Refinery Update August 2003

HOUSTON, -- Future US low-sulfur gasoline regulations and on-road low sulfur diesel regulations will be a key issue for motorists and for the US refining industry throughout the next decade, said Bryan Caviness of Fitch Ratings Ltd.

"Despite the high capital costs facing US refiners to meet the regulations, Fitch believes that the changes will prove to be very positive for refineries that remain in operation," Caviness said.

"Unanticipated supply disruptions will drive refining margins wider than historical norms and help make up for the increased investments. A lack of new capacity will further stress supply-demand balances," he added in a recent research note.

Some refiners, such as private companies with small facilities, will not be able to make the investment and will shut down, he said. Other refiners are disadvantaged because of higher sulfur crude slates, but they might be able to make up for the higher investments through cheaper crudes.

In 2004, US drivers will begin burning Tier 2 low sulfur gasoline in their cars. This is the first in a series of national regulations intended to reduce sulfur emissions from motor vehicle fuels.

"Petroleum refiners alone are expected to invest in excess of $10 billion for the gasoline and on-road diesel regulations," Caviness said. Automotive and industrial vehicle and engine manufacturers also will have to make investments to meet the regulations.

"In spite of the significant capital costs and strain on free cash flows, Fitch expects US refiners to ultimately benefit from the increasingly stringent regulations as refined product supply is removed from the market," he said.

Although refiners and manufacturers will have to do some belt tightening, much of the costs ultimately could be passed along to the end consumers through higher prices and margins, Caviness said.

For 12 consecutive years, implied gasoline demand has grown an average 2.5%/year. Although distillate consumption dipped in 2002 compared with 2001, distillate consumption has also grown by an average 2.4%/year for the past 12 years.

"Based on these trends, the US could see gasoline and distillate demand grow by 2 million b/d over the next 6 years," Caviness said.

A steady supply of capacity creep projects has offset the loss of the capacity in the early 1990s and the increased demand, he said. There has been a 1.7 million b/d increase in total refining capacity since June 1994.

ChevronTexaco Corp. plans to retain and cultivate its West Coast refineries and filling stations, the company said Friday, as part of an announcement in which it also reported a surge in quarterly earnings.

The San Ramon-based oil giant also introduced a plan to shed between $1 billion and $2 billion in underperforming assets each year going forward.

These "non-strategic assets" include its refineries and gas stations in Europe plus spent oil fields in the United States and United Kingdom. But California, which one analyst referred to as the company's "crown jewel," will be spared a similar fate.

"California is one of the largest gasoline markets in the world, where margins have historically outperformed the U.S. averages," said CEO David O'Reilly in his presentation to investors.

ChevronTexaco planned to put money into West Coast refineries, which are in Richmond and El Segundo, to make them even more efficient, O'Reilly said.

According to an earnings supplement released by the company, the "spread" between the cost of a barrel of oil and barrel of motor gasoline -- a measure of profitability without considering production costs -- is $27.37 in California, higher than spreads in any other region. With each barrel holding 42 gallons, the spread is 65 cents a gallon.

Company spokesman Stan Luckoski said that ChevronTexaco does plan to scale back its "downstream" operations but will still focus on the Gulf Coast and Asia, in addition to California.

In two months, ChevronTexaco will celebrate the second anniversary of its merger, which investors are still evaluating. The company posted earnings of $1.6 billion, or $1.50 a share, in the second quarter, which ended June 30.

Though a big improvement from the same quarter last year, when it earned $407 million, or 39 cents a share, some analysts attributed the strong quarter to rising prices for gas and oil, rather than increases in production or efficiency. The stock fell slightly Friday, losing $1.06 a share, or 1.5 percent, to close at $71.05.

Gov. Frank Murkowski announced that Flint Hills Resources LP, a Kansas-based company, is deep in negotiations with Williams to purchase all of its Alaska holdings, including the North Pole refinery.

Murkowski made the announcement because he also wanted to tout the state's entry into negotiations with Flint Hills to sell them state royalty oil for the refinery.

Murkowski said he expected to see the two sides reach a deal toward the end of the year, if not sooner.

Flint Hills, based in Wichita, Kansas, already produces a combined 600,000 barrels of crude oil a day at its refineries in Pine Bend, Minn., and Corpus Christi, Texas. It markets and produces fuels and other petrochemical commodities, and in Canada its businesses include Calgary-based crude oil marketing, trading, transportation and storage activities. The company employs about 2,000 people and is a wholly owned subsidiary of industry giant Koch Industries, also based in Wichita.

Facing billions in debt, Williams has been trying to sell all its Alaska properties, which include the North Pole refinery, two oil terminals, 29 Williams Express stores and a 3 percent interest in the trans-Alaska oil pipeline, for the past year. The refinery employs roughly 150 people, while about 25 more work for Williams Alaska in Anchorage. Statewide, the Williams convenience stores employ about 300 people.

U.S. oil refiner Premcor Inc. said on Thursday it plans to perform maintenance and expansion work on its 260,000 barrel-per-day (bpd) Port Arthur, Texas, refinery during the third quarter.

Chief Executive Thomas O'Malley added in a second-quarter earnings release that the company expects an improvement in refining profit margins as well as lower-than-expected costs to upgrade its refineries to meet environmental rules.

"Port Arthur has scheduled maintenance in the third quarter as we begin our announced expansion project there with a turnaround and expansion of the hydrocracker," O'Malley said.

