally, falter and dive, fickle traders are counting on OPEC to help drain the world's brimming oil reserves.
"There are stories about tankers being turned away from harbors because there's no place to store the oil," said Wilf Gobert, an oil and gas analyst with Peters and Co.
"The problem is as long as there is too much oil produced, the price will continue to go down."
And go down it did last week - oil prices fell below $12 US a barrel for the first time since disastrous 1986. The plunge has some oil executives chewing their fingernails, but many are pinning their hopes on OPEC's summer meeting in Vienna Wednesday.
Rumor has it the biggest OPEC players will promise new production cuts. But the last slash to quotas in March did little to empty reserves - and with news that the United Nations is closer to ending its embargo of Iraqi crude, some analysts are setting off alarms for $10-a-barrel oil.
"It's a very volatile environment and the downward tug is going to be there for the rest of the year," said Judith Dwarkin of the Canadian Energy Resource Institute.
"It's still a very bearish outlook there."
Running too slowly to find cover are large Canadian oil companies weighed down with massive debt and small junior companies with a cash flow crunch. Nature's survival-of-the-fittest law applies.
"What you'll see is weak firms are going to get taken over by big ones," predicted Rick Roberge, chair of the Canadian Energy Group for Price Waterhouse.
"If you're small and going through the whole summer with this oil price, your drilling budget is down to nothing, and you've got no options but just wait for somebody bigger to come through the door."
Today's oil price is a far cry from the Alberta government's 1998 budget forecast of $17.50.
Although a $1 US drop in the oil price means $170 million less in annual energy royalties for Alberta, the province isn't panic-stricken - not yet.
"Our economy is still growing in the province of Alberta despite $10 oil," said Steve West, the province's energy minister.
Learning from the oil bust in the 1980s, Alberta has diversified its economy. It has gone from being 50 per cent reliant on oil revenues to just 17 per cent today, West said.
The Dominion Bond Rating Service apparently believes the province is on the right track. Last week it upgraded its rating to AA (high) - the best rating it has ever assigned to any province.
"With the gas revenues and land sales continuing at a healthy pace, the revenues have not red-lined on us," West said.
The province and energy companies have been pleasantly caught off guard by robust gas prices, which have been fluctuating for months between $2 to $2.50 per gigajoule. Natural gas is being touted as the industry's salvation.
"As 1998 continues to deliver mixed signals, the industry clings to its optimism by focusing on one key item - natural gas," writes Roberge in the newly released 1998 Price Waterhouse oil and gas survey.
To completely offset inferior oil prices, gas would have to average an unlikely $2.40 per gigajoule this year, Roberge said.
And for gasoline, Canadian drivers will turn blue holding their breath for a break at the pumps.
"When a consumer hears about a drop in oil prices they presume they are gong to see the pump price change by that percentage," said Judy Wish of the Canadian Petroleum Products Institute.
But crude oil makes up only about 25 per cent of that litre of gasoline, while taxes take a 50 per cent bite and the balance goes to refining and marketing costs, dealer margins and a small profit for the gas station owner.
A Do-or-Die Date For Oil?
OPEC members must stick to pledges, says oil CEO as Vienna talks approach
CNNfn
Fresh proposals by the world's leading oil producers to cut output by hundreds of thousands of extra barrels a day could hoist prices to $17 a barrel and resuscitate a world petroleum market mired in 10-year lows, a top oil executive told CNNfn Friday.
But seeing those cuts through will require much more than a fist thumping invocation of quotas when OPEC ministers gather for their summer meeting in Vienna next week, said Luis Giusti, the chairman and chief executive officer of Petroleos de Venezuela, Latin America's largest company.
It will require a commitment by everyone at the conference table, he declared.
"I guess we're in a new world now," Giusti said. "The old quota system I think is totally obsolete. What we are seeing now is producers (who) get together and based on the current situation and based on their capabilities. agree voluntarily to do something."
"If you don't want to cut," Giusti added, "you don't cut."
