MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, FEBRUARY 27, 1998 (02)
TOP STORY
OPEC Production Quota Proposed To Decrease
Xinhua
President of the Organization of Petroleum Exporting Countries (OPEC) I.B. Sudjana said here Friday that OPEC's 27.5 million barrel per day (bpd) production quota could be lowered to stabilize the price of oil in the international market. Production quotas could be lowered if all oil ministers from OPEC member countries approved, Sudjana, who is also Indonesia's mines and energy minister, said.
The statement followed a call made by Sudjana Thursday, which urged OPEC to convene an emergency meeting to discuss the fall of international crude oil prices and the impact of higher of Iraqi oil production. The price of Brent North Sea oil in London on Thursday was only 14.03 U.S. dollars per barrel.
One of the reasons for the fall of oil prices was seemingly a result of the united Nations' approval of a plan for Iraq to boost its crude oil exports to 1.5 million bpd, up 900,000 bpd from 600,000 bpd for each six-month period.
Another reason for the lower oil price is an oversupply caused by diminished industrial demand for oil in nations experiencing economic turbulence.
Sudjana said here on Friday that most OPEC member countries also want higher oil prices so a plan to convene a meeting was fully supported by all ministers. "At the meeting, the organization will optimize supervision over the possibility of quota violations.
An OPEC monitoring minister will be necessary in the matter," he said. Sudjana said on Thursday that if OPEC ministers agreed to meet, the conference would be held in Vienna after Indonesia's presidential election next month.
FEATURE STORY
Oman Calls for Gcc Meeting to Boost Oil Prices
Oman on Friday urged the Gulf Cooperation Council (GCC) states to hold an emergency meeting to discuss ways of propping up oil prices, the official Omani News Agency reported.
Oman is "in consultations with other GCC countries on such a meeting to reach a joint stand. I hope the meeting will be held immediately," Omani Oil Minister Mohammed al-Ramhi said in a statement.
Al-Ramhi criticized some Gulf countries for piling downward pressures on the oil markets by producing more than their quotas granted by the Organization of Petroleum Exporting Countries (OPEC).
He warned that such violations of quotas would give no hope to oil price recovery.
Like other GCC members, whose economies are seriously reliant on oil exports, Muscat has been keeping a wary eye on the oil price slump.
The oil price collapse was triggered by redundant supplies and slacked demand due to OPEC's November decision to increase its output ceiling by 10 percent to 27.5 million barrels per day, a mild winter in northern hemisphere and Asia's economic turmoil.
The bearish factors have depressed crude prices from 1997's averaged 19.4 U.S. dollars a barrel to the psychologically important barrier of 14 dollars in the past months.
It was widely believed that the downslide would accelerate in the next few months with Iraq's return to the markets, which has become more possible than ever before after Baghdad and the United Nations reached a deal on resolve the crisis over arms inspections.
The peaceful solution accord signed Monday morning greatly eased worries about the disruption of Iraq's oil exports, which had been anticipated pending a possible U.S. military showdown with Iraq.
Up to now, most GCC states remained hesitant to take actions to shore up the sagging prices. They also refrain from supporting an OPEC meeting to give oil prices a leg up by cutting off outputs.
The GCC state - Oman, Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain - share nearly 45 percent of proven oil reserves in the world.
In the past years, oil revenues accounted for about two thirds of their total incomes.
FEATURE STORY
Saudi Not Considering Oil Output Cut Says Economist
Reuters
Saudi Arabia is not considering cutting its oil production to shore up low crude prices, a leading Saudi economist said on Friday.
"For Saudi Arabia to cut production is unthinkable. It is very obvious from earlier official statements that Saudi Arabia is not even entertaining the idea," Ihsan Bu-Hulaiga said.
Speaking by telephone from Riyadh, Bu-Hulaiga said that while the Saudi economy was hurting from low prices, the world's largest oil producer and exporter was unlikely to show any output flexibility.
"They will not show any flexibility right now, even if there is an OPEC meeting," Bu-Hulaiga told Reuters.
Indonesia's Mines and Energy Minister and OPEC president Ida Bagus Sudjana on Thursday called for an extraordinary group meeting to discuss the price fall.
