MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING THURS., MAY 7, 1998 (3)
TOP STORIES
Ranger Oil Gears Down Heavy Oil Output
The Financial Post
Heavy oil producers have shut down up to a quarter of their production, or close to 200,000 barrels a day, and more cuts are on the way if prices stay at current levels, the president of Ranger Oil Ltd. said yesterday.
With prices slipping under $5 a barrel, a lot of heavy oil -- which accounts for roughly one-third of all oil production in Canada -- is no longer economic, Fred Dyment said.
"At these prices, if we didn't have commitments, we'd shut in the whole heavy oil component," Dyment said after addressing his company's annual meeting in Calgary.
"There is no sense in producing something for $5 that you sell at $5. You are just wasting the resource base."
Ranger ventured into heavy oil last year with the acquisition of Elan Energy Inc., on the expectation that commodity prices had hit bottom.
But it miscalculated the end of the low-price cycle by about six months, Dyment told shareholders. It now expects to end 1998 with a loss, primarily as a result of low heavy oil prices.
Ranger's fortunes should turn around by the end of the year, as oil prices improve and as new light oil comes on stream from its fields in the North Sea.
The yearend-loss scenario "will be the rule for heavy oil producers, not the exception," said analyst Craig Langpap, with Peters & Co. Ltd. in Calgary, who agrees with Dyment's assessment of heavy oil cuts to date.
The National Energy Board estimates 787,000 barrels of heavy oil were produced daily in 1997, out of total oil production of 2.1 million barrels a day.
Ranger has shut in 4,000 b/d of heavy oil production and is considering taking out another 6,000 b/d by the end of the year, out of 20,000 b/d of heavy oil production acquired with Elan.
Until last year, heavy oil was seen as the industry's answer to declining conventional reserves, motivating the takeover of all independent heavy oil companies.
But rising heavy oil supplies, widening differentials between light and heavy varieties, and low oil prices collapsed heavy oil prices to the current $5 range from $11 a year ago.
A major problem is the lack of refining capacity. Heavy oil is much thicker and requires special refining that is usually available in the U.S., but Canadian oil is increasingly competing for refinery capacity with heavy oil from Venezuela.
There are several plans to increase upgrading capacity in Canada, but no decisions have been made because of the high capital costs, Dyment said.
Despite the production declines, heavy oil differentials -- the spread between the price for light conventional oil and the price for heavy oil -- remain around US$7.
StarWars Laser Drill Could Shake Up Oil Business
Star Wars laser technology developed during the Cold War to shoot down Soviet missiles may find a more terrestrial use in the not-too-distant future to drill for oil and gas.
Research is still in its infancy, and nobody wants to make any extravagant claims at this stage. But if all goes well, laser beams could provide a faster and cheaper means of drilling.
That would be a breakthrough equal to the advent of rotary drilling, which replaced cable tool technology in the late 19th century and is still used today.
Richard Parker of the Gas Research Institute in Chicago said a two-year basic research project had been launched earlier this year and was already drawing plenty of attention.
''We've got a tremendous amount of interest from the industry wanting to invest in this technology. They see this as a worthwhile research project,'' he said.
The institute is putting up half of the project's initial $1.2 million budget, with the Army and the Air Force each contributing a quarter of the budget.
Dr. Ramona Graves of the Colorado School of Mines leads the research team, which includes laser experts from Kirtland Air Force Base and the Army's White Sands missile range, both in New Mexico.
Parker, Graves and other members of the team visited Houston this week to present details of the project at the oil and gas industry's annual Offshore Technology Conference. The basic research phase of the project will consist of laboratory tests, feasibility studies and cost-benefit analysis.
Researchers hope their groundwork will lead to the development of a prototype laser drilling rig that could be tested in the field within 10 years.
That will require a much greater investment than the initial outlay for basic research, but Parker said the military already had done much of the costly early work on high-power lasers.
Star Wars technology, once a closely guarded military secret, can now be tapped under a program set up by Congress to strengthen U.S. industrial and technological competiveness.
And in the spirit of post-Cold War cooperation, Russian scientists also are contributing to the project.
Graves said Andrei Ionin of the Lebedev Institute in Moscow had provided valuable input on laser technology.
Parker said he was confident that researchers would ultimately prove that laser drilling could work, but conceded there was a risk it might not turn out to be cost-effective.
''I think we have the technology to do it, but can we do it economically?,'' he asked.
Nevertheless, laboratory tests by a member of the research team at White Sands earlier this year were encouraging.
Dr. Kenneth Sundberg, a research scientist with Phillips Petroleum, found that a laser could penetrate sandstone and shale more than 100 times faster than a conventional drill bit.
The laser also created a glassy layer around the edge of the hole which researchers believe could reduce or eliminate the need to line boreholes with protective casing.
