Energy, Energy Service, Natural Gas &amp; Oil Sectors

Top 1278. Sep 30, 2005 2:45 PM

» Bill_Duffy - Canadian Tar Sands

.
Rick George, CEO of Suncor (SU) was just interviewed on Kudlow. About half of Canada's oil is from tar sands. Ramp-up will not be quick. Canada tar sands reserves is about 174B barrels. Growth at SU is 10% per year, 15% ROE. Biggest challenge is finding manpower. Doing 0.25M barrels per day growing to double that by 2010. Very heavy oil. No shortage of capital. $12US per barrel operating cost.

Sounds like a fair investment. Boone Pickens owns a big share of SU.

-- posted by Bill_Duffy

Top 1279. Sep 30, 2005 6:09 PM

» axolotl - Re: Canadian Tar Sands

I am willing to include Canada as part of energy independence, but not Mexico. Normxxx is continuing to look at the past and project it into the future. China as a big consumer of oil is not in the past. It

China is a huge factor in the new oil equation. It is going to be a serious recession if oil falls below $30 barrel. Jimmi Kotter was one of the worst Presidents ever. He still has no clue. Remember, he was primarily elected because of Nixon. In turn, Reagan owed a lot to Kotter for his election and George W. owes Billy Clinton.

-- posted by axolotl

<img Width="520" src="http://www.freebuck.com/articles/mshedlock/050930mshedlock_files/image002.jpg">
Click Here, or on the image, to see a larger, undistorted image.

Top 1280. Sep 30, 2005 8:34 PM

» Normxxx - Rita

Rita

By Michael Shedlock | 30 September 2005

When hurricane Rita hit the Texas coastline at Beaumont/Port Arthur, as a category 3 hurricane, everyone breathed a sigh of relief. In terms of lives lost it certainly would be hard to fare better than we did. However, the Pollyanna viewpoint that there was minimal damage is just plain wrong. At sea Rita blasted her way through the Gulf of Mexico offshore oilfields as a Category 5 tempest doing mammoth damage to numerous rigs that will affect oil and natural gas production for quite some time. In addition some costal refineries were heavily damaged and that comes on top of refineries already crippled by Katrina.

Here are before and after pictures of Chevron's Typhoon platform in the Gulf platform with thanks to Resource Investor.

According to the department of energy, damage to some of the refineries in the Port Arthur TX and Lake Charles LA, and the lack of electrical power supply to others, is preventing their immediate return to service. Combined with the 5 percent of refinery capacity near the New Orleans area that was still out following Hurricane Katrina, as much as 15 percent of U.S. refinery capacity could be out for at least another couple of weeks.

As of Wednesday, September 28th, there are 4 refineries still shut down in the New Orleans area following Hurricane Katrina, 7 shut down in the Port Arthur and Lake Charles areas, and 3 shut down or attempting to restart in the Houston/Texas City/Galveston refining area, amounting to a total of over 3.5 million barrels per day that is currently offline. This accounts for over 1.5 million barrels per day of gasoline, over 800,000 barrels per day of distillate fuel, and over 400,000 barrels per day of jet fuel that is not being produced as long as these refineries remain shutdown.

A daily status report of Hurricane Impacts on the U.S. Oil and Natural Gas Markets can be found here .

The following highlights are from a DOE PDF as of September 28, 2005 (3:00 PM EDT).

945,506 customers are without electric power in Texas, Louisiana, Arkansas, and Mississippi. This includes new customer outages due to Hurricane Rita as well as outages remaining from Hurricane Katrina.

As a result of damage from Hurricane Katrina and precautionary actions in advance of Hurricane Rita, shut-in oil production in the Gulf is currently at 1,511,715 barrels of oil per day. Shut-in gas production is at 8.027 billion cubic feet per day.

The shut-in gas production is equivalent to 80.27 percent of the normal daily gas production in the Gulf, approximately 10 billion cubic feet per day.

Evacuations are equivalent to 72.40 percent of 819 manned platforms and 47.76 percent of 134 rigs currently operating in the Gulf.

There are reports that as many as 18 GOM rigs and 40 platforms may be missing, damaged and/or detached from their moorings.

Russ Winter did a nice summary about Rita for The Wall Street Examiner in an article entitled Postscript on the Rita "Dodged Bullet". Following is a list of damage estimates compiled by Mr. Winter.

Citgo, Lake Charles (324,300): three weeks
Total, Port Arthur (233,500): a month
Valero, Port Arthur (255,000): 2-4 weeks
COP, Westlake, (239,400): 2 weeks
Motiva, Pt. Arthur (285,000), wind damage, no power, no date given
Exxons's Beaumont plant (348,500) appeared to have no significant damage, and was awaiting power.