Connecticut-based Premcor had announced plans in May to expand its Port Arthur hydrocracker to 45,000 bpd from 35,000 bpd as part of an overall expansion of the refinery to 325,000 bpd of crude distillation by the end of 2005.

"Inventory levels for oil products suggest that we will see an improvement going forward. If the economy improves, as expected, we believe Premcor will benefit from increased consumption," he said.

O'Malley added that the company has reduced the expected cost for upgrading its plants to meet looming environmental fuel regulations, with the cost for meeting gasoline regulations at $310 million from $335 million and the cost for meeting diesel rules at $330 million from $347 million.

The U.S. Environmental Protection Agency has mandated new ultra-low sulphur fuel by 2006 to improve air quality. The U.S. oil industry is expected to invest more than $10 billion to make the required upgrades to make the cleaner fuel.

150,000 bbl/dy Refinery Under Development

The shutdown of it’s pipeline, which may not be resolved for weeks, has exposed Arizona's vulnerability to old or inadequate gas-transportation systems even as its population balloons and gas consumption rises. There are no refineries here, and some state officials think the state needs more pipelines. The one that ruptured, spilling 10,000 gallons near a subdivision going up north of Tucson, was built in 1955.

Then there is the state's exposure to accidents and energy policies in other states. California refineries already are feeling pressure to sell all of their gasoline in-state, instead of shipping part of it to Arizona. "We either need a refinery or more pipelines," said Marc Spitzer, chairman of the Arizona Corporation Commission, which enforces federal pipeline laws and regulates the price of natural gas and electricity in the state.

But Spitzer notes that pipelines and refineries are costly enterprises, and capital for such projects is hard to get.

The gasoline issues are similar to the natural-gas issues Arizona officials wrestle with. The pipeline that brings natural gas to the state from Texas is at capacity, and the federal government is demanding Arizona use less so California can have more. As with gasoline, the result will likely be higher prices for consumers.

A 150,000 barrel-a-day refinery project near Mobile, which has been on the drawing boards for decades, has been revived and would go a long way toward solving the Valley's fuel-supply problems. But the project is facing stiff opposition from area residents.

Even more daunting is the $2 billion price tag. The plant was planned when a crude oil pipeline passed near the site. That line is being converted to natural gas. Refinery promoters would have to spend $1 billion or more to build a pipeline to supply the refinery. The group, headed by entrepreneur John Greenbank is seeking an air-quality permit from the Arizona Department of Environmental Quality and is negotiating to buy crude oil in Mexico and pipe it to the site.

Suncor Energy Inc. received U.S. Federal Trade Commission approval for its planned $150-million purchase of ConocoPhillips' Denver refinery, a deal announced in mid-April.

The acquisition, which includes the 60,500-barrel-a-day refinery, 43 Phillips-branded gas stations as well as a pipeline and storage facilities, gives Canada's No. 4 integrated oil firm a new outlet for its growing oil sands production.

The transaction meets a growing need among Canada's oil sands and tar-like bitumen producers to secure markets for the nontraditional oil supply, which is fast increasing amid a multibillion-dollar spending boom.

"With a target of growing crude oil production to more than half a million barrels per day, it's critical to our strategy that we have stable, long-term market access," said Rick George, Suncor's President and Chief Executive Officer.

Suncor plans to spend up to $225 million at the Denver plant through 2006 to meet new U.S. fuels legislation and allow it to process high-sulfur "sour" crude, which will make up a larger portion of total output after the oil sands expansion.

In a move that boosts Denver's image as the "energy capital of the West," Canadian oil giant Suncor Energy Inc. has set up its U.S. headquarters in the city. The newly created domestic company, Suncor Energy (USA) Inc., kicked off its first day by acquiring an oil refinery in Commerce City and dozens of gas stations and pipelines from ConocoPhillips.

The $150 million deal, which was announced in April, was approved by the Federal Trade Commission.

Suncor also plans to spend between $175 million and $225 million by 2006 to upgrade the local refinery, said Mike Ashar, the company's executive vice president.

Suncor has retained all 585 workers at the refinery and the gas stations. Roughly 300 are employed in the refinery, while the remaining work in the marketing division.

Houston-based ConocoPhillips, the third-largest U.S. oil company, had earlier agreed to sell the refinery and related assets to gain FTC approval for the August 2002 merger of Conoco Inc. and Phillips Petroleum Co.

The Commerce City refinery, which can process 60,000 barrels per day, will use crude from Canada and the Rocky Mountain region. It will supply gasoline to RTD and jet fuel to Denver International Airport.

Suncor, which produces synthetic oil from the oil sands in Alberta, expects to supply 80 percent of the oil processed at the newly acquired refinery by 2006.

Suncor's oil sands produce 225,000 barrels per day. The company plans to expand production up to 550,000 barrels per day by 2012.

To keep pace with increased production, Suncor plans to acquire new refineries and expand current ones, Ashar said.

The race was on for the Australian petrochemical industry to comply with the introduction of new clean fuel standards in January 2006, oil giant Caltex said.

Caltex managing director Jeet Bindra said companies needed to decide this year whether they wanted to play by the new rules, which will see lower levels of sulfur, diesel and benzene in petrol.

"I think 2003 is a watershed year for the industry because those refineries that decide to comply with 2006 standards will have to make a decision this year to modify the facilities and spend the money," Bindra told Channel Seven.

With April's announcement by Exxon Mobil that it would close its Adelaide refinery, Port Stanvac, by mid year due to ongoing losses, the number of refineries in Australia will be reduced to seven.

