MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JUNE 22, 1998 (7)
TOP STORIES
Kuwait's Tough Talk Gives Oil 13% Boost
The Financial Post
Crude oil enjoyed its largest one-day price surge in 12 years yesterday, after tough talk on production cuts by the Kuwaiti oil minister before tomorrow's meeting of the Organization of Petroleum Exporting Countries in Vienna.
West Texas intermediate crude gained US$1.59 a barrel to US$13.43 on the New York Mercantile Exchange. At more than 13%, that one-day gain was the largest since 1986.
It lifted the Toronto Stock Exchange's oil and gas subindex by 112.73 points, or 1.94%, and boosted the faltering C$.
The C$ closed at US67.94›, down just US0.03› on the day. In early morning trading before the news, it had hit a new low of US67.77›.
Oil and gas stocks were the strongest performers on the day, and the industrial products subindex was the only other sector to gain ground. Overall, the TSE 300 composite index lost 15.87 points to close at 7137.52.
In New York, the Dow Jones industrial average edged down 1.74 points to close at 8711.13.
"A shock is what the market might need because the situation is very bad," said Kuwait Oil Minister Sheik Saud Nasser al-Sabah before leaving for the OPEC meeting.
Oil prices have been in a steady slide on rising supply since January 1997, when crude traded at US$26.62 a barrel. The decline accelerated last fall when the Asian crisis erupted, signalling weaker demand. The price dipped to a 12-year low of US$11.56 last week.
OPEC, whose members control 40% of the world's oil supply, announced production cutbacks in March, but the Kuwaiti oil minister indicated yesterday that move could be followed by steeper cuts.
"The cuts announced so far did not have the impact that we had expected. That is why we should reconsider the amount already pledged," he said.
Oil also got a boost from technical factors as large investors closed out trading positions before next Monday's expiration of the July futures contract on Nymex.
Short sellers have been active in the oil market, borrowing contracts and selling them immediately in anticipation of paying the purchase price on the security later for less.
Other commodities, including base metals, have also suffered large price declines because of the downturn in Asian economies.
Weakness in commodity prices has taken a toll on the C$, which is down more than 6% against the US$ since September. Traders expect the C$ to drift lower until some sign of a turnaround emerges in Asia's battered economies.
Oil Price Jump Based On Speculation: Analysts
Calgary Herald
Oil prices soared a surprising 13 per cent Monday but industry analysts say it's too early to celebrate. The price rise -the biggest one-day gain in seven years -was fueled by speculation that OPEC will agree to further production cuts when it meets Wednesday in Vienna, observers agreed.
Crude for July delivery rose $1.59, or 13.4 per cent, to $13.43 US a barrel. But Monday's price resurgence was the result of optimism and not hard facts, analysts warn.
There is still too much oil on the market and OPEC needs to cut production by a million barrels of oil a day to impact prices positively, they say.
"When we're at the extremes of the market, volatility on rumor alone is very normal," Richard Roberge of Price Waterhouse said of Monday's surge.
The rumors began as the ministers from the 11 OPEC nations began arriving in Vienna.
Eight producers have already pledged new cuts of 740,000 barrels a day after reductions promised in March failed to rally the market. More cutbacks could be announced this week.
Both Kuwait's and Russia's oil ministers have made public statements supporting cuts but neither have said how big the cuts might be.
Members of the Organization of Petroleum Exporting Countries generate about 30 per cent of world's crude oil. There is skepticism that producers will keep their promises.
"Rumoring it is one thing, promising it is another and doing it is a third," Roberge said.
"They have to come through. The question is when. Twelve-dollar oil will mean a long summer, especially for some smaller companies."
Judith Dworken of the Canadian Energy Research Institute in Calgary said the real test for OPEC will not be in what's said in Vienna, but in what's done afterward.
"That's when the rubber will hit the road," she said. "In the past 20 years, OPEC has fashioned itself as the swing producer and so, obviously, the world looks to the swing producer when things aren't going the way producers would like."
She said it's anticipated that oil prices will remain soft for the remainder of the year, especially as Asia remains in an economic malaise.
Martin Molyneaux, an analyst at Calgary-based FirstEnergy Capital Corp., said he was unimpressed with the one-day gain even though the oil and gas group on the Toronto Stock Exchange had its biggest one-day advance since June 4.
