The Grand Nigerian Oil Scam

Nigerian rebels kidnapped 5 RDS.A workers from an island rig, sending oil to $74 in Europe.

U.S. crude futures are up at $72 again despite inventories holding a 9-year high, which does not included the 19M barrels (or more) that are parked in tankers sitting in the Gulf of Mexico. We have oil inventories today where they will use a 500,000 barrel draw down as an excuse to break the 5% rule for the week, despite the fact that 500,000 barrels represents .00357 of the U.S.’s weekly consumption of 140M barrels.

Soku is an island in the coastal area of Nigeria where Shell (RDS.A) has several rigs and a gathering plant that generate over $14M a day in revenues, yet they cannot afford to hire adequate security to stop MOTORBOATS from assaulting the island! This is a joke, people - it is a massive con being perpetrated on you by the oil companies.

Meanwhile, Valero Energy (VLO) shut its 300Kbd Flint Hills refinery, so even if the Nigerians shipped the oil here, we couldn’t refine it. Refineries are operating at about 90% of capacity - that’s 3% below last year’s post-hurricane levels taking 600,000 barrels of refined product off the market PER DAY.

Meanwhile we are deluged with stories telling us that U.S. demand is up, yet somehow we get by with 4.2Mb per week LESS gasoline and distillates than we had last year. Gasoline stocks are in fact, off just 5% from the 5-year high, just 10M barrels off record July levels:

Something just doesn’t add up, but that will not change unless we do something to break the cycle that rewards the energy industry for NOT producing product. As I’ve said in the past: If your oil company makes 20% more money when you have a refinery fire, do you invest in fire extinguishers or matches?

Perhaps if we start pointing this out to politicians in the EU, they can do something over there because it’s pretty clear who pulls the strings on this side of the Atlantic.

According to Dave Lindorff:

If Congress and the White House were serious about combating price rigging and coordinated production slowdowns, they would be changing the anti-trust laws so that the objective existence of anti-competitive pricing and production alone would be illegal, not just deliberate conspiring to fix prices. A simple step would be just to make all the competitive information regarding production and pricing of oil and oil products, all the way from wellhead to pump, public. After all, if the oil companies all know everything about each other’s internal pricing and production, there’s no justification for keeping that information from the public. Instead we have the opposite situation, of course: secret meetings by our oil-industry-subsidized vice president and executives of the oil industry, where real collusive decisions were made.

Comments

[jason.george:]

Yep- more laws and more government involvement ought to fix everything! Their laws have made it so expensive that we haven't built a new refinery in 30 years. They force oil companies to have additives to make it safe, only to change their mind down the road and tell oil companies NO, you can't have that additive- its dangerous. Its a conspiracy, alright!

Supply & demand on a global scale- a barrel of oil is the same price for everyone. The evil oil companies get around 8 to 9% return on profits, while insurance, banks and pharmaceuticals rake in considerably more. They must be price fixing TOO! Refineries are old and cost more to maintain. More government involvement = more expense to the oil companies = higher price at the pump when that expense is passed on to the customers.

Government doesn't care- big oil pays plenty of taxes and gets corporate welfare in return.

2007 Jul 05 11:02 AM

[jonathan:]

Great idea! Let's make it *really really* hard to make money in the energy business because that's probably the best way to encourage <strike>those mean old energy companies</strike&g... investors to put their money into cleaner refineries, new energy sources, and excess capacity that can help ride out rough patches. Maybe if we stack on enough regulation we can make things *much* worse...then it can be a crisis, we can nationalize those mean old energy companies, and the government can run the energy industry. After all, Government services are so much more responsive and less expensive than privately run services.

Oh wait, no they aren't!

It must be a conspiracy. I blame Bush.

2007 Jul 05 01:40 PM

[Jerry Crafton:]

I enjoy reading your take on the oil markets and other topics. I am not sure the oil companies are the one's creating the hoopla as much as the traders. Too much money is being bet on the price of oil, long and short, to make any media fair and balanced. I do agree that security for an off-shore platform could not be that difficult to put in place.