Spread across NSW, Queensland, Victoria and Western Australia, major players BP, Shell and Caltex will each run two refineries, while Mobil will be down to one.

"We believe Exxon Mobil finally decided they could not justify the investment at that refinery," Bindra said.

"There may be others who are having similar debates at this time and may decide to either reduce capacity or shut down another refinery in Australia because it may not be economical for them to spend the money."

Bindra said it was likely five or six refineries could service Australia's needs long term, while some marketing considerations could see them expand their business into Asia.

"In my opinion if I was starting from scratch I would have three refineries, but considering what we have today, I think five or six refineries can well serve the needs of this country," he said.

"Similarly, I believe there is a need for consolidation in the marketing network as well so that the survivors can be competitive enough to compete not only within Australia, but with refiners and marketers in Asia."

Caltex has estimated it will need to spend $A250 million at its refineries in Kurnell and Lytton in order to comply with the new standards, with some $A40 million having been already spent.

"From Caltex's point of view we have two refineries that are reliable, efficient, in the best markets in Australia, and we have made a decision to pursue to be a strong player beyond 2006," Bindra said.

American David Reeves, currently president of the North America products company ChevronTexaco Corp, will take over from Bindra on August 11 as Caltex Australia managing director and chief executive.

Axens of France, has valued the modernization and expansion program of Kochi Refinery Ltd at Rs 1,819 crore.

The preliminary feasibility report (PFR) prepared by the French company has already been submitted to KRL. The project is expected to be completed in two phases. A detailed feasibility report is now being prepared for both the stages.

The first phase, expected to be completed by January 2005, envisages upgradation of refining capacity for motor spirit (MS) and high speed diesel (HSD) to meet the Bharat State - II norms.

In the second phase, which will be completed by 2010, KRL intends to ramp its capacity by 2.5 million metric tonne (MMT).

It will also include modernise the refining capacity to meet the Bharat Stage - III norms for MS and HSD.

The company hopes that the first phase will increase gross margin by Rs 95 crore every year. The second phase will further reduce the operating cost for the company.

Experts feel that with the tighter pollution control norm introduced throughout the country, the upgradation will be critical for the future viability of KRL.

KRL, a subsidiary of BPCL, has now refining capacity of 7.5 MMT per annum. After the expansion, its capacity will go up to 10 MMT.

The company also proposes to set up a crude oil receipt facility (CORF) consisting of single buoy mooring (SBM), shore tank farm and associated pipelines.

The CORF would facilitate transportation of crude oil in larger tankers, thereby lowering the cost incurred in transportation of crude oil.

The detailed feasibility report (DFR), which was prepared with the assistance of Engineers India Ltd (EIL), envisage setting up the CORF at Puthuvypeen within the limits of Cochin Port Trust (CPT).

Moreover, the company is now in the process of implementing SAP R/3. In the first phase, materials management, sales and distribution, plant maintenance, project systems, finance, control, human resource and payroll modules are being taken up.

In the second phase, asset management, control profitability accounting and control profit centre accounting would be brought under SAP. This part will be completed by April 2004. The total estimated cost envisaged at Rs 26.4 crore.

KRL achieved an all time high turnover of Rs 10,480 crore in 2002-3, a growth of 55 per cent. The profit also surged to Rs 696.5 crore as against Rs 118,6 crore in 2001-2.

To compensate for the shortfall in petroleum, India imports crude oil, but it exports refined products because of excess refining capacity. So the thinking is to plan primarily for strategic reserves of crude oil only.

The planned refining capacity is 138/220.75 million tonnes per annum (MTPA) at the end of the tenth plan (31 March 2007) according to statistics issued by the ministry of petroleum.

Out of this, about 77 MTPA is new capacity. With an estimated requirement of about 115 million tonnes by 2008, there is likely to be a surplus refining capacity of between 23 and 106 MTPA — provided that all the new refineries come up. This excess capacity results in over-dependence on crude oil for strategic storage.

The government made the decision to increase domestic refining capacity mainly on commercial considerations without reference to its strategic implications.

The government’s reasoning is that refining within the country results in value addition, generates employment and entails savings on the country’s import bill.

Bharat Petroleum Corporation Ltd will spend Rs 7,500 crore (Rs 75 billion) in the 10th Five-Year Plan period (2002-07) in expanding refinery capacity, putting up new petrol stations and oil exploration.

"We plan to invest Rs 1200 crore (Rs 12 billion) to increase our retail presence through new outlets while venturing into oil exploration and production business, for which Rs 1500 crore (Rs 15 billion) is budgeted over the next five years," S Behuria, chairman and managing director, BPCL told a news conference in New Delhi on Tuesday evening.

The company is investing Rs 1,830 crore (Rs 18.30 billion) in expanding its Mumbai refinery capacity to 12 million tonnes from the current 9 million tonnes by October 2004.

BPCL, which currently has a market share of 22 per cent, will add another 700 petrol stations this year to its existing 5,014 outlets.

Behuria said the company plans to extend the Mumbai-Manmad-Indore product pipeline to Delhi in the north, where it has 4 million tonnes of product deficit annually.

On the E&P initiative, he said the firm plans to bid for oil and gas blocks on offer in the fourth round of new exploration licensing policy and was in talks with Oil and Natural Gas Corporation for joint bidding.

"We are also looking at farm-in opportunities and plan to bid for acquiring Tata Petrodyne's minority stake in Gujarat offshore blocks," he added.

Behuria said the Mumbai refinery expansion would enable it to produce Euro-III emission norm complaint transport fuels -- petrol and diesel.

