MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 19, 1998 (2)
OIL AND GAS
WORLD PRICING
World oil prices fought back Monday from recent 45-month lows on supportive news headed by tension between the United Nations and Iraq.
Benchmark North Sea Brent crude prices ended trading Monday 36 cents a barrel higher at $15.86, a hefty 76 cents above a low of $15.10 touched last week, the weakest price seen in almost four years.
The gains made inroads into steep losses sustained on the back of declining Asian demand, a resumption of Iraqi oil exports and the prospect of increased OPEC supplies.
But analysts said key concerns over the impact on oil demand of east Asia's financial crisis would continue to exert bearish pressure on values.
A further imponderable is whether the Organization of Petroleum Exporting Countries (OPEC) will be able to agree on any measures to stem the slide in prices.
"Like the Asian financial crisis, the oil market is threatened with a serious meltdown,' said the Center for Global Energy Studies. "Matters could indeed get much worse before they get better."
Prices drew strength Monday from determined comments by chief United Nations arms inspector Richard Butler on a visit to Baghdad for talks with Iraqi officials about their threat to terminate the arms inspection program.
The senior official rejected a deadline set by Iraq for inspections to be completed and said he would not abandon his call for unrestricted access for the inspectors.
Butler flew to Iraq on Monday after saying the standoff had become "quite serious."
"The chance of military action by the United States has increased," said brokers GNI in London. It added that in U.S. political circles the mood appeared to be "What have we got to lose?"
Market players also cited the killing of Iraq's charge d'affaires in Jordan and seven others in Amman by unknown assailants as another bullish factor.
Additional support came from the scheduling of talks by OPEC aimed at drawing a line under the price slump damaging their oil-dependent economies.
OPEC has watched the price of oil slide to 45-month lows since agreeing in December to raise its output ceiling by 10 percent to 27.5 million barrels per day (bpd).
Several OPEC ministers have ruled out a full emergency meeting for now. But an OPEC official said Monday that an expanded meeting of the group's quota monitoring committee would be held in Vienna on Jan. 26 to discuss oil production quotas.
The committee comprises Kuwait, Iran and Nigeria, but other ministers of the 11-member cartel have been invited to sit in as observers.
The committee has no power over quotas but it monitors the oil market and OPEC member countries' output.
Traders noted the meeting's effectiveness would be limited by the fact that Ali Naimi, oil minister of OPEC kingpin Saudi Arabia, would not attend the talks. Qatar, too, said it would not attend.
Fresh evidence of OPEC concern emerged with a call by the Iran News newspaper of OPEC No. 2 producer Iran for Saudi Arabia to cut its big oil output to stabilize world prices.
Oil analysts say any attempt by OPEC to quickly hold a full ministerial conference, brought forward from its planned June conference, might easily backfire.
NYMEX
The New York Mercantile Exchange was closed yesterday.
OIL & GAS PRICE REFERENCES
Charts: oilworld.com
NYMEX Reference quotewatch.com
HEADLINE STORY
Petro-Canada Adjusts Focus In West
Record Profit Seen For '97 But 'Status Quo Won't Do,' CEO Says As Firm Keys On Natural Gas
Monday, January 19, 1998
Brent Jang - The Globe & Mail
Petro-Canada plans to accelerate its search for natural gas in Western Canada and gradually move away from its traditional reliance on the region's conventional light oil.
The company's strategy over the next three years will include looking for potential acquisitions in the U.S. Northeast retail gasoline market, said James Stanford, Petrocan's president and chief executive officer.
"We've got a lot of depth already. But for any business to be successful, the status quo won't do," he said in advance of tomorrow's release of what could be record annual profit in 1997 for Petrocan.
Industry analysts also forecast robust annual earnings in 1997 from Canada's other three major, publicly traded integrated oil companies: Suncor Energy Inc., Imperial Oil Ltd. and Shell Canada Ltd. Calgary based Suncor will issue its results today, Toronto-based Imperial is set to go on Wednesday and Shell of Calgary will release its numbers Jan. 28.
Although Petrocan last year pumped about 44,500 barrels a day of light oil in the West, "our strategy is to go for Western Canada natural gas, not oil," Mr. Stanford said. "We're harvesting our Western Canadian oil assets and we're not trying to grow that business."
The former Crown corporation is counting on its stakes in offshore Newfoundland oil projects to more than compensate for declining output of conventional light crude in the West. As well, it plans to capitalize on the growing market for natural gas in the United States, made more accessible by new pipelines.