And that, analysts say, is precisely the problem dogging oil markets as skeptical traders await some sign that producers are serious about sticking to previous pledges to curtail output.
Wednesday's OPEC meeting -- the second such gathering in three months -- is aimed at securing approval for 800,000 barrels a day in cuts to supplement the 1.245 million barrels agreed to in a first round of negotiations.
Despite the pledges, oil prices have tumbled in recent weeks. After recovering briefly in the wake of the initial cut announcements, in March, oil prices slipped to 10-year lows.
On Friday Benchmark crude for July delivery was trading up 3 cents, at $11.80, on the New York Mercantile Exchange.
A failure to cut supplies at next week's OPEC meeting could further erode confidence and send prices into another freefall. To stave off a complete collapse, traders say, a drastic cut will be necessary -- perhaps 125,000 barrels more than the producers have proposed.
Even though such cuts are ostensibly in OPEC's interests, since member countries stand to lose billions in revenues if the market caves in, unity has proven elusive.
Giusti said Friday that the Asian crisis and one of the mildest winters in a century have served to sharply curtail demand. The result has been a steady increase in worldwide oil supplies as demand slipped from an expected 2.1 million barrels a day to 1.3 million barrels a day in 1997. That demand eased last winter to a relatively paltry 800,000 to 900,000 daily barrels.
The new proposals originated in a meeting Amsterdam earlier this month at which OPEC members Venezuela and Saudi Arabia and non-OPEC member Mexico pledged to cut output by 450,000 barrels a day from July 1 through the end of the year.
In a joint pact signed June 4, the three producers vowed to pare production by 225,000, 125,000 and 100,000 barrels a day, respectively, and to press other producers to make similar commitments. OPEC producers, including Kuwait, the United Arab Emirates, Iran and Qatar pledged to cut an additional 270,000 barrels. Oman, a non-OPEC member, agreed to reduce production by 20,000 barrels.
But analysts have raised doubts about Iran's readiness to adhere to its pledges. Further muddling the outlook, the United Nations Security Council voted Friday to allow Iraq to sell $5.25 billion in oil for food, medicine and humanitarian needs over six months.
Giusti expressed hope Friday that the OPEC ministers would pay attention to the call of the markets when they talk next week.
"Right now, it's too low, and there should be some sort of an agreement," he said.
Shares of major oil drillers ended trading mixed on Friday. Halliburton Co. (HAL) closed up 1/8 at 42-1/2, while shares of Noble Drilling Corp. (NE) rose1/8 to 23-5/8 and Diamond Offshore Drilling (DO) slipped 1-1/18 to 40-9/16.
Meanwhile, oil services behemoth Schlumberger Ltd. (SLB) closed down 3-11/16 at 66-1/4 after it agreed to buy drilling equipment firm Camco International Inc. for stock valued at $3.14 billion. Camco (CAM) stock jumped 12-1/2 to close at 74-3/4.
Hibernia To Stay The Course
Oil price dive won't deter push to peak capacity, president says
Calgary Herald
Slumping world oil prices won't slow Hibernia's production, says its president.
Harvey Smith told a lunchtime crowd of Calgary petroleum writers Friday that the giant Hibernia rig will continue to push towards peak performance despite the recent souring of oil prices.
A barrel of oil was worth $11.84 US when the market closed Friday, up marginally from $11.77 Thursday.
"I think right now, during our start-up year, our costs are higher than they will be per unit when they get to peak," Smith said. "So the best thing we can do . . . to improve the margin is to get to peak production as soon as possible. It's important for us to get that platform as efficient as possible as soon as possible."
Smith believes Hibernia can attain peak production -- 135,000 barrels per day -- by the first or second quarter of next year. It is currently producing about 60,000 barrels per day.
At peak production, Smith hopes to whittle down the operating costs on a barrel of oil to $2. It is currently about $7. Meanwhile, the extraction cost of a barrel of oil over the life of a field is estimated at $12.95.
Smith said he is optimistic about the future of Hibernia but added that low oil prices are always a concern to the industry as a whole.