2007 Jul 05 01:41 PM

[alpha24seven:]

Fricking awesome. I love oil companies. I've made a lot of money with them. I've spent a lot of money with them. The irrational function of behavior by them and others that put up proxy fist fights for them show the end for them is closer than most would think. Ethanol/biodiesel/hybr... whiz technology has caught them out and out they -- will -- be out. I want to make money with the "new emperors".

We are witnessing last gasp(s) behavior.

The king is dead. Long live the king!

2007 Jul 05 01:46 PM

[alpha24seven:]

One more thing. "Peak oil" is a scam. Ask yourself, who would benefit the most by floating a doomsday scenario down to the last drop?

Exactly...

2007 Jul 05 01:48 PM

[erniem:]

I was not going to comment, but peak oil is what happens when a finite ( meaning there is not an infinite quantity) resource is utilized. No peak oil? Do you believe the earth is producing it faster than we use it? At this point the CEOs of the majors talk about it. Get with the times, man. At a certain point EVERY resource runs out.

2007 Jul 05 03:12 PM

[alpha24seven:]

Peak oil -- the part of it running out eventually is absolutely true.

That's not the point. The current purveyors of doom postulate that the Tiger of China and soccer mom in her Chevy Suburban will drain the world dry before we figure out what to do. This of course will lead to Armageddon.

Wrong.

The peak oil theory is flawed across many venues.

1. EROEI (Energy Returned on Energy Invested). Peak oilers proclaim loudly that "it will take two units of energy to get one energy unit of oil out of the ground". The problem is they are conveniently leaving out the economics. If the we need two to get one, yet the one we end up is worth ten times more economically then the original two then we will do it. BTW -- ALL energy uses more to get less because we haven't yet figured out how to repeal the laws of thermodynamics. It always takes more energy to create less energy, it's just that the final energy unit will have greater energy density and much higher economic value. Fact.

2. Peak oil states that "all the major oil fields have been found". Clearly wrong.

3. Peak oil theory doesn't include technological advancements that would extend the amount in the ground due to less consumption.

4. Back to economics. If gasoline at the pump were to go to lets just say...$6, then you know damned well that consumption would plummet. (so would the economy -- another subject) It would also accelerate new energy technologies. See item #3. So this "marching off the cliff" stuff is pure hooie.

Make no mistake. The people that benefit from putting forth the whole "peak oil Armageddon" theory are the ones that stand to profit the most. Think of the average guy down at the station filling up in the stall next to you. He yells over to you "Damn these prices are high! What are you going to do? It's peak oil! they are running out. It's all over the Internet."

Now look at all these peak oil Websites. Who are all these people? Where are they getting funding? What are their qualifications and what is their history? Who knows -- but it doesn't take rocket science to see the potential for malfeasance here. Would oil companies ever be involved in anything like that?

Rriiggghhtttt......

2007 Jul 09 05:16 PM

[Golden 1:]

Yep- more laws and more government involvement ought to fix everything! Thats whats wrong with this country now .... Thank You Jason.George .... you are right on target.

2007 Jul 05 03:31 PM

[Mmarrkk:]

You have continued to amaze me at your complete lack of understanding of an industry you continue to report on and analyze. Yes, Shell should supply security to an island that is part of a sovreign nation. That was done in Burma and lots of your types are suing the oil company that did it. Yes, we are holding back production on purpose. Yes we conspire to set prices, yet all me make is less than half the profit other industries derive. Heck, if we were setting prices, don't you think we'd at least try and get a return on our money that is equal to some of the other industries?

And oil companies do not know the interactions and contract terms of other companies. We actually work very hard to keep these secret.

2007 Jul 05 06:43 PM

[Philip Davis:]

Jason, I'm glad you mentioned "no new refineries in 30 years" this is a battle cry of big oil's spin doctors as they try to blame the government for their lack of investment but the facts are that BP, Shell and Conoco CEO's have all testified to Congress that environmental requirements have NOT blocked a single planned refinery expansion and then-EPA administrator Carol Browner testified to Congress in 2000 that about half the permit modifications for refineries were issued within five months and that most of the others were issued within a year. That conclusion was bolstered by a new survey by state air pollution regulators, which concluded that environmental requirements have not delayed refinery expansion plans.

today.reuters.com/news...;storyID=2006-06-05T21...