Frank Bonar, president of Rocksaw Technology, said he was impressed by the laser drilling project and saw direct benefits in his own business of excavating rock for gas pipelines.
''It looks like they've already got a breakthrough in some applications that are going to be commercially helpful to us. ... I think it will reduce the cost dramatically,'' he said.
Rap Dawson, an Exxon drilling engineer, said he was interested in the principle of laser drilling but believed the project faced many technical and economic obstacles.
''We should support this sort of thing but we shouldn't get the idea that there's a 75 percent chance it's going to work. It's a lot lower than that I would think,'' he said.
Royal Dutch Shell Says Oil Price Depends On Output Cuts
Royal Dutch/Shell Group (RD.AS) (UK & Ireland: SHEL.L) said on Thursday that the outlook for crude oil prices will depend on the successful implementation of agreed production cuts by OPEC and several non-OPEC countries.
On Asia-Pacific refining, Shell said prospects are for continued low margins, although some modest recovery may come through in the second quarter as the de-stocking that occurred in the first quarter may be reversed.
While announcing a 23 percent fall in first quarter net income, Shell noted that the North Sea Brent crude oil price during the quarter averaged just $14.05 a barrel, some $7 below a year ago before the output cut agreement steadied the price to $13-14 at the end of the quarter.
OPEC and non-OPEC producers pledged to cut 1.5 million barrels daily from April 1 but OPEC ministers have said they would cut back further if the price continued to weaken.
The low oil price took it toll on the first quarter earnings of most oil companies although those with extensive downstream operations were able to soften the blow thanks to higher margins.
Shell noted that the average average Rotterdam complex refining margin was $2.40 a barrel during the first quarter, an improvement of 50 cents a barrel from first quarter of 1997.
''Despite the very mild winter, margins were higher due to strong demand growth in the USA and Europe. In Asia-Pacific weak margins were attributed to the general economic slowdown in the region which, coupled with consumer de-stocking, resulted in product surpluses,''Shell said.
It said the Singapore complex margin averaged $1.70 a barrel during the quarter, a 43 percent reduction from the first quarter 1997.
Shell said chemicals trading conditions were ''unfavourable'' in the quarter. Although feedstock prices fell in the first quarter 1998 resulting in higher cracker margins in Europe, overall margins were lower as petrochemical prices have fallen even further, partly due to the global impact of the Asia-Pacific economic crisis and also increased industry capacity.
''The outlook for the rest of the year will depend mainly on the speed of recovery of Asian economies,'' the company said.
Optimistic On Oil
Forbes Magazine
Think oil is going to remain cheap forever? Talk to Decker Dawson-at 77, a busier-than-ever geophysicist.
As the oil industry deals with the lowest inflation-adjusted prices in a generation, geophysicist L. Decker Dawson laughs. Just wait, he says. Oil prices won't be weak forever. He still believes in the potential of China and India. "Look at all the people who never rode in a car, much less owned one," he says. "Eventually they'll get a car. And their demand for gasoline will drive up prices."
Thus, Dawson takes issue with the view expressed in FORBES (Apr. 6) that new discoveries and new technologies assure plentiful oil through the foreseeable future. But then, Dawson is taking the long view. Why not? He's been around almost forever.
During a half-century in the oil services industry, Dawson, 77, has seen plenty of ups and downs and heard plenty of pessimistic utterances. In 1952 he started Dawson Geophysical Co. in remote but mineral-rich Midland, Tex., and he remains the president. The company helps oil producers chart underground formations that might contain oil or gas.
In the mid-1980s Dawson had a 2% share of the land-based seismic market. Collapse or merger of rivals has helped drive up his revenues fivefold, to an estimated $60 million for this fiscal year, tying him for the number two spot (behind Western Atlas Inc.), with a 10% market share. Since 1990 his stock has gone from $3 to a recent $16.75, and has been as high as $27.
Low oil prices? "We have an eight-month backlog of work," Dawson says. "It's a nice problem."
In 1985, during the last great oil collapse, FORBES sought Dawson's wisdom. Cheaper oil, he said, had forced efficiencies upon the oil industry that would result-for survivors-in far greater profits. Investors were getting out at the wrong time. He was right on both counts.
His take now is much the same. "Fundamentals couldn't be any better," he says in the slow twang of his native Oklahoma. "We're even more efficient now as an industry."
Dawson dismisses suggestions like FORBES' that supply will keep pace with or outstrip demand. "Energy is a growth industry," he says. "It compares with any growth industry you can name-computers, whatever. Demand is going to go up faster. So the cost of the commodity will go up."
Back in 1985 Dawson said the industry was in "a long, slow shakeout" that would take another two to three years to end. It took a little longer, maybe five years. This time around, Dawson's smart enough not to pick a specific time frame for a price increase, except to say it will happen "fairly quickly."