"I think (the low oil price) is a concern," he said.
"Companies in the last few years have always tried to manage their operations around a range (of prices). No one is thinking about really high, but we're at the very low end of the range and so I think if we have a prolonged period of low oil prices, I certainly think it will have an effect on projects."
Hibernia is located 315 kilometres southeast of St. John's, Nfld. The 550,000-tonne concrete island sits on the Grand Banks of the North Atlantic, where it's expected to pump out 615 million barrels of oil over its projected 20-year lifespan.
The $5.8-billion structure took six years of planning and construction. Smith said Hibernia will pay for itself.
The owners of the Hibernia consortium are Mobil Oil Canada, Chevron Canada Resources, Petro-Canada, the Canadian government, Murphy Oil and Norsk Hydro of Oslo, Norway.
Natural Gas Boost - Phillips Petroleum Planning Billion Dollar Petrochemical Plant
Calgary Sun
One of the U.S.' largest oil companies is working on plans to build a billion dollar petrochemical plant in Alberta.
Phillips Petroleum Co. said it is in the preliminary development stage of the "major petrochemical complex" to expand its presence in North American markets and ease exports to Asia.
The Oklahoma-based company declined to provide a potential value for the plant, but said it would be virtually identical to one in Qatar that's valued at about $750 million US.
The project is slated for operation as soon as 2003, the company said in a newsletter.
A location wasn't disclosed.
"Phillips has completed a feasibility study and believes the economics to be favorable for such a project," the company said in an internal memo discussing the plant.
Alberta features large ethane feedstocks and is well-positioned to reach major U.S. and Asian markets, Phillips said.
The complex would produce 1.2 billion lbs. a year of ethylene, the world's most widely used petrochemical, and 1.1 billion lbs. of polyethylene, said Jack Howe, senior vice-president of chemicals for the petroleum giant.
The company is pursuing the project as a 100% owner, but may consider other joint ventures, Howe added.
The plant would mark Phillips' re-entry into Canada as a major player in the energy game. In the mid-80s, the company sold most of its Canadian assets to Calgary-based Petro-Canada.
Phillips is also rumored to be interested in buying Nova Corp.'s chemicals division once the company merges its operations with
TransCanada Pipelines Ltd.
Rick DeWolf of Ziff Energy Group said it's no surprise Phillips wants to build in Alberta despite flagging world petrochemicals prices.
"The natural gas infrastructure is growing now, so there's a possibility of a lot more liquids to provide feedstock for petrochemicals production," DeWolf said.
"With projects like this, you tend to look at the long term. It may be a low point in the cycle right now, but by the time it comes on line, you hope you're at the high point."
Ethylene is used in a number of other chemicals that are found in products ranging from soap to plastics and motor oils.
Polyethylene is found in food and drink containers, trash bags, plastic pipe and other products.
Phillips' Sweeny, Tex., petrochemical complex can produce 4.5 billion lbs. a year of ethylene, while its Houston Chemical Complex can make 2 billion lbs. a year of polyethylene.
In addition to making chemicals, Phillips also searches for and produces oil and natural gas and refines crude into gasoline, heating oil and other fuels.
'Lien'-ing On An Oil Well
St. Johns Evening Telegram
A Calgary-based oil technology firm has placed a lien on an unfinished oil well in western Newfoundland, claiming it is owed $50,000 from a drilling operation that went terribly wrong and further charging the fiasco has given Newfoundland a black eye in the oilpatch.
Datalog Technologies filed the lien against St. John's-based Inglewood Resources, its partner LMX Resources of Calgary, and Aegis Engineering of St. John's, which ran the ill-fated drilling program at Campbell's Cove.
"It's difficult to say who's responsible," Greg Gullickson of Datalog said from Calgary. "A court case will come out of it, I guess. They incurred over $2 million in costs and only had a million in terms of budget so there must have been other subtrades who got hurt like us."
Several small Newfoundland companies are out tens of thousands of dollars in what has turned out to be a modern tale of exploration disaster.