Behuria said the combined refinery throughput at BPCL's refinery at Mumbai and its subsidiary Kochi and Numaligarh refineries increased from 17.87 million tonnes to 18.17 million tonnes in 2002-03. Group market sales increased from 19.90 million tonnes in 2001-02 to 20.53 million tonnes.

On the merger of Kochi Refineries Ltd with BPCL, Behuria said, "We desire that, but it is not being actively pursued. There are many approval which need to be taken...we are open to it but are not pushing for it."

The state-owned Hindustan Petroleum Corporation (HPCL) has given accord to take up the Rs 1,600 crore clean fuel project (CFP) at its Visakha Refinery.

“Recently we got approval from the headoffice to implement the project in Visakha Refinery, now we are in the process to get the permissions from Pollution Control Board and other departments. If permissions come, we will start the project work during this fiscal only”, sources at Visakha Refinery said.

According to Euro-III specifications, and central government auto fuel policy, all refineries in the country should expect to meet new stringent fuel specifications by April 2005. Keeping this in mind Visakha Refinery has proposed this CFP and little bit expansion of the existing capacity with an investment of Rs 1600 crore.

National Environmental Engineering Research Institute has prepared rapid environmental impact assessment report for this project and Engineers India has carried out detail feasibility study for the project.

At present, Visakha Refinery has been producing petrol with .1 per cent sulphur content and diesel with .25 per cent content, according to Euro-III specifications by 2005 these contents should come down to .015 and .05 respectively.

As part of the CFP, the company will construct new diesel hydro treating unit, naphtha hydro treating unit and the revamp of some existing units to improve the product quality conforming to Euro-III specifications, sources said.

“Because of this project, in addition to improve the product quality, crude refining capacity will go up from 7.5 million tonne to 10 million tonnes per annum”, sources said.

The company will generate required funds from internal resources only to take up this project, and project will be completed with in three years, sources added.

State-run Indian Oil Corp (IOC) will invest Rs 380 crore in laying a pipeline from Chennai to Madurai to transport petroleum products in the region.

"The IOC Board has cleared the Chennai-Trichy-Madurai product pipeline to evacuate products from IOC's subsidiary Chennai refinery," IOC Director (Pipelines) P Uplenchwar, said.

The pipeline would be in place by 2005 when Chennai Refinery's Manali unit expansion from 6.5 million tonnes to 9.5 million tonnes is expected to be completed.

The Chennai-Trichy-Madurai pipeline was earlier being pursued by Petronet India Ltd but the project could not take off as IOC was unwilling to sign take or pay agreement.

IOC and PIL held 26 per cent each in the project while remaining was earmarked for financial institutions/strategic investors.

Anticipating delays, IOC board on July 30 decided to take up the project on its own, but has reduced the capacity of the pipeline and the project cost to Rs 380 crore from Rs 505 crore, he said.

IOC has reduced the diameter of the pipeline and increased its length from 526-kilometres that Petronet was planning, to 680-kilometres.

The pipeline will additionally have a tap-off point midway at Sankari from where a branch pipeline will go to Salem which is a high-demand area for petro goods.

Besides, tap-off points at Asanur and Trichy would enable the firm feed demand centres around Neyveli, Trichy, Madurai and Thanjavur.

The pipeline, which will transport petrol, kerosene and diesel, will have a design capacity of 2 million tonnes per annum in the first phase and another 2.5 million tonnes in the second phase, Uplenchwar said.

PIL was undertaking pre-project activities like route survey, ROU acquisition and obtaining necessary approvals from the State and Central Government when it began to exercise to look afresh at the viability of the project based on the present supply/demand scenario.

IOC is planning investment of Rs 1,100 crore towards setting up a new crude oil pipeline from Paradip to Haldia, to ensure raw material supplies for its Barauni and Haldia refineries.

The pipeline would save the firm Rs 400 crore annually in transportation cost, they said.

Besides, the conversion of the Kandla-Bhatinda product pipeline to a crude oil carrier is estimated to cost Rs 725 crore.

The conversion would cater to the enhanced capacity at the Panipat refinery from where the products could be introduced in the northern region.

The government is contemplating to source out to the private sector over a billion-dollar project of coastal refinery for which a consortium of Saudi as well as Canadian investors has joined hands with Pakistan State Oil and National Refinery.

“After Iran had backed out from the Pak-Iran Refinery project, the government has been looking for private sector investors interested in this project to address the gap between the demand and availability of refined oil products”, said Abdullah Yousaf, Secretary Petroleum, while commenting on the interest of the Sunaid Khair Consortium.

He said that Pakistan’s total demand for all sorts of oil products is 80 million tons while the existing four refineries are producing only 11 million tons. “Therefore, we are discussing this opportunity of filling in the gap with various interested private investors,” he added.

To a specific question, he said, “Yes, there are other parties, as well, interested in the refinery project but so far no one has come forward to the extent Sunaid Consortium did in this case. “They have joined hands with the PSO and the National Refinery for preliminary planning but there is nothing final as yet,” he added.

Asked about the location of the proposed refinery, the Secretary said, initially when it was being planned under a government-to-government joint venture with Iran, a location known as Khalifa Point was identified. The place is little west of the Karachi port.

Earlier, officials stated that Sunaid Group delegation which is on a four day-visit to Pakistan singed a letter of undertaking with the NRL and PSO the other day to plan, design, construct, finance and manage the proposed refinery project.

