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Alan von Altendorf on Is Exxon Betting on $100 Oil? I'd be glad for somebody to show me why these n...
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Alan von Altendorf on Tupi Shut Down, Sugar Loaf Dry Hole This joke is getting funnier by the minute. Ups...
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Alan von Altendorf on Tupi Shut Down, Sugar Loaf Dry Hole Preliminary results from deepwater drilling at ...
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A Barrel Full on Tupi Shut Down, Sugar Loaf Dry Hole That's worrying as Brazilian oil is essential t...
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Alan von Altendorf on Main Street down and out? Grr. Same problem, can't upload pix.
Posts by Themes
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More Transparency at Tupi Would Be Nice
Certainly that sounds like good news, until you consider it apparently took 160 days to produce at an average of 2000 bopd -- far less than the 14,000 bopd that Petrobras announced in May.
Then the problems began.
I accept that operating an arguably novel ultradeep well can be complicated and require engineering adjustments. But I have some questions about what Petrobras has learned after five months of fiddling with the iron.
1. Was it necessary to work over or reperf the well?
2. Did asphalt or gas coning gum up the tree?
3. Is 3-RJS-646 producing? at what rate?
The world was led to believe that Tupi is the biggest oil discovery in the Western Hemisphere since Cantarell. Maybe so. That's why it would be nice to have more transparency from Petrobras.
A big resource that can't be produced isn't much of a resource.
Disclosure: no position long or short in PBR or any ETF or oil options.
Is Exxon Betting on $100 Oil?
The Jubilee oil field offshore Ghana was discovered by Tullow in partnership with Anadarko in 2007. It's a remarkable story in several respects. The deepwater Tano Basin had been previously surveyed and drilled by Phillips in the 1970s, by Arco in the late 1980s, and successively by Amoco, Hunt, and Dana Oil in the 1990s based on two 3D seismic surveys commissioned by Ghana's national oil company. Tullow did a splendid job of finding a reservoir that everyone else missed.
Privately-held Kosmos Energy LLC of Dallas was awarded a block in 2006 that overlaps about 2/3 of Jubilee and became an investment partner with Tullow and Anadarko. I haven't looked at the details of that deal, but Kosmos had $100 million in private equity cash to fund four exploration wells.
That $100 million is now worth $4 billion, according to the Wall Street Journal.
Let's say hypothetically that Jubilee has 400 million bbl recoverable, and that Tullow's estimate of $5 billion subsea and topside expense is correct. Exxon paid $4 billion for a 1/4 share of production and probably have to pony up another $1 billion as its share of development expense. That values Jubilee at $20-$25 billion if you consider cost overruns and interest expense on borrowed money. Let's assume that the Republic of Ghana is going to get something in taxes, royalties, fees, local goods and services, training, and special gifts under the table. So Jubilee is a $28 billion asset.
400 million bbl x $50 = $20 billion
Ooops. Obviously there's something wrong with my arithmetic. Maybe Exxon's $4 billion includes its capex contribution, which values the project at $20 billion total (breakeven at $50 a barrel).
I'm certain Tullow and Anadarko will flip their shares to CNOOC and Shell, both of which expressed interest and prompted Exxon to move fast and first. Some industry analysts expect Exxon to make a corporate takeover offer for Tullow, which is exactly how supermajors grew oil reserves in the past couple decades -- by merger and acquisition.
But Exxon's $4 billion says they aren't betting on $50 oil, the long term average. They need $100 a barrel to make Jubilee a risk-free investment with 10% annual return in my opinion.
Disclosure: no position in companies mentioned, ETFs, or oil options.
Tupi Shut Down, Sugar Loaf Dry Hole
And so they have, with a timely tragi-comic assist from Petrobras.
Bwahaha. No risk with pre-salt, eh?
Disclosure: no position long or short in any of the companies discussed.
Oil Outlook: Steady As She Goes
If we agree that demand for oil is inelastic, which means people will pay whatever it costs to operate their cars, trucks, jet aircraft and military vehicles, then the price of oil is determined entirely by effective (cash-in-pocket) demand.
I don't expect the US dollar to crash or to dramatically appreciate in 2010. There is a demonstrated consensus among central banks to deploy currency swaps as needed, and I disbelieve that commodity speculation is a sticky factor, so my oil forecast for 2010 is based solely on fundamentals.
Let's assume that US and world economic output are joined at the hip. There will be no recovery or net growth in 2009-2010. Mish explains:
So, the demand outlook is weak -- i.e., fewer dollars in private and public purses, with a continued emphasis on saving more and spending less. Second quarter industrial earnings beat expectations only because they cut costs. I anticipate demand for oil to remain depressed.
Similar weakness in Japan, Spain, France, and Italy:
All eyes are on China and India at the moment, expecting them to grow and consume more oil, therefore bidding up the world price of crude. While it's true that China is on a capex spending spree, acquiring production and reserves wherever it can, Chinese and Indian oil consumption (10 million b/d) is small compared to OECD + OPEC (50 million b/d).
I don't subscribe to the "last barrel" marginal pricing theory. There are too many players and byzantine price regulation in every jurisdiction on earth. At present, Chinese growth is picking up slack from soft OECD demand.
Another myth is the notion of OPEC "spare capacity." While it's true that Saudi Arabia can lower their output from time to time, to support an orderly market and keep petrodollar speculation in check, it's highly significant that Saudi production has been more or less flat for over a decade:
The global picture aggregates OPEC, OECD, and emerging market supply. There is no immediate threat of "peak oil" shortages or shocks in 2010:
I expect global supply to bounce around 73 million b/d, rain or shine, and WTI to trade at $60-$65 the rest of this year and next on 2% World GDP "recovery."
Disclosure: no position in oil, E&P, or commodity indexes.
War risk lifting oil price?
I can't find a fundamental supply-demand explanation for why crude oil prices are rising steadily, so I decided to take a look at war risk. Traders and suppliers often factor potential disruptions well in advance, raising prices incrementally rather than panic too late and bid erratically. Buy on the rumor, sell on the news.
Certainly, some risk can be attributed to perceived dollar weakness, massive U.S. Treasury requirements, and worries about inflation. A barrel of oil tomorrow will cost more dollars than today.
But war risk seems to be front and center in the minds of oil ministers and traders, as far as I can judge from press reports. There are too many trouble spots to say that one or two are pivotal. Rather, the background worry of peak oil has magnified a dozen supply and transportation threats into an overall sense of foreboding (and a bit of paranoia) about global oil insecurity.
More »Main Street down and out?
The stock market is on a tear because the US Treasury and Federal Reserve will do whatever is necessary to prop up banks and automakers. Very reassuring. Wonderful.
How much of it will trickle down to mom-and-pop small business is an open question. Most big firms have cut their consultants and all other nonessential expenses like entertainment, interior design, advertising, travel, free food (at Google) and, of course, construction -- all of which were supplied by mom-and-pop small business.
The SBA sez small firms:
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