Datalog received only half the money it was owed, Gullickson said, adding it is the first time the $15-million-a-year company has suffered such a loss.
"It certainly doesn't encourage us to come down there and do work and not get paid for it," he said. "Here in Alberta we do a lot of work almost on a handshake basis."
But a consultant for LMX Resources, on whose behalf Inglewood operated the property, said this sort of thing happens all the time.
"It's not going to have any effect on the play in western Newfoundland, absolutely no effect," said LMX's John Harper, who was until recently a geology professor at Memorial University. "This goes on in Alberta all the time. There are always problems when you're drilling wells."
But the onshore-to-offshore slim-hole well at George's Bay appears to have had more than its fair share. Two distinct disasters emerged: first, the well itself ran into political and technical problems; and second, the company operating the property and the company overseeing drilling operations pointed fingers at each other when it came time to pay contractors.
Aegis Engineering, a one-man operation run by Bob Harvey, says Inglewood is responsible. Inglewood Resources, a small junior exploration company run by St. John's businessman Chris Inglewood, says Aegis must pay suppliers. Both sides agree costs did run 100 per cent over budget for a well that was only 25% completed.
But it's unlikely Aegis will be paying anyone.
The company is owed $50,000 and basically ceases to exist, its president and owner Bob Harvey said from Halifax this week.
"It's a messy story," Harvey said. "Because they're not paying, Aegis Engineering is effectively sunk. What I'm trying to do is keep my head above water.
"(Inglewood) is telling all the contractors I was their contractor. I was not their contractor I was operating as their agent," Harvey said.
But Inglewood Resources has said it won't pay. The company has issued a statement to all suppliers saying it has paid everyone except Aegis and that it was Aegis that ran the budget up to $1.9 million.
"Aegis has been paid substantial moneys and the remaining amount outstanding is approximately $250,000 which is currently in dispute," it said in a letter dated June 4. "Inglewood has no way of knowing, and it is not our responsibility to know, who Aegis has or has not paid."
Inglewood's Gill Dalton said in an interview that the company's lawyers were in the process of having Datalog's lien removed.
But then there's the story of the well itself, which was drilled about 600 metres toward its total target depth of 2,438.
The well's problems hit started last September, when operators were informed by the Canada-Newfoundland Offshore Petroleum Board they would have to have the well - which sits on dry land - certified by Lloyd's of London.
According to one source, this unusual CNOPB requirement stems from a piece of poorly drafted legislation that requires all offshore wells be certified, but doesn't specify whether the well starts on land or not.
The matter first came under contention when Noble Drilling was forced to go through the Lloyds certification ordeal for an onshore well in 1996. The CNOPB said it would take a look at its regulations, but has not changed them yet.
"We're certainly acutely aware of the issues that have arisen with regards certification of onshore rigs drilling for offshore prospects," CNOPB's Angus Taylor said Friday. "We're still working on that."
Without an exemption, Aegis had to write a special contingency plan and a well control plan under an extremely tight deadline, Harvey said, and racked up unexpected bills of $100,000.
"It was pure nonsense for them to impose that," he said.
The well itself suffered problems almost from the moment it started.
After a nine-day shut down, the drill ran for one day before the drill bit twisted off. That was Christmas eve last year, and flying in replacement parts in the busy holiday season was virtually impossible, Harvey said.
There were problems with the casing and with hard rock. In the end it took tremendous push and cost just to get the well shut in.
Even LMX's John Harper, who said cost overruns happen all the time, shook his head on this one.
"A lot of inexperience went into the whole Newfoundland play," he said. "I'm not going to make any comments about what these guys did or didn't do."
Harper also said the lien would not prevent LMX and Inglewood from finding other investors to buy into the project.
"The lien is not a problem in that regard because if we were to find investors, of course, (the debts) would be paid off," he said. "(But) it's going to be expensive. Costs in western Newfoundland are three to four times for equivalent exploration in western Canada so companies have to look at that."
Investors will also look at the price of oil, which is at its lowest in more than a decade - and at past experience in the region.
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