During their meeting with the Chairman Board of Investment, the Sunaid Khair Consortium has announced that it could bring in 100 per cent equity of the project estimated to be at a cost of $1.5 billion to $1.7 billion. The consortium at the same time was also ready to offer equity share to their local partners namely PSO and NRL.

China's leading export-oriented refinery, Dalian West Pacific Petrochemical Co. Ltd. (WEPEC), is considering a capacity expansion to 10 mln tons over the next few years. The move will enable production costs to be lowered and make the company more competitive on the international market, a company publication relations official told Interfax.

The expansion proposal, yet to be discussed among the company's five investors, including PetroChina, Sinochem and the French oil giant TotalFinaElf, was estimated to cost around USD 200-250 mln over a period of three years, according to company Vice President Hendrik Botter. WEPEC currently has a processing capacity of 8 mln tons per annum, and more than half of its products are marketed overseas as required by China's investment regulations.

Despite being the first major Sino-foreign joint-venture refinery in China, WEPEC is much smaller than other local refineries in terms of capacity. Sinopec-controlled Maoming Refinery in Guangdong Province and Zhenhai Refinery in Zhejiang Province, among the largest in China, have increased capacity to 13 mln tons and 16 mln tons per annum respectively.

OMV, Austria's national oil and gas company, achieved better than expected profits on improved oil refining margins and higher oil and gas output.

Earlier this year, the group took over 313 filling stations in Germany, Hungary and Slovakia, plus a 45 per cent stake in the Bayernoil refinery, and purchased the upstream oil and gas assets from Germany's Tui for €300m. The company said that its market share in the Danube region grew to 12 per cent, making it the region's leading player.

Wolfgang Ruttenstorfer, chief executive, said: "We have delivered on our strategic goals through selected acquisitions and developed leading positions in our key markets from which we can deliver organic growth going forward."

"Whilst the contributions from recent expansion are already being seen, the true benefits will become apparent as the year progresses." But the acquisitive Austrian company failed to win a 25 per cent stake in Ina, its Croatian counterpart, after losing out to Mol, the Hungarian oil and gas company.

The battle for dominance in central Europe's fuel markets is expected to heat up again later this year when the Czech government puts its 63 per cent stake in Unipetrol up for sale through a public tender.

Poland's move to sell off two major branches of its economy, oil refining and steel, gives a clear idea of the government’s wish to create national and regional champions from traditional sectors of heavy industry.

The Polish government believes that the country’s oil refineries could emerge as a regional powerhouse. This is the rationale for its decision to abort the tender for the purchase of Rafineria Gdanska, leaving another British company empty-handed.

Czyzewski had been expected to announce the sale of a 75 percent stake in the refinery to a consortium comprising the Polish petrochemicals giant PKN Orlen and the British company Rotch Energy.

Instead, he now says that the refinery will be merged with smaller refineries in southern Poland--in Jaslo, Gorlice, and Czechowice--and possibly with Petrobaltic, a firm exploring oil and gas fields in the Baltic Sea. The new group, which has already been established, is Grupa Lotos.

However, this is unlikely to spell an end to PKN Orlen’s ambitions. Czyzewski said that he would like to see Grupa Lotos and PKN Orlen form a large Central European consortium. This could also include Hungary’s MOL and Austria’s OMV, which would increase the negotiating weight of Central European companies in talks with Russian and Arab oil suppliers.

PKN Orlen, the biggest Polish fuel producer with 64 percent of the country’s fuel market, is already saying openly that it would like to buy Grupa Lotos. Pawel Olechnowicz, the president of Grupa Lotos, has indicated that the first talks could be held this autumn after the four refineries are merged.

This time, though, PKN Orlen says it would not be looking for foreign capital--leaving Rotch Energy, which had once considered teaming up with Russia’s LUKoil, out in the cold.

While the merger could make Rafineria Gdanska bigger, it could also leave it weaker. Adam Grzeszak, an economics expert who writes for the weekly Polityka, argues that “Rafineria Gdanska, a not very large company, could be dragged down by three obsolete factories that have received too little investment and whose existence is important more for social than economic reasons.”

However, he sees one advantage in the minister’s decision: Poland has avoided a monopoly in fuel market--at least for the moment.

It is an analysis that misses one important new opportunity. Grupa Lotos is one of the companies that won a subcontract from Kellog, Root & Brown, a branch of U.S. fuel services giant Halliburton, to help in the reconstruction of the Iraqi oil sector.

The Iraqi Ministry of Oil has finalized a plan to gradually reach a production level of 2.8mn b/d by April 2004, provided that there is the necessary security, electric power and finance, MEES learns from authoritative sources. Iraq had a pre-war capacity of around 3mn b/d and averaged 2.23mn b/d in 2002. Current production is approximately 1mn b/d.

The nine-month plan (July 2003-April 2004) will focus on the repair and rehabilitation of the surface facilities of the upstream sector which received the brunt of the bombing in the war, and the looting and sabotage afterwards. The management of the projects and construction work will be carried out by the Southern Oil Company (SOC) and Northern Oil Company (NOC) and other ministry affiliated firms, particularly the State Company for Oil Projects (SCOP). Procurement and engineering is being carried out initially by KBR and later by the winners of the new tenders already announced by Team Rio and expected to be awarded in the second half of August. The US will fund through KBR over $1bn, while Iraq will provide approximately ID20bn. The exact division of labor between the ministry, the companies and KBR is not yet clear.

The principle underpinning the rehabilitation program is that the oil industry is the property of the Ministry of Oil and that SOC and NOC are the owners of the projects.

