Saturday, February 8, 2003 www.canoe.ca By CAROL HARRINGTON, CP

CALGARY -- Canadian drivers and businesses that guzzle lots of fuel are pumped with anger over gasoline prices spiking because of war fears and concerns about world oil supply. Dane Baily, vice-president of the Canadian Petroleum Products Institute, said he has had a barrage of phone calls this week over pump prices that jumped at least six cents in some places. "A lot of people want to know when prices are going down," he said. "I do, too." Many of the calls are from Montreal where the country's most expensive gasoline was being pumped yesterday at 88.9 cents a litre. "It's too expensive. It's frightening," Pauline Paquette, a Montreal motorist, said while filling up her vehicle. "It's had an effect on my business," Dennis Doehl, owner of Jay's Moving and Storage, said from Regina where gasoline was 81.9 cents a litre. "When people move, they have to move. It's just sometimes they do it themselves if our prices get too high because of gasoline prices." Energy experts are blaming geopolitical events -- a looming war in Iraq, a national strike in Venezuela that has affected oil production and a 26-year low in U.S. oil inventories. But the pump pain isn't over yet, according to Wilf Gobert, energy expert at Peters & Co. in Calgary. He predicts gasoline prices are likely to leap again if the United States actually attacks Iraq. "An attack on Iraq will temporarily further cause a price shock because everyone will be afraid of what the longer-term implication is," he said. There's also some doubt about whether Venezuela will be able to pump out as much oil as it previously has when the strike ends because pressure in oil wells there has dwindled, Gobert added. The topic of rising gasoline prices was raised in the Commons yesterday when Bloc MP Benoit Sauvageau asked Industry Minister Allan Rock if the federal government plans to do anything about the situation. "The prices are influenced by a whole host of factors and it's a provincial jurisdiction," Rock replied. Baily said provinces rarely get involved in gasoline prices, although the federal and provincial governments collect gas taxes. Gas prices are driven by crude oil, an international commodity that rides on supply and demand. Even though energy companies have been reporting spectacular fourth-quarter results, the bonanza isn't being reflected on the stock market. "Investors are leery," Gobert said. "Oil and gas has a notoriety for its volatility." Ever since oil hit a low of $10 US a barrel in February 1999, prices have increased for the most part -- the longest period of sustained healthy prices since the early 1980s, Gobert pointed out.

ogj.pennnet.com By Sam Fletcher OGJ Senior Writer

HOUSTON, Feb. 7 -- Colder weather and declining supplies pushed heating oil futures prices to a 26-month high and nudged the March natural gas contact nearer the $6/Mcf mark Thursday on the New York Mercantile Exchange.

Heating oil for March delivery jumped 3.31¢ to $1.03/gal in the wake of earlier reports by both the US Department of Energy and the American Petroleum Institute of large declines in US inventories of the fuel during the week ended Jan. 31 (OGJ Online, Feb. 6, 2003). Low temperatures in the major Northeast US market had heating-oil distributors scrambling for supply.

Analysts said energy market prices also were prodded higher by continued tough rhetoric among US officials against Iraq.

Meanwhile, Alvaro Silva Calderon, secretary general of the Organization of Petroleum Exporting Countries, and Claude Mandil, new executive director of the Paris-based International Energy Agency, called Friday for cooperation to stabilize world energy markets.

Visiting OPEC Secretariat offices in Vienna in his first official engagement outside of Paris, Mandil said IEA has the ability and capacity to deal with oil shortages. But as a policy, he said, IEA recognized that oil producers should always act first in times of difficulty. He praised OPEC's move to increase oil production quotas this month to offset the 68-day strike in Venezuela that curtailed oil production and exports.

In a nationwide radio and television speech Thursday, Venezuela's President Hugo Chávez announced that his government and the Central Bank of Venezuela signed a new foreign exchange agreement setting a new exchange rate of 1,600 bolivars to the US dollar. The exchange rate plunged to a record low of 1,853 bolivars to the dollar on Jan. 21, prompting Venezuela's Finance Ministry to suspend foreign exchange trading since Jan. 22.

