OIL AND NATURAL GAS PRICING SCENE - PART1
FEATURE-The Arab embargo -- Oil Crisis To OPEC Crisis
Repeat Article With Chronology Addition
A quarter of a century after the Arab oil embargo, the West's lingering nightmare that the petrol pumps might again run dry has scarcely felt so remote.
Awash with oil, the once-mighty OPEC cartel now suffers the lowest real crude prices since it tipped the world's leading industrial powers into crisis in 1973.
Saudi Arabia's King Faisal sanctioned the embargo on October 17 that year to punish the West for its support of Israel in the Arab-Israeli war that started on Yom Kippur, 11 days earlier.
Oil prices quadrupled, scarring the economies of the West for years with recession, inflation and unemployment.
The Organisation of Petroleum Exporting Countries ushered in the era of shared baths, power cuts and little stickers urging consumers to "save it".
At the height of the energy crisis in the winter of 1973, U.S. President Richard Nixon solemnly announced that the national Christmas tree would remain in darkness.
Twenty five years later, in the worst oil glut for a decade, it is OPEC that is feeling the backlash of the first oil shock.
This year's severe glut is only the latest in a series caused by persistent oil market overcapacity, partly a consequence of the 1973 embargo.
Sheikh Zaki Yamani, the mastermind behind Saudi oil policy at the time, admits mistakes were made.
"I think we were intoxicated in the seventies and some major consumers helped us dig our grave," the former Saudi oil minister told a recent conference in London.
Vowing not to be caught out again, the West invested in its own oil.
The major companies, sent packing by the nationalisation which swept OPEC producers, invested heavily in regions like the North Sea. New technologies were invented to slash the cost of finding crude.
Power generators in nations without oil turned nuclear and then increasingly to cleaner fuels like natural gas.
Consumers also became more efficient. High taxes in most parts of the industrialised world, with the exception of the United States, have replaced high prices as the incentive for efficiency gains.
In Europe, tax now counts for more than 80 percent of the price of petrol. European motorists pay $185 a barrel at the pump for gasoline which fetches $17 a barrel at the refinery gate.
Oil demand growth this decade has been quelled to little more than two percent a year from seven percent annually in the 20 years before the 1973 embargo.
BIG OIL IS BEAUTIFUL AGAIN
Stagnating demand and this year's low prices have already started to reshape the structure of the oil industry.
Shell <RD.S><SHEL.L> chairman Mark Moody Stuart has predicted that oil prices, having averaged $18 a barrel over the past 10 years, could stay depressed at $12-$16 in the medium term.
"Financial instability has already taken a toll on the oil industry in terms of lower demand growth," warned Franco Bernabe, chief executive of Italian energy giant ENI <ENI.MI>.
The giant merger of British Petroleum <BP.L> and Amoco Corp <AN.N> is expected to spark further consolidation among companies keen to cut costs.
"Lower cost is the driving force for big oil," said analyst Fadel Gheit at Fahnestock and Co.
"It is a mature industry with slow or no growth. There is no question that we are at a turning point and oil companies can only merge."
Meanwhile, the big Gulf oil states are starting to welcome back the multinationals they shunned two decades ago. Even Saudi Arabia is showing signs that it might reopen the door to foreign investment in its prized oilfields.
"Repeated attempts to defend oil prices have cost the industry in the Gulf dearly in terms of future expansion and development," said Mehdi Varzi of Dresdner Kleinwort Benson.
Oil prices, controlled first by the multinationals and then by OPEC, have long since fallen under the spell of the market.
OPEC ministers, by the time of the second oil shock in 1979 in the aftermath of the Iranian revolution, were able to force prices to $41 a barrel.
Now the free market writes the rulebook and oil is back around $14. Flickering futures screens and financial derivatives dictate market direction.
"The interplay of commercial, political and economic forces has fundamentally altered," said Robert Priddle, executive director of the International Energy Agency, set up by the industrialised powers to safeguard energy security in the wake of the 1973 embargo.
"Market forces have overwhelmed the institutions which were created to manage them."
A FUTURE OIL SHOCK?
Past oil shocks were caused as much by the fundamentals of supply and demand as by the fear factor of politics.
Surplus supply capacity was negligible in the months before the 1973 embargo after years of soaring demand.
After this year's three million barrels a day of supply cuts, designed to bolster prices, spare capacity stands at more than five million barrels on the 75 million barrel a day market.
Nevertheless, few are prepared to rule out a future oil shock.