The plan also calls for the maximization of the Iraqi component in the projects through the involvement of oil ministry companies, industry ministry firms and the Iraqi private sector.

Meanwhile, approximately $1.7bn worth of oil equipment and supplies are available to Iraq under the UN oil-for-food program. Of this total, around $1.2bn worth of contracts were signed by the former Iraqi government and approved by the UN sanctions committee, with the necessary letters of credit opened. However, the Iraqi authorities have been asked by the CPA to prioritize these supplies according to their needs – a factor which is causing a delay. Some of the hurdles that Iraq will encounter are security, stability, finance, power shortages, delays to oil-for-food contracts and, last but not least, the continuation of looting and sabotage. New equipment installed by KBR since the war has already been looted.

The Ministry of Oil also aims during the fourth quarter of this year to draw up plans to restore the country’s pre-1990 production capacity of 3.5mn b/d during the period 2004-05, MEES learns. The focus will be to restore the potential of the reservoirs – in contrast to the current nine-month plan to rehabilitate the surface facilities. The work will include drilling, workover, development completion of uncompleted fields and the laying of pipelines.

MEES also learns that the plans under discussion are based on the fact that Iraq’s pre-Kuwait war (1991) capacity of 3.5mn b/d will remain under the authority of the Ministry of Oil and be operated as part of the national effort. The ministry’s affiliated companies will operate and maintain these fields, and perhaps raise their capacity to 4mn b/d. It is expected that service and technical contracts will be signed with specialized firms to assist in the restoration of the lost capacity as well as the enhancement of productivity from currently producing fields.

MEES soundings also indicate that new fields in the south, north and east of Baghdad will be developed in cooperation with international oil companies (IOCs), national oil companies (NOCs) and independents to reach a production level of 4-6mn b/d. No decision has been taken yet on the exact formula to be used: production-sharing, development and production agreements, advanced buy-backs, or joint ventures. If the political situation allows and the rehabilitation program takes off, then the ministry envisages starting by end-2003 to draw up a draft policy for future expansion. In any case, such a policy would require the approval of a recognized Iraqi government that would adopt the proposed policy, plus an elected parliament to pass the necessary legislation.

MEES understands that the Ministry of Oil intends to review in the next few weeks the contracts signed by the previous regime with Jordan, Turkey and Syria. The heavily discounted crude and products supply agreements with these neighboring countries are not expected to be renewed. However, it remains to be seen what new commercial accords, if any, might be reached in light of the new political circumstances. Baghdad, with US approval, is temporarily bartering fuel oil for gasoline and/or LPG with private firms in Kuwait, Jordan and Turkey – but not Syria.

The absence of viable and authoritative public institutions in Iraq today is compounded by the fact that the country has suffered during the past 23 years from three major wars and 12 years of sanctions. The country’s infrastructure has deteriorated and cannot cope with present needs, particularly the national power grid (for an analysis of Iraq’s power industry, see MEES, 28 April). Machinery in the public sector is, on average, around 20 years old, and the newest equipment is 13 years old. The sustained electricity shortages are creating bottlenecks in all parts of the economy and major problems for the people, especially during the summer when the temperatures in the central and southern parts of the country average around 45-50° C (113-122°F). More and more questions are being raised concerning the CPA’s slow handling of such issues. One example is the rehabilitation of the 640mw Daura power plant which is contracted to Siemens, in accordance with the oil-for-food program. But thus far the CPA has refrained from giving Siemens approval to complete the project.

The Iraqi oil sector was one of the few public institutions in the country that was able to pull itself together very quickly and effectively after the war. As early as 13 April, less than a week after the fall of Baghdad, the oil ministry began functioning – albeit in very difficult circumstances: without a government, authority, security or budget, and under occupation. The Ministry of Oil team gradually made contacts with the affiliated companies in the north and in the south, despite the absence of telecommunications, in order to meet domestic products demand and to protect the oil industry from further looting and theft. Today, the country has enough supplies and is planning to resume exports gradually.

The sabotaging of crude, gas and products pipelines continues unabated with two aims in mind: to hinder exports (as is the case with Kirkuk crude), or disrupt supplies to refineries to create shortages and public discontent. The Ministry of Oil is short of money; the only funds available to it today are salaries provided by the Treasury and what cash it can collect from selling domestic products – hardly enough to survive on and meet many of the grave challenges that it encounters daily.

The development of the oil industry, and the economy as a whole, cannot start in earnest unless there is security, stability and a credible authority. Iraq has a long way to go before reaching that stage – and the road ahead is difficult.

The Sudan government has finally granted the contract of laying a 700 km-pipeline and a refinery revamp to the state-run ONGC. The government of Sudan has invited us to lay a petroleum product pipeline from Khantum refinery to Port of Sudan. The project is estimated to cost $200-300 million,"said Atul Chandra, managing director of ONGC Videsh Ltd, the overseas arm of ONGC.

The company also bagged the contract of revamping and upgradation of a petroleum oil refinery at Port of Sudan at an estimated cost of $400-500 million. The project also includes expansion of the refinery capacity from 34,000 barrels per day to 71,000 barrels per day.

OVL is already entitled for one-fourth share of the 13 million tonnes crude oil produced by Greater Nile Oil Project in Sudan where it has 25 per cent participating stake.

According to Chandra, the contracts would mean more oil for the country, which is 70 per cent import dependant to meet its requirement.

Asked if ONGC will take any other downstream oil refining company for executing the contract, ONGC chairman and managing director Subir Raha said the company is capable enough to execute such projects on its own.