Chávez also decreed maximum price controls on a wide range of goods and services including food, medicines, soap, school books and uniforms, water, electricity, natural gas, residential telephone services, public transport, and hospital care. He said his government is working on a new penal law dealing with speculation in foreign currency and appointed a new Foreign Exchange Administration Commission.

Meanwhile, officials at Petroleos de Venezuela SA (PDVSA) said 9,000 of the state oil company's 35,000 employees have been fired for participating in the strike, up from 5,000 previously.

PDVSA Pres. Alí Rodríguez Araque has said he plans to restructure the company's entire workforce to improve its efficiency. However, critics claim Chávez's administration plans to eliminate political opposition and maintain control of the state-owned company.

Energy prices The March contract for benchmark US light, sweet crudes gained 23¢ to $34.16/bbl Thursday on NYMEX. The April position inched up 6¢ to $33.33/bbl. Unleaded gasoline for March delivery slipped by 0.32¢ to $1.03/gal.

Meanwhile, European gasoline prices this week jumped to the highest level in 2 years as refiners maneuvered to ship more fuel to American markets. With virtually all of its refining capacity shut down by the strike, Venezuela is purchasing more gasoline abroad.

The recent surge in gasoline futures prices on NYMEX and declines in US supplies also opened more of the US market to imports. Traders expect at least 1.5 million tonnes of gasoline to be sent from Europe to the US in February.

The March natural gas contract gained 18.4¢ to $5.83/Mcf Thursday on NYMEX, wiping out the previous day's 11.8¢ loss to profit taking. That contract hit a new high of $5.91/Mcf in early trading Thursday after the US Energy Information Administration reported the withdrawal of 208 bcf of natural gas from US underground storage during the week ended Jan. 31, said analysts at Enerfax Daily. However, prices were rolled back in a wave of profit taking among locals and speculators at the end of the session

"The huge storage withdrawal reported this week caps the largest 3-week withdrawal, 674 bcf, in the market's history, leaving only 1.521 tcf in storage, well below the 5-year average," the analysts reported Friday. They cautioned, "Look for the market to hit $6(/Mcf) soon, at least momentarily. The cold is expected to hang around through the weekend."

Analysts said, "There is an unusually large number—about 18,000—of call options at the $6(/Mcf) level. However, so far, the March contract has failed to push through key technical resistance at $5.93(/Mcf), a level that was seen as a 50% retracement from its December 2000 highs of $10.10(/Mcf)."

In London, the March contract for North Sea Brent gained 8¢ to $31.44/bbl on the International Petroleum Exchange. The March natural gas contract dipped 2.3¢ to the equivalent of $2.69/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes gained 25¢ to $30.77/bbl Thursday. Contact Sam Fletcher at samf@ogjonline.com

www.canada.com Tim Weiner New York Times Sunday, February 09, 2003 CREDIT: The Associated Press, File

CADEREYTA, MEXICO - Tony Cantu grew up with the giant oil refinery that Pemex, Mexico's state-owned oil company, runs here in his home town. He helped build it and operate it, rising from construction worker to computer programmer to chemical engineer.

Cantu gave Pemex a decade of his working life. But he will never work there again. He can explain why in one word.

"Corruption," he said, gazing at the refinery, 30 kilometres outside Monterrey in northern Mexico. "People being stepped on, forced to be corrupt -- I hated that.

"There were a lot of things you had to shut up about. The bosses would kill to protect themselves. People were subjugated by fear."

For more than 60 years, Pemex, the world's fifth-largest oil company, has been Mexico's economic lifeblood. A $50 billion US-a-year enterprise, it controls every gas pump in Mexico, and it sells nearly as much oil to the United States as Saudi Arabia does.

Today, with some oil producers like Iraq and Venezuela facing nation-shaking crises, Mexico looks like a sure and steady source of oil. The United States may be tempted to rely on it even more.

But Pemex is in danger of breaking down.

"Financially, we are falling," its director, Raul Munoz Leos, said.

Nearly every peso of Pemex's profits go to run the government of Mexico. The company, after paying taxes and royalties, actually lost $3.5 billion in 2001. Without a massive restructuring, tens of billions of dollars in foreign investment, or a huge budget increase, Munoz Leos warned recently, "We would face, in the short term, a collapse."

