Jan. 1, 1998
Russia's spring will bring new growth and deepening roots for major oil companies. A new phase of openness with the international oil community began in November when two major deals were signed between British Petroleum and Sidanco and between Royal Dutch/Shell and Gazprom. These new deals set the stage for renewed investment in the Russia interior and offshore regions. Caspian Sea activity is moving ahead strongly and Sakhalin Island development is well underway.
Victor Schmidt

Russia thawing to new investment

Russia's spring will bring new growth and deepening roots for major oil companies. A new phase of openness with the international oil community began in November when two major deals were signed between British Petroleum and Sidanco and between Royal Dutch/Shell and Gazprom. These new deals set the stage for renewed investment in the Russia interior and offshore regions. Caspian Sea activity is moving ahead strongly and Sakhalin Island development is well underway.

New opportunities are now developing. The Barents Sea and Sea of Okhotsh are the next potential offshore plays. One round of licensing for the Barents Sea is complete with more to follow later this year. Sakhalin activity created new working relationships that will soon be branching into more Sea of Okhotsk exploration. No plans for licensing are yet available, but certainly are in the planning stages.

India tries again to attract capital

India realized last spring that its petroleum policies were non-competitive. Policy change proposals were announced in April 1997 but required some time to achieve approval. The Finance Ministry accepted the new tax code in October. The New Petroleum Exploration Licensing Policy will be implemented in 1998 by opening 47 new exploration blocks for upstream oil and gas development. Key elements of the new policy include:
  • A 7-year tax holiday for exploration and production
  • A continual open bidding process
  • No preferential treatment for the national oil companies
  • No compulsory state participation or carried interest
  • Domestic marketing of contractor's petroleum products
  • No signature, discovery, or production bonuses
  • Crude oil royalty payments of 10% for offshore and 12.5% for onshore
  • Natural gas royalty payments of 10%
  • Reduced royalty for deep water exploration for the first 7 years of commercial production
  • Abolition of cess payments
  • International prices for crude oil production
  • Full cost recovery for exploration from the contract area with unlimited carry forward.
This new framework may finally place India in a position to attract the necessary risk capital to explore its territory. The wonder is that it took so long for the country to respond to its own internal needs and the requirements of the very competitive world market in exploration acreage. This ensued after the 1991 collapse of the Soviet Union. The country is experiencing another change in government that may delay implementation of the new policy.

Petroleum demand continues to grow

The Supply and Demand Committee of the Independent Petroleum Producers of America (IPAA) released its 1998 forecast for the industry. The IPAA anticipates global petroleum demand increasing by 1.8 million b/d of crude during 1998, a 2.5% growth rate. The increase will come primarily from developing nations. Supply from non-OPEC nations is expected to grow by 1.6 million b/d of oil, forcing OPEC production constraint to maintain a balanced international market. For the US market, IPAA sees crude oil production increasing a modest 6.43 million b/d, or 0.3% of 1997 production. US oil imports are projected to grow to 9.8 million b/d, nearly 53% of total US petroleum demand for 1998.

In a related development, OPEC is responding to growing demand by increasing its official production ceiling. The new quota is 27.5 million b/d, an increase of 2.5 million b/d. This is still below its unofficial production tally of 28 million b/d but serves to acknowledge its current production pattern.

Stability in the Middle East?

The oil industry is more involved than ever in searching out new reserves, especially offshore. Why? Increasing demand is the primary driver but behind that is the strategic fact that the majority of the world's known petroleum reserves still reside in the Middle East. It is in the strategic interest of the international oil industry to locate new counter-balancing sources of petroleum to ensure security of supply.

This was a primary driver of the development of the North Sea during the 1970's. It is a major driver in the opening of the Caspian Sea resources today and underscores the push into deep water around the world. OPEC is slowly returning to the days where it enjoyed a 70% or better share of the world oil market. Only current "overproduction" by Norway is restraining OPEC from exploiting its position.

Where does the Iraqi regime fit in this scenario? Hussein would like to militarily control the oil production of the Middle East. Barring that, he wishes to be strong enough to impose his will on the Gulf States and wield power over the world oil markets, thus controlling the pace of the world economy. His lever to this position of ultimate power is the energy dependence of the world. This leads to two conclusions:

Y Hussein will risk much to reach his goal. Containment may be necessary for real peace in the Middle East, and the smooth functioning of world commerce.