GOM shut-ins account for about 28% of total US oil output and 14% of total US natural gas output.

The Houston Chronicle is reporting a close call on natural gas for winter.

Winter is coming, and most of the natural gas wells in the Gulf of Mexico remain shut in. Industry officials say gas supplies will be adequate to heat Americans' homes through the colder months. But at what cost?

"Based on everything we see right now, coming off of Katrina and Rita, we should be fine this winter," Natural Gas Supply Association Chairman Joseph Blount said Tuesday.

Consumers, however, won't be happy.

Even before Rita pushed natural gas prices to new highs, Guy Caruso, head of the Energy Information Administration, was estimating home heating bills this winter could jump as much as 70 percent in some parts of the Midwest.

Lawmakers on Capitol Hill are hurriedly responding to the latest energy crunch sparked by the hurricane duo by writing a new energy bill. House Energy and Commerce Committee Chairman Joe Barton, R-Ennis, today will push a provision to encourage construction of a natural gas pipeline across Alaska and bring new supplies to the lower 48 states. Resources Committee Chairman Richard Pombo, R-Calif., will sponsor a measure that would allow states to authorize oil and natural gas drilling off their coasts. Neither provision will help consumers this winter.

To date, hurricanes Katrina and Rita have deprived the markets of nearly 5 percent of the annual gas production that would have otherwise come from the Gulf.

Although natural gas is used year-round to generate electricity, demand is greatest in the winter months. To meet that seasonal demand, the industry must build inventories before the severe cold hits.

As of Sept. 16, 2.8 trillion cubic feet of gas was in storage, the Energy Information Administration reported. That's up about 3 percent from the five-year average, although down about 3 percent from the same time last year.

Industrial customers with the ability to switch from use of natural gas to heating oil have largely done so. Residential customers typically don't have the luxury of switching. Their demand depends on the weather.

Forecasters are predicting a warmer-than-normal winter, although cooler than last year. Overall, the natural gas association estimates residential gas demand will be up more than 7 percent from last year.

Following is a chart of natural gas prices for the January 2006 Contract, as of September 29th.

To see a more current chart click here.

On Wednesday we looked at rising Credit Card Delinquencies. Here is a small snip:

The American Bankers Association reported Wednesday that the percentage of credit card accounts 30 or more days past due climbed to an all-time high of 4.81 percent in the April-to-June period. It could grow in the months ahead, experts said.

Those figures were pre-Katrina and pre-Rita. Not only do we have continued high prices for gasoline, we have record high prices for natural gas as well. If the experts are correct and Midwest heating bills rise 70% this winter, there is sure going to be a lot more economic stress than we see right now.

Consumer sentiment is already falling thru the floor and that is before any of those heating bills have hit. Here is a chart of consumer sentiment to ponder, with thanks to Jesse.

<img Width="520" src="http://photos1.blogger.com/img/101/3984/1024/UnivMichSent%26SP5001.jpg">
Click Here, or on the image, to see a larger, undistorted image.

Mish, is this a weather related outlier or are consumers finally ready to toss in the towel?

Good question but I think that sticky gas prices, rising interest rates (eleven consecutive rate hikes and more threatened), falling real wages, two hurricanes with possibly more to come, rising foreclosures, rising delinquencies, and looking ahead to even 30% hikes in winter heating bills let alone the 70% that is projected is likely to be the brick that broke the consumers' back. The recession of 2006 is coming up.

Mike Shedlock / Mish

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

http://online.barrons.com/article/SB1128...

Top 1281. Oct 1, 2005 5:39 AM

» SteveT - Insiders Evacuating Coal-Mine Stocks

Insiders Evacuating Coal-Mine Stocks

By NAUREEN S. MALIK

AMERICA HAS LONG BEEN KNOWN as the "Saudi Arabia of coal." And a slew of coal-mining companies have been among the best performing U.S. stocks in recent years.

Shares of Peabody Energy, the world's largest publicly-traded coal company, are up a whopping 10-fold since hitting a low of $8 in July 2002. And the shares of other companies, including Arch Coal and Consol Energy, have enjoyed similar rises.

But if coal company insiders are any judge, it may be time to take some profits in this industry.

Insider selling has picked up at Peabody Energy, Consol Energy, Arch Coal, Massey Energy and Alliance Resource Partners.

Mark LoPresti, a senior quantitative analyst with Thomson Financial, says much of the selling is inevitable given the run these stocks have enjoyed.

"It's almost criminal not to be taking advantage of these higher prices," he says.