Prices soared briefly above $40 in 1990 when dealers thought Iraq's invasion of Kuwait might turn into missile strikes on Saudi oil facilities.
And the volatile Middle East remains home to 65 percent of the world's one trillion barrels of known oil reserves.
OPEC's 40 percent share of global production, down from two-thirds in the 1970s, will rise again once low prices start to squeeze out high-cost production.
"A new era of Middle East dominance in oil supply will come when North Sea production has peaked and before non-conventional oils are widely used," predicted the IEA's Priddle.
Geologists say that despite new sources such as the Caspian Sea and offshore West Africa, oil companies are losing the race to replace depleting reserves.
"Over the past decade, less than half the world's oil production has been replaced by new discoveries,"
Geneva-based Petroconsultants says. "Over the past five years, the replacement ratio has dropped to just over 30 percent."
British academic Colin Campbell, in a study of what's left in the world's petroleum reservoirs, concludes that oil is nearing the point of terminal decline.
"We can be in no doubt," says Campbell, "that Hydrocarbon Man is approaching a turning point as conventional oil production reaches its peak within a matter of a few years."
Chronology Of 1973 Arab Oil Embargo
Following is a chronology of the events surrounding the Arab oil embargo which started on October 17, 1973.
Sept 15-16 - The Organisation of Petroleum Exporting Countries (OPEC) designates six Gulf countries to negotiate collectively with Western oil companies over prices.
Oct 6 - Egypt and Syria attack Israel on Yom Kippur, starting the fourth Arab-Israeli war.
Oct 8-10 - OPEC negotiations with oil companies to revise the 1971 Tehran price agreement fail.
Oct 16 - Saudi Arabia, Iran, Iraq, Abu Dhabi, Kuwait and Qatar unilaterally raise posted prices by 17 percent to $3.65 a barrel and announce production cuts.
Oct 17 - OPEC oil ministers agree to use oil as a weapon to punish the West for its support of Israel in the Arab-Israeli war. They recommend an embargo against unfriendly states and mandate a cut in exports.
Oct 19-20 - Saudi Arabia, Libya and other Arab states proclaim an embargo on oil exports to the United States.
Oct 23-28 - The Arab oil embargo is extended to the Netherlands.
Nov 5 - Arab producers announce a 25 percent output cut. A further five percent cut is threatened.
Nov 23 - The Arab embargo is extended to Portugal, Rhodesia and South Africa.
Nov 27 - U.S. President Richard Nixon signs the Emergency Petroleum Allocation Act authorising price, production, allocation and marketing controls.
Dec 9 - Arab oil ministers agree a further five percent cut for non-friendly countries for January 1974.
Dec 22-24 - The OPEC Gulf six raise posted prices from $5.12 a barrel to $11.65. Prices have quadrupled from $2.90 in September.
Dec 25 - Arab oil ministers cancel the five percent output cut for January. The Saudi oil minister promises a 10 percent OPEC production rise.
Jan 7-9, 1974 - OPEC decides to freeze prices until April 1.
Feb 11 - U.S. Secretary of State Henry Kissinger unveils the Project Independence plan to make U.S. energy independent.
Feb 12-14 - Progress in Arab-Israeli disengagement brings discussion of oil strategy among the heads of state of Algeria, Egypt, Syria and Saudi Arabia.
Mar 17 - Arab oil ministers, with the exception of Libya, announce the end of the embargo against the United States.
Jun 13 - The International Monetary Fund establishes its oil facility -- a special fund for loans to nations whose balance of payments is hit by rising oil prices.
Nov 15 - The International Energy Agency is formed in Paris within the framework of the Organisation for Economic Cooperation and Development (OECD).
Apr 9, 1975 - The OECD's 24 members establish a $25 billion lending facility to provide assistance to industrial nations hurt by high oil prices.
FEATURE - Has America learned the energy lesson of 1973?
There were giants roaming the earth in those days -- just 25 years ago. In fact, they could be seen surrounding every gas station in America.
Giant chrome and steel cars, polished high to glint proudly in the sun, once glided across America's superhighways, guzzling gasoline as if there was no tomorrow, ferrying Americans back and forth from their over-heated homes.
They were glorious floating sofas made without regard for the environment or economic efficiency and their era came to a crashing halt when the Organisation of Petroleum Exporting Countries (OPEC) decided to use oil as a weapon just after the start of the Yom Kippur war.
