KERM'S KORNER WEEKEND WRAP-UP INFO / LATE BREAKING NEWS AND STORIES (13)
NEWS STORY
Death Squads, Rebels Threaten Colombian Oil
Bogota Newspaper
Foreign oil companies operating in Colombia are under growing pressure from both right-wing paramilitary gangs and leftist guerrillas to pay ''war taxes'' amounting to as much as $200,000, local media reported Sunday.
Failure to pay the illegal armed groups routinely leads to threats to kidnap or kill employees and sabotage installations, the leading El Tiempo newspaper said.
El Tiempo said state-run oil company Ecopetrol had just drawn up a confidential study which highlighted ''acute concerns'' about the security situation and systematically documented threats to private oil companies.
Ecopetrol sources could not be immediately contacted to confirm the report.
Foreign oil firms have repeatedly raised concerns about security problems facing their Colombian operations.
Marxist guerrilla attacks on multinationals are a long-established feature of Colombia's high-risk oil industry.
There has, however, been no previous mention of paramilitary groups demanding war taxes from oil firms, although some multinationals have been accused in the past of setting up their own ''private armies'' to protect facilities.
El Tiempo published extracts of what it said was the confidential Ecopetrol report, citing threats made by left and right-wing groups to Lasmo (UK & Ireland: LSMR.L), Emerald Energy (UK & Ireland: EEN.L), Repsol (REP.MC), Chevron Corp (CHV) and Exxon's (XON) Colombian unit.
Last week, British firm Lasmo said it was looking to sell its 12,000 to 18,000 barrel per day operations in Colombia to concentrate on activities elsewhere in the world. It denied, however, press reports that it took the decision for security reasons.
FEATURE ARTICLE
Too Much Gas, Or Not Enough
The case for the Alliance Pipeline Project is straight forward: Alberta's natural gas producers have been suffering from low gas prices because there hasn't been enough pipeline capacity to take gas to higher priced U.S. markets like Chicago. Alliance aims to help solve that problem -- but is it in danger of over correcting and helping to cause a gas glut?
In the past year, the Alliance proposal has evolved from just a bright idea on the part of a group of gas producers for a new pipeline, into a real flesh-and-bone project with several billion dollars in financial backing and some huge U.S. pipeline players as equity partners. In industry shorthand, Alliance isn't renting office furniture any more.
It was obvious that the project crossed some kind of threshold last year when Nova Corp. started saying what a bad idea it was, how it would be bad for the industry (i.e., bad for Nova), yadda yadda yadda. Alliance is now the focus of a National Energy Board hearing, in which opponents have done everything but claim that the project will cause earthquakes and tooth decay.
Apart from the regional issue of whether Alliance will duplicate existing pipelines in Alberta, some observers have concerns about the project's effect beyond the borders of the province, and in fact beyond the borders of Canada. They have raised the spectre of a river of Canadian gas pouring into Chicago with nowhere else to go -- something that inevitably would cause the benchmark price on the New York Mercantile Exchange (NYMEX) to drop.
The billion-dollar questions are how much it would drop, how quickly and for how long. These are important issues. The driving force behind Alliance, and behind the increased focus on gas production in Alberta, is the assumption that access to Chicago means much higher prices. That would mean significantly higher cash flow, something the oil business certainly isn't providing much of at the moment.
Alliance president Dennis Cornelson has said the insufficient export capacity is costing Alberta producers close to $6-billion a year in lost revenue. A surplus of gas in Alberta means prices are lower here than in the United States (Alberta prices are about 45 per cent lower than those on NYMEX, and have been as much as 60 per cent lower). But what if that gap were narrowed, not by Alberta rising to meet the NYMEX price, but by the U.S. price falling and Alberta's rising, to meet somewhere in the middle?
"There's no question Chicago prices will fall," said Gus Colessides, director of energy forecasting with Williams Gas Pipelines, the U.S. operator that recently bought Tulsa based pipeline company Mapco in a $2.5 billion (U.S.) deal.
Interestingly enough, this gave Williams a 5-per-cent stake in Alliance, and Mr. Colessides made it clear he is not opposed to the project per se. However, he said he is concerned about what will happen when Alliance starts pumping 1.3 billion cubic feet (bcf) of gas a day into Chicago.
To make matters worse, an expansion of the Foothills/Northern Border Pipeline into the U.S. Midwest is under way and should be on stream by the end of this year. That will add 700 million cubic feet (mcf) per day of export capacity. But there is likely to be a demand for only about 300 mcf per day over the next decade in the region, Mr. Colessides told a recent conference.
While substantial growth in demand for gas is expected in the southeastern and northeastern United States, the Northeast will likely have all its needs met by production from Canada's Sable Island project, he said. The Southeast, meanwhile, is primarily a market for gas from the U.S. Gulf Coast.