In fact, share-price gains by these coal companies are only mirrored by oil and gas refining companies, he says.

"(Coal) industry fundamentals look favorable," adds Mark Reichman, energy analyst at A.G. Edwards & Sons, particularly as utility companies, which consume 92% of coal produced, rely more on this cheaper source of energy as oil and natural gas prices continue to rise.

Historically, supply of coal increased following such a run up in coal prices, he says. But, production is up less than 1% this year and utilities are facing inventories near historical lows, he says.

As Peabody Energy's share price passed $80 in recent weeks, it triggered selling in insiders' trading plans.

Over the past 90 days, six insiders sold $309,000 shares after exercising options for $21.4 million, mostly on behalf of a family trust, according to Securities and Exchange Commission filings.

"They've been regular sellers throughout the whole run," but this was the largest amount of shares insiders sold in any year, says LoPresti. "They're taking great values for their shares."

In September alone, Irl F. Engelhardt, chairman and chief executive officer, sold 50,000 shares for $4.2 million, while Gregory H. Boyce, president who will take over as CEO next January, sold 15,000 shares in September.

At Consol Energy, which produces natural gas as well as coal, nine insiders sold 170,000 shares for $11.7 million, which included selling by CEO J. Brett Harvey and Chairman John Whitmire.

The rise in the stock's price, which has gained about 117% over the past twelve months, triggered selling according to preset 10b5-1 plans instated by insiders more than a year ago, says Thomas Hoffman, vice president of external affairs at Consol.

Whitmire, who recently sold 34,000 shares, is just rebalancing his portfolio, given he "is an independent board member and accepts only [stock] compensation," says Hoffman.

Foundation Coal, the fourth largest U.S. coal producer, launched its IPO last December. Its shares are up 68% this year. Hans J. Mende, a board member, sold 1.5 million shares for $54 million on behalf of AMCI, a mining and marketing company he co-founded.

Meanwhile, Arch's shares gained 97% this past year, boosted by record second-quarter revenues. Six insiders sold 213,000 shares for $13.2 million.

Arch spokeswoman Kim Link says, "If you look at the trading on a percentage basis, Arch's senior management has exercised a small percentage of their overall holdings."

By contrast, selling has been more subdued at Massey and Alliance Resource Partners, says LoPresti. Eight Massey insiders sold 13,000 shares for roughly $640,000 in the last 90 days. At Alliance Resources, two executives made $380,000 on 4,100 shares.

Over the past year Massey's stock rose 82%, while Alliance Resources gained 64%.

In selling shares in recent months, insiders are basically trying "to protect their profits," says Thomson's LoPresti. "If you think of it in terms of you got money riding on the roulette table and hit red ten times in a row… you get more and more nervous about leaving it there."

-- posted by SteveT

Top 1282. Oct 1, 2005 5:49 AM

» SteveT - Oil Output Will Peak, But When?

Oil Output Will Peak, But When?

By DIMITRA DEFOTIS

OLD GREENWICH, Conn. -- A peak in global oil production is either upon us or comfortably decades away, depending on whom you ask.

Experts on a panel discussion on the subject at the John S. Herold energy conference here this week agreed that daily global oil production, now about 85 million barrels a day, will indeed "peak" at some point.

The question, of course, is when.

Concern about dwindling oil production globally is helping drive oil prices to new levels -- near $67 per barrel Thursday, compared with historic averages closer to $25.

As fears of "peak oil" production grow amid strong demand and reserve growth limited to about 2% a year despite investment, the experts agree that higher oil prices are here to stay.

But with a little effort on the part of consumers, peak oil need not lead to drastic changes in the American lifestyle despite dwindling and expensive fossil fuels.

Charles Maxwell, once Wall Street's leading energy analyst, says that Americans will need to conserve energy voluntarily or they will face "higher prices with harsh economic consequences."

Domestic U.S. oil production peaked in 1970. The question is whether worldwide production could peak in several years, as some theorists contend, or if the high point is decades down the road.

That would give governments and individuals more time to invest in conservation and alternative fuels, and to adjust to the higher cost of living.

Maxwell thinks output will peak between 2015 and 2020 -- a decade or so from now.

He says the impending energy crisis will create a new world order, with a wave of warnings over the next 25 years. The damage to oil and gas production facilities in the Gulf of Mexico from Hurricanes Katrina and Rita were the latest warnings, he told attendees at the conference organized by Herold, an independent energy research firm.

Maxwell thinks energy conservation measures, promoted by the U.S. government, are needed to push the day of reckoning further into the future. (See Barron's, "The Gathering Storm1," Nov. 15, 2004.)