"Yes, (oil prices) are up 13 per cent, but it's $13.43 and, essentially, there are very few operations in western Canada that are operational at that level."
Talisman Energy and Burlington Resources Announce Discovery Of New Algerian Oil Fields
Burlington Resources (NYSE/BR) through its wholly-owned subsidiary, LL&E Algeria Ltd.; Sonatrach, the National Oil and Gas Enterprise of Algeria; and Talisman Energy Inc. (NYSE/TLM) of Canada announced the successful testing of the MLSE-1 well, a new wildcat discovery well on the Menzel Lejmat Block 405 in theBerkine Basin of Algeria. The well flow tested at a combined rate of 14,638 barrels of hydrocarbon liquids and 107 million cubic feet of natural gas per day from four intervals with a combined net pay of 57 meters (190 feet).
LL&E Algeria Ltd. operates the MLSE-1 well which is located in the southeastern portion of Block 405. The well was drilled to a total depth of 4,407 meters (14,459 feet) and encountered four hydrocarbon bearing intervals. The Triassic TAG formation tested at a stabilized rate of 11,278 barrels of 45.4 degree API gravity liquid per day and 21 million cubic feet of natural gas per day on an equivalent 1.67 inch choke with 802 psia flowing wellhead pressure from 24 meters (79 feet) of net productive sands. The Carboniferous Visean RKF sandstone tested 2,675 barrels of 53.2 degree API gravity liquid per day and 38 million cubic feet of natural gas per day on a 56/64 inch choke with 2,726 psia flowing wellhead pressure from 21 meters (70 feet) of net pay. The well also tested two zones within the Devonian section. The Strunian F1/F2 sands tested at 685 barrels of 54.7 degree API gravity liquid per day and 35 million cubic feet of natural gas per day on a 60/64 inch choke with 2,152 psia flowing wellhead pressure from 5 meters (18 feet) of net pay, while the deeper Emsian F4 sands tested at 13 million cubic feet of natural gas per day on a 48/64 inch choke with 1,340 psia flowing wellhead pressure from 7 meters (23 feet) of net pay. No formation water was recovered during any of these tests.
Bobby S. Shackouls, BR's chairman, president and chief executive officer, commented, ''We're extremely excited about these excellent test results which indicate substantial reserve potential in this unexplored area of Block 405. The MLSE-1 well tested a large seismic feature on our block. We are in the process of moving the drilling rig from MLSE-1 to immediately begin drilling MLSE-2, a delineation well on Block 405 approximately 5 kilometers (3.1 miles) to the northeast of our new field discovery. Additional exploratory drilling as well as acquisition of a three-dimensional seismic survey is planned for the southeastern portion of Block 405.''
In the western portion of Block 405, a second rig under contract is currently drilling another exploration well, MLW-1. This is BR's first well based on a three-dimensional seismic survey that was acquired over the MLN Field and adjacent areas. MLW-1 is located 16 kilometers (10 miles) west southwest of MLN-1, a previous discovery, and will test both TAG and Devonian targets.
Bobby S. Shackouls commented further, ''The encouraging results we have experienced from our two most recent exploratory wells on Block 405, MLN-4 and MLSE-1, demonstrate the significant benefit of our accelerated drilling program in Algeria. We plan a very active drilling program for the remainder of 1998 and expect to drill or participate in at least two additional exploratory wells and five development wells in Algeria this year.''
Shell Canada Says Assets Not On Block
Shell Canada Ltd. has no plans to jettison its Canadian conventional oil and gas business despite recent rumors that the extensive assets could be a target of rival Petro-Canada (PCA.TO - news), a senior Shell executive said on Monday.
''We've done a bit of (selling) on an asset-by-asset basis, but that was strictly in an effort to weed out those we thought did not have a long-term growth opportunity and were underperforming,'' Shell Canada senior operating officer Ray Woods told reporters.
''But at the moment, we're not looking at any kind of wholesale exit from western Canada at all,'' Woods said after a presentation to the Canadian Association of Petroleum Producers investment symposium.
The rumor regarding Shell Canada's western Canadian upstream business was one of several that surfaced after Petro-Canada pulled out of the symposium. The move to bow out of the well-attended event fed speculation that Petro-Canada was on the brink of announcing a major acquisition.