When opponents of Alliance want to make this point about oversupply, all they have to do is whisper a single word: California. Everyone in the gas business remembers with visceral intensity what happened in the late 1980s when too much gas flooded into California. The high prices that Alberta producers had been counting on disappeared into thin air.
Mr. Cornelson said Alliance's backers are well aware that pushing 1.3 bcf a day of new Canadian gas into Chicago could result in a drop in prices of some proportion. "We have always said that we could give producers NYMEX minus about 40 cents [per thousand cubic feet] for transportation costs" from Alberta, he said. In other words, Alliance never guaranteed that producers would capture the entire difference between Alberta and NYMEX.
In addition, Mr. Cornelson said, comparisons with the California situation do not stand up to scrutiny. For one thing, he said, that market was relatively landlocked -- in the sense that once the gas arrived, there wasn't an easy way to move it elsewhere -- while Chicago is a central hub. Although there are not as many outbound routes from Chicago as one would like, Mr. Colessides said, new supply could result in new routes being built.
Even if NYMEX prices fall, Mr. Cornelson said, Alberta producers would get more than they are getting now in Alberta. And while Gulf Coast producers may drop their prices in an attempt to grab market share, he added, much of their production is high-cost and not as competitive.
In any case, producers likely would feel that competing tooth-and-nail with Gulf Coast producers is better than the current situation. "Right now they're competing with themselves," Mr. Cornelson said. How much better off they will be a year or two from now is up to the market to decide.
FEATURE ARTICLE
Oil Patch Weathers Slump
Globe & Mail
Weak oil and gas prices are reducing profits for energy producers and draining millions of dollars from the Alberta treasury, but industry executives and analysts say the sector is showing surprising resilience.
Even if oil prices -- which have dropped 30 per cent in the past year to about $15.50 (U.S.) a barrel -- get stuck in the dumps for several months, oil patch watchers say there are enough signs of a potential recovery for the industry to avoid pushing the panic button.
Natural gas prices, after falling 20 per cent from a year ago, are widely forecast to rebound later this year because of increased export pipeline capacity coming on stream to feed the growing appetite for gas in the United States.
Petro-Canada, Alberta Energy Co. Ltd. and Renaissance Energy Ltd. are among the companies shifting their attention to natural gas in anticipation of a rally in gas prices.
And even if the hectic pace of Western Canadian oil and gas drilling tapers off to 13,000 to 14,000 wells this year from last year's record of almost 16,500 wells, it will still be a vast improvement over recent slumps.
From 1986 to 1992, companies drilled an average of 6,237 wells annually in the West, or less than half of the drilling activity envisaged this year.
Spending on pipeline and petrochemical projects also is forecast to remain robust.
"The sky is not falling," says Kerklan Hilton, spokesman for Prudential Steel Ltd. , a Calgary-based oil services company.
Still, there are plenty of frayed nerves in the oil patch, where last year's boom seems like a distant memory.
Capital spending by oil and gas producers is expected to fall significantly in 1998, with several companies, such as Canadian Occidental Petroleum Ltd. , already cutting their budgets by 10 per cent or more. Some are cutting by one-third.
In Alberta, there are lingering nightmares of the last major oil crash. Oil prices plunged 46 per cent in 1986 to average $15.10 a barrel, with lows of less than $10 during that year. The economic bust came as a quite a shock because at the time, oil prices were expected to soar to $50 or even $75.
This time around, most analysts -- in predictions before crude markets began softening in early October -- had figured that oil prices would average $18 to $22 a barrel in 1998.
So, with prices for benchmark West Texas intermediate light crude now hovering close to $15.50, compared with $22 a year ago, the oil patch is feeling the pain of the plunge.
One full year of oil prices around $15.50 would slash corporate profits, while $12 to $14 oil would bring red ink for many producers.
But industry veterans aren't subscribing to any doom-and-gloom scenario, saying they expect oil prices to bounce back to average at least $17.50 this year.
Edythe (Dee) Parkinson-Marcoux, president of Gulf Canada Resources Ltd.'s newly created heavy-oil division, says now is the time for companies to stay calm.
"I know what oil prices are every day, but it's not the first thing I pounce on to use as a decision-making tool," she says. "You have to stay the course and you have to be prepared, you know, like a good Boy Scout or Girl Guide."
Weakening prices are being watched closely by the Alberta government, but Premier Ralph Klein says the province has built a financial cushion that will allow it to withstand sagging commodity prices until mid-1999.
"We can probably handle a year, maybe a year and a half, of prices in the $16" range, he said Friday. But "if that is sustained for two or three years, then we'll be in the glue."