Those up in arms about the production peak are disciples of the late M. King Hubbert, an oil industry geologist. He revealed a scary-looking bell curve in 1956 and predicted U.S. oil production would peak in 1969. Oil production did indeed peak a year later.

Today, peak oil is a hot enough debate that there's an Association for the Study of Peak Oil, based in Sweden. Arthur L. Smith, chairman of John S. Herold, knew Hubbert and is a follower.

"I think we are on top of peak oil now," says Smith.

The peak would mark the end of cheap oil. And if people cannot switch to alternatives fast enough, global economies could suffer.

Tom Petrie, who runs an energy investment bank and research firm in Denver, says that "a lot of things can be done to mitigate the [oil production] decline curve, but they are just mitigators."

One big unknown in determining just when production will peak is Saudi Arabia.

The Saudis possess 25% of the world's proven oil reserves and say they can double their daily output of 10 million barrels. But if the Saudis are near their production peak, as some think, oil prices could head higher still.

Petrie credits Matthew R. Simmons, chairman of a Houston energy investment bank, in getting the peak-oil debate going. (See Barron's, "Crude Calculations2," Nov. 29, 2004.)

Simmons doubts the Saudis' future production promises. His new book is on "the coming Saudi oil shock."

But the Saudis aren't the only wild card that could cause oil price spikes. Any severe short-term disruption in supplies, from civil unrest in Venezuela to another bad Gulf of Mexico hurricane, could send prices past $100 per barrel.

While those spikes might be temporary, higher oil prices mean strong earnings for energy companies, says Mark Tinker, head strategist at Execution, a London-based brokerage.

"The guys I talk to have trillions of dollars to invest," Tinker told the investors and energy executives assembled here. "Sustainable returns are out there. Doing nothing is taking a risk."

Of course, if the hurricanes and higher energy prices damp consumer sentiment enough that the U.S. economy slows for an extended period, demand would decrease, the production peak could be pushed further into the future and oil prices would come down.

Tinker disagrees with the gloom-and-doom prognosticators. He says those who thought the Nasdaq market crash, terrorism, the jobless recovery, the weak dollar or the housing bubble would crush the U.S. economy have been wrong so far.

"High oil prices will no more kill the American consumer than any of the previous [scares]," Tinker says.

But given the importance of oil to the U.S. and world economy, peak oil is bound to cause some wounds. No one at the conference was in a hurry to make dire predictions.

Comments? E-mail us at online.editors@barrons.com
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-- posted by SteveT

Top 1283. Oct 1, 2005 5:53 AM

» SteveT - Cheaper Oil May Not Sink Energy Stocks

Cheaper Oil May Not Sink Energy Stocks

By DIMITRA DEFOTIS

FOR NERVOUS NELLIES WORRIED ABOUT how to invest in energy if the latest oil price bubble bursts, the past may be prologue.

In 2001, a recession helped crude prices drop 26%. And while the economy today is still growing at about 3% a year, the sharply higher costs of running a car, heating a home and delivering goods could crimp consumer spending.

That in turn could curb oil demand and push prices below $50 per barrel in the coming year, from nearly $70 now.

Meanwhile, high oil prices are encouraging investment in fuel-efficient hybrid automobile engines and liquefied natural gas technology that ultimately may reduce reliance on crude.

"We believe the average price of oil will be $50 and it will spend 70% of the time between $40 and $70 -- at least in the next five years," says Waqar Syed, an oil field services and drilling analyst at energy research firm Petrie Parkman.

When prices have fallen in the recent past, shares of exploration companies have suffered more than those of refiners and large, integrated firms that operate in both those businesses.

This week, oil prices were rising again as Hurricane Rita threatened to damage oil production and refining facilities in Texas and the Gulf of Mexico.

To help curb prices, the Organization of Petroleum Exporting Countries said Tuesday it could produce two million barrels a day of remaining spare capacity, although some industry observers questioned OPEC's ability to do so.

Longer term, higher oil prices should generate more production, and energy prices will find a floor near $40 per barrel, says Zack Schroeder, an energy analyst at BB&T Asset Management.

High energy prices are having less impact on the economy than they did in the 1970s, when energy comprised roughly 8% of U.S. consumer spending, versus 2% to 3% now, says Bernard Picchi, senior energy analyst at Foresight Research Solutions (see Weekday Trader, "Letting the Gas Out of Oil Price Fears1," June 1, 2004).

But extremely high energy prices or major supply interruptions still could trigger a recession, and crude prices would tumble, Picchi says. He thinks they could fall to $50 a barrel for six months or a year.

