OIL & GAS / International Coverage - Part 1
Backing Rises For Turkey-Azerbaijan Oil Pipeline
WASHINGTON - A U.S.-backed plan for a major energy pipeline from Turkey to Azerbaijan has gained ground in recent weeks, and those countries and key oil companies are expected to intensify negotiations on the deal, a senior U.S. official said Monday.
Richard Morningstar, who coordinates Caspian Sea policy for the administration, told Reuters in an interview he expected the oil companies ultimately to agree to build the Baku-Ceyhan pipeline but the timing for construction was unclear.
He said that while the United States was prepared to make the project more commercially attractive by offering certain "incentives," there were no plans to underwrite the pipeline with direct funding, even though the project was in the United States' strategic interest.
The U.S.-backed plan to take Azerbaijani oil from Baku through Georgia to the Turkish Mediterranean port of Ceyhan has run into difficulty, with the international consortium that decides on the route saying it is too costly at $4 billion, given current oil prices and projected export volumes.
The route preferred by the United States is one of three competing projects. The other pipelines would go to the Black Sea port of Novorossiisk in Russia or to Georgia's Supsa.
Ankara says the Baku-Supsa proposal is unacceptable because of the threat extra tanker traffic would pose to Turkey's Bosporus.
The Clinton administration has actively backed the Baku-Ceyhan option.
It would be a significant boon to Turkey, a NATO ally that suffered by aligning itself with the United States and against Iraq in the Gulf War.
U.S. officials also view the Baku-Ceyhan route as more secure. It would keep a major energy route out of the control of Iran, which Washington still considers a deeply troubling state despite a slight improvement in ties.
It would also ensure that an unpredictable Russia did not have an energy lever it could use against former Soviet states.
Morningstar said in recent weeks "the landscape has changed" after Turkey spelled out incentives it was willing to provide to make the Baku-Ceyhan deal more viable and after Turkey, Azerbaijan, Georgia, Kazahkstan and Uzbekistan signed a declaration supporting that route.
The Turkish incentives include tax holidays, financing and reduced tariffs. Morningstar said he did not know how much this package might be worth.
But he dismissed oil company officials who say the Baku-Ceyhan project costs $1 billion too much. "It's a question of what you're comparing it to ... The issue is what will it take to make the project commercially viable," he said.
Morningstar declined to quantify U.S. incentives, involving the Overseas Private Investment Corporation which provides direct project financing up to $200 million per project and political risk insurance up to $200 million per project; the Export Import Bank which finances U.S. exports and the Trade and Development Administration, which funds feasibility studies and technical support.
Congress has urged OPIC to go beyond its policy limits with the Caspian project if warranted.
But Morningstar said the United States would not underwrite the project directly. "I think it would be very difficult to get that through Congress and I don't think it's appropriate for the government to provide grants to oil companies to build a pipeline," he said.
There has been speculation that Azerbaijan Operating Co., an 11-member consortium, would decide on the pipeline project this month.
But Morningstar said, "I don't even know if it's critical at this point that the consortium make a decision."
"I think what's happened over the last several weeks is the (oil) companies are now recognizing how strong the political realities are in the region and that although Baku-Supsa may be cheaper, it's not attainable. So it's becoming an irrelevancy," he said.
"I think there is going to be a period now where there is extensive negotiations between the companies and Turkey and Azerbaijan to determine how to make Baku-Ceyhan a reality," he said.
Morningstar said the United States was willing to play the "honest broker" in these negotiations, which could take a few months. In that period, it is expected that "we'll know a lot more about the volumes" of oil that would be available to make the Baku-Ceyhan pipeline commercially viable, he said.
Recent Turkish statements have been increasingly shrill about the need for a Baku-Ceyhan route to keep tankers out of the backed up Bosphorus and there are fears Ankara might halt tanker traffic in the Straits if its favored route fails.
Morningstar would not say if Turkey would be justified in taking such drastic steps. "Our position is that Turkey has legitimate concerns about the Bosphorus. We support Turkey to the extent it acts in accord with international law," he said.
Saudis Against Foreign Upstream Oil Role -Insiders
CAPE TOWN, Nov 1 - Saudi Arabia has no intention of granting foreign oil companies any form of ownership in the kingdom's prized oil and gasfields, the industry insiders said.
Despite feverish speculation in recent weeks, foreign investors would continue to be denied any role at the heart of the domestic Saudi oil business -- exploring for and producing oil and gas, they said.
"Saudi Arabia has all the sophistication to find, develop and use its reserves -- and people in the business know that," said one authoritative insider. "But you have those people who are wishful thinkers."