If building refiineries were only an "environmental issue" then wouldn't Mexico or China be littered with them, they make toxic chemicals in India and we already ship gasoline around the world so don't blame US regulations for the global lack of refineries, there obviously are other global forces at work and, with VLO making $5Bn a year operating under a constrained US regulatory environment, I'm sure setting up a rerfinery would be slightly more profitable than sewing Nikes together for a foreign corporation.

Also, that 8-9% figure is total nonsense, oil companies pay out spectacular salaries, pay dividends, buy back their own stock, consolidate each other, depreciate Billions in assets annually (XOM, for example, in 2006 depreciated $11Bn of assets but spent just $15Bn in capital expenditures) and generate incredible amounts of cash. XOM had a gross profit of $164Bn and spent $83Bn on SG&amp;A with 106,400 employess, while GE, for example, with 319,000 employees spent $74Bn on SG&amp;A last year.

Based on the return on equity of comparable firms, which is the basic measure of profitability on which oil companies themselves rely when they report their earnings to their shareholders, oil companies are earning far too much. In the past five years, they have set record after record. Total company profits reflect increased profits on crude oil and natural gas, as well. In the quarter century between 1974 and 1999, major oil companies had a higher return on equity than all manufacturing only twice. Since 2000, their return on equity has exceeded all manufacturing six of seven years, and every year since 2002.

Keep drinking the Kool-Aid but these guys have sold you a bill of goods. Ordinarily, you wouldn't have to say anything more than, "Hey, XOM made $40Bn last year and will make more than that this year" and it would seem like something was wrong somewhere since $40Bn for that one company is more money than is made by MRK,PFE,GSK,NVS&am... combined or by WMT, TGT, SHLD, ANF, GPS, JWN, SKS and any 20 or 30 other retailers you've heard of COMBINED or by the ENTIRE steel industry or by the ENTIRE building industry or by pretty much the whole of any other industry on the planet - all for just XOM.

You think nothing is wrong with that? You think this doesn't destroy the whole concept of capitalism when one company or one industry becomes a bottomless sinkhole for all the world's capital by choking the life out of average people by gouging them on a vital necessity. This diversion of capital into the energy industry has been a drag on what could have been the greatest global expansion of all time with $4T of gross profits being sucked into the energy sector annually.

======================...

You're right Alpha, they have sowed the seeds of their own destruction (as do most greedy, bloated tyrants throughout history) but we will still suffer through the next decade as they lash out wherever they can to "protect" their ill-gotten gains.

Before peak oil there was peak coal and before peak coal there was (and I'm not kidding) peak wood. I guess in the next generation there will be peak sun for someone to worry about...

======================...

MMMarkk - than you for admitting you hold back production on purpose, that was a brave thing to do and I will quote you as a reliable industry source! 8-)

I love all the talking points, could you send me that sheet? I'd love to see the whole list.

Yes you are making TONS of money, in fact you are making 200% more than the S&amp;P average over the last 5 years and while it is nice that some retirees own some of your stock, you really don't want me to go down a comparative list of who owns what percentage of your company because all those poor widows and orphans you claim to champion put together couldn't afford the gas your top shareholder puts in his yacht in the average month.

I do make profits for people every day but I don't pursue profits at the cost of human suffering. I don't glory in the destruction of a hurricane because it will drop cash to my bottom line, I don't jump for joy when there's a cold snap and old people freeze to death in their homes because they can't afford to heat them. I'm sorry I can't be a cold blooded, souless capitalist and maximize my profits at the expense of my humanity - I'm sure I'm not man enough to play at your club but that's just fine with me.

There are many ways to make money by improving the world rather than by raping and pillaging it. You guys could have made investments in alternate energy years ago and we could have been living in a cleaner, better world today but profits would have been less so you went with plan B and sqeeezed every last dime you could out of the consumers. Now others are investing in alternate energy and we are in a period of peak oil profits, not peak oil, and I guarantee you that the Hubbert curve will look like a gentle slope compared to how fast this party ends for you.