Oil prices hit roughly $26 per barrel in December 1996 before dropping nearly 60% through November 1998.

In November 2000, prices peaked at $34 per barrel before falling 42% through January 2002, according to Thomson Financial/Baseline.

In each case, increased OPEC production was a big factor behind the price drop. In 2000-2002, a U.S. recession weakened global demand.

Historically, as oil prices fell, investors flocked to integrated oil companies for their dividends, strong refining margins and breadth of global exploration activities.

Shares of major international integrated oil companies rose roughly 20% in 1997 and fell less than other energy sectors did in 1998. They held up well in 2001, too, especially those based in Canada.

During each of the two big recent price declines, shares of refiners produced double-digit returns, while exploration companies consistently showed double-digit declines, according to John S. Herold, an independent energy research firm (see table, "When Oil Prices Fall").

"If you think prices are going to fall, we think margins are moving to natural gas and refining," says David Talbot, an energy investment strategist at Herold.

The integrated oil companies are among the biggest refiners and natural gas producers worldwide.

"Where would I want to hide? BP, Royal Dutch Shell, Exxon Mobil," Talbot says.

In the current cycle, producers are finding it harder and more costly to replace depleting supplies. That's why some think demand and prices for services companies -- and their stock prices -- should hold up.

"If oil prices decline, oil stocks will decline, too, but you will still have tremendous demand for oil services as long as oil is above $40 a barrel," says Don Hodges, a Dallas-based co-manager of the Hodges Fund.

He says he bought shares of mid-cap global offshore drilling services company Ensco International this week and recently added Schlumberger, a large global oil and gas services firm, to his portfolio.

"The services sector has to keep working even if the oil price comes down, because worldwide demand and supply are so close," says Sarah Hunt, an analyst at Capital Management Associates, a New York money management firm.

Of course, peak oil theorists and some Wall Street firms like Goldman Sachs expect oil prices to top $100 a barrel. And heavy demand from rapidly industrializing countries like China and India could keep prices high.

So, even if oil prices fall, they are unlikely "to crater as they have in the past," says David Kelly, chief economist at Putnam Investments.

That could mean a boon for all energy sectors, bucking historic trends.

But if history is any guide, at some point energy investors may shift to integrated oil companies, refiners and some services companies to brace themselves against the long-term storm -- an economic slowdown leading to lower oil prices.

Full Disclosure:
• John S. Herold is an independent research firm that provides services to oil and gas companies, investment banks and institutional investors. Its clients include Exxon Mobil, BP, and Royal Dutch Shell. David Talbot does not hold shares in those companies, according to a John. S. Herold spokesman.

• Don Hodges, co-manager of the Hodges Fund, said he holds an undisclosed number of shares of Ensco International and Schlumberger.

• Capital Management Associates owned 32,000 shares of Tidewater, 8,200 shares of Nabors and 13,000 shares of Cooper Cameron in the quarter ended June 30, according to StreetSight.net. Each firm provides services related to oil and gas drilling and equipment.

Comments? E-mail us at online.editors@barrons.com
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-- posted by SteveT

Top 1284. Oct 1, 2005 6:01 AM

» SteveT - LNG Isn't Just Hot Air

LNG Isn't Just Hot Air

By DIMITRA DEFOTIS

TURNING NATURAL GAS INTO A LIQUID is getting a lot of attention this week at a conference for investors in energy stocks.

"The light is turning green now for liquefied natural gas [LNG]," says John Parry, a senior equity analyst at John S. Herold, an independent energy research firm which sponsored the weeklong conference in Old Greenwich, Conn.

With U.S. demand for natural gas strong and domestic supplies dwindling, consumers must look overseas for natural gas. But in order for natural gas to make it to U.S. shores cost-effectively, it must be turned into a liquid form for easy shipping.

A number of energy companies are building facilities near natural-gas sources to liquefy gas at -260 degrees Fahrenheit, thereby compacting its volume and cutting transport costs. Then, it is shipped in special tankers to "regasification" plants, which convert the LNG back into gas.

This timing couldn't be better. Natural-gas futures hit a new all-time record at $13.45 per million British thermal units Wednesday after a report said U.S. consumers can expect higher heating bills this winter.

There are about 50 U.S. LNG projects proposed, and LNG should increase to 12% of U.S. natural-gas supply by 2010, from 7% now, says Parry.

Investors in LNG infrastructure say the timeline for getting it to U.S. shores is moving faster than expected.

Marathon Oil, the integrated exploration and refining company, said Tuesday that the race is on to get LNG to market between 2007 and 2009 when profits will be strongest. (See Weekday Trader, "Is Liquid Gas Liquid Gold?1" Nov. 17, 2004.)