The Executive Assistant to the Managing Director for Production at Kuwait National Petroleum Company (KNPC) said that there is a general agreement for establishing a fourth oil refinery for oil distillation in Kuwait, Kuwait News Agency (KUNA) reported.

The official added that the company is currently at the stage of preparing the relevant documentation needed to get an approval for establishing the refinery in the country.

The production of this refinery, according to the official, will range between 250,000 and 460,000 barrels per day at a cost of KD700 million ($2.3 billion).

Building of new refineries for Kuwait National Petroleum Corporation is not economical at the moment, says a top official of Kuwait Petroleum Corporation (KPC).

"The most important projects currently in progress at KPC are the perfumes project, olefins project and the project to develop Ahmadi port. The total cost of all ongoing construction projects of the corporation is over three billion dinars," Executive Assistant to Managing Director of KPC, Sheikh Talal Al-Khalid Al-Sabah told Al-Rai Al-Aam.

Al-Khalid, who is also the Director of Government and Parliament Relations Department of KPC, said the corporation has prepared a list of new projects to be implemented, adding KPC is looking for new markets in fast developing countries.

All the new projects are aimed at improving the operating performance of the corporation, he added.On KPC's investments in Thailand, Al-Khalid said, the economic crisis which has been plaguing the East Asian countries since 1997 has adversely affected investment. However, he added economic indicators in the region are showing signs of improvement.

The Nigerian House of Representatives is to initiate a bill that would compel multi-national oil companies operating in Nigeria to set up their own refineries as the country is trying different variables to solve the persistent fuel scarcity in the country, Mr. Austin Opara, Deputy Speaker of the House has said.

Mr. Opara, in an interactive session with journalists in Port Harcourt foresees no hope for a lasting solution to the energy crisis in the country, except if the multi-national companies are forced to set up their own refineries.

According to him, in the past four years, the federal government had committed huge amount of money in a desperate move to revive the four state owned refineries in Port Harcourt, Kaduna and Warri, but regrets that nothing tangible was recorded.

The Deputy Speaker stated that "the military killed our refineries. When we came four years ago we under took the study of the four refineries and discovered that there was no Turn Around Maintenance (TAM) conducted on each of them culminating to their present status."

The government he said had spent $700 million on the refineries but there was nothing to show for it adding that "we need more refineries and there is nothing stopping Mobil, Shell and Agip from setting up their own refineries."

Mr. Opara, however declared that even if the four refineries are fully operational, Nigeria will continue to witness shortage of petroleum products, just as he reiterated that the House is going to review the act that sets up the Petroleum Products Regulating Agency (PPRA).

BETWEEN 1965 and 1989, Nigeria's total refining capacity was 445,000 barrels per day (bpd), beginning with a modest capacity of 35,000 bpd installed in Port Harcourt in 1965. The Warri and Kaduna refineries which followed eight to nine years after, produced 125,000 bpd and 111,000 bpd respectively. As at today, the average capacity utilization of the refineries is 53 per cent, even with supposedly government intervention in the last four years.

SINCE assumption of office of the present administration, it has ensured that regular maintenance works were carried out in the nation's refineries. In Port Harcourt Refinery Company for instance, TAM on the new plant started in mid 2000. TAM contractor's work on the refinery will terminate by July 2003. In Warri Refinery and petrochemical Company, full rehabilitation of the Fluid Catalytic Cracking (FCC) unit as well as the overhaul of Gas Turbine Generator and procurement of TAM materials is in progress. The TAM execution of the refinery is also due for completion in the third quarter of 2003.

Key rehabilitation projects are in progress in Kaduna Refinery and Petrochemical Company. The project includes: rehabilitation works on Demin Plant, Raw Water Intake, Electric Substation, air Compressors, Fuel Plant and Instrumentation. The completion dates for the projects range from August 2003 to September 2004.

Ongoing rehabilitation projects of the nation's pipelines, depots and reception facilities are on, including the construction of single Bouy Mooring in Lagos in 2003 to improve discharge rate of import vessels.

In Port Harcourt refinery, last-but-one TAM, carried out in 1994 was followed six long years later by another in 2000. The power unit remains the main problem. The Warri refinery is another example of inadequate maintenance leading to catastrophic system failures from time to time such as the main crude heater blow up of 2000. The last TAM was 1994. At the Kaduna refinery, inadequate maintenance is due almost totally to internal staff relations while resource constraints remain a major factor in refinery performance. The 1992 TAM was overrun and never satisfactorily concluded, while the one started in 1998 was still to be concluded as of 2000, with two missing TAM in between.

The executive director, Global Soap and Detergent Industries, Ilorin, a subsidiary of Doyin Group of Companies, Mrs. Omolola Olobayo has said that the repair of the nation's refineries by President Olusegun Obasanjo remains the only solution to hike in the prices of the petroleum products, and their attendant non availability.

According to her, the government shouldn't have increased the prices of the petroleum products. "What they should have done was to repair all the refineries that are in terrible state, before even embarking on this liberalization of the sector. By then if there was any need for the FG to increase the prices it wouldn't be as much as we are presently experiencing, to the extent that every sector is groaning.

Continuing, Olobayo said, "the consequence of what the presidency has done is inflation. You know petroleum products have attendant effects on every aspect of our daily life, whichever way it is hoarded. As it is now, the cost of our production and distribution has been terribly affected, even the cost of coming to work by our staff is giving us serious concern. So we are worried about how to solve the problems without necessarily sending wrong signals to our staff and our numerous customers.