One reason is a rottenness at Pemex's core. The company loses at least $1 billion a year to corruption, its executives say, in a continuous corrosion of the machine that keeps Mexico solvent.

Fixing Pemex is as crucial to Mexico's future as it is to U.S. oil supplies. When Vicente Fox became president two years ago after defeating the political machine that ran Mexico for 71 years -- the Institutional Revolutionary Party, or PRI -- he vowed to make his country more open and democratic and to make Pemex run like a 21st-century corporation.

To change Mexico, Fox must first change Pemex. It has been a cash machine for the government, a slush fund for politicians and a patronage mill for party loyalists since the party created Petroleos Mexicanos, or Pemex, in 1938.

After nationalizing U.S. and British oil interests, the party promptly changed the constitution to bar foreign investment in underground oil and gas. It was a declaration of independence: "Expropriation Day" is still celebrated each year.

ATTEMPTS AT REFORM HAMSTRUNG BY A HISTORY OF CORRUPTION

Even today, the PRI, which still holds a plurality in Congress, is fighting changes to the constitution and at the oil giant it created, partly on grounds of patriotism. Fox's attempts at reform have been hamstrung by PRI resistance -- and Pemex's history of corruption.

Pemex's last director, Rogelio Montemayor, a former PRI governor, and its union boss, Carlos Romero Deschamps, a PRI senator, each stand accused of stealing tens of millions of dollars from Pemex for the PRI's 2000 presidential campaign against Fox.

Both men deny the charges. Romero Deschamps is battling an attempt in Congress to strip him of the legal immunity he enjoys as a sitting senator. Montemayor fled Mexico last year and is fighting extradition from Houston. The PRI, fighting to defend them -- and itself -- is also resisting all of Fox's efforts to change the oil giant it created.

"The political will needed to reform Pemex has just not coalesced," said Eduardo Cepeda, the head of J.P. Morgan Chase's Mexico office.

Edward L. Morse, executive adviser at Hess Energy Trading Co. and former publisher of Petroleum Intelligence Weekly, said by telephone from New York, "the effort to reform the beast" has failed. Fox, he said, does not "understand how thoroughly ingrained in the national political culture the monopoly of Pemex is."

Pemex remains one of the world's few national oil companies with no competition from within or without. Its resulting inefficiencies are stark.

Othon Canales Trevino is Pemex's director for competitiveness and innovation -- the man in charge of creating the "new" Pemex. He once ran a company that supplied Pemex with chemicals, and he was often solicited for bribes, he said. Today he sits on a commission on corruption at Pemex, composed of 14 directors.

"There is corruption," he said. "But I think the inefficiency is worse. There is brutal inefficiency."

For example, Canales said, he recently asked how much Pemex paid each year for goods and services -- everything from ice packs to helicopters rented to fly engineers to offshore rigs.

No one knew. It took four months to come up with the answer -- $7 billion.

"We want to act like a company," he said. "Pemex isn't a company. It isn't Pemex Inc. We're not a government ministry either. We are -- something weird. Our behaviour changes depending on whom we are dealing with.

"To the Finance ministry, we're their biggest taxpayer. To Congress, we're something else. To our customers, sometimes we're an opportunity and sometimes we're a threat."

Pemex had sales of $46.5 billion in 2001 and paid $28.8 billion in taxes -- almost 40 per cent of all government revenues. With the government taking such a large share of revenue, not enough is left to pay for exploring new sources of oil, repairing aging refineries or tapping vast pockets of natural gas.

If Fox could free the government of its addiction to Pemex's money -- by collecting taxes from millions of people who evade them, for example -- then Pemex could invest in producing more oil and gas, and in time generate more revenue.

But today, with foreign investment banned, and corruption and inefficiency sapping its cash flow, Pemex's ability to produce energy is bound to decrease, Pemex executives and industry analysts say.

Pemex is in "a very complex fix," said Munoz Leos, the director and a former chief of DuPont's Mexican operations.

But unless Fox finds a way to clean up Pemex's operations and, above all, change the constitution to permit foreign investment -- a path the PRI has blocked -- the company's production will start to plunge.