Marathon told conferees it is poised to start the second phase of its LNG project in Equatorial Guinea, on Africa's western coast, according to Henry Aldorf, a senior vice president at Marathon.

Natural gas is fueling acquisitions, too. Norway's Norsk Hydro this month said it would acquire Spinnaker Exploration, a Houston-based independent exploration and production company, for $2.45 billion. Parry estimates Norsk paid a nearly $1 billion premium for Spinnaker's reserves.

"Natural gas is where the real action is," says John Ryan, a longtime energy investor and an adviser to Windlass Energy Value Partners Fund, an independent Houston-based fund. "We don't have enough in the U.S. and Europe. LNG is going to be a big business."

Parry estimates roughly 15% of Marathon's earnings will come from natural gas in the coming years, making it more exposed to the upside than the biggest LNG investors -- the so-called super-major oil firms including Royal Dutch Shell, BP, Exxon Mobil and Total.

But another way to play the growth of LNG is construction, says John Olsen, who co-manages several Houston-based energy hedge funds. The veteran energy investor with Sanders Morris Harris Group, who says he has "kissed a lot of frogs and chased a lot of rabbits" in the sector, thinks the next five years will be the best of his career.

Olsen's LNG-exposed stock picks include Shaw Group and Foster Wheeler, construction and engineering companies whose energy projects include LNG-related plants. Shares in each are trading at roughly 20x forward earnings, but they deserve a premium to the broader market, he says.

"There are a huge amount of energy construction contracts to be awarded -- especially in Qatar and Saudi Arabia -- and these companies have a longstanding presence in the Persian Gulf," Olsen says.

Of course, energy stocks look rich to many investors. Marathon shares are up roughly 72% in the past year.

And the future price of natural gas is an important question mark. The higher it goes, the more foreign governments controlling reserves will push for a greater share of LNG profits. If prices are high, utilities can still switch to coal and nuclear to turn on the lights.

But expanding coal and nuclear power is problematic. And broadly, bullish investors say energy stocks still have upside because the companies budget for commodity prices at levels well below what the futures market predicts. (See Electronic Q&A, "Still Stoked About Energy2," Sept. 27, 2005.)

That's why some stocks looking like the frog now, could turn into the prince.

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-- posted by SteveT

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Top 1285. Oct 1, 2005 6:44 AM

» SteveT - Saudi Arabia: A Whole New Drill

Anticipating a rise in long-term demand, the kingdom is ramping up production

Saudi Arabia's image as master of the oil patch has been taking a beating of late. For months global markets have fretted that the Saudis can't or won't produce enough oil to keep a lid on soaring prices. Politicians around the world are blasting the kingdom for failing to open the taps more. And Houston investment banker Matthew R. Simmons has captured headlines with his book Twilight in the Desert, which says that Saudi production may be peaking and an oil shock bigger than the current one is on the way.

Yet, little noticed by the outside world, the Saudis are making some bold moves. In recent months, Saudi Aramco, the national oil company, has been rapidly inking deals with drilling rig operators and oil field contractors. Some 70 drilling rigs are now operating in the kingdom, up from 55 in 2004 and about 20 in the mid-1990s. By next year Aramco aims to have 110 rigs drilling, although that may be unreachable because of fierce competition for equipment.

It's all part of a massive effort to add some 3 million barrels per day of production capacity -- comparable to a large producer such as Kuwait or Venezuela. That would be a more than 30% leap over the roughly 9.5 million bbl. per day Saudi Arabia is now producing, although in a pinch it claims that it could get output up to 11 million bbl. The cost of hundreds of new wells and related infrastructure could exceed $14 billion. A spokesman for Saudi Aramco says the national oil company is even looking at "scenarios to bolster [production] to even 15 million barrels per day" if demand warrants.

If the Saudis succeed, the tightness that has plagued the world's oil markets may ease for the medium term, relieving prices. New Saudi oil would join increases from West Africa, Brazil, Central Asia, and the Gulf of Mexico. "This is very important," says Jamal Qureshi, an analyst at consultants PFC Energy in Washington. Saudi production combined with the others could lead to "a pretty good supply bulge" over the next few years, he says. But unlike a non-OPEC country such as Russia, which is likely to produce close to flat out, the Saudis may dial back on both production and expansion plans if they think a glut is developing.