The remarks appear to quash speculation that Riyadh might change tack after Saudi Crown Prince Abdullah in Washington last month invited the heads of several leading U.S. oil companies for suggestions on how they could help develop Saudi resources.
"Saudi Arabia has been, is, and will continue to be interested in foreign investment," the insider said. "The challenge is to find projects which need that investment."
Rather than any upstream role, this source said, foreign companies could "add value" by offering expertise in new areas like gas-to-liquids technology or super-lubricants.
The companies might also lend a hand in the gas-fired power sector to help meet fast growing Saudi demand for electricity.
Saudi Arabia is the world's largest oil producer and holds 262 billion barrels of reserves, one quarter of known proven reserves of crude.
The kingdom nationalised its oil industry in 1975 ending the concessions run by Exxon <XON.N>, Chevron <CHV.N>, Mobil <MOB.N> and Texaco <TX.N>.
With the exception of Kuwait, now on the verge of allowing some form of foreign ownership, Saudi Arabia is the only major oil producing nation which bars foreign financing.
The country's oil reserves are easily and cheaply accessible and state company Saudi Aramco already has more than two million barrels a day of unused capacity.
The last public comment from Riyadh on upstream policy came last year when Saudi Oil Minister Ali al-Naimi told Western oil companies that foreign investment in the upstream sector was not needed.
Multinational oil companies already have a large stake in refining and distributing Saudi oil -- the downstream sector. Aramco has joint ventures in the United States and elsewhere and U.S. and European companies operate refineries in the kingdom.
Foreign firms also invest heavily in Saudi infrastructure projects and have joint venture stakes in petrochemicals.
The industry insider said that Crown Prince Abdullah's October invitation to U.S. oil firms was not intended to exclude European or Asian companies.
"There is a very special and profound relationship between the kingdom of Saudi Arabia and the United States. But this is not exclusive," he said.
U.S. Oilmen Work Up "Interesting" Ideas For Saudis
WASHINGTON, Nov 2 - American oil companies are working feverishly to come up with business proposals for Saudi Arabia, most of which are likely to concentrate on developing areas other than the kingdom's strategic crude oil reserves, according to a top U.S. oil executive.
Saudi heir apparent Crown Prince Abdullah stirred intense interest in the oil industry in September when he held a rare meeting with top U.S. oil executives in Washington, inviting them to come up with "varied and interesting" ideas for developing the country's energy sector.
The meeting was interpreted in some quarters as heralding the first opening to private foreign oil companies since the Saudis nationalized the industry in 1975. However, many industry insiders have said the Saudis probably are seeking ideas for relatively undeveloped areas -- such as natural gas, refining and petrochemicals, and the power generating sector -- rather than for crude oil, the kingdom's crown jewel. The top oilmen at the meeting have remained tight-lipped so far, but one chief executive of a major U.S. oil company spoke to Reuters on condition he wouldn't be quoted by name.
"They weren't specific... (but) they asked us to come up with ideas we thought would make sense for the Saudi government and U.S. companies," he said. "That meeting was all about the desire of the Saudi government to increase its business relationships with the U.S. oil companies. That was the message we were given."
Saudi Arabia is the world's largest oil producer, with output at about eight million barrels per day (bpd), and sits atop a quarter of global proven crude reserves. However, it has been producing at only about 80 percent capacity for some years as part of its effort to prop up oil prices.
Asked if it made little sense for the Saudis to seek help finding and producing more crude now, the oil executive said: "The Saudis aren't producing as much oil as they want now, so something that just increases production next month doesn't make sense.
"Does that mean they were more interested in chemical plants, utilization of gas -- everybody knows they are interested in utilization of gas -- or downstream joint ventures...?" the executive asked rhetorically.
All of the above projects require large capital investment and Saudi Arabia has been keen particularly to develop its vast reserves of natural gas, much of which is currently wasted.
Among those at September's meeting were the chief executives of Mobil Corp.<MOB.N>, Chevron Corp.<CHV.N>, Atlantic Richfield Co. (ARCO) <ARC.N> and Phillips Petroleum Co. <P.N>.
Any decisions on large-scale projects are likely to take some time.
"These (proposals) are going to take a long time to develop and to discuss with the Saudis to see if they make sense to them," the executive said. "I would envision these happening as ideas, and then discussions to see whether they (the Saudis) think they make sense. Turning it into a specific proposal, in depth, would take a long time," the official said.
The crown prince's Washington visit was part of a world tour that was widely interpreted as an effort to signal to key allies the kingdom's friendly intentions as he prepares to take over the reins from his ailing brother, King Fahd.
Oil May Boost Or Wreck Faroese Economy
TORSHAVN, Nov 2 - Big oil discoveries off the North Atlantic Faroe Islands could bolster or wreck the remote archipelago's fragile fishery-dependent economy.
