carbonates

Opportunities in the Oil Sector

I too am convinced the best place to be in the oil and gas sector is in the majors and internationals for the next few years. The political climate in the US is forcing most domestic independents to slow down or stop drilling, resulting in falling production and reserves for those companies. Currently Federal leases are being revoked in some areas, some states are planning to raise severance taxes, higher Federal royalties are being imposed on some leases in the Gulf of Mexico, and the Obama budget has some large hits for oil and gas in the form of lost tax deductions. All of this will tend to shrink domestic production. Add to that the current oversupply of the US gas market, and low prices that for many operators are approaching the cost of finding and development, and the US independents will be feeling pain for a year or more.

International operators (majors and independents) will actually benefit from the current US political climate, being able to operate outside of the US restrictions while supplying the US market. The primary result of the current policies that are being imposed is that the US will rely much more heavily on imports in the future.

I am not bullish on service companies like RIG. Right now the drilling and service companies are looking at a major downturn in work. While they have still got some work continuing from last years high priced market, as soon as those contracts end, they are likely to be laid down. Just about every oil and gas producer out there is dramatically reducing costs, and the first place they will look will be service companies.

Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy

Okay, Fearing, I'll take the bait. By your logic I should stop drilling in the US, as the US production is going into decline anyway. That's fine with me. I can take my skill set to Saudi Arabia and get paid more anyway. My quality of life will decline slightly, but my personal finances will be greatly improved by reductions in taxes and higher income. My work will be slightly easier, because I will not have to deal with any sort of environmental standards, and even fewer regulatory hurdles. You will still be paying my higher salary (but you will be receiving far less of my income in the form of taxation), so it makes little difference to me. I could have provided my services inside the US, creating high paying jobs and huge amounts of tax revenue in the US, but it seems you feel you would be better off to buy imported oil. By the way, the MMS is the second largest source of revenue to the Federal government behind income taxes. As US oil production declines, your tax rates will increase.

Likewise, I can shift my investment portfolio from US oil producers to foreign producers that will benefit from having a larger market share in the US. As US production goes into even higher declines, oil will no doubt go higher and I will continue to benefit in my portfolio. I can even start collecting my paycheck in Euros or Swiss francs!

Also inherent in your position is the shift away from environmentally responsible oil and gas production within a strongly regulated framework, to production in areas where there is no environmental regulation. Russia still considers plowing on-shore oil spills under with a tractor to be "spill remediation." Other countries I have worked in tolerate lakes covered with 12 inches of oil as the cost of doing business. Your attitude only supports this lack of responsibility and will hasten the decline of the worldwide environment.

Meanwhile, you seem to suggest the US stop using oil, or alternatively import more oil, as for some reason drilling seems to upset you. You would prefer to take the point of view that since we can't produce all of what we need, we should not even try.

I can easily change the way I live. It will not be beneficial to you however, but will be very beneficial to me. Can you change the way you live? Call me an idiot, but at least I have a positive suggestion on how to make the transition to renewable energy and alternative raw materials that will be needed to replace oil and gas. As is often repeated quietly in the oil industry "you can all go freeze in the dark" if you don't want my help. I'm not the cause of your digestive problems.

Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy

Yet another example of how your premise is so WRONG, North Dakota, which has also experienced new levels of drilling activity in the past couple of years, is setting new records of oil production (natural gas is NOT included in these numbers). North Dakota produced 5,324,274 bbls of oil for the month of July compared to the 4,985,773 bbls of oil produced a month earlier. These are all-time high levels for North Dakota, and the direct result of DRILLING. Proven reserves for North Dakota are on the upswing, showing that through effective modern exploration it IS possible to reverse long-term declines. Both new engineering technology and new geologic concepts made it possible to recover tremendous amounts of oil from the Bakken, which has been drilled through and ignored for decades. Many more examples exist, and the new wave of oil drilling is only beginning to be apparent to the investing community and even much of the oil industry. You know very little about what you are talking about.

EOG Resources, the principal operator of Parshall field, reported production of 854,119 bbls of oil from 53 wells in July. NONE of these wells existed two years ago.

Large percentages of these new record production levels in North Dakota are being produced from Federal leases. This is something you would have us stop leasing, since apparently 5 million barrels a month isn't enough to matter to you. At only $100 per barrel, that translates into $500 million dollars of revenue that went into the US economy; new wealth created by US oil companies, and money that was NOT part of the US trade deficit. That $500 million of revenue also may have provided as much as 12 1/2 percent of the gross revenue (the Federal royalty payment) to Federal tax coffers, effectively reducing the need to tax US taxpayers by millions of dollars (which would have been needed if we had bought imported oil instead.)

You really need to rethink your numbers.

Why "Drill, Baby, Drill!" Does Not Translate Into Effective National Energy Policy

Okay, record rig counts this year in the US have only produced 8% year on year production increases in natural gas, creating the possibility of lower natural gas prices for some time to come. Most of those wells were not even planned over two years ago. Many of them weren't even planned a year ago. Current estimates of total natural gas reserves in the US are up dramatically from only a year ago.