What has kicked the Saudis into gear? The surge in demand from the U.S., China, and elsewhere seems to have convinced them that it is worth pouring money into expanding production. The Saudis also want to regain lost clout in the market. While they aren't sorry to be earning $145 billion or so from oil this year, the Saudis don't like their lack of power over prices. The only way to regain it is by having barrels to add or subtract from the market. "They want to maintain a certain spare capacity cushion. The price runups we saw in the last few years have spooked them, too," notes Qureshi.

The Saudis are also well aware that the spare capacity they do have is the wrong stuff. Their clients want light crude, best suited for converting into gasoline. The heavy crude that forms most Saudi spare capacity sells at a discount, if at all. Much of the new oil will come from expansion of fields such as Qatif and Khursaniya that were mothballed in the 1980s, when production fell and the Saudis decided not to juice it up again. They'll also make big additions to the newer Shaybah field, which produces some 500,000 bbl. per day of light crude from below the red sand dunes of the Empty Quarter.

VYING FOR RIGS
Of course a massive expansion of oil production won't be easy for the Saudis, who have coasted, with a few exceptions, for 20-plus years. Aramco engineers are proud of the job they did in the 1990s developing Shaybah, which was brought onstream ahead of schedule and uses high-tech multi-branched wells. But their new undertakings are on a far grander scale. They will need to manage large numbers of foreign contractors on several different sites -- no easy task. They will also need to pay top dollar in an overheated market.

The Saudis are already vying for a limited number of rigs. Aramco will be paying Houston-based Rowan Cos. (RDC ) $100,000 to $105,000 per day for each of four large offshore rigs slated to begin exploring for oil and reworking wells in the Arabian Gulf for a three-year period beginning in early 2006. The Saudis originally contracted for five Rowan rigs but one is missing following Hurricane Rita. Rowan hasn't found work in the kingdom since 1981. "It's a nice way to go back," says William C. Provine, an investor relations vice-president. Another participant is Bermuda's Nabors Industries Ltd. (NBR ), which has 10 rigs in the kingdom.

The Saudis also face technical challenges. Oil projects are complex and expensive. It is not just a question of drilling. Massive infrastructure needs to be built for separating the oil from the gas, for injecting water into the fields to maintain pressure, and for piping the oil to refineries. According to one industry source in the region, the Khurays field, the largest expansion planned, will need an estimated 400 wells drilled to produce the target of 1.2 million bbl. If each rig drills six to seven wells per year, that would require some 20 rigs at the site for three years. The field will also need 2 million bbl. per day of water injection, facilities to process the water, and pipelines.

Given all that, getting production up even to 12.5 million bbl. per day seems a tall order, especially considering the Saudis need to add enough capacity to offset declines of 400,000 to 500,000 bbl. per year in existing fields. "Clearly Aramco has allocated the funds and set up the contracts for the expansion. The challenge will be for the contractors to mobilize the materials, drilling equipment, and human resources to meet the kingdom's very tight schedules," says Sadad Husseini, a former Aramco executive vice-president for exploration and production.

Then there is the question of whether the Saudis have the oil. As Simmons points out in Twilight in the Desert, the Saudis have few alternatives but to look for gains from fields that had serious problems in the past. But analysts such as Qureshi, who closely watch the kingdom, think the Saudis will at least come close to meeting their goals -- as long as world demand holds up. If the Saudis see demand leveling off, they will likely delay. So the key to future markets and to how fast the Saudis add production is how fast demand grows -- something no one has proved very good at forecasting so far.

By Stanley Reed in London

-- posted by SteveT

Top 1286. Oct 3, 2005 1:53 PM

» lcha - MONSTER MACHINES

Oct. 1, 2005, 6:15PM

MONSTER MACHINES

High fuel cost can't curb Hummer love
-------------------------------------

New dealership says business is doing just fine

By DAVID KAPLAN
Copyright 2005 Houston Chronicle

COASTAL residents fleeing Hurricane Rita may have been struck by the
sight of a new business along the Gulf Freeway in Clear Lake.

It would be hard not to notice the yellow Hummer mounted on the roof of
one-month-old Ron Carter Cadillac Hummer Saab and the vast sea of
Hummers on the lot.

With recent gas shortages and rising gas prices, you might think that
the Hummer was bound for oblivion. Some Hummers get about 10 miles per
gallon.

Yet the Hummer is on track to break overall sales records in 2005.

Reasons for its staying power include the new Hummer H3, which gets
better gas mileage than its H1 and H2 forerunners. Just as important,
Hummer has established itself as a powerful, durable brand.

The Hummer transcends the automotive realm and is "really a lifestyle,"
said Wes Brown, a partner in the automotive research firm Iceology in
Los Angeles. He noted that consumers can now purchase Hummer brand gas
grills, footwear, wallets and apparel.