Many of the 44,000 Faroese hope that black gold -- none has yet been found -- will turn their tiny country into "a northern Kuwait" while others fear that a major oil industry could destroy their unique way of life.
Summing up the oil dreams and concerns, parliamentary Speaker Finnbogi Isaksson told Reuters: "We all want the money but we are scared. We have seen bigger countries which have not been able to control that money, and this is a very small community."
Oil income would smooth the home-rule government's drive to declare the Faroe Islands independent from Denmark. The thorniest part of forthcoming sovereignty talks is how to phase out a Danish state subsidy covering one third of the annual Faroese budget of three billion crown ($500 million).
"Perhaps there will be oil, we don't know. But if there is oil it will overshadow the other industries," said Prime Minister Anfinn Kallsberg.
FINAL FRONTIER OFFERS FAVOURABLE CONDITIONS
Ben Arabo, general manager of the Faroese arm of U.S. Amerada Hess <AHC.N>, one of more than two dozen international oil companies keen to bid for exploration licences in Faroese waters, said seismic surveys had yielded encouraging results.
"What makes this area interesting is that it is close to known (oil producing) areas," he said, referring to Foinaven and Schiehallion, two new oil fields near Britain's Shetland Islands -- the Faroes' closest neighbours 300 km (180 miles) to the south.
The British oil group Lasmo<LSMR.L> calls the Faroes the final frontier for exploration in northwest Europe. Potentially, the area contains far larger discoveries than those being made in mature North Sea basins, it said.
The Faroes hydrocarbon planning commission said that conditions for finding oil were "relatively favourable" and if indeed oil was found it would become an economically interesting resource for the islands for at least a couple of generations.
GDP $1 BILLION, OIL TAX REVENUE $2 BILLION?
Even moderate oil production could have an overwhelming impact on the tiny Faroese economy which last year had a gross domestic product of 6.1 billion crowns ($1 billion).
The commission calculated that successive discoveries between 2002 and 2008 of four oil fields yielding a total two billion barrels would generate public tax revenues of five billion crowns over the lifespan of the fields, based on a price of $14 per barrel.
A price of $18/bbl could push tax revenue to more than 13.5 billion crowns.
One moderate oil field producing 150,000 barrels per day would cause explosive growth in Faroese exports, which in 1997 amounted to 2.5 billion crowns -- 98 percent from fish.
Such a scenario could easily overheat the economy.
An influx of oil workers from aboard could shatter the housing market, for instance. House building permits in 1997 amounted only to 50.
"If you buy 15 houses in Torshavn you drain the entire market," noted Arabo at Amerada Hess.
Oil industry could drain workforce and capital from the mainstay fishing and fish processing industries, leading to "speculative transactions, possibly with real economic effects", the commission cautioned.
OIL MAY THREAT FISH
Since the islands were settled by Vikings some 1,000 years ago, fishing has been at the core of the Faroese economy.
Hans Johannes Brugv, managing director of Faroe Seafood Prime, the archipelago's biggest exporter with 1997 turnover of almost 900 million crowns, said the oil industry could bring benefits as well as drawbacks.
"We have heard about oil money. A washing woman will get more pay than a full-time fishery employee. Then nobody will work with fish," he told Reuters, noting that fishing vessels and fish processing factories were already facing recruitment problems.
With fewer people working in fishing, there would potentially be more money for those in the business.
But the oil industry could also disturb the marine environment, driving away the fish from Faroese waters during oil exploration and possible development and production phases, the commission said.
"There is a risk of considerable negative consequences for the marine environment with exploration drillings and production of hydrocarbons at sea," it said.
TERRITORIAL DISPUTE HAS DELAYED LICENSING ROUND
A long-standing boundary dispute between the Faroe Islands and Britain has delayed the awarding of licenses to explore for oil in the Faroese seabed.
Seven years of negotiations have failed to bring the two sides to terms on where to draw the demarcation line through a disputed area halfway between the Faroe and Shetland Islands.
"The area which is not solved yet, the 'White Zone', is rather big and we want to have this solved before we have a licensing round," said Kallsberg, who is also in charge of offshore oil affairs.
Heralvur Joensen, head of the petroleum division at the Faroese ministry of trade and industry, said the first licensing round was now scheduled to be held in spring 1999.
"There is considerable interest," he told Reuters, noting that the exact areas, or blocks, to be opened for exploration bids had yet to be specified.
Oil experts say drilling around the Faroe Islands will be technically challenging because of the thick basalt layers under the seabed, extreme currents in certain areas, deep water and rough weather conditions.
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