2007 Jul 06 06:10 AM

[Mmarrkk:]

Phil: I'll send you today's copy of the talking points as soon as they come in. We usually get them around 7:30 AM CST. Would you send me copies of your talking points from Schmucky Schumer and Billary Clinton in return? I'm sure I'd find some interesting reading amoungst the villifying of American industry.

You are right, oil companies COULD have invested in alternative energy years ago. However, these companies are OIL and GAS companies and have focused on OIL and GAS, not solar, wind, etc. The shareholders of these companies buy shares because these companies explore for, produce, transport, refine and market oil and gas and their derivities. That's what they do and who they are. Would you suggest that WalMart go into the medical field? Or should McDonald's start a new exercise center division of their company? Focus is the name of the game; know what you do, and do it well. And I believe that XOM's $40B in profits shows that they do what they do very well.

The depreciation figure is cute. Do you know that oil companies have to book depreciation, depreciation and amoritization for every barrel of crude or MCF of gas produced? So whenever we produce more barrels, we have to take a charge for DD&amp;A. It runs around $4 per barrel, sometimes much more. Do you realize that one field development in the Gulf of Mexico can cost upwards of $5 billion? Or LNG facilities, plants, ships, etc can run in the multi-billion dollar range?

If you are so dead set convinced that we are up to no good, do a couple of things: get an investigative arm to FIND wrongdoings. Not crow about it, gather headlines, yell and scream but actually FIND firm hard admissable evidence that a crime has been committed. Second, if you don't like XOM, boycott them. I say that with a snicker as I read these all the time. Yes, that will work. Don't buy XOM gasoline for a day, week, month. Buy it from Wal Mart. That will teach those bad guys at XOM. Of course, XOM yields a very small portion of their "obscene" profits from selling gasoline at the retail level in the US. A very small portion so it won't even be a bother.

Or better yet, get some rich folks who believe like you, take your money and invest in the business. Then, run it like you think XOM, BP, COP, etc. should be run. I'm sure folks will be lined up to pay you for your efforts. If investing in refineries and alternative energy is such a darned good idea and a good investment, why not get Buffet, Gates and Soros to chip in a few bucks to start the Phil Davis oil company. You know why?? Refineries are horrible investments. Horrible. And retail gasoline outlets are even worse.

2007 Jul 06 08:36 AM

[UncleFred:]

Hello??

Nobody seems to link the fact that this entire Bush administration is filled with oil people and oil service industry people. Nobody seems to notice that oil prices started to skyrocket right after Dick Cheney had his super secret "energy policy meeting" in 2001, a meeting that he refuses to say who was there or what was discussed. Mysteriously, oil prices started climbing from the $30/bbl range to the $70/bbl range right after that meeting.

And everyone continues to scratch there heads and wonder why oil prices are so high? Come on, people, the big fix is in!! Get wise to it!!

2007 Jul 06 11:15 AM

[ptrader:]

oil is moving, t boone and every scientist who has looked at it says its depleting, we love it on pullbacks and we love the emini-contracts for real trading we like OilGasFutures.com and for those learning we like papertrading at ptrades.com

2007 Jul 06 12:26 PM

[Philip Davis:]

Fred - I would think it was too obvious to mention! ;-)

======================...

MMMarkkk (can I just call you KKK?),

Talking points: www.democrats.org/a/20...

Since I didn't get yours, I've saved you some trouble and found an article on the Republicans policy: psychosy.blogspot.com/...

I'm so glad you have cleared up the matter that BP IS actually full of it when they BS people about alternate energy and I thought this Fortune article about how XOM has their head entirely in the sand was a little harsh but I guess you guys are that myopic.

money.cnn.com/magazine...

Now let me get this straight - you say that XOM, who sells 1.6Bn barrels of crude per year, somehow gets to knock $6.4Bn off their taxes by depreciating the barrels??? That is truly amazing!

Remind me to cry over the cost of oil field development as the $5Bn investment (which they only make well after they have identified a functioning field) yeilds $17.5M per day in revenues, pulling out $6.5Bn the first year while you depreciate it against existing operations that have been paid for 10 times over and are just generating wads of cash. Only a greedy bloated spoiled industry would complain that it costs money to produce their product when gross margins are over 40% - gee I'm sorry the days when you could just stick a straw in the ground and rip people off for zero production costs are behind you - how's it feel to work for a living?