NIGERIA'S refineries and the National Electric Power Authority (NEPA) will not be sold to the highest bidders, the new Director-General of the Bureau of Public Enterprises, Dr. Julius Bala, said. The organizations, he said, were too important to the nation to be sold to a firm or group of people just because they could pay the highest prices on them." The privatization of big organizations, such as refineries, NEPA and NITEL will not be based on auction sale where considerations are merely given to the highest bidder, because of their importance to our national life," Dr. Bala told newsmen.

"They are not like selling a house, because they play critical roles in the overall existence of the Nigerian public, the economic growth of the nation and, therefore, cannot be given to people only because they can pay very high prices for them." High price was the major cause of the failure of the core investor sale of NITEL, as the highest bidder, the IILL group could not raise the $1.317 billion it promised to pay for the 51 per cent NITEL equity put on sale, by the Federal Government. Dr. Bala, who is an expert in privatization, said the most important variable to be given priority in the big enterprises would be core investors' expertise to run them efficiently and expand their outputs rather than just the proceed that would accrue from them.

President Lula is thinking about building not one, but two oil refineries. The first one will be in the Northeast, to be ready sometime before 2008, and the second in Rio de Janeiro, scheduled to open in 2012.

Yukos and LUKoil grabbed headlines with moves to expand their presence in Europe.

The country's two leading oil majors share a desire to establish a global reach, but analysts said Yukos and LUKoil have fundamentally different business strategies.

LUKoil bid this week for a 70 percent stake in Serbian retail distributor Beopetrol, while Yukos is cultivating plans to build a pipeline spur to link its Slovakian arm, Transpetrol, with the Schwechat refinery in Austria.

Yukos' project to build the pipeline link and sell crude to the Vienna-based refinery "is very positive news," Valery Nesterov at Troika Dialog said.

The view from Eastern Europe of Russian corporate titans, however, is a bit less rosy.

LUKoil is not a welcome guest in Eastern Europe, where governments are not keen to see Russian expansion into their home markets.

Nesterov was skeptical of LUKoil's chances of winning the tender in Serbia, saying Hungary's MOL was a favorite for both political and logistical reasons.

MOL controls a Slovakian refinery and a blocking stake in Croatian oil company INA. In Eastern and Central Europe, MOL is battling for dominant position with Austria's OMV, which owns the Schwechat refinery, and Poland's PKN Orlen.

LUKoil bid for a stake in Greece's Hellenic Petroleum and Polish Refineria Gdanska last year, but in both cases government officials failed to close the deal. LUKoil's press office said Tuesday that the company was still eyeing the two countries as prospective markets.

LUKoil has snapped up refineries in Ukraine, Romania and Bulgaria and established sales branches in each of the three countries as well as Poland and the Czech Republic.

"LUKoil is going down the whole value chain [from upstream to downstream]," said Paul Collison, oil and gas analyst with Brunswick UBS.

The upstream part of the business involves pulling the oil up from the ground; the downstream business involves refining and retail.

Yukos spokesman Hugo Eriksson disagreed, saying the company was doing much more than exporting crude.

"Everything that goes beyond pumping crude is downstream business," Eriksson said. "We are expanding downstream."

Strategy-wise, Yukos' project to sell crude to Austria is likely to pay off in the near future, analysts said, while LUKoil's plans to accumulate refinery assets will take time to reap profits.

"Selling crude will be extremely profitable in the short term," Collison said. In trying to buy refineries, "LUKoil is tying up much more capital [than Yukos]."

The pipeline to Schwechat is estimated to cost between $30 million and $60 million. Yukos' single largest investment project is a $1.7 billion pipeline to carry its crude to China, the world's fastest-growing oil market.

The two oil majors, along with Sibneft and TNK, clinched a groundbreaking deal in December last year to build a pipeline to the northern seaport of Murmansk, from which they would be well positioned to export to the energy-hungry U.S. market.

This is the first time the country's oil majors have agreed to cooperate on a major investment project, though it is common practice in the West for oil firms to share commercial risks.

The business community cheered after the Russian Anti-Monopoly Ministry gave its approval for the Yukos-Sibneft merger, despite ongoing investigations in Yukos’ business transactions in the 90’s.

The merger will create on oil giant which controls almost 30 percent of the Russian oil production and pumps 2.3 million barrels of crude per day. With its reserves of 19.4 billion barrels, it is number three worldwide, behind Exxon Mobil and Royal Dutch/Shell but ahead of BP and Chevron Texaco. But the investigations into Yukos have cast a huge cloud over the pending transaction. However, the approval was connected with the claim that the new entity would have to adhere to certain behaviours. The company will be forced to process crude of other producers at their refineries if there is idle capacity. Furthermore, competitor products must be allowed market access to Yukos-Sibneft dominated markets. If the new company will build private pipelines, other companies must be granted access, according to their investments. At the moment, there are no private-owned pipelines in Russia but the claim refers to the $5 billion pipeline project from Western Siberia to the deepwater port of Murmansk. Both, Yukos and Sibneft are initiators of the idea. Private oil companies would finance the venture and in return would receive the ownership. This pipeline would allow the involved firms to boost export to Western European and US markets and thereby circumventing Transneft, the state owned pipeline monopoly. Yukos is also ready to co-sponsor a pipeline from Eastern Siberia to Dacqing in China to increase Asian exports. If the merged company fails tocomply with these conditions, it will be forced to sell one of its Siberian refineries, Omsk, Achinsk or Angarsk.