carbonates

For Your Perusal: The Glory of Free Market Oil Supply

Your premise that removing production of OPEC and Russia leaves only oil produced by market-based oil producers is probably wrong. Most of the majors produce in Russia and OPEC countries. BP's net in Russia is close to 1 million bbl/day. Shell's net production in Nigeria is about 850,000 bbl/day. Oxy's current net production is at least 400,000 bbl/day in OPEC countries. Total was producing 535,000 bbl/day from OPEC and Russia for 2008. Exxon is not transparent about its production per country, but has major projects both in OPEC countries and Russia. Chevron still has a major stake in Venezuela which has quadupled its income over the past 4 years suggesting Chevron production is rising there. Likewise Chevron is growing production in Algeria. While the overall trend in liquids production numbers is falling for many majors, this graph may more correctly represent a shift away from production towards OPEC and Russian locations more than a decline in overall production of multi-nationals and independents. I suspect you have oversimplified this chart to the point it does not represent the true picture.

I will also point out that considering only liquids production can be misleading since gas production is rising in most parts of the world. Through fuel substitution as well as gas-to-liquids projects, gas is slowly replacing liquids and will likely continue that trend.

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.