Alberta is counting on $5.48-billion (Canadian) in revenue from general corporate and personal income taxes during 1998-99. That's just 1.3 per cent lower than the previous fiscal year.
Almost $650-million in royalties from conventional crude oil is predicted for the 1998-99 fiscal year, based on oil selling for $17.50 (U.S.) a barrel. But that would be a big decrease from the revenue of more than $900-million (Canadian) expected from conventional crude oil royalties in the current fiscal year that ends March 31.
The province expects to collect $1.28-billion from natural gas royalties in 1998-99, compared with $1.62-billion in the current fiscal year.
The oil and gas slump is also expected to slash prices at land auctions in 1998-99. The Klein administration estimates that it will attract $650-million from land leases that provide drilling rights, down from $1-billion in 1997-98.
On the international front, crude oil markets are being depressed by expectations that Iraq may soon be allowed to increase its oil exports. But Iraq, which has faced trade sanctions since it invaded Kuwait in 1990, isn't the only ingredient that's resulted in oil prices dipping to four-year lows.
Decreased demand in Asia because of financial turmoil there, and increased output from the Organization of Petroleum Exporting Countries and non-OPEC nations have also contributed to the market slide.
The impact of low commodity prices on Canadian oil and gas companies will vary, but analysts say most producers will report sharply lower first quarter profits compared with the same period in 1997.
Investors have already factored in the poor financial performance of the past five months, sending the Toronto Stock Exchange oil and gas index down about 20 per cent since early October, when it closed at a 52-week high.
In the first three months of last year, light oil prices averaged $23.08 (U.S.) a barrel, while natural gas sold for almost $2.20 (Canadian) per 1,000 cubic feet, compared with the recent Alberta benchmark of $1.75.
"You must always remember that this is a commodity-based industry. Oil prices are controlled by global events like the political situation in the Middle East, not what happens in downtown Calgary," says Stanley Jones, president of energy investment banking firm Lomax Group Inc. in Calgary.
PanCanadian Petroleum Ltd. of Calgary is one company that has already reacted to events. It has taken steps to cut costs, announcing last month that it will lay off 200 staff, or 11 per cent of its payroll.
PanCanadian will also reduce spending on the production of heavy oil in particular, because prices for the tar-like substance have fallen even further than those for conventional light crude.
"I don't want to diminish the layoffs, because that's traumatic for those workers. But the situation we're in is quite different than a bust," says Robert Mansell, a University of Calgary economics professor. "We're not in a boom either, but there certainly is rapid economic growth."
About $20-billion in spending predicted for northern Alberta's oil sands in the next decade will go ahead, because it has been budgeted for long-term developments, adds David Manning, president of the Canadian Association of Petroleum Producers.
However, some projects that steam heavy oil out of the ground will be delayed one or two years until the glut of heavy oil disappears.
"No matter how many times we go through these up and downs in the industry, people still have trouble getting used to it," says Rick Roberge, an analyst with Price Waterhouse in Calgary.
"A year ago, everybody wanted heavy oil. Now heavy oil's in the doghouse."
FEATURE ARTICLE
Beaver Drilling Has Solid Balancing Act
Calgary Sun
"Busy as a beaver" aptly describes the past year's activities of Beaver Drilling, so busy in fact the rodent runs the risk of being replaced by the company as the standard for busy-ness.
"We've had a very successful year," says company president Brian Krausert.
"We've added a drilling rig last year and we've increased our rig days by 25 percent over 1996."
Beaver now operates 11 rigs as well as 10 camp catering operations, which combined brought revenues up 25% in 1997.
"We increased our staff by about 10 percent," says Krausert of the company's year of dynamic but planned growth.
He describes Beaver's secret to success as a balancing act between a rock and a dry hole.
"The trick in contract drilling is to control overhead and control debt," he says.
"We've managed to consistently do both. It definitely lets you sleep at night."
The cyclical nature of the drilling industry means Krausert has had a few sleepless nights during his 22 years in the business. But he's also seen several changes, many of them for the better.
"Rigs are run differently now," he says.
"The emphasis is on training and safety for rig hands. And we handle environmental issues much better."
Another change Krausert's seen is in the rig workers themselves.
Replacing yesterday's transient workers are career rig workers who have become very skilled at their jobs.
"It used to be that they were only there for the paycheque," says Krausert, ad-ding the turnover rate has gone down from 500% several years ago, to less than 10% today.
"When you provide decent working conditions and wages, people tend to stick around."
For 1998, Krausert plans to stick to what he does best -- well managed contract drilling leading to steady but solid growth.
This includes adding another camp, upgrading the fleet, putting up a new office building in Grande Prairie and adding some more pumps.
But nothing too fancy, too big or too far out on the edge. "It's best to play most of your games in your home court," he says. "Growth just for the sake of growth is not a good thing."
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