Meanwhile, drilling for natural gas-whose wellhead price has held relatively steady, at least compared with oil-helps keep Dawson and his crews busy. "In the U.S., most of the undiscovered gas is deep, and expensive to find," he says. "People like me are needed."
Dawson Geophysical's special expertise consists of laying out hundreds of tiny sensors called geophones at 20-foot intervals, all wired to a master computer. A vibrator truck shakes the earth. As the sound waves reverberate, the sensors register them and computers interpret the findings to determine promising drilling sites.
Fifteen years ago, prospectors considered themselves lucky if they hit oil on one of every three wells drilled. That's when the seismic readings were two-dimensional-taken along a line. Now they're taken in 3-D-over an area. It costs a lot more, but the success rate has risen to about 75% in some cases. Soon to come: 4-D, which is 3-D with the added dimension of time-the same area shot over and over.
Besides delivering quality work, Dawson has stayed in business by practicing cyclical contrariness. He hoarded cash in good times, spent it in bad times and stayed frugal. How frugal? Debt-to-equity ratio: zero. After 38 years in the same one-story building, he's moving into bigger space. Not buying, mind you; he's leasing overbuilt office space for a dirt-cheap $7.50 a square foot a year.
Frugal, but not cheap. Over the past four years he's poured $35 million a half year's revenues into buying the latest in high-tech seismic equipment. Dawson has funded that with a strong cash flow-last year $12 million, or $2.83 per share-and an occasional stock offering.
You can learn a lot about business cycles in Midland (pop. 100,000), 300 miles west of Fort Worth. The city is in the center of the energy-rich Permian Basin. In 1982 so much cash flowed through the town that the main drag-Wall Street-seemed like the real thing. That year a stunning eight Midlanders made the first Forbes Four Hundred list. Dawson wasn't one of them.
Today, not one remains on the list. "I hope to hell we never have another boom like that because the aftermath is so bad," Dawson says. His company was briefly at risk in the late 1980s, when much of its net worth was tied up in stock of First RepublicBank, a Texas-wide lender that failed due largely to the state's flagging economy.
Is Dawson Geophysical up for sale now that the owner is getting on in years? Decker Dawson whose own stake is down to less than 10%, allows that he gets unsolicited offers all the time. "We're not interested," he says, then pauses. "Of course, if we get a high enough premium...." He leaves the clear impression that, given his optimistic assessment of the demand for oil, the premium would have to be substantial.
IN THE NEWS
Brigdon Resources Inc. (BRG.A/TSE) of Calgary announced that its spring 1998 drilling program will start on May 9, 1998. Brigdon has reached agreement with joint venture partners on four commitment wells plus three option wells. The four commitment wells will be drilled by June 15, 1998. If options are exercised on each of the other three wells, Brigdon expects to drill continuously through the end of June. Brigdon's working interest averages 59%.
All of the planned wells are in Brigdon's 33,000 acre Buffalo Lake - Erskine-Stettler property and five of the seven locations are in the thirty square mile block covered by three dimensional seismic data. The primary drilling targets are Basal Quartz channels with secondary targets in the Glauconite, Ostracod and Belly River zones. Gas discovered and developed will be processed through Brigdon's Red Willow and Erskine North plants.
INTERNATIONAL
Companies
Lundin Oil AB announced that its wholly owned subsidiary, IPC Malaysia Limited, has spudded Bunga Manggar-1, the first well of the 1998 drilling campaign in Block PM-3 in the Commercial Arrangement Area between Malaysia and Vietnam. The Company intends to drill 4 wells and possibly a 5th before the end of the year.
The Bunga Manggar-1 is the first well to assess the areal extent of the thick, low CO2, gas-bearing channel sands discovered last year in the Bunga Seroja-1A and Northwest Bunga Raya-1 wells. Both of these wells tested gas at rates of up to 50 million cubic feet per day. Bunga Manggar-1 is expected to be drilled to a total depth of 7,600 feet below sea level and will take approximately 20 days to drill and test. The Sedco Rig Trident 15will be used which is a sister rig of the Trident 17 that drilled the Company's 1997 discoveries.
The principal target is the sweet gas bearing Late Miocene "H Group" channel sand which forms a large stratigraphic play across the Block. The Bunga Manggar-1 well could double the known volumeat this horizon. Additionally, there is potential for a significant volume of oil at this location. Once the Bunga Manggar well is drilled, the rig will proceed to the Pakma-Orkid Sub-Block, some 32 kilometres to the Northeast to drill the North Bunga Pakma-1, the largest undrilled structure on the Block with the potential to equal the volume of gas seen in the Seroja/Manggar channel.