The vehicle has a "strong image of power and freedom, and being able to
go where I damn please," Brown said. It conveys a message that is
"muscular, brutish and in-your-face."

"It's not just 'Let me by,' " he said. "It's 'Get out of my way!' "

The macho SUV inspires resentment in other drivers, but part of being a
Hummer owner is not caring what others think, he said.

But the steep rise in gasoline prices may, over the long term, slow
sales of Hummers and all SUVs, some analysts believe.

Among consumers there has been a slight shift away from the SUV, Brown
noted, but the Hummer seems to be immune to it because of its strong
name and image. Still, the Hummer is not a high-volume selling SUV
like, say, the Chevy TrailBlazer, which sold 169,552 units through
August of this year.

Hummer's 2005 sales totals through August were 31,211 units, compared
with 17,736 sold in the same period last year. The H3, introduced this
year, is a big reason for the surge.

At the other end of the spectrum, Toyota's hybrid Prius sold 31,406
vehicles during the first eight months of 2004, compared with 72,849
during the same period this year.

Higher gas prices won't hurt Hummer sales, according to Mark Brown,
general sales manager at Ron Carter Cadillac Hummer Saab. People who
can afford Hummers generally are not concerned with the price of
gasoline, he said. He also noted that the H3 gets relatively decent gas
mileage.

However, Kevin Tynan, a senior auto analyst with Argus Research Group,
believes the Hummer and SUVs in general are starting to feel the pinch
from rising gas prices.

The whole "bigger is better" mentality that once dominated the SUV
market is seeing the effects of higher fuel costs and environmental
concerns, and "buying very big SUVs has become uncouth at this point,"
he said. The midsize SUV market that the H3 finds itself in is very
competitive, Tynan said.

It is ironic, he said, that the Hummer started out as "the biggest,
baddest vehicle that could go through 8 feet of water. The H1 was so
over the top: big, loud and expensive to maintain. With the H3, they've
come 180 degrees away from that in order to stay in the hunt."

New market

The H3 creates a new Hummer market, said Kevin Thieleman, sales manager
of Demontrond Hummer. It starts at just under $30,000, much less than
the H2, and gets 16 to 20 miles per gallon. Its smaller size makes it
easier to drive and park. At McGinnnis Hummer, the H3 recently has
accounted for 80 percent of sales, Jary Adams, sales manager, noted.

The H3 is a unique addition to the "midsize luxury off-road market,"
which also includes the Nissan Pathfinder and Jeep Grand Cherokee,
Adams said.

The original Hummer market, represented by the H1 and H2, is much less
concerned with fuel efficiency or moderation.

For some people, the Hummer has come to represent American excess.
Singling out the Hummer may be unfair, however.

"People like to pick on the Hummer, because it's an easy target," said
Brian Moody, road test editor of Edmunds.com, a Web site for auto
buyers and sellers. But compared with some other gas guzzlers, the
Hummer is not so unusual.

The Dodge Ram 1500 SRT-10 pickup, for example, takes premium fuel only
and gets 9 miles per gallon in the city and 12 on the highway, Moody
noted. The Hummer H3 gets 16 city/20 highway, which isn't that bad for
an SUV. The Chevy Tahoe gets about the same.

The monstrous 86.5-inch-wide H1 costs between $140,000 and $150,000.
Relatively few H1s are produced. They are more of a celebrity-type
vehicle, Moody noted.

Styled after the Humvee military vehicle, the Hummer made its debut in
1992 and was acquired by General Motors seven years later.

Off-road capabilities

Ron Carter built its new dealership in Clear Lake because many dealers
were required by Hummer to build modern showrooms, Brown said. The
Hummer on the roof — it's a real one — was the brainchild of sales
manager Alan Hall.

Many people buy Hummers, not to show off, but simply to have fun in the
country, said Mark Brown, the general sales manager at Ron Carter.

"They like the off-road experience" and seeing what the vehicles are
capable of, he said.

Phyllis Daugherty, a floral designer from La Porte, is one of 35
members of the Texas Gulf Coast Hummer Owners Group. On weekends,
members in their Hummers crawl single-file over rocks, creeks and hills
and through mud. They are careful not to harm the environment, she
said.

Terry Porter, a train derailment specialist, owns an H1, H2 and H3, and
he just ordered another H1 from Ron Carter.

His first H1 is for himself; he uses it for his work.

"It's a neat toy," he said, capable of climbing a 72-degree plane. He
bought the H2 for his wife and the H3 for his daughter. He ordered a
second H1 because the new version has more horsepower and torque.

"I'll keep buying every new model they make," Porter said.

-- posted by lcha