In 1997, Shell Canada's resources division produced an average of 25,000 barrels a day of crude oil and bitumen, 55,000 barrels a day of natural gas liquids, 600 million cubic feet of natural gas and 7,000 tonnes per day of sulphur.
Meanwhile, Woods and other Shell Canada officials said they had yet to receive any indication from Australia's Broken Hill Proprietary Co. Ltd. (BHP.AX) on the status of its plans to team up for development of C$3.2-billion oil sands project.
BHP, brought into the project for its mining expertise, would have a 25-percent stake in the Lease 13 development in northern Alberta. Regulatory and company approvals could be garnered in the second quarter of 1999, allowing construction to start.
However, it was unclear whether spending on the project, which would produce 150,000 barrels a day by 2002, would still be allowed by BHP's Australian head office in the face of severe financial pressures the company currently faces at home, Shell Canada officials said.
Reports this week said the struggling steel, mining and oil concern could reveal a cut of US$1.2 billion from the value of its assets when it releases annual accounts on Friday.
The oil sands of Lease 13 contain an estimated five billion barrels of bitumen -- or extra-heavy crude -- in place. The bitumen would be extracted from the sands and pipelined to a proposed upgrader at the site of Shell Canada's Scotford refinery near Edmonton.
It is one of several planned projects and expansions of existing operations in the Alberta oil sands and one of two multi-billion dollar projects in which Shell Canada is involved.
Woods said Shell Canada had deferred plans to double the output of its Peace River heavy oil operation in northern Alberta by 1999.
The project, which is testing two high-tech methods of extracting heavy oil, is pumping at a reduced rate of 7,000 barrels a day, down from its capacity of 10,000.
Previous plans included work on the plant to double the capacity in 1999, but low prices for heavy oil led the company to shelve the project, Woods said.
''We've cut the expenditure on debottlenecking projects and slowed down some of this drilling,'' he said, adding that some steam injection -- which is done to allow the thick oil to flow to the surface -- has also been shut down.
''All in all, we're not going to be much past seven (thousand barrels a day) in this year or next.''
Union Pacific Resources Hopes To Complete Asset Sales By Q1 '99
Union Pacific Resources Group Inc. (UPR) hopes to complete up to $2 billion in asset sales by the first quarter of 1999 as part of its goal of chopping its heavy debt load, the head of the company's Canadian division said on Monday.
Fort Worth, Texas-based UPR, which earlier this year completed a $2.5 billion purchase of Canada's Norcen Energy Resources Ltd., aims to use sale proceeds to cut debt to 50-60 percent of its total capitalization from the current 75 percent, John Vering, president of UPR's Canadian division, told reporters.
UPR's debt currently stands at about $4.5 billion after taking on about $1 billion to fund the Norcen transaction, which added extensive assets in Canada, the U.S. Gulf of Mexico, Venezuela and Guatemala.
The company expects to sell about $600 million of non-core producing properties -- including up to $150 million worth in Canada -- as well as to realize $1.2 billion-$1.4 billion from spinning off its natural gas gathering, processing and marketing (GPM) assets.
''I think the producing-property dispositions will probably be completed this year. The monetization of the GPM assets and business is probably going to flop over into the first quarter of next year,'' Vering said after a presentation to the Canadian Association of Petroleum Producers Investment symposium.
The gas-rich Canadian oil and gas assets on the block garnered strong interest from potential buyers, Vering said. Bids for the properties were due on Monday.
''Obviously, one thing we were concerned about was where product prices are, particularly crude prices, and what sort of interest there would be. But it's been very strong interest and we've been very pleased with the level of activity in that regard,'' he said.
The properties for sale in Canada and the U.S. represent less than 10 percent of the company's production.
Vering said several options for the gathering and processing assets were being considered, including outright sales, joint ventures and income trust structures.
Meanwhile, UPR has cut its capital spending budget for western Canada in 1998 as a result of low crude oil prices. It now expects to spend $225 million on the properties, down from the previously budgeted $280 million, he said.
He said the company had no plans to undertake another large acquisition in Canada, although small buys within core operating areas were part of UPR's strategy.