As part of the ongoing Phase One development, the nearby Bunga Kekwa Field has now produced a total of 3.54 million barrels of crude oil since coming onstream in July, 1997. This production data has had a significant impact on development planning and future profiles. Two wells are scheduled this year to prove up additional oil reserves.
"The reserves on the block are increasing continuously as a result of our ongoing drilling campaign. Last year's discoveries added 26 percent and the Company's current reserves are now in excess of 175 million barrels of oil equivalent", stated Ian Lundin, President.
Lundin Oil AB with a working interest of 41.44 percent, operates Block PM-3 on behalf of its partners, Petronas Carigali Sdn. Bhd. (46.06 percent) and PetroVietnam Exploration and Production (12.5 percent).
Arakis Energy Corp. (NASDAQ/AKSEF) announced that pipeline construction has begun in Sudan - another major step forward in development of the Sudan Petroleum Project. On May 4, 1998, the first length of 28" diameter steel pipe was laid near the Port Sudan end of the planned 1,500 kilometer pipeline that will run from the oil concession in south central Sudan to a marine terminal to be constructed near Port Sudan on the Red Sea coast. On May 5, 1998, construction also began along another stretch of the pipeline route, close to Khartoum. The target date for completion of the pipeline is mid-1999. To meet the fast-track schedule, construction will be carried out simultaneously along several stretches of the pipeline right of way. The pipeline design provides for an initial throughput capacity of 250,000 barrels of oil per day.
Through its wholly-owned subsidiary, State Petroleum Corporation, Arakis holds a 25 percent interest in the Consortium that is developing the oil concession and constructing the pipeline. The Company's Consortium partners are: China National Petroleum Corporation (40 percent), Petronas Carigali Overseas Sdn. Bhd. (30 percent) and Sudapet Limited (5 percent).
Supply of the steel pipe for the pipeline began arriving in Port Sudan in early February 1998 and by the end of May 1998 an estimated 40 percent of the project's requirements will have been landed. All of the necessary excavating equipment for trenching along the pipeline route is either on site or in transit. The engineering and manufacture of the remaining components for the pipeline project, including pumps and drivers, marine facilities, field facilities, and the SCADA and telecommunications system are underway at various international locations.
Concurrently with the construction of the pipeline, the Consortium is pursuing an aggressive upstream development program on the concession to achieve a minimum 150,000 barrels per day of crude oil deliverability by mid-1999. Initial production plans encompass development of the Heglig, Unity, Toma South, El Nar and El Toor fields, including the installation of production facilities, field gathering pipelines, and a central processing facility at Heglig. Production from these areas will be transported by a 20" diameter pipeline running from Unity to Heglig, with gathering lines to collect production from the three other fields. Following treatment at the Heglig processing facility, the crude oil will be transported through the main pipeline to the marine oil terminal near Port Sudan for export.
Commenting on the recent developments, Raymond P. Cej, Arakis' President and Chief Executive Officer said, "The commencement of pipeline construction is a momentus occasion for the people and Government of Sudan - a major step towards bringing substantial oil production on stream and with it the potential for a significant improvement in the country's economic well-being. For Arakis, the fast-track program being pursued presents not only a significant challenge but also growing excitement. With first production little more than a year away, Arakis and its shareholders can begin anticipating the rewards from this major international project that has consumed the Company's energies since 1993."
Minex Minerals (MNXM/CDN) reported that it has concluded the acquisition announced in a letter of intent Jan. 21st, 1998, of a 25% interest in the El Chivil and Surubi concessions within the Northwest Cretaceous Basin, Province of Formosa, Argentina. The Basin is host to other important fields in the area which have produced more than 100 Million Barrels of oil and more than 130 billion cubic feet of natural gas. The fields were acquired from The Roggio Group in partnership Dong Won 25%, Technicagua 25%, and CGC 25%, the operator.
El Chivil (approx. 62,500 acres) has 4 wells with accumulated production of more than 560,000 barrels of oil. The estimated proven reserves based on current wells is 1.4 million barrels, and has accumulated production of 558,000 barrels of oil to date. Current production is about 250 barrels of oil per day from 1 well. The other 3 wells will be considered for re-entry to solve technical problems incurred by YPF.
Surubi (approx. 90,000 acres) has 3 wells drilled, one of which was deemed productive, but never put into production due to infrastructure problems. Current production was tested at 125 barrels per day.
The hydrocarbon potential of these concessions is particularly important because El Chivil has a seismically defined, large undrilled structure on trend with the Palmer Largo field (31 MMBO and 21 BCFG). CGC has estimated that possible reserves in this structure are 7.5 million barrels. The current wells in El Chivil have explored only one structure to date and the rest of the block remains unexplored. Surubi also has many unexplored structures and Minex plans to examine the potential of further exploration, re-working and completion of existing wells and increase in daily production. The acquisition of these concessions fulfills the company's strategy to become oil producers within our first year.
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