MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, FEBRUARY 23, 1998 (2)
TOP STORY
Weather Throws Cloud Over 1998 Forecasted Drilling Activity In Canada
Reuters
Warm weather in western Canada this winter threatens to throw cold water on predictions that the country's energy industry will drill a record number of natural gas wells in 1998, Alberta Energy Co Ltd (AEC/TSE) Chief Executive Gwyn Morgan said on Monday.
A lower-than-expected number of gas wells could wipe away Canada's long-standing gas surplus and drive prices up when the industry is faced with filling 1.1 billion cubic feet a day of new pipeline capacity coming into service in November.
''We look like we are about to have had one of the shortest drilling winters in history. In fact, our own people plus other companies are saying that the rigs are already having to be pulled out,'' Morgan told Reuters after a speech to an industry conference. ''So this could be a year when not as much gets done as people had hoped.''
The bulk of gas drilling in Canada is done in the winter before ''spring breakup,'' when melting snow and ice forces road bans in many regions, temporarily halting much activity.
Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, said his members were concerned that this year's winter drilling season could end up to a month earlier than it usual does.
The CAODC has predicted the Canadian industry would drill a record breaking 16,600 oil and gas wells this year. Of those, about 60 percent were expected to target natural gas.
That would beat the unprecedented activity in 1997, when 16,484 wells were drilled, 64 percent of which were gas wells.
The association revises its initial projection each year when spring breakup arrives.
Several industry executives, including the CEOs of major gas producers Poco Petroleums Ltd (POC/TSE) and Anderson Exploration Ltd (AXL/TSE), have already predicted Canadian wellhead gas prices would pare a longtime discount to U.S. NYMEX prices when Northern Border Pipeline's and TransCanada PipeLines Ltd's (TRP/TSE) expansions come on stream in November of this year.
Northern Border's much-awaited expansion and extension of the pipeline to the rich Chicago market will add 700 million cubic feet a day of new capacity, while TransCanada will add about 400 million cubic feet a day to its Canadian mainline.
The proposed Alliance Pipeline, which is still embroiled in a Canadian National Energy Board hearing, would add another 1.3 billion cubic feet of export capacity in 1999.
Record gas drilling had been expected this year to meet the higher export demand while arresting current declines in production within western Canada.
Morgan, whose company is a major gas producer and operator of AECO-C Hub, western Canada's biggest storage facility and its main pricing point, said he believed Canada still had a surplus of gas, as evidenced by the continuing wide spread between Alberta and NYMEX prices.
However, that surplus was depleting quickly, he said.
"There is a real question as to whether or not the expanded Northern Border, TransCanada and Alliance will be full initially and I think that they probably won't be full initially,'' Morgan said.
''But we've made real mistakes in the past by trying to project how much gas there was going to be, and every time we thought we had enough transportation we'd end up overshooting it.''
Another factor threatening a record well count this year was an expected drop in revenue as a result of low crude oil prices and a corresponding decrease in corporate capital spending, he said.
FEATURE STORY
Barging In On Badami
Oil Processing Plant Adding Fuel To Hay River's Economy
Northern News Services
The Mackenzie River is not usually known as a short cut.
Unless, of course, you're barging a 3,000 tonne oil processing plant to Alaska's north slope.
This summer, Northern Transportation Company Ltd., will do just that.
NTCL marketing and traffic director Lynette Storoz said last week that plant modules, being assembled in NTCL's Hay River yard, will be loaded on to barges at the end of June or early July.
"We expect to be in Badami Aug. 1."
Badami is a marginal oil field east of Alaska's Prudhoe Bay. Once operational, the facility will feed oil to the Trans-Alaska pipeline which connects Prudhoe Bay with Valdez.
"Because it's marginal, it's not a major producer. The project looks to top up the capacity of the pipeline," Storoz said.
Logistically, BP Exploration Alaska determined that designing, engineering and assembling the plant in Canada means saving big bucks.
"The alliance formed by BP to develop Badami, plus new technology, means BP will be able to cut the cost in half," she said.
BP estimates the project will come in at around $300 million US, Storoz said.
"The Canadian fabrication -- the Badami plant designed and engineered by Calgary based Colt Engineering then trucked to NTCL -- is only a small percentage of the $300 million US," Storoz said.
BP Alaska estimates a very small percentage of the cost of bringing Badami on-line will be spent in Canada.
Still, said Storoz, a small percentage of $300 million US is significant.
For 40 of NTCL's 300 employees, it means winter work. And there are about 40 NATCO staff from the company's Calgary offices in Hay River working on the plant. NATCO is another partner in the Badami alliance.
