MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, MARCH 5, 1998 (2)
TOP STORY
Talisman Set To Weather Weak Oil Prices With Focus On Gas
The Financial Post
Talisman Energy Inc. said yesterday it is refocusing on natural gas, adding up to 200 million cubic feet a day of production from Western Canada within two years.
The company will spend $260 million to expand production and help it weather the storm from weak oil prices, said president and chief executive Jim Buckee.
"Talisman may well be the largest gas producer in Canada in the year 2000," he said, with expectations of up to one billion cf/d from Canadian operations, the North Sea and Indonesia.
The energy firm had record cash flow of $797 million ($7.29 a share) in 1997, up 14% from 1996.
Production was up 19% to 203,000 barrels of oil equivalent a day while revenue rose 18% to $1.4 billion.
Net income was $77.1 million (70›), down 19% from 1996.
For the fourth quarter, production rose 28% to 235,000 BOE, cash flow was $2.25 a share, up 13%, while earnings were $11 million (10›) compared with $26 million (24›) in 1996.
Oil production for the year was up 30% to 130,177 barrels a day and natural gas was up slightly to 658 million cf/d.
Finding and development costs were $6.89/BOE.
Talisman's foray into the North Sea has proved highly successful and oil production in Indonesia increased 26% last year, said Buckee.
For 1998, capital spending will be about $1 billion. The company's outlook is not "brilliant, but it's certainly survivable," he said.
"At current oil price levels, 1998 will be a tough year for the industry."
Talisman's production is expected to increase to 240,000 BOE in 1998 and 280,000 BOE in 1999.
Nick Majendie, Vancouver analyst with C.M. Oliver & Co., said it makes sense for Talisman to take advantage of improving natural gas prices and expanding pipeline capacity.
Talisman shifted its emphasis from natural gas in northeastern British Columbia a few years ago because of toll fees and weak prices to increase oil production.
It has deliberately avoided significant involvement in heavy oil.
"Wascana was a play for unexploited assets, not for its one-third heavy oil," said Buckee.
Petro-Canada Moves To Calm Hibernia Fears
Petro-Canada, a partner in Canada's C$5.8 billion Hibernia oil project, moved to calm fears on Thursday that the development was experiencing major production problems.
Production from Hibernia, in which Petro-Canada has a 20 percent interest, has been halved to 30,000 barrels a day from the 60,000 barrel a day rate reached last year.
"The first two wells showed excellent reservoir quality...These wells are now shut in to allow for the assessment and management of pressure in the reservoir," Petro-Canada Vice-President Norm McIntyre said in a statement.
"Production will likely be significantly lower in the second quarter, and indeed there will be ups and downs throughout the first year of operations. Variability was expected and accounted for in our projections for overall production in 1998."
The first two Hibernia wells, drilled late last year, produced at 50,000 barrels a day during January and February.
McIntyre said Petro-Canada still expected its share of Hibernia output this year to average 12,000-15,000 barrels a day.
FEATURE STORY
Hibernia Construction Site Changes Hands For $1
Canadian Press
The construction site used to build the massive Hibernia oil platform is a ghost town no more, thanks to a deal announced Thursday that will see up to 700 workers build components of the Terra Nova floating platform.
In the three-way deal, valued at $100 million, the Newfoundland government bought the site from the Hibernia consortium for $1 and then immediately leased it for $1 a year to the alliance of companies building the Terra Nova offshore platform.
The site at Bull Arm, Nfld., about 160 kilometres west of St. John's, beat out several international competitors for the work, said Premier Brian Tobin.
"One of the important legacies of the Hibernia project is that there is now an important cornerstone of infrastructure that we need if we are to maximize here the benefits of an oil-and-gas industry," said Tobin.
A previous agreement between the government and Hibernia Management and Development Co. Ltd., stipulated Newfoundland would assume control of the $475-million site 30 days after three million barrels of oil was loaded on to tankers from the Hibernia platform.
The three-million-barrel mark was reached in early February.
Eager to unload maintenance and security costs that could reach $3 million a year, the government quickly turned the site over to PCL Industrial Constructors Inc., the Edmonton-based company in charge of the fabrication work for Terra Nova.
The second largest East Coast oilfield is being developed by a seven-member consortium led by Calgary-based Petro-Canada. Six other companies are involved in building the platform.
In return for cheap rent, PCL has agreed to pay financial penalties if it fails to provide a minimum of 2,700 tonnes of production work at the site over the next 34 months.
