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

Top 1328. Nov 17, 2005 12:06 PM

» lcha - Re: Re: Re: Re: Re: Groups join to cut U.S. oil thirst

In response to Re: Re: Re: Re: Groups join to cut U.S. oil thirst posted by Kirk:

I believe Kirk probably has the best solution with price supports. If oil companies KNEW they were going to get at least $40 per barrel, let's say, then MANY more drilling prospects would become economical on a risk adjusted basis. Given the history of plumetting oil prices, many companies are still using $22-$25 oil as their price benchmark for grading prospects. It is the prudent thing to do.

As for oil companies promoting conservation, let me save them a lot of time and effort with this suggestion, which I know they would propose anyway. Much tougher CAFE standards that are enforced. Problem sovled. It's so easy no one wants to do it. VROOM, VROOM!

-- posted by lcha

Top 1329. Nov 17, 2005 12:28 PM

» Normxxx - Re: Re: Re: Re: Re: Re: Groups join to cut U.S. oil thirst

In response to Re: Re: Re: Re: Re: Groups join to cut U.S. oil thirst posted by lcha:

Kirk: Give them price supports, perhaps at $45 per bbl

I don't know of any Republicans proposing such. But, if what you say is true, and this is a partisan issue and a solidly Republican Congress is too chicken to pass such legislation, then we can best forget about it.

But, how about a campaign to educate the people and insure them that the oil companies will not simply profit by such supports, with little or no added benefit?

Much tougher CAFE standards that are enforced. Problem sovled. It's so easy no one wants to do it. VROOM, VROOM!

Well, what you are saying (and this has been well proved) is that we have chickens for congresspersons and administration and no one will willingly attempt to reign in the gas guzzling until the next energy recession/depression hits! {It only took W nearly 5 years to suggest a little conservation.}

And, wasn't Iraq supposed to solve our gas problems? Gas prices didn't get this high with all of the Kuwaiti fields out of commission!

-- posted by Normxxx

Top 1330. Nov 17, 2005 2:15 PM

» lcha - Re: Re: Re: Re: Re: Re: Re: Groups join to cut U.S. oil thirst

In response to Re: Re: Re: Re: Re: Re: Groups join to cut U.S. oil thirst posted by Normxxx:

Well, what you are saying (and this has been well proved) is that we have chickens for congresspersons and administration

I am in such complete and total disgust with both the Republicans and Democrats at this point that to call them chickens would entail elevating their status to a level that I am not comfortable with.

-- posted by lcha

Top 1331. Nov 17, 2005 4:38 PM

» axolotl - Re: Re: Re: Re: Groups join to cut U.S. oil thir

All oil is of course not equal - there is light Brent and West Texas Intermediate and heavy oil, etc, but it is a worldwide commodity and I am not sure that it is practical to try to support a commodity in the USA that is available worldwide. The major oil co.s are international and it is a complex business. The USA supports alcohol from corn even though it is inefficient and in fact block the importation of alcohol from Brazil which is from cane and 3 times more cost efficient than he corn process. The current price spike has caused many wells to be drilled and has spurred alternatives. The Gulf of Mexico is said to contain enough NG for many decades, but it is expensive to drill in the Gulf and Florida needs to allow it within its area. The path to energy independence is to limit foreign imports a few percent per year until it is achieved.

-- posted by axolotl

Top 1332. Nov 19, 2005 6:28 AM

» SteveT - High on Japan…and Energy

Interview with Chuck Clough, Manager, Clough Global Equity and Clough Global Allocation Fund

CHUCK CLOUGH'S CLOSED-END FUNDS have invested in a handful of profitable themes and trade at nice premiums to net asset value. Here's what he sees now.

Is the energy story over?

Nobody believed oil and gas prices would stay high. It's always been a fakeout in the past, the Lucy and the football [which she always snatches away just before Charlie Brown can kick it in the Peanuts comic strip]. This time, the prices have stayed. Companies are getting conviction. We're starting to see huge increases in drilling-rig day rates and much longer contracts.

What's the case for Japan?

Not only do you have rising incomes, employment and capital spending, but you also have a huge shift of domestic savings into the capital markets. Japan could be the bull market of this new century.

What's your outlook for the U.S.?

This is the dullest market I've lived through. The Standard & Poor's 500 is 1200. It was at 1200 in 1998. We spend a lot of time trying to predict something that hasn't gone anywhere. The return will be fairly disappointing. We have a $55 trillion capital market in the U.S., nominal gross domestic product is $12 trillion, and that GDP has to huff and puff awfully hard to create high returns.

Isn't it unusual for closed-end funds to trade at a premium?

There tends to be too much product and a lot of funds are single-purpose, designed not to increase net asset value, but instead to provide a yield. Our funds are designed to increase NAV.

YOU MIGHT THINK THAT ENERGY STOCKS HAVE HIT their highs, but Chuck Clough considers that a delusion. The chief of Boston-based Clough Capital Partners says that while crude prices have backed off, natural-gas supplies are getting tighter, as North American gas fields are being depleted. "There will be a second level of tightening," Clough predicts confidently. "This is still in the early stages of being recognized by the capital markets. I hate to use this metaphor, but we're in the third inning."

THIS ISN'T A NICE PROSPECT for consumers, but it's good news for investors in Clough's two closed-end funds: Clough Global Allocation (GLV), and Clough Global Equity (GLQ). The funds have a fifth of their assets committed to natural-gas outfits, drillers and coal.