Mexico's ability to produce oil will peak by 2010, according to Pemex officials and the International Energy Agency, a coalition of 24 oil-producing nations. Then it will decline, they forecast.

By 2030, perhaps sooner, Mexico will have to import oil. It will not be able to sell a single barrel to the United States.

"If we're going to export oil in the future, we need more investment now," said Jose Herlindo Alvarez, a chemical engineer for 26 years at Pemex's Tula refinery, 100 kilometres north of Mexico City.

Pemex has six oil refineries working nearly at capacity in Mexico. But they cannot now meet the nation's needs. Mexico, sitting on huge pools of untapped oil, has to import nearly a quarter of its gasoline from the United States.

It has not built a new refinery since the late 1970s. One reason, said several oil industry analysts, is that to authorize a billion-dollar project at Pemex is to invite grand theft.

That corruption is something Tony Cantu said he had witnessed first-hand -- what he described as organized crime, systematic shakedowns and needless deaths due to mismanagement. He wept briefly as he talked, during a return visit to the Cadereyta refinery in December.

"It's sickening to see how something that could be so beautiful is such a mess," he said. "To advance at Pemex, it didn't matter how good you were, your knowledge or intentions, but whether you participated in the good-old-boys' system."

Pemex's chief back then, Jorge Diaz Serrano, later served five years in prison for embezzling $34 million. Its longtime union boss, Joaquin Hernandez Galicia, was released from prison in 1999 after serving seven years for amassing enough weapons to run a private army. Ten years before, Carlos Salinas, then president of Mexico, had sent government troops to arrest him in a political confrontation over the union's power -- which remains vast today.

Even now, Pemex loses more than $1 billion a year to fraud, theft, tax-evasion schemes and clandestine fuel sales by its workers and distributors, according to two senior Pemex directors.

The plunder includes thousands of gallons of jet fuel sold under the table to drug dealers for flights of cocaine into the United States. Those thefts, which create small fortunes for Pemex managers and union officials, continue apace despite a crackdown.

So do no-show jobs, a staple of Pemex operations for decades.

"People who didn't work at the refinery still came in to pick up their money every two weeks," Cantu said. "You had to give a cut to the union boss -- 30 per cent. I saw this with my own eyes."

Though the union does not acknowledge it, no-show jobs still exist, according to Pemex officials, and those who hold them are known as "aviators" or "parachute artists." Pemex's workforce has grown to 139,000, compared with 121,000 in 1996. More than 90,000 are union members.

Cantu said he had seen six untrained workers die building the Cadereyta refinery. They were sons and brothers of union workers, hired despite having no experience.

Pemex's safety record down the years has been grim. Two major explosions, in 1984 and 1992, killed at least 800 people in residential neighbourhoods in Mexico City and Guadalajara. Industrial accidents have killed hundreds more.

After nine years of working for Pemex, and after earning his degree as a chemical engineer, Cantu had had enough. He moved to Houston and started his own company and a new life.

But in 2000, he agreed to return to work at Pemex on two projects, one to upgrade Cadereyta's emergency-control room, another for natural gas processing plants in Villahermosa.

'You cannot change so deeply embedded a mentality in a few years.'

He said the Pemex engineer in charge of the Villahermosa project had "a private bank account" that he expected outside contractors to fill. On the Cadereyta project, he said, Pemex engineers never showed up to approve his work.

Munoz Leos said a recent $1.3-billion remodelling at the Cadereyta refinery was botched, and efforts to fix it were costing Pemex $15 million a month.

"I thought things might have changed" after Fox's election in 2000, Cantu said. "But Pemex hasn't changed. You cannot change so deeply embedded a mentality in a few years."

One of the strongest forces for change may be dissident union workers, who see their task as no less than rescuing the union from its own leaders.

"People inside the union hate this situation -- the embezzlement of millions, not only from the oil revenues, but from the union itself," said Oscar Edgar Hernandez Garcia, president of the group, the Oil Workers' Coalition.

"We know what's going on, but we can only fight from within," he said. "We have to end the cushy no-show jobs, to end the coziness with the PRI, to protect our workers from harm, and to improve Pemex's productivity."

