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October 2006 Headlines

After meeting in Doha, Qatar on 19-20 October, members of OPEC decided to cut total production by 1.2 million barrels/day in an effort to stabilize falling prices and correct over-supply. The reductions, which will bring total OPEC production to 26.3 million barrels/day, are effective 1 October. It is important to note that the cuts are not off of the production quotas the cartel has had in place, but are targeted to impact actual production levels. Saudi Arabia will institute the largest reduction, decreasing their daily production by 380,000 barrels/day, with Iran to take the second largest at 176,000 barrels/day. OPEC is scheduled to meet again in December, when it will review the impact of this action and determine further measures, if necessary.

The US FERC Houston Ship Channel natural gas index fell a steep 37% from September, with October settling at $4.00 USD/MMbtu. The gas market has been in a free fall from mid-September, partially linked to the mild start of the fall season and record high inventories, as well as the near bankruptcy of energy trading firm Amaranth Advisors LLC. Spot cash gas hit a low of $3.66 USD/MMbtu on 29 September before rebounding to $4.00-4.10 USD in the first two days of October. US natural gas stock levels remain high, nearly 13% above the prior year and about 12% above the 5-year average. As of the close of business on 12 October, spot Henry Hub was trading at $5.13 USD/MMbtu, with forward December and January gas at $7.362 and $7.927 USD/MMbtu, respectively.

Surprising many, the US FERC Houston Ship Channel natural gas index for October was fixed at $4.00 USD/MMbtu, down 37% from the previous month. The impact of the near bankruptcy of energy trading firm Amaranth Advisors LLC ($6 billion USD in gas futures sell-off) appears to have run its course for the moment. This, in combination with the return to colder weather patterns across most of North America, has triggered a resurgence in the natural gas price. US EIA data recorded for the week ending 20 October 2006 showed US natural gas inventories are slowing in their build, resting at 3461 billion cf. The inventory level is now 10% above the 5-year average and 10% above the level recorded for the same period last year. The value of natural gas has regained some lost ground from the start of the month, with both prompt spot and forward market pricing on the rise. As of close of business on 25 October, the cash spot Henry Hub natural gas price was $7.22 USD/MMbtu. As of this same date, Nymex December, January and February natural gas prices were $8.328, $8.701 and $8.731 USD/MMbtu, respectively.

On 12 October, Methanex Corporation announced that the Argentine government has expanded its export duty increase on oil, natural gas and derivatives, with coverage now to include all the remaining supplies from the province of Tierra del Fuego. Methanex receives 60% of its natural gas for its Chilean methanol operations from Argentina. The increase was first announced in July 2006, with duties rising from $0.30 per MMbtu to $2.25 per MMbtu. The new wider regional scope, which went into effect on 20 October, will now envelop all of Methanex's feedstock from that country. As in July, Methanex once again stated that they have "contractual protection against such export duty." However, they also acknowledged, "we cannot provide assurance that this export duty will not have an adverse effect on our results of operations and financial condition." In its recent earnings announcement, Methanex addressed the situation, stating that they are in negotiations with suppliers in an effort to help them offset some of the duty increase, but will be seeking varying types of concessions in exchange.

It is being reported that Methanol Chemie Nederland (MCN) may restart one of the trains at the former Methanor facility in the first half of November using natural gas feedstock. The possibility of this was first mentioned in September, when the sale of the Methanor assets to MCN was announced. The plant can only seriously review restarting when the sale is finalized and operators return to the plant.

This month, Uhde announced that it has been granted the licensing, engineering and supply contract for a methanol-to-gasoline (MTG) project to be located in Jincheng, Shanxi, PR China. Shanxi Jincheng Anthracite Coal Mining Co. Ltd. is behind the project, which will include an MTG pilot plant, a fluidized-bed hard-coal gasification plant and a methanol unit. With production slated to begin in 2008, the unit will produce 100,000 tonnes of gasoline per annually. Technology for the MTG plant is based on a proprietary process licensed from ExxonMobil Research and Engineering Company (USA).

Early this month, two US Gulf MTBE facilities, namely Valero's Corpus Christi, Texas unit and Lyondell's Houston Ship Channel complex, stopped production. Both companies are presently converting these units to either iso-octene or iso-octane production. The loss of MTBE volume from these two plants equals a capacity closure of approximately 2.23 million tonnes per year, with total lost methanol demand at about 811,000 tonnes/year. Balanced against this lost North American methanol demand will be the upcoming closure of Celanese's methanol plant in Canada. While both the total supply and demand volumes will show declines, these two events clearly offset each other.

In the 19 September edition of the Federal Register, the US Department of Energy published a proposal to change the date by which 30% of US motor fuels production must be comprised of replacement fuels from the initial deadline of 2010 to 2030. The DOE had deemed the twenty-year extension to be necessary, citing the original timetable as "not achievable." The proposal is now open for comments until 3 November 2006.

Initially surfacing in July 2006, further reports of potential downstream activities at Methanex's Punta Arenas, Chile location have emerged, with the company looking at a DME project there. Capacity has been indicated at upwards of 600,000+ MT/year of DME. Methanex indicates that the preliminary review is in the early stages. Any forward progress is years away and would depend on reliable natural gas supplies within the region. If it does go forward, the loss of available methanol from Chile may be balanced by Methanex's Egypt project, should it proceed. Methanex appears very positive on the Egypt project, but cautions that the final approval vote is still pending for year-end 2006.