MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY DECEMBER 29, 1997 (4)
FEATURE STORY
HIBERNIA'S ''FIRST OIL CARGO'' HEADED TO MARKET
Hibernia development project owners today announced that on December 26, 1997 the first 850,000 barrel Hibernia crude oil cargo had been sold to Tosco Corp., a US refining and marketing company. While terms of the sale were not released, the cargo sold at a premium to Dated Brent.
During the first year, Mobil Oil and Chevron will purchase the oil at Hibernia's Offshore Loading System (OLS) from the other Hibernia owners and deliver it to market. After the first year, each of the Hibernia owners may market their share of Hibernia oil independently. Main markets for Hibernia crude oil are expected to be refineries in eastern Canada, the US Atlantic and Gulf coasts, the Caribbean and north west Europe.
Hibernia owner company Presidents agree, ''the 'first lifting' (the transfer of crude oil from the platform to the tanker) and marketing of Hibernia crude oil is a proud moment for everyone who has participated in the project. It is one of the last major milestones of the Hibernia development project and is the result of many years of dedication, perseverance and team work''. They added, ''We are very pleased to see Hibernia's first crude oil cargo enter the market as this represents the beginning of commercial activity and the dawn of a new industry in Newfoundland and Labrador marked by exciting future developments''.
Until the completion of the transshipment terminal at Whiffen Head, Hibernia crude oil will be carried direct to market using two of the most technically sophisticated tankers in the world, the (x)M.T. Kometik and (xx)M.T. Mattea. Once the transshipment facility becomes operational in October 1998, transportation of the oil to final market will be by some combination of direct shipment and by transporting the oil to the terminal, where conventional tankers will carry the oil to market.
Hibernia's first crude oil cargo of 850,000 barrels was lifted onboard the M.T. Kometik using Hibernia's Offshore Loading System (OLS). For safety reasons, the OLS is located about two kilometres from the Hibernia platform, which has crude oil storage capacity of 1.3 million barrels. When a tanker arrives at the OLS, crude oil is pumped via a subsea pipeline from the platform to the OLS and from there to the tanker through a flexible loading line connected to a sub-surface buoy.
The Kometik and its sister ship, the Mattea, are state of the art vessels and specially designed for the icy waters of the Grand Banks. Each vessel is Canadian flagged and crewed by two shifts of 23 people (including four cadets), most of whom are Newfoundlanders. Vessel features include:
- state of the art navigation, communication and positioning systems;
- two bow thrusters, twin 13,000 horse power engines, two propellers and two high-performance rudders providing exceptional maneuverability; and
- ice-strengthened double hull to withstand sea ice impact.
In addition to this technology, emergency response training and equipment, combined with the experience of the crew, will ensure the best possible protection of both people and the environment. These features demonstrate the commitment of the Hibernia owners to providing safe, environmentally responsible and efficient operations in the challenging marine environment off east coast Canada.
Hibernia has completed the drilling of two wells which are expected to reach a total production rate of about 60,000 barrels of oil per day. Hibernia's third and fourth wells, currently drilling, are expected to enter production in the first quarter of 1998. By June, 1999 Hibernia expects production to be 135,000 barrels of oil per day on a sustained basis.
The Hibernia owner companies are Mobil Oil Canada (33.125%), Chevron Canada Resources (26.875%), Petro-Canada (20%), Canada Hibernia Holding Corporation (8.5%), Murphy Oil (6.5%) and Norsk Hydro Canada Oil & Gas (5%). The Hibernia platform is located 315 kilometres east southeast of St. John's, Newfoundland. Oil production began November 17, 1997.
Notes:
(x)Kometik - is an Inuit word meaning sled. This sled was carefully crafted to safely carry families, food and valuable possessions over the hostile terrain of northern Newfoundland and throughout Labrador. She was named Kometik as a symbol of safe and reliable transportation and symbolic of Newfoundland's progress towards a new era of oil exploration and development.
