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.

Book Review: Robert Hefner's 'The Grand Energy Transition'

Natural gas is currently suffering from being categorized along with oil by policy makers and consumers. The two fuels vary dramatically in supply, marketing, and consequences of consumption. We do have a hundred year supply of natural gas, even if consumption rises, due to changes in drilling technology and geologic paradigm shifts that are currently being adapted in the natural gas industry.

Currently natural gas is the only fuel that can be used to quickly supply electric power when demand rises unexpectedly. Wind power, solar, nuclear, hydroelectric, and even coal cannot do that as quickly as natural gas. Currently natural gas is the cheapest source of hydrogen. In effect, burning natural gas IS burning hydrogen as most of the energy comes from the 4 hydrogen bonds.

There is no reason that natural gas cannot be used to substitute for transportation fuel (gasoline and diesel), yet wind and solar cannot do that with any efficiency. I converted my vehicle to natural gas in 1974. Large fleets of buses and garbage trucks in my area have been converted for years.

The real problem for natural gas is that the current administration is throwing the baby out with the bath water, by limiting natural gas production and doing nothing to improve natural gas distribution systems. Currently the natural gas industry is facing higher taxes, serious restrictions on technology applications, revocation of Federal leases, increasing royalties and severance taxes at both federal and state levels, and a supply glut that is forcing most producers to stop drilling and cancel programs that would have been our supply several years from now. Boom and bust, while decried by Obama, seems to be the real result of his administrations policies for the natural gas industry. Maybe Al Gore (who was once a proponent of natural gas) needs to read this book so that maybe the Whitehouse will get the message.

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.