But Cantu predicts an end to the power and pride of Pemex only on the day when the machine collapses.

"Then they would be forced to let Shell, Conoco and Exxon come in," he said. "But who would want to come in now? If Shell had a billion to invest, would they invest it in a system that is rotten to the bone?"

Ailing giant: Mexico's economic lifeblood is its state-owned oil company Pemex. But chronic massive corruption and inefficiency have now left the world's fifth-largest oil company in danger of collapse

A gasoline tank burns in November 1996 at a state-owned Pemex storage facility near Mexico City, where the explosion injured at least 12 people. Pemex's safety record over the years has been grim -- two major explosions, in 1984 and 1992, killed at least 800 people in residential neighbourhoods in Mexico City and Guadalajara, and industrial accidents have killed hundreds more.

Union members march last September in Mexico City in support of their leader, Carlos Romero Deschamps, accused of stealing tens of millions of dollars from Pemex to fund a political election campaign.

www.forbes.com Reuters, 02.07.03, 9:19 AM ET By Richard Mably

PARIS, Feb 7 (Reuters) - OPEC may hold enough spare capacity to prevent the need for a release of strategic oil reserves from consumer countries should war break out in Iraq, the new head of the West's energy watchdog said in an interview on Thursday. International Energy Agency (IEA) Executive Director Claude Mandil told Reuters that he hoped the cartel would be able to cope with an Iraqi stoppage and stop another damaging spike in world oil prices. If not, the IEA, adviser on energy to 26 industrialised nations, was ready "within hours" to order an emergency release from the huge inventories held to safeguard energy security in countries like the United States, Germany and Japan. Mandil said he expected OPEC to open the pumps towards full capacity should an attack by Washington shut Iraqi exports of nearly two million barrels daily on the world's 40-million-barrel-a-day market. "We expect that to be done. It is only if it is not done or if it is not enough that we will have to assess whether there is a shortage and decide that we need to do something," he said. "We are in very close contact with leading producing countries and when we have to take a decision we will take into account our latest estimate of their spare capacity and whether or not it will meet the shortfall." With OPEC thought to be holding just 2-2.5 million bpd of unused capacity, mostly in the hands of Saudi Arabia, the IEA faces a close call. The industrialised powers which make up its membership could suffer a huge setback to economic recovery should oil prices, already near two-year highs of $35 a barrel, repeat the spike to over $40 seen during the 1990-1991 Gulf War. Set up in 1974 to protect the West after the Arab oil embargo, the IEA requires its member nations to hold stocks equivalent to at least 90 days of forward demand. Stocks now are near 114 days, more than enough to meet any hole in supply that war might create, barring a much longer conflict than most Western military analysts expect. Mandil said the IEA had made no preliminary judgment on whether a release might be needed in the event of war and would not make that decision until an actual stoppage. "We will wait for a supply disruption but if there is a supply disruption we can act within hours," he said. "We are prepared to cope with any kind of supply disruption and we are prepared to do so extremely swiftly."

SAUDI SEES NO IEA RELEASE His remarks followed recent comments from Saudi Arabia suggesting that Riyadh was not expecting to an IEA release of emergency stocks, last used in 1991 after Iraq's invasion of Kuwait. Saudi Oil Minister Ali al-Naimi said in Abu Dhabi at the weekend that discussions with consumer nations had left them confident in OPEC's ability to make up any shortfall without the use of the reserves. Mandil meets with OPEC Secretary-General Alvaro Silva in Vienna on Friday and is expected to discuss the issue. The cartel, fearful of a post-war price crash, will he hoping to convince Mandil that a release is not required unless Iraqi leader Saddam Hussein pulls a surprise and is able to inflict significant damage on Saudi or Kuwaiti facilities. "What will be most important to judge is whether the war will spread and hurt other countries," said Klaus Jacoby, head of emergency planning at the IEA. With fundamentals on world oil markets always difficult to read, the Paris-based agency is faced with a tricky decision. Mandil said the extent of any war damage to Iraqi or neighbouring facilities, growth in Venezuelan production, the weather and the lull in oil consumption after peak winter demand were all factors. Saudi Arabia already is pumping more to make up for a loss from fellow cartel member country Venezuela where exports have been hit by a two-month-old strike aimed at ousting President Hugo Chavez. Venezuelan output also is on the rise again after dipping to less than 700,000 barrels a day on average in January, less than a quarter of normal production. Mandil said the IEA had the flexibility to review any decision to release reserves day by day. "Perhaps we will have to take a decision one day and take a different decision, say, eight days later. We can reassess the situation on a daily basis," he said.