The Arab oil embargo of 1973 -- actually a cut in supplies -- plunged a nation where the car was king into despair and self-doubt. It found it could no longer afford to consume cheap gasoline with carefree abandon and gobble up finite natural resources. "The party's over," declared philosopher E.F. Schumacher, who popularised the idea that "small is beautiful."
Thus was born an era of environmental concern -- in the fuming and fretting of drivers forced to wait in long lines to buy gas, an event that produced a sort of collective nervous breakdown for motorists.
Americans traded horror stories and sharp rebukes in the queues. But the worst was yet to come -- the embargo triggered a series of sharp price increases that played havoc with the U.S. and world economies, sending interest rates and inflation soaring.
HAZY MEMORY
Now 25 years later -- it all seems like a hazy memory, a distant bad dream. A new, although more efficient breed of gas guzzler roams the roadways -- the Sport Utility Vehicle -- and petrol prices are as low as they ever were and supplies plentiful.
Instead of worrying about whether they will run out of energy supplies, Americans worry instead over whether the stock market is heading for a crash. Every era, it seems, has its fear of the moment that brushes aside other memories.
The veteran British newsman Harold Evans, in his new book, "The American Century," called the oil embargo a watershed event that along with runaway prices, a devalued dollar and a series of foreign rebuffs led Americans to question the future of their prosperity.
"The American century seemed to be collapsing," he wrote of those times. It is a thought few people indulge in 25 years later.
The oil embargo, which lasted from October 1973 to March 1974, inspired heated rhetoric, a debate on U.S. foreign policy and a host of solutions with many of them falling by the wayside after oil prices collapsed in the 1980s.
The United States toyed with price controls and reduced the speed on highways to conserve fuel. Thermostats in homes and offices were dramatically lowered.
President Jimmy Carter, faced with a rapid bout of OPEC price increases in 1977, donned a sweater to address the nation on the need to conserve fuel, declaring the energy crisis to be the "moral equivalent of war."
"(The oil embargo) was a wake up call to Americans," said Henry Weigel, special assistant to the director of the Office of Energy Markets at the Energy Information Administration, a government agency.
THE GOOD OLD DAYS
"Up to that time no one worried about energy -- where it was coming from or how much it would cost and the embargo forced us to give that serious consideration," he said. Congress mandated that cars get an average of 27.5 miles to the gallon and light trucks about -- far better than the eight to 14 miles to the gallon of the gas guzzler. The new standards helped the sale of Japanese imports and that in turn forced the American auto industry to reinvent its product.
The standards were met as cars everywhere became more efficient, burning cleaner fuels and polluting the environment less than they once did.
But as petrol prices dwindled, Americans forgot the crisis and forgot the threat that OPEC once posed to their freewheeling lifestyle, although a key reason for the Gulf War in 1991 was to prevent Iraq's President Saddam Hussein grabbing more control of world oil supplies. The need for oil, probably more than other reason, liberated Kuwait. "We (the united States) are only five percent of the world population and yet we use between 25 to 30 percent of world oil production. The average American uses about 25 barrels of oil a year and we will have severe shortages if the rest of the world catches up with us," said Iraj Ershaghi, director of the Petroleum Engineering Programme at the University of Southern California in Los Angeles.
He cites studies that predict severe energy shortages in the 21st century. Oil production will probably peak by 2010, he says, and then decline to the point where, "we will again become aware of the exhaustibility of this resource."
Hill Huntington, the director of the Energy Modelling Forum at Stanford University in Palo Alto, California, warns that an OPEC-style embargo can happen again.
"It is an issue that isn't discussed much these days, but it can happen again...I can easily see a situation where if there was a disruption in the Middle East, the economy could not adapt and something could snowball and return the world to sharp price increases," he said.
OPEC President: Price, Demand Will Dictate Next Move
OPEC President Obaid bin Saif Al-Nasseri said Sunday that it would be easier for the Organization of Petroleum Exporting Countries to agree to extend its previous production-cut pacts another six months than to implement another round of reductions.
At a press conference on the sidelines of the Middle East Gas Summit '98, Nasseri also said that OPEC must act to enable Iraq's full return to the world oil market.
Nasseri, who is also the United Arab Emirates oil minister, said it's "difficult" to predict prices and that oil producers from both OPEC and non-OPEC countries must hold consultations on what to do next.
"What will dictate that will be the level of prices and the level of demand," he said.
Asked whether prospects for another round of OPEC/non-OPEC cuts have dimmed because of statements by the Venezuelan oil minister that his country won't cut any more and by the Saudi oil minister that market share is his country's top priority, Nasseri said: "Market share is important, but dumping more oil or excess oil onto the market won't be a wise idea."