Saudi Arabia, OPEC's linchpin, has said it wants to check the group's March output before giving its crucial support to an emergency meeting.
Riyadh has also made it clear it wants Venezuela, OPEC's biggest quota buster, to make the first move towards reigning in over-production among the 11-member cartel.
Saudi Oil Minister Ali al-Naimi last week called for "meaningful efforts" towards quota adherence among those in the group which have been pumping beyond their official quotas.
Saudi Arabia's King Fahd said on Monday that oil prices and the stabilty of world oil markets were the responsibility of all producing states.
"Protecting the market and restoring its stability is the responsibility of all exporting states inside and outside OPEC," King Fahd said.
FEATURE STORY
Iraq: Oil Exports Limited to $4 Billion
Reuters)
Iraq will be unable to export more than $4 billion worth of oil under the third phase of the U.N. oil for food deal, Oil Minister Amir Muhammad Rasheed told a news conference on Saturday (today).
He said this was because of a lack of spare parts in the oil sector and the deterioration of world oil prices.
Rasheed said Iraq was now negotiating with the United Nations for the provision of equipment needed for Iraq's oil industry, and added that he would give priority in awarding contracts in this field to Iraq's friends.
The United Nations earlier this month passed a resolution increasing the value of Iraq's oil exports for the third six-month phase of Baghdad's oil-for-food deal to $5.256 billion from the $2 billion ceiling allowed during the previous two phases.
The deal was designed to allow Iraq to import vital food and medicines to help a population suffering increasing hardships from the U.N. sanctions imposed on Iraq after it occupied neighboring Kuwait in 1990.
As well as suffering from a shortage of spare parts for its oil export facilities, Iraq is selling its oil on a world market in which prices are currently about $5 below the average price for last year and some $11 below a post Gulf War peak hit about 16 months ago.
FEATURE STORY
Russia Can Do Little but Fret Over Low Oil Prices
Reuters
Plunging world crude prices are hurting Russia's key energy sector more severely than many other large oil economies, as high transportation and production costs and hefty taxes squeeze producers.
"All Russian companies are losing money on oil exports,' said Stuart Amor, oil analyst at CS First Boston in Moscow.
"Russian producers are more susceptible to low oil prices than the Shells and BPs of this world, because, for one, Russia has a negative taxation system."
No matter what happens to the value of crude abroad, the pressure is on to export as much as possible, because domestic consumers as often as not cannot pay for their supplies in cash, but in kind.
"Companies simply need exports because they need good, hard money, even if they are showing formal losses," said Yevgeny Khartukov, general director of the International Centre for Petroleum Business Studies in Moscow.
"The problem is there is no way to escape." Russia exported over one third of its output last year, pumping 2.54 million barrels a day to all destinations and 2.20 million bpd outside the CIS. Western exports were worth over $13 billion in 1997.
Oil barons are lobbying the government with increasing urgency to relieve the tax burden as they watch prices plummet to depths not seen for nearly four years.
Benchmark Brent crude fell to a low of $13.73 a barrel on the International Petroleum Exchange (IPE) in London on Tuesday. The market topped $25.00 as recently as October 1996.
Russian oil is considerably heavier and cheaper than Brent. Vagit Alekperov, president of Russia's largest oil company LUKoil, said on Wednesday it was losing over $5 a tonne of oil exported through the Black Sea port Novorossiisk.
This is a bad sign for the rest of the sector, as LUKoil is widely considered to be among the lowest cost producers.
Yevgeny Shvidler, chief financial officer of YUKSI, the proposed merger between YUKOS and Sibneft, said the company's exports would not be cut because of low prices. Instead the government should help.
"We are not going to reduce our exports. We are going to work more effectively with the government," he said on Thursday.
"Our position is that the government should reduce excise taxes, transportation and railway tariffs," he said, adding that this was not just YUKSI's position, but the whole industry's.
Minister without portfolio Yevgeny Yasin said on Thursday: ''The government is looking at what to do about this. Oil companies have proposed lowering excise duties and other breaks in order to allow them to survive this difficult time. I think that a decision will be made in a month, or month and a half.''
He described the situation facing the sector as ''dangerous,'' adding that Russian oil fetched just $11.60 a barrel at current prices from $19.10 a year ago and $16.10 on average in 1997.