I'm sure the investigative arm of our new Congress will find hard evidence of wrongdoings and I'm sure that energy contributions into the Republican campaigns this year and next will set records but I don't think it will be enough. The tide has turned, the rich folks are pulling out their wallets to invest in ways to take you out of the game because you guys got too fat and greedy and made yourselves the biggest targets on the planet for long-term investment dolllars as there's now hundreds of Billions to be made by just taking out 10% of what you gorge on every year.

Enjoy your last meal but be careful... many bubbles pop just like this!

2007 Jul 06 12:26 PM

[Mmarrkk:]

The k's at the end are due to a sticky key, not a relation to a bunch of goons. But its always good to see you lib's pinning that on anyone you can. What next?

Sorry, the $5B investment is not made "well after" the "functioning field" has been identified. In deepwater, you get a few wells drilled and a few hours of production testing. You then have to make a scientific estimate and a reasoned risked assessment of reserves and then you plop all of your $5B into building the structure and drilling the wells. YOu then get to turn it on and watch it produce and see if what you thought was there was really there.

On the depreciation, we don't make the rules, we just abide by them. Same rules apply to mining companies.

I'll be willing to lay down $100 that no major oil company or upper level executive will be found guilty of anything related to price fixing, market tampering, etc. There is none so I'm confident that even misguided vengeful hater's like the Dem's won't even be able to conjure something that will hold water in court. And that 5-4 Supreme Court wouldn't let it happen (wink wink with an evil snicker).

2007 Jul 06 02:25 PM

[Mmarrkk:]

Oh, have you rounded up those investors for the super big money making investment in a new refinery?

Didn't think so.

2007 Jul 06 02:27 PM

[David Lentz:]

Dear MMMarkkk, do you really expect us oil-industry-outsiders to believe that refineries are such poor investments while gasoline prices increase right along with oil prices? I doubt that the cost of running a refinery has changed much over the past few years, but the prices of their products have!

oilnergy.com/1combo.ht...

I fail to find much credibility in your claims that refineries are such "terrible" investments. I believe that the reason no refineries are being built is that the only people with the expertise and ability to do so are sitting on their hands and creating artificial scarcities. I don't think I'm alone in this belief.

Here's your chance to do a little PR for the oil industry and show us why selling the same amount of product for more money is a better deal than investing in the production facilities (including refineries) and selling MORE product for more money. The Chinese and Indians are eager for more product, too.

Normally, in businesses of any stripe, when making money hand over fist and finding demand outstripping supplies, additional supplies are developed as fast as possible to take advantage of the demand. Why isn't this happening in the oil industry?

Looking at XOM'S exploration budget vs the amount they spend in stock repurchases tends to leave one with a pretty sour outlook. The $28+B XOM spent in 2006 for stock buybacks looms pretty large against the $39+B they achieved in net income. XOM seems to have no problem pouring money into natural gas production, yet natural gas prices have languished in comparison to oil (or gasoline) prices. I fail to see why producing more gasoline is such a bad business decision -- except for the ability to play the oligopoly card and hold markets hostage by artificially restricting supplies in order to drive up prices. Is it really just "coincidence" that the industry takes refineries offline to adjust the product mix during spring break, the first big demand period for gasoline each year?

2007 Jul 07 08:14 PM

[Mmarrkk:]

Whether you and a bunch of others believe that refineries are bad investments isn't my problem. I can tell you that when you crunch the economics, the return on investment is well below anything acceptable to any industry, EXCEPT Government. Government doesn't need to make a return; everyone else does. When you factor in the capital cost and the operating costs and the raw products that feed a refinery, then yes, they are horrible investments. That is why no one is building them. Not the state run oil and gas companies who definetly have the skills and capabilities.

