MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUES., JANUARY 13, 1998 (1)
OIL AND GAS
NYMEX
Crude oil futures inched lower at the New York Mercantile Exchange Tuesday after an early advance on growing friction between Iraq and United Nations arms inspectors was reversed.
February crude oil settled down $0.04 to $16.43.
The conflict between Iraq and the U.N. over arms inspections drove nearby crude oil futures to a high of $23.15 in early October. Nymex players speculated then that Baghdad's rift with arms inspections could lead to military strikes and a possible disruption of the Middle East's oil shipments, or a halt to Iraq's humanitarian oil sale.
But analysts this time around didn't expect the situation to derail the restart of exports under the Iraqi oil for food sale, which allows Baghdad to sell oil and buy humanitarian aid for Iraqis. By Tuesday morning, the U.N. had approved five contracts submitted by Iraq's national oil company for liftings of Iraqi oil.
Natural gas futures mostly ended higher Tuesday in a moderate session, with front months clinging to pared short covering gains though few saw any fundamental reasons for a sustained rally, sources said.
February firmed 1.2 cents to close at $2.014 per million British thermal units after earlier hitting a new contract low of $1.97. March settled 0.8 cent higher at $2.012. Most other months ended flat to up 0.9 cent.
"I wasn't surprised to see us rally on some short covering, but it was weak toward the close. It was not an impressive close," said one East Coast trader.
While temperatures this week are colder than last week, traders noted they were still mostly seasonal or above, and with storage comfortable and in coming weeks likely to grow versus year-ago, few expected any sustained move up.
Early withdrawal estimates for Wednesday's weekly AGA storage report range from 30 bcf to 100 bcf. For the same week last year, stocks declined 127 bcf.
Arctic air is expected to dominate the Midwest through midweek, with milder temperatures seen later in the week though levels are likely to remain below normal. The East is now forecast to cool to below normal at midweek, then stay slightly below into the weekend.
Chart traders agreed a higher February close today after dipping to a new low raised the possibility of a technical reversal to the upside, but few were impressed by the close. Resistance was now seen at today's high of $2.085, and then at $2.25 and $2.34. Support was pegged at the new low of $1.97, with spot continuation support seen in the $1.85-1.88 area. Further support should be at prominent continuation chart lows of $1.77 and $1.68, the spot low last year.
In the cash Tuesday, Gulf Coast quotes firmed a couple of cents to about the $2.00 level. Midcon pipes were little changed in the high-$1.90s. New York city gate swing gas gained more than a nickel to about $2.40 on cooler weather forecasts for the region. Chicago was flat to up slightly at $2.05-2.10.
The NYMEX 12-month Henry Hub strip rose one-half cent to $2.157. NYMEX said an estimated 49,914 contracts traded, up from Monday's revised tally of 26,152.
FEATURE STORY
Price Decline Unsettles Oilpatch
Gulf May Delay Heavy Oil Unit Spinoff, But Other Producers Unfazed
The Financial Post
Gulf Canada Resources Ltd. may delay the spinoff of its heavy oil subsidiary until commodity prices recover, a company spokesman says.
But other oil and gas producers planning billion-dollar heavy oil and oilsands projects said yesterday they're undeterred by commodity price weakness and are marching ahead.
And at least one, Mobil Oil Canada, is considering expanding the scope of its proposed heavy oil upgrader to process product from other parties.
Gulf Canada is shooting for the third quarter to spin off its new heavy oil subsidiary, said spokeswoman Jennifer Martin. But if commodity-price weakness continues, it may delay the IPO until market conditions improve.
"If we think we'd get more value by postponing it, I would say that we would time it as beneficially as possible," Martin said.
Gulf's heavy oil subsidiary would include assets from its recent acquisition of Stampeder Exploration Ltd., and its planned $1.2 billion Surmont Oil Sands bitumen project near Fort McMurray, Alta.
In the past two years, projects worth $20 billion have been announced to exploit the oilsands deposits, the world's largest oil reserve.
But in recent months, plunging oil prices and widening discounts for heavy oil because of lack of refining and upgrading capacity have raised questions about the viability of the project.
Mobil is on schedule with its $2-billion Kearl Oil Sands Mine and upgrader. The company is considering five locations to build the upgrader. Two of the potential sites are in the Athabasca area, one is in Cold Lake, one in Hardisty near the Saskatchewan border and one in the Fort Saskatchewan area near Edmonton, project manager Jan Nowicki said.
"Depending on the location, we are considering participating or leading in a regional upgrader kind of approach," she said. "We are looking at what would be the best business option."
Mobil will make a final decision in early 2000. The project is forecast to yield 100,000 to 130,000 barrels of oil daily when in full operation in 2003.
"This is a long-term project and we are not spooked by the short-term price differential," said Nowicki.