The work is expected to begin this fall and employ as many as 700 people during the peak of construction next summer.
PCL president Alan Bodie said the Bull Arm site was chosen for its good location, low costs and readily available skilled workforce.
The company has the added benefit of an existing labor agreement reached with 16 unions last spring in anticipation of job opportunities at Bull Arm.
However, two of the unions are involved in a dispute over how that deal was reached.
"The agreement has not been without its trials and tribulations," said Vince Burton of the International Building and Construction Trades Petroleum Development Association.
"However, we are very confident that in time it will be a model for the future."
The Terra Nova oilfield is 350 kilometres southeast of St. John's and contains an estimated 370 million barrels of recoverable oil.
The topsides work to be completed at Bull Arm will include a water injection module, a produced water module and a flare tower.
Two other modules that can't be made in Newfoundland will be built by Barmac, a Scotland-based company.
The 1,600-hectare Bull Arm site was built in 1990. It housed up to 3,500 workers at a time during the six years it took to build Hibernia's mammoth platform and concrete base.
Its amenities included a post office, bank, bar, variety stores and a swimming pool.
Meanwhile, Hibernia president Harvey Smith used the handover ceremony to reaffirm production is on schedule and proceeding smoothly.
He said there is nothing unexpected in media reports the company has cut its output by half to increase pressure in its wells.
The platform, which pumped 60,000 barrels a day in its first phase of operation, is forecast to average 30,000 barrels a day from late February until late June.
"That's the normal way we do things," said Smith. "You'll see a dip over the next quarter, but by the third quarter we'll be back up to the 60,000-barrels-a-day range and on target to meet our year-end total."
FEATURE STORY
Jobs Pumped Out
Calgary Sun
Petro-Canada Inc. is planning to siphon as many as 350 jobs out of Calgary and into three other cities, the Sun has learned.
The oil and gas giant will relocate up to 350 Calgary-based sales and marketing jobs to the Edmonton area, Montreal and Toronto as part of a reorganization of its refinery business.
Spokesman Robert Andras confirmed yesterday an expanded Petro-Canada will pump 100 positions into the Edmonton area to run its western Canadian headquarters for downstream operations.
"It is our intention to relocate our western region downstream head office in Edmonton," he said.
Before the move is made, Andras said the company will have to do a staff reorganization and construct office facilities at its refinery, which is just east of Edmonton in Strathcona County.
He said up to 250 other employees in Calgary will be dispatched to refineries in either Toronto or Montreal to handle sales and marketing in those regions.
Andras said the moves are the result of a new joint venture company being formed with U.S.-based Ultramar Diamond Shamrock Corp.
Last month, the two agreed -- subject to regulatory approval -- to merge their refining and gas station businesses.
Under the deal, Petro-Canada will double the number of outlets it operates and gain a foothold in the American marketplace.
If approved, the joint venture will have $8.5 billion in annual sales, operate five refineries (the Ultramar refineries are in Quebec and Michigan) and control 3,500 retail outlets in both countries.
Petro-Canada will hold a controlling share of the voting rights of the partnership and take home 64% of its profits.
The companies estimate that, combined, they will save $625 million a year, taking advantage of economies of scale in transportation, distribution and marketing.
Andras said the relocation of will happen in two to three years.
"The fine details and the specific timing are a bit uncertain, but that's the general direction that we're proposing to move in," he said.
FEATURE STORY
Rig Built To Plug Holes
Edmonton Sun
A giant 875-tonne offshore drilling rig taking shape at the former Dreco yard in Nisku is being built for a peculiar purpose - to plug up holes on the bottom of the North Sea.
"The whole reason for Phillips Petroleum Co. (of Norway) to commission this job was to find an environmental way to shut down existing wells," said project manager Jan Erik Rugland.
"This rig will fit on 10 different platforms."
Rugland works for Hitec Asa of Norway, which is the lead contractor for the project. It subcontracted about $35-million worth of the work to Dreco, which was sold last year to National Oilwell Inc. of Houston.
The project is similar to a conventional offshore drilling rig built at Dreco two years ago, for the same customer.
Rugland said offshore wells are currently shut down using conventional rigs but the process will be easier using the new model. He added a drilling unit to be completed by August will give the new rig drilling capabilities as well.
The rig is to be trucked out of Edmonton to either Michigan or Texas within three weeks and, from there, will travel by ship to Norway.