Two other points: the cost of running the refinery has definetly gone up. Labor costs and materials are all going up. Plus the cost of the raw product, crude oil, has skyrocketed. Second, there are a lot of folks with the expertise to build refineries. Call any number of major engineering firms (none owned by Big Oil) and they can design one. And call the big construction groups and they will build you one. Call the big contractors and they will run it for you. All you need is CASH. And Soros, Gates, etc. all have lots of that. But they won't make the investment because it is very poor. Believe it or not. That's not my problem. I've seen the numbers and I understand the economics. You and many others obviously do not.

Nat Gas prices have languished?? Are you really kidding? They've gone from under $2 to over $7 in the last 3-4 years. Man, what languishing!!

No its not coincidence that refineries adjust their product mix during spring break. It's when the new product is needed. If they didn't do it then, there would be worse problems. Earlier than that and the supply of heating oil would be curtailed and you'd have little old Yankees freezing in the Northeast. Any later and there would be serious supply disruptions as we enter the summer driving season. Do a bit more research.

You guys can claim foul and you can claim collusion and all the other crappola. But you can't prove it and you can't show it and all you have is circumstantial evidence. Again, there will never be any conviction or indictment because there is no "there" there. Stock buybacks are a way of life and as a stockholder, I love them. They are giving me some of my investment back. Instead of griping and complaining, why not buy some XOM stock.

Oh, and while you're researching, go try and find out how much of XOM's profit comes from the U.S. and more specifically, U.S. refining and marketing. I think you'll be amazed at how small that portion really is. Care to guess?? I know the number and its quite small. So, they could stop selling gasoline altogether and let valero, Citgo, etc. refine and sell the gasoline and guess what? They would still make b-b-b-b-billions of dollars. BooYahhhhh.

2007 Jul 07 10:01 PM

[alpha24seven:]

MMMarkkkK

Correct me if I'm wrong. Isn't Virgin supremo Branson shopping a location to build a new refinery so he can literally "fly around" the "refining cabal" to more appropriate fuel prices?

The FACT is that the oil industry is making egregious amounts of money at the expense of the average citizen. I love big business and you will NEVER find a more committed capitalist, but there comes a time when only idiots think that such an overwhelming disparity towards one company(s) is healthy for the entire economic system. It isn't, and it's clear to anyone that has a lick of common sense.

What to do? End subsidies to ALL energy providers. That means oil/gas, wind, solar et al. Let them fight it out in a competitive marketplace and watch what happens. Oil will go back to $30 to keep the "new" energy industry wolves at bay. Even at that price, it is only a matter of time before new materials science will reach a critical breakthrough of some sort. Could be 2008 or 2018 -- it WILL happen and big oil better start doing some quick style M&amp;A...

2007 Jul 09 04:56 PM

[philprism:]

I believe in democracy based on responsible capitalism.

Oil is a strategic resource, our economy runs on it, take it away and it collapses. You can not separate Oil from politics anywhere in the world.

Oil generates immense profits and tax revenues. Government has and always will manipulate oil prices. Rightly so if it is in the interests of its citizens and the stability of the economy.

The community of oil producing companies and countries is small enough to be considered an oligopoly and OPEC is a powerful example of a market fixing oligopoly.

Turkeys dont vote for Christmas. With billions still in the ground does anybody seriously think the Oil companies are giving anything more than lip service to alternative energy sources. The words spin and diversion come to mind. Oil companies executives are paid to make profits and they do it very well, cynicaly, heartlessly, without compassion or regard for the economy at large only for their own company.

Enron showed us how you could shaft an entire states energy supply by restricting energy supplies to swell the company coffers. Do you think the oil comanies wern't watching?

Now just imagine the increased price of oil, no matter how that increase was achieved-restrictive trade practices- monopolistic actions- amoral business practice, happened to be in line with government policy. Perhaps the government has a war to pay for or it needs to reward its 'loyal friends and supprters' or it needs to finance its failed ecomimic policies. It would be on the part of an administration to gid rid of the financial criutch that keeps it going.

Oil and politics are inseperable, its strategic, oil companies are making these huge profits because they are being allowed to and the government isn't to fussy about how it does it. The market is being manipulated.

Oh yes I nearly forgot.... its an open invitation to corrupt our world and every generation that follows. It will however make fabulous profits and thats all that really matters.

Phil

2007 Jul 10 06:49 AM