Saudi Arabia and Venezuela and non-OPEC Mexico formed the troika which launched the first production cuts in March. The three are in a fierce battle for U.S. market share. The Saudi and Venezuelan ministers emerged from a recent meeting in Cancun saying they would push for an extension of the current pact at OPEC's November meeting. Other OPEC members, such as the Kuwaitis and Iranians have been lobbying for another round of cuts.
US Crude Outlook -Imports May Leave Prices Reeling
U.S. crude prices could be in for another rough week as imports appear set to leap higher even as demand from the refining sector continues to slip, traders and analysts cautioned Monday.
This week, the Columbus Day holiday will cause a day's delay in the release of the U.S. Department of Energy's weekly crude oil and products stock report, but the American Petroleum Institute's statistics will come out as usual on Tuesday after the New York Mercantile Exchange closes.
Those figures will be closely watched after last week's data showed a sharp drop in crude oil imports because of storm-related shipping delays in the Gulf of Mexico. For the most part, crude traders expect to see imports rebound in the next round of data, likely pushing crude stocks above the current 319 million barrel mark.
In the domestic market, Heavy Louisiana Sweet/Empire will remain center stage after suffering heavy hits in the last several weeks. Since jumping to a 30 cent premium to West Texas Intermediate/Cushing in September because of concerns over production disruptions caused by Hurricane Georges, the market has plummeted to a 70 cent discount to the benchmark.
And U.S. traders said Monday they saw little near-term upside to the market with the crude unit British Petroleum's 250,000 barrel per day refinery in Belle Chase, Louisiana, which chiefly runs HLS and Nigeria's Forcados, expected to remain shut-down most of this week because of a recent fire.
Other cash crude grades are also feeling the pressure of unplanned refinery shutdowns, including Chevron's 295,000 bpd Pascagoula refinery in Mississippi, and a heavy slate of scheduled maintenance work over the coming weeks.
Also, traders warned that what appears to be a rush crude imports heading for the U.S. could add to the pressure on domestic crude prices this week. One U.S. trading company is already bringing four Ultra Large Crude Carriers of light sweet European crude to the Gulf Coast, and more cargoes could follow with the spread between crude benchmarks WTI and Brent nearing the $1.40 a barrel point at which incremental imports become profitable.
"There are a lot of foreign sweets coming this way and some are already here and trying to find homes," said one Houston-based trader. "I think the overall temperament of the market is downward, anyway. This excess of foreign sweet crudes will only add to that. The mood is definitely for more selling," the trader said.
Light Louisiana Sweet/St. James is under the greatest threat, as it competes directly with the light sweet crude sold out of Europe, traders said.
By Monday, LLS/St. James had dropped to a 30 cent discount to WTI/Cushing, compared to a 15 cent discount a week ago.
Still, some said that over the next few days the market could find a bit of support from disruptions to exports out of West African. In Nigeria, protests have forced companies to shut-down about 500,000 bpd of crude production, or about a quarter of the OPEC member's normal output.
Force majeure has already been declared on exports from the Bonny, Forcados and Brass River terminals.
US Prod Outlook-Correction Won't Kill Stock Fears
U.S. spot product prices last week more than pared gains made on Hurricane Georges refinery shutdowns, as surplus worries returned to haunt the market, traders said on Monday.
But traders expected some support from a correction in inventory reports this week.
"Last week, the API (American Petroleum Institute) did not make sense because there were fundamentally some problems with hurricane shutdowns and turnarounds. Expect to see a correction," a trader said.
In its weekly stock data report, the API reported only a slim drop of 148,000 barrels in distillates for the week ended Oct. 2.
"The market was disappointed with a lack of a draw last week," said a New York Harbor trader.
Gasoline stocks in the northeast edged down by by only 51,000 barrels while the Gulf Coast hub slipped by nearly three million barrels. But nationwide gasoline stocks fell by only 1.8 million barrels.
"If there is to be a surprise this week (for Harbor motor gasoline) it would be on the bullish side, because the bearish market is already priced in," he added.
"After tomorrow's product inventories, expect to see some buying," a Gulf Coast market source said. The API's report will be out on its usual day this week, on Tuesday, but the Department of Energy's stock report will be one day late, Thursday instead of Wednesday, due to the Columbus Day holiday on Monday.
Underlying sentiment was, however, still bearish with both gasoline and distillates stocks looming over last year's levels.