Though this is a big project for NTCL, the company has barged a similar oil processing plant down the Mackenzie to Norman Wells.
And after Badami, NTCL may be playing a part in the transporting of more oil processing plants, the company's president, Cameron Clement, said.
"Everybody in town is getting spinoffs from this," he said.
Clement said the Canadian route affords a wider window of opportunity.
And the north slope of Alaska has a shallow draft so NTCL barges can take the plant right up to shore. To accommodate an ocean barge, coming around Point Barrow, a 40-metre pier would have to be built.
Another advantage is the low Canadian dollar.
With the Canadian dollar trading below 70 cents against the US greenback, the costs of building the plant in Canada are very appealing.
NTCL is 100 per cent owned by NorTerra Inc. which is owned by the Inuvialuit Development Corporation, representing the Inuvialuit of the Western Arctic, and the Nunasi Corporation, representing the Inuit of Nunavut.
FEATURE STORY
Reuters
U.S. dependence on oil from the Persian Gulf region increased during the first nine months of 1997, reversing a seven-year decline, the U.S. Energy Information Administration said Monday.
During the period, Persian Gulf countries supplied 19.2 percent of U.S. net oil imports, up from 18.9 percent in the 1996 January - September period, the EIA said in a special report.
Saudi Arabia again accounted for the vast majority, 82.5 percent, of U.S. oil imports from the Persian Gulf during the first nine months of 1997.
U.S. net oil imports from the Persian Gulf jumped to 1.73 million barrels per day (bpd) during the first nine months of last year, up from 1.60 million bpd during the same period in 1996, the EIA said.
Since increasing from a 25-year low of 310,000 bpd in 1985 to 1.97 million bpd in 1990, U.S. dependence on oil from the Persian Gulf had declined gradually through 1996 before increasing again during January September 1997, the EIA said.
For more in the Persian Gulf, see International Countries/Regions
OIL & GAS
WORLD
Brent crude futures traded at $14.20 per barrel on the Singapore International Monetary Exchange (SIMEX) on Monday, down 48 cents from London's close on Friday after U.N. secretary general Kofi Annan said he had reached agreement with Iraq over weapons insepctions.
The price was the lowest front-month trade since April 1994.
Annan said earlier in Baghdad, after talks with Iraqi officials, that he had concluded an agreement with Iraq following his trip there over the weekend.
The agreement is aimed at defusing a potential U.S.-led military strike.
''In my view, the terms of this agreement, which have been concluded in writing, are acceptable and remove a major obstacle to the full implementation of relevant Security Council resolutions. I will so report to the Security Council immediately upon my return to New York on Tuesday...I hope it will be acceptable to all members of the Council,'' he said at a news conference in Baghdad with Iraqi Deputy Prime Minister Tareq Aziz.
The U.S. and Britain -- Iraq hawks -- have offered guarded comments over the deal, the details of which have not been released publicly.
Aziz turned away suggestions that the military build up in the Gulf had prompted Iraq to enter into the agreement.
''What helped in reaching this agreement...is the goodwill that he (Annan) brought with him -- not the American or the British build up in the Gulf or the sabre-rattling,'' Aziz said.
NYMEX
Crude Oil
Oil prices dropped sharply Monday after the United States indicated it would allow Iraq time to comply with a last-minute agreement struck over the weekend aimed at staving off a punitive military attack.
Traders said diminishing prospect of a strike against Iraq also weighed on gold, silver and other commodities seen as assets in times of international discord.
"The fact that a military strike with Iraq was averted may have contributed to the selloff in metals, oils and commodities in general," said Scott Mehlman, chief bullion dealer with Credit Lyonnais Rouse in New York.
At the New York Mercantile Exchange, crude oil for April delivery closed 87 cents lower at $15.37 a barrel, just above a 46-month low of $15.35 hit earlier in the day.
Selling pressure heightened in the afternoon on news that U.S. President Bill Clinton was willing to give a chance to the Iraq pact brokered by U.N. Secretary General Kofi Annan, thus allaying fears of any immediate air strike against Iraq.
Annan himself, speaking in Paris after two days of last-ditch negotiations in Baghdad, said Iraqi President Saddam Hussein was ready to have U.N. teams inspect all eight "presidential sites" previously off-limits to U.N. inspectors searching for evidence of chemical or biological weapons.
Annan was scheduled to fly back to U.N. headquarters in New York on Tuesday, where he said he did not expect tough talks at the Security Council.
Clinton, in a speech from the Oval Office, tentatively endorsed the deal to resume weapons inspections in Iraq, saying if implemented, it would allow U.N. teams to scour Iraq for weapons of mass destruction.