I think your premise is radically WRONG. It seems to me the facts are already there to support more drilling as both a way to increase domestic production, drive down prices for hydrocarbons (already happening for natural gas), and reduce the trade deficit. Increases in production this year certainly support that. You don't seem to understand that the period you are using to prove your data includes significant periods of oil prices near $12 a barrel and longer periods below $25. Next you are going to tell me that having sex does not lead to more babies.

I think you've done a good job of choosing your data in such a way that it matches your hypothesis. As an exploration geologist, I disagree with most of your "facts."

Does Big Oil's Apathy Justify Proposals to Tax Windfall Profits?

As an exploration geologist I can only shake my head and realize how misunderstood my job really is, even within the oil industry. As recently as 2005 I was forced to calculate the economics of a new well proposal based on $20 oil and $2 gas. More recently that number has crept up to $80 and now $100, but only because I am at a much smaller company. At the major, my lead time on drilling a well was in some cases ten years. Can you predict oil prices out ten years to make spending decisions today? Yes, it took that long to plan and prepare for it. Then we were risking $10 to $20 million for a one well prospect that might have a 20% chance of success. Ten percent was more likely. Big projects risk billions of dollars many years in advance of any return on investment.

On top of all of this the industry has gone through extraordinary hard times only a decade ago when prices went to $13 and layoffs were huge. Exxon bought Mobil to survive. BP bought Amoco, Arco, and Pennzoil. Today they can't hire enough people and only recently have new college recruits showed signs of being willing to work for a "dead" industry- never mind that it pays incredibly well and we use technology that would make NASA envious. At times the value of the computing power under my desk has exceeded $500,000 if you count the software on my computer. Yet the damage from years of periodic layoffs has left a serious mark on the industry and chased away much of the talent that is needed to find new oil. Never mind that in an experience based business, the next generation will have to learn from increasingly scarce workers who remain. Of course, it doesn't help the majors that some of their best talent gets hired away by the likes of National Oil Companies.

The point you don't seem to get, is that big oil has been failing to find enough new reserves to replace its own production for quite a few years. The Gulf of Mexico is in decline. Alaska has been in decline since 1987. Mexico has been in decline for decades. The North Sea has long been in decline making the Brent marker crude almost an obsolete pricing tool because the trading is too thin.

The future of US oil and gas production is not with the majors. They have the unenviable position of trying to find resources that have "material" value. Too small, and they walk away; they never even drill. Only a few years ago I was told that if my play concept couldn't reach a scope of 3 Trillion cubic feet of gas, it wouldn't get tested. Those elephants are mostly gone. Small independents who are purely producers are the wave of the future. Small independents are happy to drill a $5 M well and find less than 1 million bbls. Some have figured out how to drill a $50K well that may only produce 10K bbls. Majors can't do that. They would never be able to grow the balance sheet, much less keep up. The problem is that $5 M well will probably only produce a 100 barrels a day. We need 180,000 of those. Currently there are 1,921 rigs working in the US. Most of those average one well per month. If half of those wells fail to find commercially viable oil, they might be able to add a little over $1.2 million bbls/day in production to the US. Of course, that is $580 Billion a year at current prices that would not be part of the trade deficit. What would that do for the dollar? As much as $90 billion of that might go straight into state, local, and federal tax coffers. The US oil industry currently is the 2nd largest source of income to the Federal government, with revenues from leasing, royalties, bonus payments, and other taxes. All of that is BEFORE income taxes- it is at the wellhead. In reality, the idea of adding windfall profits tax to the US oil industry is most likely to be revenue neutral because as the production falls, the existing royalties will fall also.

But you would like to tax us. The result: less money for the high risk exploration budget. Job cuts. Lower production in the long run. Fewer new hires. Fewer small independents that are willing or able to raise the millions in capital it takes to drill just one well. And I will just go work for Saudi Aramco or some other foreign company, where even my personal tax burden will be lower. I don't see grocery stores risking $15 million dollars trying to find enough canned beans to stock the shelves next month.

If you want to see what the result of your tax proposal will be, you don't have to look far. The Canadian province of Alberta raised taxes on oil companies last year. Layoffs were almost immediate. Stock prices fell dramatically. Large companies left the province like mice from a sinking ship. Drilling rigs moved south to the US, which was fortunate for the US operators. Production is down already.

I will also take issue with your belief that oil companies are not investing in alternative energy. Shell did key research in developing thin film solar and is part of a joint venture to create the next wave of solar energy. BP is one of the world's largest solar power manufacturers. Shell is one of, if not the largest generator of wind power in the US. I believe they have about 500Kw of wind generation. Chevron is the world's largest geothermal power company. Shell has major investments in cellulosic ethanol and is the world’s largest refiner of biodiesel. None of these enterprises is large enough to attract the attention of stock investors, but none of the alternative energy supplies come close to displacing oil (some like corn ethanol don't even have the capacity to replace oil), so being a big fish in the smallest pond is not very impressive to investors like you. Nevertheless, the oil industry has my bet to dominate the "alternative" energy industry as soon as the economics begin to work.

The oil business is NOTHING like grocery stores. If your suggestions are implemented, I'll be moving out of the US to find a job, unless of course I want to stock shelves.