INTERNATIONAL FOCUS

Pdvsa's proposed Trans-Caribbean pipeline. [87,249 bytes] Some producing companies are good at finding oil and gas; others are good at developing hydrocarbon finds; and there is a third group with strength in refining and marketing. Naturally, producing firms with complimentary strengths make ideal merger candidates. That trichotomy explains the heavy merger interest today, best exemplified by the Union Pacific Resources - Pennzoil battle.

Nov 1st, 1997

Leonard Le Blanc & Marshall DeLuca
Houston

Pdvsa's proposed Trans-Caribbean pipeline. [87,249 bytes]

Merger hawks prowling industry

Some producing companies are good at finding oil and gas; others are good at developing hydrocarbon finds; and there is a third group with strength in refining and marketing. Naturally, producing firms with complimentary strengths make ideal merger candidates. That trichotomy explains the heavy merger interest today, best exemplified by the Union Pacific Resources - Pennzoil battle.

With healthy cash flow and a push by the major stockholders, Union Pacific Resources isn't the only producer prowling for reserves or a strategic coupling of advantages. There are at least four more similar deals in the works, but none willing to admit anything more than casual conversation.

Another inducement for turning a merger as quickly as possible is the cost of drilling. Drilling units are difficult to lease on a timely basis, and both rig day rates and the cost of equipment are continuing to rise monthly. Thus, it is once again becoming cheaper to buy reserves than drill. Even gas reserves are becoming a hot commodity. Gas demand continues to rise, despite the threat of milder conditions in the US and Europe as a result of El Niño. Oil prices already reflect additional Iraqi output.

Follow the money

There are enough oil revenue dollars sitting in private Swiss and offshore bank accounts to make a point - oil revenue shares paid to the governments of some countries are not always returned to domestic economies. It is a fact of life in some under-developed countries, but it may not have to be.

Of necessity, producers feel they must be neutral, not instruments of foreign policy, and should not try to influence the disposition of contracted payment arrangements. Further, producers believe they can do more good if they are engaged locally. And besides, there is the matter of selling off prospects or assets to a very limited number of competitors at a fraction of their value, if they are forced to pull out.

Unfortunately, the only producers left in some countries are those with the least political and public sensitivity to their host country's wayward activities.

Today, sensitized consumers in Europe and the US are reacting to unacceptable activities in some countries by shunning the products of producers that operate there. But, there may be a way to deal with a government's unacceptable behavior early.

The solution could rest with international lending agencies, which have a firm enough understanding of financial transfers within most governments to detect diversion of revenues, certainly over a period of time. Why not utilize these agencies to monitor revenue flows and expose shortfalls and neglects. Evidence of diversion could be posted instead of quietly filed away, as it is now.

The point is that the diversion of oil revenues is frequently accompanied by misappropriation, and the end result is social and economic poverty for the affected countries or regions. There is greater public revulsion for diversion of money than misappropriation. Thus, exposure may focus consumer and political attention in consuming countries on the real problem - diversion and mismanagement of revenues - rather than the nearest perceived object of influence - the oil company doing business there.

Investment returns: China versus Russia

The Chinese government has long touted the need to control its economy and structure of investment in order to prevent what has happened with Russia's economy. Will China's lengthy, tightly controlled market conversion prove to be easier than Russia's disorderly and devastating shift of economic control to the private sector? International bankers have always favored the quick fix, and private investors are beginning to view it that way too.

While the annual reports of many western petroleum firms tout their investment in China, not many cite consistent investment returns or the promise of any. Investment returns in Russia don't appear much better.

Conditions in both countries could begin changing substantially, as both Chinese and Russian petroleum firms reach beyond their borders. Private (mostly) Russian oil and service firms are touring the world in search of investible projects. The Chinese are staying closer to home, with government investments in Central Asia and the Mideast that are tied into domestic consumption. Usually, a country's intellectual property transfer and competitive conditions are always an obstacle course for outside investors, until such time that domestic companies begin to work abroad. These new multi-nationals then put pressure on home governments for quid pro quo.