But the U.S. military force assembled in the Gulf would stay in place, he said. He warned Iraq that there would be "serious consequences" if it failed to honor the agreement with the U.N.
While the accord, if implemented as currently understood, would stave off air strikes on Iraq by a U.S.-led coalition, it also would mean no disruption of oil supplies in the area, a bearish market factor.
The world currently is in the midst of an oil glut, partly due to overproduction by some members of the Organization of Petroleum Exporting Countries.
Following crude downward, oil products also reflected the market's awareness of abundant oil supplies.
March heating oil closed 2.19 cents lower at 42.53 cents a gallon and March gasoline was down 2.10 cents to 48.31 cents.
Michael Rothman, senior energy analyst at Merrill Lynch & Co, said oil traders were also eyeing the United Nations' plans to allow Iraq to sell more oil on world markets to obtain supplies.
"This portends an even larger over-supply situation developing," Rothman said. "We are on track at a first quarter projection of a one million barrel per day stock build."
Natural Gas
Natural gas futures, pressured by fairly mild weather forecasts and a softer cash, ended mostly lower Monday in a moderate session, but prices remained stuck in recent technical ranges, sources said.
March slipped 1.9 cents to close at $2.179 per million British thermal units after trading today in a tight range between $2.17 and $2.21. April settled 1.3 cents lower at $2.227. Other months ended flat to down 1.3 cents.
"With crude down sharply, the bears had their best chance but still couldn't break the market down much today. I think people see dips as value, but technically, we're still in a range," said one Texas based trader.
Forecasts this week still call for mostly above-normal temperatures across the U.S., with Midwest levels ranging from 10-20 degrees F above for the period. Eastern temperatures are expected to vary from several to 13 degrees above normal.
Next week, most of the nation is expected to cool to seasonal or below seasonal weather though New England and the upper Midwest may stay above normal.
But despite the balmy weather and a 26 percent storage overhang to last year, technical traders noted March has been unable to break support and seemed range bound.
Key March support was pegged at $2.15, with a break of that level likely to lead to a test of 2.03. Major resistance was seen in the $2.32-2.35 gap. Further selling should emerge at the prominent high of $2.435 and in the $2.50 area.
In the cash Monday, Gulf Coast swing quotes eased slightly to the low-to-mid teens. Midcon pipes were one cent lower in the $2.06-2.11 area. Chicago city gate gas firmed slightly to the low-$2.20s, while New York also was modestly higher in the high-
$2.30s.
NYMEX March natgas futures expire Wednesday, Feb 25.
The NYMEX 12-month Henry Hub strip fell 1.2 cents to $2.362.
U.S. SPOT GAS
U.S. spot natural gas prices were narrowly mixed Monday as futures provided little direction and temperatures continued to remain mostly above-normal, industry sources said.
Swing gas at Henry Hub traded at $2.17-2.21, unchanged from Friday's levels and mirroring NYMEX's March gas contract.
In the western Texas market, however, cooler southwestern weather and an unexpected outage in Arizona nudged Permian prices a little higher to $2.01-2.06 as more gas traveled westward. Southern California border prices similarly stepped up five cents to about $2.28-2.29.
The 1,270 megawatt Palo Verde 1 nuclear unit in Arizona was expected to return to service Tuesday, according to the Nuclear Regulatory Commission. In the Midcontinent, prices slipped one cent to about $2.08, with Chicago city gate quoted mostly at $2.22, as forecasts called for temperatures to hover 15-25 degrees above normal through Thursday.
In the East, where warmer-than-normal weather is also continuing, New York city gate prices were stagnant in the mid-to-high $2.30s.
CANADA SPOT GAS
Canadian spot natural gas prices failed to budge from last week's trading range on Monday amid continued warmer-than-normal weather and range-bound trade on NYMEX, industry sources said.
Spot gas at the AECO storage hub in Alberta was talked unchanged at C$1.62-1.63 per gigajoule (GJ), while March clung to about C$1.625. Summer business was quoted at C$1.64.
Temperatures in Calgary are expected to reach highs in the low-40s Fahrenheit (F) through Wednesday.
Export trading at Sumas, Wash., was also static at US$1.13-1.15 per million British thermal units (mmBtu).
In the eastern export market, Niagara gas prices remained in the low-to-mid US$2.30s per mmBtu amid temperature highs around 40 degrees F.
NYMEX's March gas futures swayed today between a tight
OIL & GAS REFERENCES
Charts
oilworld.com
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NYMEX
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