The Kometik first arrived in Canadian waters on October 15, 1997 and conducted a series of sea trials and testing at the OLS, as well as loading and delivering several crude oil cargoes from the Caribbean to a New Jersey refinery for Mobil Oil. The Kometik is owned by Mobil (49.8%), Chevron (40.4%) and Murphy (9.8%) and is managed by a Newfoundland company, Canship Ugland Limited.
(xx)Mattea - The name Mattea was selected because of its historical significance and connection to Newfoundland's discovery by John Cabot 500 years ago. In honour of his wife Mattea, Cabot christened his ship Mathew (anglicized version of the name Mattea), before sailing across the Atlantic Ocean in 1497.
The Mattea is owned by Penney-Ugland Inc., a joint venture company based in Newfoundland. It is time chartered by Petro-Canada, Norsk Hydro Canada Oil and Gas and Canada Hibernia Holding Corporation. It is expected to arrive in Canadian waters in early January, where it will undergo a series of sea trials and tests at the OLS.
FEATURE STORY
NATIONAL ENERGY BOARD FEELING STRESS OF OIL BOOM
Calgary Herald
The boom in Alberta's oil and gas industry is creating problems at the National Energy Board, retiring chairman Roland Priddle said Tuesday.
Priddle, who left the federal regulatory agency Wednesday, said the NEB has been swamped by an explosion of work generated by the resurgent energy industry.
Megaprojects like the $3.7-billion Alliance Pipeline, which will see natural gas shipped to Chicago from Alberta and northeastern B.C., and a variety of smaller projects are straining the Calgary-based board's resources.
"We're busier than we have been in 10 years and as a result of our downsizing program we're having to handle the work with 100 fewer people," Priddle said.
He is worried the NEB's response time, a critical factor for large-scale projects, will be impaired as key employees move to accept better paying jobs in the private sector.
"We are losing people because of the pressure-cooker atmosphere and because salaries have been frozen," said Priddle.
"I don't think any of us anticipated the depth and breadth of projects that would spring up this year," said Brian MacNeill, president of IPL Energy Inc., whose subsidiary, Interprovincial Pipe Line Inc., has just applied to the NEB for approval of a $640-million line expansion.
"We require a quick turnaround (from regulatory agencies) in order to do business successfully in this environment. Otherwise, you are left hanging with financial and contractual commitments that can run into the billions of dollars."
David Manning, president of the Canadian Association of Petroleum Producers, said industry members are "very concerned" about the stresses being felt at the NEB.
"Initially, service times begin to decline, which is where the industry feels it most," he said.
"But there is also a concern that over time, the quality of decisions made by regulatory boards will be impaired if they don't have the staff to handle the workload."
NEB CHIEF RIDING INTO RETIREMENT
Roland Priddle Will Be Remembered As An Avid Cyclist - And A Gentleman
Charles Frank - Calgary Herald
In February 1991, when Roland Priddle learned the National Energy Board would be moving to Calgary, the longtime government employee was nonplussed.
A job is a job, after all.
But when discreet inquiries revealed that Calgary was home to an extensive network of well-maintained bike paths, the NEB chairman, an inveterate cycling enthusiast, was overjoyed.
Since moving here, the 63-year-old Priddle, who retires today, has been regularly making the 11-kilometre bicycle trip between his home and the NEB's downtown offices. During last Thursday's early-morning snowstorm, when traffic was in a snarl, Priddle jauntily biked his way to work as usual.
"The cycling is so much better here than in Ottawa that making the move was really no big adjustment," Priddle says in a lighthearted attempt to downplay the complexity of what industry officials insist was one of the seminal developments in the modern history of Alberta's oil and gas business.
"That (cycling in the snow) is vintage Roland," says Canadian Association of Petroleum Producers David Manning with a laugh. "But seriously, I doubt we'll find another like him. His integrity and knowledge were remarkable."