The $2.2-billion Terra Nova oil development is scheduled to begin production in mid-2000 on the East Coast, and the $5.8-billion Hibernia oil megaproject is forecast to be pumping at almost full capacity by then.
Petrocan is the lead partner in Terra Nova with a 34-per-cent stake, and is the third-largest owner of Hibernia, with 20 per cent.
"In a matter of three short years, those two projects alone should add in the order of 60,000 barrels a day to Petro-Canada's account, which is more than what we produce now in Western Canada," Mr. Stanford said during an interview in his 52nd-floor office at Petrocan's headquarters in Calgary.
Despite a weaker fourth quarter in 1997 compared with a year earlier, analysts are expecting some healthy figures from Petrocan. Profit for 1997 is expected to exceed the company's record performance in 1994, when it earned $262-million, and easily surpass 1996's $247-million earnings.
Mr. Stanford declined to comment on analysts' estimates but said that "1997 was a good year" and added: "For the fourth quarter, a lot of fundamentals were still strong" because commodity prices didn't get to worrisome levels until December.
Ian Doig, publisher of Calgary-based energy newsletter Doig's Digest, said Petrocan has come a long way since it lost $603-million in 1991. That year, the federal government began selling off its shares.
Petrocan's turnaround has been impressive, Mr. Doig said, but he tempered his praise by pointing out that the oil giant received huge subsidies during its years as a Crown corporation.
There is speculation that Ottawa, which created Petrocan in the mid-1970s, is weighing the pros and cons of relinquishing its final 18-per cent stake this September, rather than waiting until 1999 or so.
But Mr. Stanford said he's in no hurry to lobby the government to sell. "I expect that they will eventually divest their interest in Petro-Canada. The timing around that? It's their choice, not ours."
Petrocan began trading on the Toronto Stock Exchange in mid-1991 and the federal government stayed on as the majority owner until September, 1995. Since then, Ottawa's presence as a minority shareholder hasn't been a "major overhang" hindering Petrocan's progress, Mr. Stanford said.
Amid a series of cost-cutting measures, layoffs and drastic restructuring, Petrocan has turned a yearly profit in each of the past six years.
Mr. Stanford said he's pleased with his company's latest major deal, announced on Jan. 6, to form a joint venture with Ultramar Diamond Shamrock Corp. , or UDS, of San Antonio, Tex.
The new entity will combine Petrocan's Canadian refining and retailing assets with large portions of UDS's holdings, including gasoline stations across Quebec, the Atlantic provinces and the U.S. Northeast.
"We are now positioned through the UDS assets in Michigan and the New England states to move in some interesting and potentially significant ways beyond the borders of Canada," Mr. Stanford said.
Petrocan also won't be afraid to spin off certain non-core assets, including its retail propane business ICG Propane Inc.
He said Petrocan has been "restructuring ICG and we're mostly finished that now. We think ICG is just a whole bunch more efficient now and therefore more valuable than before."
He said sluggish oil and gas prices could lead to a general slowdown across the petroleum sector this spring if commodity markets remain depressed. "Following this winter drilling season, we might see the brakes put on a little bit."
Although natural gas prices could be depressed for several more months, Mr. Stanford said Petrocan plans to increase its output of gas this year beyond its 750 million cubic feet a day produced in 1997 across Western Canada.
With new export pipelines to the United States scheduled to come on stream over the next three years, Petrocan is positioning itself to take advantage of a possible recovery in natural gas prices late this year.
On the oil side, Mr. Stanford forecasts that crude prices will rise later this year from current levels hovering around $16.50 (U.S.) a barrel.
He added that investors and oil patch workers shouldn't panic during times of falling commodity prices.
"It's made some people very, very nervous. But I've been to this movie before. A lot of us have. You do become a bit philosophical the more times you live through this," said Mr. Stanford, who joined Petrocan in 1978 after working for 19 years at Mobil Oil Canada Ltd.
"You recognize that indeed there is life after $16 a barrel."
Hibernia, which has a break-even point of roughly $11.50 a barrel, remains economically viable during the current trough.
And Petrocan's 12-per-cent stake in the Syncrude Canada Ltd. oil sands project still looks attractive, with unit operating costs at about $13.70 (Canadian) for each barrel of synthetic light crude.
Petrocan's share of Syncrude production in northern Alberta is forecast to double to 50,000 barrels a day within a decade as the sprawling oil sands operation expands.
Internationally, Petrocan also expects steady growth from its interests in oil projects in the North Sea and Algeria.
Buoyed by its diversified portfolio, the company will weather the storm of low commodity prices expected early this year, setting the stage for significant improvements in financial results in the longer term, Mr. Stanford said.
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