carbonates

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.