But analysts said the government could not afford to give much away in the form of tax breaks and tariff cuts at a time when the Kremlin badly wants the draft budget passed and is already threatened with a revenue shortfall this year.
"The government may be looking to take some steps to help support the oil industry...but it also has to think about the budget. The room for manoeuvre is limited," Khartukov said.
Fuel and Energy Minister Sergei Kiriyenko said on Thursday that production costs were too high.
But new fields need to be tapped to make major inroads into costs, and billions of dollars are needed.
Some of Russia's biggest firms have signed strategic deals with Western partners in recent months, partly as a way of bringing in financing needed to tap new deposits. Mergers and strategic alliances are also buzzwords within Russia.
YUKSI, which when it is officially formed will leapfrog LUKoil to the top of the Russian oil pack, led the way in January, announcing plans for a full merger. LUKoil is expected to sign a strategic alliance with Tatneft soon.
Low oil prices are not seen as the main catalyst. ''Low oil prices are not a major reason for strategic partnerships in Russian oil,'' said Igor Kourennoi, oil and gas analyst at CAIB investment bank. ''Most companies need strategic partners for expertise and technology as well as financing.''
FEATURE STORY
Oil Companies Tread Warily as UK Budget Looms
Reuters
Oil companies fearful of irritating the British government before the annual budget in March are unwilling to identify North Sea developments they say are on hold pending the outcome of a tax review.
But oil and gas field operators insist the 34 projects spoken of in a lobbying submission as under review do exist.
The 34 are at the forefront of a group of 117 projects at risk if the government announces tax changes on March 17 that eat into profit margins already hit by oil price falls, the U.K. Offshore Operators Association (UKOOA) said.
Operators said they were reluctant to hold a gun to the government's head as it decides whether it can raise extra taxes from oil companies without harming future investment levels or the thousands of jobs dependent on the industry.
The $5 slide in oil prices from the 1997 average has complicated the government's decision by cutting project returns, including exploration costs, to around 3-4 percent, below the cost of capital, said Aberdeen University's Professor Alex Kemp.
A spokesman for UKOOA said the list, compiled in a confidential survey, had not been provided to the government, although individual companies may have volunteered the information to Treasury officials.
Only the west of Shetland Clair development has been said to be at risk by its operator British Petroleum Co.
"Clearly Clair needs a lot of help to be a good project," a BP spokesman said. "The development is designed on the basis of the existing tax rates and if they should change then the partners involved would need to consider that."
Secondary phases to existing developments and projects discovered in the past that needed technological advances before they could be made profitable were most likely to stay on the back burner if taxes changed, industry analysts said.
"We're now talking about families of projects discovered a long time ago," said one operator. `But these are not strong swimmers and if you tie a fiscal brick around them then they'll sink."
Treasury officials were giving no clues to the outcome of their review, though observers suggested cutting tax relief on decommissioning, green taxes, stiffer rates of corporation tax or an excess profit tax may have been considered.
"The most difficult question is whether they will be able to put on any extra tax and sustain a high level of activity,'' said Kemp.
"Oil price falls make a big difference to the amount of taxable capacity available."
"The ground has shifted and the oil price gives the government a perfect excuse for not lifting taxes," said a spokesman for an oil major.
Oil executives dispute assertions that Britain has an overly lenient tax regime, arguing that smaller fields and difficult operational conditions make exploration expensive.
Extra tax, they say, will prevent the development of the marginal discoveries increasingly common in Britain's mature hydrocarbon provinces and divert fickle investment capital to politically riskier but more rewarding oil regions.
On Monday, the Offshore Contractors Association (OCA) said 380,000 jobs in Britain depended on the oil industry and some 40-50,000 were at risk from the spending cutbacks that would follow a change in the tax regime.
The OCA has been lobbying politicians with large oil interests in their communities, with much of the focus on Aberdeen, Britain's oil capital, which would suffer the worst effects from an industry contraction.
"The fiscal arguments are compelling,'' said Steve Colville, spokesman for Chevron Corp's U.K. unit. ''Anyone taken through it cannot fail to be persuaded, and the political arguments for leaving things alone are equally compelling."
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