Just how the NEB came to Calgary is a story in itself, said Priddle, a sof spoken gentleman who has ruled the NEB with a firm hand since taking over the top job at the nation's most prestigious regulatory agency in 1986.
During a cabinet meeting at 24 Sussex Drive prior to the February 199 budget, then Finance Minister Michael Wilson was in the midst of unveiling the details of his budget package when Alberta MP Don Mazankowski reportedly complained about the absence of "goodies" for a then federally conservative Alberta.
"The way I understand it, Prime Minister Brian Mulroney turned to the finance minister and gave him the authority to move the NEB to Calgary on the spot," says Priddle.
"In fact, Wilson had to read it into his speech because the budget documents had already been printed."
So much for the complexities and intricacies of government policy making.
Prior to the NEB's emotional and physical trek from the Ottawa lowlands to Calgary's foothills, local energy officials regularly made hundreds of annual pilgrimages to plead their cases on the endless cornucopia of energy matters that, as a matter of course, fall under the board's mandate.
Rightly or wrongly, the need to travel to Ottawa, cap in hand as it were, was a bitter pill to swallow for the independent, entrepreneurially minded individuals who tend to head up Alberta-based energy companies.
"I wouldn't say it was quite like that," says Priddle with a smile. "But I'm sure there was that perception in the community."
Ironically, Priddle points out that the NEB was modelled after the old Oil and Gas Conservation Board of Alberta (which has since become the Alberta Energy and Utilities Board).
In fact, the NEB's first chairman, Ian McKinnon, was a former head of the Alberta board who had been loaned to the federal government to oversee the development of the regulatory agency.
"We (the NEB) actually owe a lot to the government of Alberta," says Priddle.
The native of Glasgow, who garnered his educational credits during stints at Cambridge University and the University of Ottawa, staunchly maintains that his tenure as NEB chairman in both Ottawa and Calgary has been free of political interference.
"There has never been a single instance during my tenure when a politician tried to influence a board decision," he says adamantly.
But Priddle also acknowledges that moving the bureaucratic-minded government agency out of Ottawa's environs changed the way the NEB went about its business.
"There is no doubt that coming to Calgary resulted in a culture change for us."
The fact that the NEB lost almost two-thirds of its staff in the move opened the door for a new generation of employees who had earned their spurs in the oilpatch, as opposed to government.
"The whole market environment and the entrepreneurial attitude that so typifies Alberta captured us," he says.
As a result, it wasn't long before NEB officials began to view themselves as a regulatory and service agency rather than an arm of government.
Shortly thereafter, NEB officials, with Priddle's blessing, began looking for ways to streamline their operation and reduce their overall numbers, a mantra that has been well-documented throughout the oilpatch.
By and large, Priddle says, the NEB's restructuring has gone well although the huge upsurge in activity that has characterized the oil and gas industry in 1997 is straining the NEB's resources.
As NEB chairman, Priddle, by nature a voracious reader, has been required to consume binders full of complex data relating to each NEB hearing.
The chairman's downtown Calgary office is awash with rows of thick binders pertaining to current issues like the Alliance Pipeline, and Priddle admits he will miss the challenge involved in processing the daunting amounts of information that characterize the NEB's work.
"I suspect I'll still follow things quite closely," he says with a smile. "But it's really been a wonderful ride."
FEATURE STORY
THE YEAR AHEAD - (U.S. Article)
Oil Major Restructuring Set To Continue
After 1997's record merger year, the oil business is expected to remain under pressure in 1998 to cut costsin both upstream and downstream arenas.
In the upstream, softer crude oil prices due to the imminent resumption of Iraqi reports and slowing Asian demand are expected to curtail exploration and production, sending oil companies shopping on Wall street to pick up reserves.
Refiners uninvolved in 1997's merger activity will be faced with meeting the challenge of finding a merger partner to help consolidate market share and cut costs.