Y The industry must find major new supply sources outside of the Middle East and away from conflicts onshore.

This will allow the industry to do its job of fueling the world economy and providing that energy at a competitive rate without the fear of a major supply disruption. It also will keep a lid on those forces in the Middle East that seek to coerce the developed world into doing its bidding.

Romanian licensing hosts marine block

The National Agency for Mineral Resources (NAMR) is reopening the First National Licensing Round. Eight onshore and one offshore block are available for licensing.

The offshore block EPI-15 straddles the southernmost fourth of Romania's Black Sea coast. The deadline for offer submission is March 31, 1998. Negotiations will close at the end of August 1998 with license awards scheduled for September. Romania's Petroleum Law became effective March 28, 1996 with a new royalty and tax system. Data packages can be previewed in Bucharest. Contact Mihail Ianas, President, or Arcadiit Hinculov, General Manager, at NAMR, 36-38 Mendeleev St, 70169 Bucharest, Romania; phone +401-613-22-04 or fax +401-210-74-40.

PDVSA adjusts to a new world

Petroleos de Venezuela announced the restructuring of its oil operation into functional units. Luis E. Guisti, President, said, "New realities require the complete and permanent search for the creation of value for the corporation. High efficiency must be replaced by maximum efficiency." The new organization will consist of three parts: PDVSA-Parent, PDVSA-Oil & Gas and PDVSA-Chemical. PDVSA-Parent will handle planning, finance, human resources and external affairs. PDVSA-Oil & Gas is responsible for oil, gas, coal, and Orimulsion operations. This entity will include exploration and production, manufacturing and marketing and services. PDVSA-Chemical will handle all petrochemical operations and all joint venture companies. The full structure will be in place and operational by the first quarter of 1998.

Venezuela's third operating agreement round results

Seven offshore areas were awarded in the latest licensing round, six in Lake Maracaibo and one in the Caribbean Sea. Ambrosio, B-2X.68/79, B-2X.70/80, Cabimas, Intercampo Norte and LL-652 are contracts to redevelop and extend production from older fields., La Vella Costa Af uera, in the Caribbean, is the largest license and has been tested by 25 wells. The area has no commercial production to date. An Arco-Phillips consortium is seeking gas from this license.

Namibian law improvements

Namibia is making changes to its 1991 Petroleum (Exploration and Production) Act, the 1991 Petroleum (Taxation) Act and the Model Petroleum Agreement in advance of its Third Petroleum Licensing Round scheduled for October 1998. The changes introduced include the following:
  • The Minister of Mines and Energy will be given powers to extend, by up to a year the
  • initial or renewal exploration periods.
  • The production royalty rate will be reduced to 5% for the third and future licensing rounds, the current rate is 12.5%.
  • The Petroleum Income Tax (PIT) rate will be reduced for all oil & gas companies from 42% to 35%.
  • The PIT ring-fence will be relaxed so that exploration expenditures can be apportioned between all of a company's license areas.
  • A change will be made in the statutory formula for the first tier rate of the Additional Profits Tax (APT). For existing licenses this will yield an APT of 25%.
  • A provision will be incorporated allowing the APT to be modified if NAMCOR participation interest is negotiated.
  • PIT and APT relief will be granted for contributions to an approved fund/escrow account for abandonment costs.
  • A trust fund or escrow account will be required to cover the cost of field abandonment.
Licensees will be required to make annual contributions to an approved fund once 50% of estimated field reserves have been produced.

Namibia has received many inquires about its deepwater leases. Western Geophysical is currently shooting 6,300 kms of new seismic surveys that will be available for the Third Licensing Round.

East Russian resource conference

The All-Russia Petroleum Research Geological Exploration Institute (VNIGRI) of the Ministry of Natural Resources of Russian Federation is planning an international conference on east Russian resources this May 25-29. The conference is titled "Results and Development Prospects of Energy Resources, Far East Region, Russia" and will be held in Khabarovsk, Khabarovsk province, inland west of Sakhalin Island. Topics to be covered include:
  • Raw material forecasts of on/offshore basins
  • Regional estimates of petroleum and coal potentials
  • Economic efficiency of energy development
  • Potential problems, licensing, and investment policy
  • Ecology of energy development; alternative energy sources
For specifics contact M.D. Belonin, Director VNIGRI by email: [email protected], phone 7-812-273-43-83 or fax 7-812-275-57-56. A complete announcement will be forthcoming.

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