www.chron.com Feb. 7, 2003, 10:48PM Copyright 2003 Houston Chronicle News Services

NEW YORK -- World crude oil prices hit fresh more-than-two-year highs Friday as concerns of a winter fuel supply crunch in the United States combined with mounting rhetoric against oil supplier Iraq and renewed threats against U.S. economic targets.

"Once you get into a panic buying situation, you really never know when it's going to stop," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Traders are concerned that an attack on Iraq, the world's No. 8 oil exporter, could coincide with a crippling strike in Venezuela, to leave supplies dangerously thin during the high-demand winter season in the Northern Hemisphere.

The U.S. Energy Information Administration said Friday that low supplies and troubles in Iraq and Venezuela mean the average price for U.S. crude oil is expected to stay above $30 a barrel for the rest of this year.

That projection is bad news for U.S. heating oil and gasoline consumers.

In addition, it could hinder the recovery of an economy struggling to rebound from recession.

In Texas, the statewide average for a gallon of regular self-serve fuel is $1.49 -- up 6 cents a gallon in only a week, according to the Weekend Gas Watch, compiled by AAA Texas. San Antonio has the least expensive fuel at nearly $1.45 a gallon -- up more than 6 cents in a week, and that's 45 cents more than last year's average of $1 a gallon. Houston and Dallas tied for the most expensive fuel, averaging nearly $1.50 a gallon. Both cities saw increases of nearly 6 cents a gallon.

"The recent increases appear to be the result of panic pricing by retailers on the anticipation of war with Iraq," said Rose Rougeau, spokeswoman for AAA Texas. "In some areas, the price of gas jumped 5 to 10 cents higher within the last couple of days. This move is premature, considering gasoline supplies in the United States are plentiful."

Nationwide this week, the average price of regular unleaded gasoline was $1.53 per gallon, up 11 cents since the year began and 43 cents higher than a year ago.

On Friday at the New York Mercantile Exchange, light, sweet crude for March delivery hit $35.25 a barrel -- the highest level since November 2000 -- before settling up 96 cents at $35.12.

On London's International Oil Exchange, March Brent crude oil hit $32.50 per barrel, also a two-year high, and closed up 90 cents at $32.34.

Heating oil posted a 23-year high of $1.113 a gallon before closing at $1.0957 a gallon, up 6.86 cents on the day.

Fuel suppliers in the Northeast, the world's biggest heating oil market, are seeking an emergency release of U.S. strategic stockpiles to ease shortages as heavy snows hit the region.

March gasoline futures rose 3.87 cents to close at $1.067 a gallon.

And natural gas futures rose 3.7 percent to a two-year high, cracking $6 per thousand cubic feet, also on concern over frigid U.S. weather. Gas for March delivery rose 21.5 cents to $6.043.

The oil rally got under way Wednesday after the Department of Energy reported an unexpectedly large decline in inventories.

Then on Friday, Attorney General John Ashcroft raised the nationwide threat level.

Traders believe an attack on Iraq would halt oil supplies from the producer and could also hit supplies from other Middle Eastern countries, which provide 40 percent of the world's 40 million barrels per day of oil exports.

Even as President Bush presses the case for using force in Iraq, U.S. consumption of Iraqi crude has been rising.

Imports rose 24 percent in January to 1.15 million barrels per day as the U.S. sought new suppliers to offset the loss from Venezuela.

The International Energy Agency, the West's energy watchdog, said OPEC exporters may have enough spare capacity to prevent the need for consumer countries to release strategic reserves in the event of war in Iraq. But if not, IEA Director Claude Mandil said he could order a release of emergency inventories within hours.