With nearly 153 million barrels of distillates, the U.S. still had 17 million more barrels than this time last year. At 208 million barrels, gasoline stocks were also 10 million barrels higher year-on-year.
"The fact remains that there is plenty of inventory, and you have to get some weather to change things. The rally in prices was a direct result of Hurricane Georges," a trader said.
The hurricane which struck the U.S. Gulf Coast on Sept 28 spurred a flurry of buying and a hike in prices of up to 4.0 cents per gallon in gasoline outright prices on the Gulf Coast.
But by the end of the last week, gasoline prices on the Gulf Coast fell by around 6.0 cents per gallon to around 40.80 cents last week, with differentials sliding from over a small premium to over 3.50 cents of a discount to the NYMEX.
New York Harbor gasoline also slipped by nearly 5.0 cents to 42.30 cents.
Heating oil prices had been very slightly lifted by the hurricane, but by last week were trading at low than pre-Georges levels.
Several traders also said the recent spikes in refining margins were, as expected, shortlived.
"Those big margins were just a bounce, brought around by the hurricanes," said one Harbor trader.
"Chevron's refinery could be down for four to six weeks, but we're back to pre-hurricane differentials," he added.
The remaining casualty of Hurricane Georges, Chevron Corp's <CHV.N> 295,000 bpd refinery in Pascagoula, Miss., still was under repairs with no restart date set yet.
BP's <BP.L> 250,000 Belle Chase, Louisiana, which caught fire while starting up, is expected to return to normal operations this week.
Northeast traders were also worried as storage threatens "containment type levels," a trader said.
"There are economics to pump gasoline up north, but there is enough there already," said one trader.
"There's going to be a real battle between gasoline and heating oil up North, to see which one is going to win storage space," he added.
On the positive side, refinery turnarounds in Philadelphia, New Jersey and Newfoundland, Canada, are expected to offset the impact of incoming arbitrage cargoes.
INTERVIEW-Woodside <WPL.AX> Relies On Oil Hedges
Woodside Petroleum Ltd said on Monday its hedging programme offered protection from falling oil prices but warned that eventually profits would suffer if prices failed to turn around.
"If we don't see improved prices...then quite clearly as the hedges unroll we'll see a greater exposure to price," Woodside managing director John Akehurst told Reuters.
Akehurst earlier told an industry conference the outlook for oil prices was negative, in part due to a flood of new production scheduled to enter the world market in the next decade.
Amid the new production hitting the market, OPEC was struggling to maintain production levels, he said.
Woodside, the operator and one-sixth equal partner in Australia's North West Shelf gas project, has already felt the effects of spiralling oil prices.
Its net profit of A$140.56 million for the six months to June 30, 1998 was down from A$152.01 million a year-ago due to unfavourable oil prices and foreign exchange movements.
Still, a low cost base would help Woodside better weather a period of low prices, Akehurst said. "We can feel very confident that in a low price environment we are going to be in good shape."
For the last year Woodside has had half its production hedged at prices above US$19 a barrel. "In the shorter term, we have not been badly exposed to prices," he said.
"As we move further out, however, the hedging position becomes a smaller proportion of our production, so on the liquids side we become more exposed to prices. We're as exposed in three year's time as anybody else in the business fully exposed to prices."
In the last 18 months crude has traded between US$12 and $26 a barrel and currently fetches about $14.60 a barrel.
In liquefied natural gas (LNG), Akehurst said the final go-ahead for a multi-billion dollar expansion of its North West Shelf partnership was being stalled by an uncertain demand outlook in Japan. "It's quite clear the customers are finding it difficult to forecast their energy need in the 21st century," he said.
Woodside is hoping to put 20 year supply contracts in place before proceeding with the expansion, which initially would take LNG output to 15 million tonnes a year from around seven million currently.
But short-term economic difficulties in Asia coupled with deregulation of the electiricty market in Japan was making it difficult to measure future LNG needs.
"The enthusiasm is still there with our Japanese customers to reach a deal as soon as we possibly can," he said.
The equal partners in the North West Shelf venture -- Woodside, The Broken Hill Pty Co Ltd <BHP.AX>, British Petroleum Co Plc <BP.L>, Japan Australian LNG (MiMi) Pty Ltd, Chevron Corp <CHV.N>, and Royal Dutch/Shell <RD.AS><SHEL.L> -- will complete all design work on the expansion by mid-1999, he said.
They are unlikely to proceed any further without the supply contracts, Akehurst said. Shell owns a 34.27 percent stake in Woodside. |