Worldwide, oil and gas mergers and acquisitions so far this year totalled $58.4 bln, up from $52 billion in 1996 and ahead of the previous record of $53.8 billion in 1984, according to Securities Data Co, a consultancy which tracks M&A activity.
Analysts and bankers are sceptical that the majors will make up for a $1.00-$1.50 decline in the spot benchmark West Texas Intermediate to $19.00-$19.50 per barrel with higher output given their poor record in translating development dollars into higher production, so there will be an incentive to buy reserves.
''The smaller companies are likely to get smaller and the weaker will disappear. Lower oil and gas prices are going to smoke out the hype. The emperor is likely to be seen to be half naked at least,'' said Fadel Gheit, analyst at Fahenstock & Co.
Another key for the majors will be a concerted drive to convert natural gas production in emerging economies into electricity.
''The majors are going to leverage their natural gas output and move up the value chain to become independent power producers,'' said Gheit.
He says opportunities from the Asian financial crisis, which has weakened domestic players means cash-rich majors will come out stronger and that governments will be reluctant to interfere because pricing will stimulate economic growth.
In the downstream, the majors will be forced to fix businesses to match the estimated $800 million annual savings to be achieved by Texaco Inc (NYSE/TX), Shell Oil Co ( SHEL.L; RD.AS) Star Enterprises, a joint-venture between Saudi Aramco and Texaco in the U.S. and $500 million projected by British Petroleum Co Plc (BP.L) and Mobil Corp (NYSE:MOB - news) in Europe.
Texaco has already said it is studying its options in Europe, which include withdrawal.
''Competitive pressure in the U.S. will be exacerbated and for two- or three years those that have formed alliances will reap the benefits, while in European refining there has been lots and lots of commotion,'' said Eugene Nowak, analyst at ABN AMRO Chicago Corp.
Amoco Corp (NYSE/AN) and Mobil have long been rumored to be in talks on merging downstream operations, and Amoco has said it needs to cut around two cents per gallon from its costs.
One insider said that he that the two had come close to a deal, but failed to negotiate acceptable terms.
''The sort of returns we are seeing in the downstream business are unacceptable to stockholders and there is pressure being applied to bolster returns to shareholders,'' said Calvin Cobb, head of Ernst & Young/Wright Killen's energy division.
He notes that returns in the refining business are still lingering way below cost of capital, but says that bolstering those returns are possible via self-help measures.
''It certainly must be possible, USX-Marathon Group (USX/NYSE) has had a return on capital in its downstream business of 13.4 percent a year over the past three years,'' Cobb said.
Another trend of linking long-term supply contracts from heavy oil producers in Venezuela and Canada will continue.
As well as offering producers a guaranteed outlet, these deals offer refiners lower crude costs.
In the domestic upstream, there will be no shortage of deals as interest rates remain low, says Geoffrey Roberts, president ofMadison Energy Advisors Inc.
He notes that while the 12-month strip prices on the New York Mercantile Exchange show lower oil prices, looking furtherout oil prices remain relatively firm.
While the February price on NYMEX is $18.40, looking out to the start of 1999 the price rises to $19.01 per barrel
''Oil prices are not low enough to affect plans,'' said Roberts.
Fahenstock's Gheit said that he believed 1998 could even see the merger of two major oil companies, but declined to speculate on which the two would be.
''We are likely to see companies like Royal Dutch/Shell go for an acquisition, they no longer believe they are above the idea of trading and swapping assets,'' he said.
In the international arena, there is a race on for assets in the former Soviet Union, with the privatization oil giant Rosneft, which is being keenly fought over by BP and Shell, both in alliance with other Russian majors.
Texaco has said that it would look at Rosneft, possibly in an alliance with a Russian consortium, while Exxon Corp (NYSE/XON) is also considered a contender and a powerful combination of Russian oil company YUKOS and Rosprom are looking for a partner.
Stephen O'Sullivan, head of research at MC Securities in London believes that the Europeans may have the edge over U.S. majors when it comes to taking risks in Russia.