Increased upgrading capacity would help reduce the discount paid for heavy oil relative to light oil, softening the blow of weak oil prices.
Shell Canada Ltd. will decide later this year or early in 1999 whether to proceed with its $3-billion Muskeg River Mine project, including a mine, pipeline and upgrader. The project is on track and on schedule.
Shell plans to upgrade only its own bitumen. The upgrader would be located at its Scotford refinery site near Edmonton. However, the design would not preclude the use of some quantities of other feedstock, said Tara Black, manager, public affairs, oilsands division. The goal is for first production from Muskeg in 2002.
Suncor Energy Inc., too, is proceeding as planned with the $2.2-billion expansion of its integrated operation at Fort McMurray. When completed in 2002, oil sands production will increase to 210,000 barrels of oil daily, from 78,000 in 1997.
"We feel that we are well positioned to deal with the risk associated with these volatile prices," said spokesman Ron Shewchuk.
The company has hedged one third of its total 1998 production at US$20 per barrel.
Suncor's oilsands operation produces oil at $13.50 a barrel, which is expected to decrease further in the next few years.
No changes are being planned at Syncrude Canada Ltd., which is proceeding on a $6-billion expansion of its oilsands facilities near Fort McMurray.
The consortium said yesterday it reached record production of 207,000 barrels daily last year, up from 201,000 barrels per day in 1996.
"We are price takers, we are not price makers," said spokesman Peter Marshall.
"So we do our [best] to make ourselves more robust by concentrating on keeping our operating costs as low as possible."
The consortium produced synthetic crude at under $14 a barrel in 1997. Costs are expected to decline to $12 a barrel by 2000, and under $10 by 2005.
FEATURE STORY
Falling Oil Prices Haven't Altered Offshore Plans - Yet
Canadian Press
The steady, steep tumble of world oil prices in recent months, coupled with projections of a slow rebound, appear to have done little to dampen enthusiasm for Canada's offshore oilfields, say analysts and key industry players.
In a business that waited 18 years to see its first project begin production, price fluctuations are just part of the game.
"In the long run, it's not going to do the companies any good," said Ian Doig, the Calgary based author of the industry publication Doig's Digest.
"But in spite of that, the handful of companies that are out there are all big people and they're not going to be generating Yes-No decisions about their future projects on the basis of everyday pricing."
Oil futures for next-month delivery settled at $16.43 US a barrel Tuesday in New York, compared to $21.32 US only three months earlier.
Analysts attribute the falling prices to a number of factors: reduced demand sparked by both the Asian economic crisis and a mild winter; a United Nations deal that allows Iraq to re-enter the marketplace; and increased production from members of the Organization of Petroleum Exporting Countries, as well as non-OPEC members such as North Sea producers and Hibernia.
The Hibernia platform, located 315 kilometres east of Newfoundland, has so far sold two tanker shipments - each carrying 850,000 barrels - to refineries along the U.S. Eastern Seaboard since production began last November. The discovery well was drilled on the reservoir 18 years earlier.
The project's owners have not disclosed the exact pricetag on the light crude, but said it sold for slightly more than North Sea Brent, which went for $15.38 US a barrel Tuesday.
Falling prices are not yet a concern because the project is budgeted to make money as long as prices stay above $12.95 US a barrel, said David Slater, leader of Hibernia's reservoir performance team.
That figure is higher than North Sea offshore projects or production in Western Canada, said Slater, in large part because of Hibernia's $5.8-billion startup costs.
An increase in the recoverable reserves, or a reduction in operating costs, could help lower the break-even point, he added.
Meanwhile, Hibernia partner Petro-Canada plans to bring the neighboring Terra Nova field into production by 2001. Its break-even point is pegged at about $12 US a barrel.
Other projects are at various stages of development, and exploration on the Grand Banks resumed last year for the first time in several years.
At least some of the major companies involved in the East Coast offshore industry are resigned to put themselves at the mercy of the markets when it comes to future developments.
"Investment in these projects has to be for the long term, particularly when you're dealing with a very large investment and high risk," said Rob Andras, a spokesman for Calgary-based Petro-Canada.
However, the company can't ignore the hit its stock has taken in recent weeks, he added.
"We're committed to balance-sheet discipline for our shareholders and that could eventually impact our ability to finance future projects," said Andras.
"But we're not at that situation yet."
If the company eventually finds itself strapped by even further price declines, it would likely pull out of areas such as exploration before it would delay offshore projects that are further along, he said.
The Canadian Association of Petroleum Producers is among the observers who don't expect an immediate turnaround in the market. However, the group also doesn't expect the price to get significantly weaker, said Chris Peirce, vice-president of strategic planning.
"At the beginning of 1998, there's really no reason to be anything but optimistic about the offshore."
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