At this point, an overriding difference between China and Russia is the presence of internal advocates for a market-driven economy in high government position. Russia has more market decontrollers than China in key positions.

Until someone such as Zhu Rongji, an experienced market reformer, the former mayor of Shanghai, and a likely appointee to the premiership early next year, gains some stroke in enacting tough reforms sooner, the policy of market gradualism in China is likely to continue far into the next decade.

The next several years will determine which market approach - Russia's rapid sell-off or China's gradual shift - will prove a winner.

Briefs:

Americas:

Oryx Energy has participated in a subsalt discovery at its Penn State Deep prospect located at Garden Banks Block 216 in the Gulf of Mexico. The discovery drilled 123 ft of net pay in four zones and lies in 1,450 ft water depth. Oryx anticipates development with a subsea tie-back to Baldpate.

Enserch Exploration has sold 40% of its interest in the Allegheny Field in the Green Canyon area Gulf of Mexico. One-half of the interest and operating rights to the block was sold to British-Borneo for US $12.5 million, and one-half to Reading & Bates Development for US $8 million. However, Enserch has retained the deeper geological rights on the acreage.

Europe:

Phillips and Shell Expro have announced a new discovery in the Kate prospect Central North Sea. The well, 22/23B-5, yielded 11,500 b/d oil and 22 MMcf/d of gas from two pay zones. The find is located on the boundary of Shell's Block 22/23B and Phillips' Block 22/28A. The well was drilled by Phillips but funded by both with 50% interest. Phillips and Shell will co-operate the discovery.

Han-Padron will team with Kvaerner to carry out funded conceptional TLP engineering studies for the Saga/Kristin field off Norway. Conceptional engineering will be split into two phases with award of EPCI contract mid-year, 1998.

Fugro-Geoteam and Statoil have completed acquisition and processing of a 3,534 line-km high resolution seismic survey in the Southern Norwegian North Sea located over the Central Graben area. The survey is designed to evaluate fairways for long distance migration of hydrocarbons generated in the Central Graben.

Mobil Exploration, Norway, and operator, Norsk Hydro, have brought the Njord Field in the Norwegian North Sea into production. The field is expected to reach peak production of 70,000 b/d by early 1998. Reserves are estimated at 132 million bbl of oil and 210-350 bcf of gas. The field is being developed by 15 subsea wells and connected to a floating production and drilling platform.

Asia/Pacific:

Elf Exploration Indonesia has obtained a 20% interest in the Sabo block located in the Timor Sea offshore Indonesia. The license is operated by Japex Sabo and covers 4,571 sq km with water depths ranging from 300 meters to 2,000 meters located next to the Corallina and Laminaria discoveries.

Unocal has announced the discovery of significant quantities of natural gas and oil on one of its exploratory wells offshore Indonesia. The well, Merah Besar #6, was drilled in 2,284 ft of water in the Makassar Straight deepwater area offshore East Kalimantan. The well tested at a rate of 24.8 MMcf/d and 860 b/d of oil. This discovery earns Unocal a 50% working interest in the Strait with Mobil Makassar holding the remaining 50%.

Pogo has brought the new nine-well Tantawan platform "C" onstream in the Gulf of Thailand. This is the third platform in the area and has more than doubled production. The current average gross production from the three platforms is more than 8,200 b/d and 90 MMcf/d of natural gas. The crude and gas are being stored in the FPSO Tantawan Explorer.

PetroVietnam is planning to sign an oil exploration deal for offshore block 12E with Opeco of the US and International Petroleum of Canada. Under the agreement, Opeco and International Petroleum would assume the exploration risks, and in the case of a discovery, PetroVietnam would hold up to 15% of a production-sharing contract.

Conoco and partners Inpex Northland of Japan, and Todd Petroleum of New Zealand, have announced plans to drill two wells in New Zealand's North Island deepwater license PEP 38602, over the next eight years. This announcement came after the evaluation of recent 2-D seismic survey results in the Northland Basin. The license is the country's largest offshore concession.