Elsewhere in the FSU, there is a race on for reserves in the Caspian as companies such as Phillips Petroleum Co (NYSE:P), who have eschewed the region in the past because of lack of legal structures, become interested.
FEATURE STORY
MERGER MANIA
Glen Whelan - Calgary Sun
It was the year of the high stakes deal.
Mergers and acquisitions hit a frantic pace in 1997 as deep-pocketed chief executives went hunting for bargains in the city's overheated oilpatch.
Fistfuls of cash and stacks of stock certificates changed hands across Calgary boardroom tables in conditions ripe for corporate takeovers.
"I think it was a record year for merger and acquisition activity," says Wilf Gobert, oil and gas analyst for Calgary-based Peters and Co.
"When everything is counted, it will probably be a record for overall financing of deals, and maybe even for the number of companies that were taken over."
Three-quarters of the way through the year, 33 companies had been sold for an aggregate value of $7.6 billion, according to Frank Sayer of Sayer Securities Ltd.
That's a 162% increase over the first nine months of 1996, when 26 firms valued at $2.9 billion hit the auction block.
And although the final tally isn't in, the value of acquisitions is expected to exceed last year's record of $10.2 billion, according to Sayer's calculations.
Analysts agree it was a question of survival of the fittest.
Riding an unprecedented swell in stock prices, healthy firms forswore expansion through the drill bit for the faster formula of growth through the chequebook.
Their targets were almost exclusively troubled firms having difficulty financing growth -- the kiss of death in a merger-happy market.
"There were a few mergers of healthy firms, but generally speaking the companies targeted had poor financial performance," Gobert says.
"There's pressure to be competitive. If you can't, you naturally become a target for other firms."
High production costs and rising land values made it increasingly difficult for many firms to boost production and enhance shareholder value in 1997.
And with oil and gas reservoirs shrinking year by year, the cost-crunch hit weaker companies worse than ever, says Warren Holmes, managing director of First Energy Capital Corp.
"Economies of scale have become critical to making real money out there," Holmes says.
"If you don't find an economic level to operate at, then it becomes difficult to grow. If you can't grow, your board of directors is in trouble."
With high-priced stock to leverage their deals, stronger companies swooped in for the kill to satisfy growth needs.
"During '97, a lot of companies had very high-priced paper: That gives you the currency for buying up other companies," says Holmes.
"And with interest rates so low, the other option of financing acquisitions through the bank was also available."
The result has changed the oilpatch forever. Longtime institutions like Morrison Petroleum Ltd. and Stampeder Exploration Ltd. were swallowed whole while others, such as Precision Drilling Corp. and Gulf Canada Resources Ltd., grew in leaps and bounds.
But as active as 1997 was, some analysts are calling for even more acquisitions in the first part of the new year.
And while this year saw an inordinate amount of negotiated transactions, the trend in 1998 will be toward the hostile takeover, Holmes predicts. "Companies will probably be going hostile because they know there won't be many competitors with strong balance sheets to pay cash, and they won't be willing to give out stock when it's weak," he says.
"It should be an interesting first quarter. There are a lot of bargains out there for companies that can afford them."
TAKEOVER TALLY
A selected list of the year's mergers and acquisitions.
February
* Northstar Energy Corp. buys Morrison Petroleum Ltd. for $645 million days after Canadian 88 Energy Corp. withdrew its bid for the firm.
* TransCanada Pipelines Ltd. purchases U.S.-based Enron Louisiana Energy Co. for $210 million.
April
* Canadian Occidental Petroleum Ltd. rides in with $2 billion white knight bid for Wascana Energy Corp., thwarting a $1.7-billion hostile takeover attempt by Talisman Energy Inc. The acquisition was the year's largest oilpatch takeover.
May
* Precision Drilling Corp. caps off two years of heavy acquisitions with $500 million in takeovers, snatching up Kenting Energy Services Inc. and Lynx Energy Services Corp.