''Our primary concern right now is to get our balance sheet cleaned up so we're in a position to take advantage of opportunities as they come along,'' he said, adding that concern over UPR's debt was a major factor behind its languishing stock price.
Signs Of Life On Planet Arakis
Globe & Mail Business West
In the science fiction novel Dune , a desert planet is ruled by a secretive group of families whose lives are torn by feuds and intrigue. The name of the planet is Arrakis. A Calgary-based junior oil company with a similar name, Arakis Energy, has high hopes for a chunk of desert in Sudan -- and has seen its own share of turmoil.
After more than four years of trying to find the backing to develop an oil field in war-torn Sudan, Arakis says it is finally on its way to making the project a reality. Construction has begun on a 1,500-kilometre pipeline from the project to the Red Sea, and the company said at its recent annual meeting that production should start in mid-1999.
There are some hurdles to overcome, however. Although Arakis has some deep-pocketed partners -- the Chinese national oil company and the Malaysian state oil company -- it still has to come up with its share of the financing, and that means finding about $200-million this year. Arakis recently filed a prospectus for an offering of notes and debentures.
Anyone familiar with Arakis's turbulent past could be excused for being surprised the company has even made it this far. In 1996 it seemed Arakis was just another fly-by-night stock promotion that had exploded in a flurry of shareholder lawsuits and plummeting stock prices.
Two things kept the company going: The first was the fact that its two pieces of land in Sudan were estimated to hold about three billion barrels of oil -- estimates made by Chevron and Shell when they spent $1-billion (U.S.) exploring the property in the 1970s. The second factor was Lutfur Khan, whose earlier company first identified the project and who is now Arakis's chairman.
The company's downfall coincided with the involvement of Howe Street promoter Terry Alexander. He became president of Arakis in 1994, and soon the company's stock was trading on the Vancouver exchange at more than $22 (Canadian). At one point, the company had a market value of $1-billion.
In the summer of 1995, Mr. Alexander announced a deal with a Saudi Arabian group of investors, to whom Arakis was to sell 40 per cent of the company in return for $345-million (U.S.) and a line of credit for $400-million.
After the B.C. Securities Commission started investigating the nature of the agreement, Arakis voluntarily delisted itself from the VSE and continued to trade on the Nasdaq exchange in the United States, but the stock was soon halted there. When it resumed trading more than a month later, the Arab group's deal had fallen through and the stock plunged to about $6.
Arakis was hit by several shareholder lawsuits alleging fraud, and Mr. Alexander left the company in December of 1995. He was replaced by John McLeod, a former Amoco Canada engineer and veteran oilman who was in charge of the Sudanese project from 1991, before it became part of Arakis.
Things started to look up for the company. It got some financing through private placements, and signed the deal with the Chinese oil company (which got 40 per cent of the project) and Malaysia (which took 30 per cent). Arakis kept 25 per cent, and the Sudanese government got 5 per cent.
But there was more turmoil and intrigue to come: For one thing, Adolf Lundin started to take an interest, something that tends to make small companies nervous. The Swiss financier controls a web of small exploration companies, some of which are run by his Vancouver-based son Ian.
In February of last year, the Lundins bought the rights to a chunk of property directly beside the Arakis fields -- and were busy buying stock in Arakis as well. By March, a Lundin company said it had 7.25 million shares or about 8 per cent, and wanted seats on the board of directors. Sure enough, at the recent annual meeting, Ian Lundin was named to the board.
The board changes, and the growing influence of the Lundins, appeared to set off some alarm bells in Sudan. Company spokeswoman Kristine Dow said Arakis got a message from the government earlier this month saying the company was in danger of losing its stake unless it explained itself -- but she says the notice was withdrawn and that Arakis executives are flying to Sudan to straighten out what they believe to be a misunderstanding.
The turmoil in the executive suite, meanwhile, has continued. Last year in April, Mr. McLeod was replaced as president by Ernest Pratt, another oilman who had been working on the Sudanese project for some time. By last September, however, Mr. Pratt was gone too -- with no explanation.
In February of this year, the company hired Raymond Cej -- a respected former senior operating officer with Shell Canada -- as president and CEO. Arakis has also paid an insurance company $3.5-million to cap its exposure in the U.S. securities lawsuits, and paid a $250,000 penalty to the VSE for its failure to ensure that the Arab group financing was legitimate.
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