FEATURE STORY
Worldview
Where The Oil Flows Too Fast
This year, Norway does not want the $14-billion worth of investment that eager oil companies have offered it to develop fields in the North Sea. So, it was announced on Wednesday, it will cut 12 offshore projects to reduce spending by $5-billion this year and next.
The decision shows that, in a world where countries like Canada beg for, then subsidize, energy investment, others have it in abundance. It comes after the central bank issued warnings that growth in Norway's economy is proceeding too fast; carry on with this amount of energy spending, the bank said, and the economy is bound to overheat. The Norwegians run a tight ship. They are selective on which companies can get exploration licences, and they tax them aggressively. But so large are their offshore fields that normally arrogant oil majors wait patiently in line for their chance.
Can a country have too much oil? The question used to be asked of Saudi Arabia, a developing country that has had no difficulty spending, borrowing and squandering every cent. More properly, the question should be asked of highly developed, thinly populated Norway. In the late 1970s and 1980s, it did as others did, waking up with little to show for its supposed riches. But since 1990 the oil money has started to gush as a result not only of prior investments, but of the government and its state-owned creature, Statoil, starting to get huge returns from its stake in the offshore fields.
As the oil riches have flowed, so Norway's foreign debt has been paid off and the clamour has increased to spend more on welfare and hospitals and the Oslo school system. But to spend more would overheat a small economy -- just as investing more today would strain an energy industry that is already suffering a shortage of drilling rigs and skilled crews. So the compromise that has been arrived at is not to spend today what might be better spent tomorrow.
Politically this works. Its instrument is a State Petroleum Fund managed by the Norwegian central bank under terms laid down by the parliament or Storting. And into it flow sums that make its older sister, the Alberta Heritage Savings Trust Fund, an instant poor relation. Alberta has $12-billion in a rainy day fund that dates from the 1970s, much of it already borrowed against -- an amount that corresponds to what Norway can put away in six months. At the end of this year, its petroleum fund will be $40-billion. By 2001, it will be worth $120-billion.
The ostensible target for spending it is on keeping up state pensions, and the full panoply of welfare benefits, as the Norwegian population ages in the early years of the next century. All developed countries face a pensions crisis; only Norway can solve it so simply. The latest budget documents and fiscal statements are full of statistics that show the difference between "success" and "failure" in looking after the needs of Norwegians in the year 2020. And since spending of the oil money is deferred, it is treated as being almost a part of a different country's economy (the offshore economy, which should have no effect on the actual economy, called the mainland economy).
To date, the petroleum fund has been invested in the government bonds of Norway's neighbours and trade partners in Europe. Pretty unexciting stuff. But now, on a recommendation of the central bank, 40 per cent of both the old and new money flowing in will be stashed into international equities.
A lot of secrecy surrounds the process. Chase Manhattan has been appointed global custodian of the fund, which will do its purchasing in 21 approved stock markets, including Canada's. But bank officials are reluctant to disclose which firms will be appointed fund managers (Canadian firms have been among a crowd of applicants) and equally close-lipped about how swiftly the diversification to stocks from bonds is proceeding.
One thing is for sure. Norway will not be emulating the big U.S. and British pension funds by taking chunks of corporations, then trying to influence decisions at management or board level. Parliament has decreed that it must be a purely passive investor. The central bank suggested the fund take no more than a 3-per-cent shareholding in any one corporation. The politicians thought even this too much and cut it to 1 per cent. This means that, by 2001, a petroleum fund that has $50-billion invested in global equities will have a truly international, and truly scattered, portfolio. If, as the money mounts, it becomes impractical to stick to a 1-per-cent level, then the guidelines can always be changed, a central bank official says.
For a country to use its oil wealth to pay off its deficits and cover social spending commitments and get rid of foreign debt is one thing. But Norway has done all of that.
Now, at a time when world stock markets are in record territory, it is setting out to invest a big slice of its patrimony in them as a means of guaranteeing the pensions of those who are 40 years old today (the kind of people who, in other countries, are at the peak of their earning capacity and busy saving for themselves, not relying on the state). Just as unusual, it is the nation's central bank, the supervisor and guardian of its financial system, that is to manage billions in stocks and bonds on the government's behalf, with its reputation presumably riding on getting a favourable rate of return.
How does a developed country manage its wealth when it becomes superrich? The Norwegians are finding out by venturing into some totally uncharted waters |