Cairn Energy of the UK has discovered gas in the Sangu gas field on Block 16 in the Bay of Bengal, offshore Bangldesh. The company drilled the Sangu No. 3 development well which tested 45 MMcf/d of gas and encountered a 131 ft gas-bearing zone. An additional well, Sangu No. 4, has also encountered gas-bearing sands, but no results have been released.

Russia:

Statoil has entered into an exploration agreement with the Russian gas company, Gazprom, for the exploration of the Medynskaya-more field in the Pechora Sea off northern Russia. Under the agreement, Statoil will pay 25% of the exploration costs with Gazprom paying the remainder. A jackup is already on location drilling the first well in 33 ft of water and has encountered some hydrocarbons, but no assessment has been made.

Middle East:

Total of France, Gazprom of Russia, and Petronas of Malaysia have formed a consortium to contract with National Iranian Oil for development of part of the South Pars gas field offshore Iran. Under the contract, the project will be financed by the consortium and Total will handle delineation work, development, and start-up production. The contract has sparked criticism from the US which is considering imposing penalties on the consortium for violating the Iran and Libya sanctions Act of 1996.

Pennzoil has begun drilling the first of three exploration wells on Block 8 offshore Qatar, located 50 miles offshore in the Arabian Gulf. Pennzoil has added Novus Petroleum of Australia as a 25% working interest partner in the Block contingent upon approval of the Qatari government.

Central Asia:

Pennzoil has found natural gas at the KPS-1 exploration well on the Karabakh block in the Caspian Sea. This is the first of three exploration wells scheduled to be drilled on the block located 125 km east of Baku, Azerbaijan. The well encountered the gas at a depth of 3,470 meters. The company plans to begin the other wells after analysis of seismic data is completed.

Agip and Socar have signed a production-sharing agreement for the exploration and development of the Kurdashi, Araz, and Shir van Deniz fields located in the Caspian Sea, offshore Azerbaijan. Under the agreement, Agip must undergo a three-year exploration term, and a 25-year development phase. Initial production is expected to begin in 2003.

Turkmenistan is offering 11 blocks for bidding in the Caspian Sea. The blocks cover 22,600 sq km and have estimated reserves of three billion tons of oil and 4.8 tcf of gas. The blocks on offer include both shallow water and deepwater areas with concentrations of hydrogen sulfide and 23 identified, undrilled structural and stratigraphic leads. Turkmenistan will close the bidding on November 28.

West Africa:

Chevron's Nigerian unit has begun exports of liquefied petroleum gas from the Escravos field off Nigeria. The first shipment is destined for NGC Global Liquids in the US. The Escravos project, a joint-venture between Chevron and Nigerian National Petroleum Company, produces over 8,000 bbl of liquefied petroleum gas and natural gas liquids per day.

Tuskar Resources (Ireland) has reported that its first development well on the Obe Field, located on OML 110 offshore Nigeria, has yielded 9,500 b/d of oil from two reservoirs. Tuskar is currently considering a fast-track development for the field as well as drilling a second delineation well.

Pipelines unbounded

Venezuela's Pdvsa has finally released the details on one of the worst-kept secrets - a proposed 2,000-mile trunkline from Eastern Venezuela to North America via the Eastern Caribbean Sea. If built, the line would provide taps at Grenada, St. Vincent, St. Lucia, Martinique, the Dominican Republic, Quadalupe, St. Maarten, Puerto Rico, the US Virgin Islands, Cuba, and Florida. The line would transport 300,000 b/d from Venezuela, releasing 10,000 b/d to the Less Antilles, 150,000 b/d to Puerto Rico, the Dominican Republic/Haiti, and Cuba, and the rest to Florida.

Florida officials are interested because it would eliminate some of the north-south tanker traffic just offshore, but there are concerns over rights-of-way and refinery requirements. On the other hand, maintenance costs could be high for such a long pipeline. The $3.6 billion line would require 8-10 years to build.