July
* Gulf Canada Resources closes its $1-billion takeover of Stampeder Exploration Ltd.
October
* Talisman Energy Inc. picks up the exploration arm of the Mannix family's Pembina Corp. for $605 million. The Mannix's Loram Corp. was divesting itself of its privately held oil and gas and coal holdings
to finance new ventures.
* Orbit Oil and Gas Ltd. announces it will fight a hostile takeover attempt by Sunoma Energy Corp. valued at $97 million. The Calgary company is still waiting for a higher bidder to rescue the firm.
NATURAL GAS SALES ALL FIRED UP
Ontario Deregulation Sees Brokers Taking Over From Utilities
Claudia Cattaneo - Calgary Bureau Chief The Financial Post
Brokers and marketers are increasingly replacing utilities as the main sellers of natural gas to residential customers in Ontario.
And a new study says it won't be long before the rest of the country catches up.
The study, by the Calgary-based Canadian Energy Research Institute, says as much as 70% of natural gas is now bought from brokers and marketers. In the residential segment alone, direct sales volumes have more than doubled since 1994.
Until recently, natural gas sales were dominated by distribution companies such as Consumers' Gas Co., Union Gas Ltd. and Centra Gas Inc. Because of deregulation, the market is looking more and more like the telephone long-distance market of the past few years, the study says.
Ontario -- and to a lesser extent Quebec -- lead the country in direct natural gas sales because deregulation is at a more advanced stage.
The new approach fosters competition by allowing brokers and resellers to profit from the difference between the price they pay for the commodity and the price they sell it for.
"The gas that the residential client receives still goes through the pipes of the distributor, but the commodity itself is freely traded and consumers have a choice," said Roland George, CERI's vice-president for North American natural gas and electricity and one of the study's authors.
"It's definitely, on average, driven prices down for customers."
It is common, for example, for customers to receive discounts, or to lock in their purchase price in long-term contracts.
An estimated 20 resellers are competing in the Ontario market.
They include one producer, Calgary-based Suncor Energy Inc., through Sunoco Inc.; and two Calgary-based pipeline companies, IPL Energy Inc., through Consumers' Gas, and TransCanada PipeLines Ltd., through TransCanada Energy.
Suncor recently spawned the new business as part of a strategy to increase its energy sales in Ontario, said John Oziaizler, Toronto-based manager of sales and marketing for residential natural gas.
"We are supplying customers in Ontario with petroleum products and we wanted to expand our relationship with our customers. We saw the deregulation of the natural gas industry as the next logical step."
Their pitch is simple, Oziaizler said. "Sunoco, through Suncor Energy, is a producer of natural gas, and as a producer we can sell to you directly and you can save."
Customers who sign up get a 10% annual discount and $20 of free gasoline from Sunoco as a signing bonus.
In Alberta, regulation has discouraged direct sales because resellers are not allowed to earn a margin -- they have to charge the same price they're paying for the commodity.
"In those provinces where you have institutional barriers, they will come down," George predicted.
"But it's going even further than that."
Across North America, the energy business is being deregulated on all fronts, from natural gas to electricity. This paves the way for companies that own distribution networks or have established client lists to sell packages of services, including electricity, natural gas, home security systems and even cable television.
"Their clients would have one bill, for all the various services provided by this mega-marketer of energy and non-energy services," George said.
Suncor, for example, is considering moving into electricity and bundling other products and services, said Oziaizler.
Consumers' Gas entered the direct purchase business this year through its Consumers' First marketing affiliate. Before deregulation, Consumers, which distributes half the natural gas in Ontario, was responsible for buying, distributing and marketing gas to customers.
Under the current regime, the firm still has responsibility to secure the gas and distribute it, but customers can buy from the seller of their choice.
While Consumers' lost some of its turf from deregulation, it doesn't oppose competition.
"As part of the competitive forces unfolding in the market, in the long run the ultimate benefactor will be the customers," said IPL spokesman Frank Ternan.
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