Both have achieved nice returns, and both, as their names attest, can range around the world. Global Allocation has about 70% committed to stocks; Global Equity more than 80%. They can use a modest amount of leverage and sell short judiciously. In keeping with Clough's emphasis on capital preservation, the portfolios have healthy slugs of cash, bonds and utilities.

This year, Global Allocation has returned 22% versus 3% for the Standard & Poor's 500. Since its April inception, Global Equity is up 9.6%, versus 7.3% for the index. And both trade at premiums to net asset value, attesting to the skills of their manager.

You may remember Clough as the global strategist (until late 1999) at Merrill Lynch, where he won a clutch of first-place rankings from Institutional Investor magazine. He grew to be increasingly notorious for the bearish calls he began issuing in '98, making life tougher for the legions of brokers at the company whose longtime corporate motto was "bullish on America."

Just days after he opened his new Boston-based firm in early 2000[[NOTE: I got date from Clough prospectus], the Nasdaq peaked. It subsequently collapsed, then marched higher after the Sept. 11 terrorist attacks.

As before, Clough focused on identifying a handful of key economic themes and baskets of stocks that benefit from them -- with no small success.

Today, the firm manages $1.45 billion in assets -- $1.1 billion is in the two closed-end funds, and the rest in hedge funds and other accounts. Most of Clough's own liquid assets are tied up in the funds.

One big investment area for the funds is North American natural gas, where years of underinvestment have finally led to rising prices. North American gas fields are mature, and production was hit by Hurricane Katrina.

At the same time, the strong economic growth of China and Southeast Asia has driven up demand for oil, with which natural gas competes. This winter alone, overall demand for gas in the U.S. is expected to rise 2.3%, with residential demand jumping 7.4%. North American gas producers must acquire new reserves, or drill for them.

Says Clough: "The purpose of high commodity prices is to entice new investment. This time, they're high enough that companies are finally getting conviction." Expect even more capital spending. Companies must go deeper to find gas: "If you're going to bring in new capacity, it will be in 70 to 100 feet of water."

Offshore deep-water rigs cost $300 million to $500 million. Already, producers are entering into premium-rig contracts that extend to 2008. Quite a change from prior years, when rigs were booked per job. Meanwhile, the contracts "are at prices nobody would have dreamed of a year ago." Thus, the value of gas reserves and rigs is rising. And consolidation supports higher valuations.

Clough likes Western Gas Resources (WGR), Chesapeake Energy (CHK), Nabors Industries (NBR) and Ensco International (ESV).

ANOTHER BIG THEME IS A REBOUND for Japan. This year, the benchmark Nikkei 225 index is up 22.5%, but in dollar terms it is up just 7%, owing to the greenback's strength.

That ought to reverse. Says Clough, "There are good Overboughts and bad Overboughts. The bad ones happen late in economic cycles. In the good ones, earnings are in a very early stage of development. This is an early one. We think in 2006, we'll get both the market and the currency going for us."

Japan, Clough maintains, is just in the first stages of a bull market. Corporate Japan, after years of restructuring, has been building cash. Deflation simply masked corporate health.

Today, Japan's economy is improving as companies begin spending on capital equipment and on labor. Political reforms are also helping, particularly the privatization of the post office, which de facto is Japan's largest bank and where savers have stashed trillions of dollars.

Restructuring ought to push that cash into higher-returning instruments like equities, he says. At the moment, just 3% of Japanese savings reside in mutual funds.

"Not only do you have rising incomes, employment and capital spending, but also a huge shift of domestic savings into the capital markets. Japan could be the bull market of this new century," Clough maintains. Here, he likes banks like Mizuho Financial and Bank of Yokohama, Japan's largest regional lender, on the theory that having restructured, they're poised to grow.

HE ALSO FAVORS FULL-SERVICE brokers like Nomura Holding and Daiwa Securities: "They're highly leveraged, and companies in Japan will raise capital, and there will be more mergers and acquisitions, which clearly benefits the full-service guys, and trading volumes are up a lot." He's a fan of Daiwa House Industry and Goldcrest, which are benefiting as Japan's property market recovers.

He's big, too, on emerging markets, particularly Brazil and Southeast Asia, which have restructured capital accounts and banking systems since the 1997 currency crisis, and which are now benefiting from strength in domestic consumption, which leaves economies less dependent on exports.

Brazil is easing credit, but maintaining a "responsible" monetary policy: The overnight rate is 19%, and the two-year note still yields 15%-plus, even as loans to the private sector are jumping. As interest rates fall, asset prices will boom, he says. In Brazil, he likes jet manufacturer Embraer (ERJ) and budget airline Gol Linhas Aereas (GOL).

In Asia, he's a fan of India's ICICI Bank (IBN) and a clutch of exchange-traded funds, including one focused on Malaysia, the iShares MSCI Malaysia Index Fund (EWM).

"The biggest sleeper in the portfolio is global insurance," claims Clough, who forecasts more consolidation and better pricing for the much-maligned sector. About $180 billion of capital has exited the business, he points out. "You have a chronic capital shortage, profitability looks good, good upgrading prospects. These are the cheapest stocks on the planet." Among his favorites: PartnerRe (PRE), RenaissanceRe Holdings (RNR) and Bristol West Holdings (BRW).

IN HIS SPARE TIME, Clough serves on a slew of boards, including the one at his alma mater, Boston College, where he is chairman of the board of trustees. An ordained Catholic deacon at his local parish in Concord, Mass., he has also performed scores of weddings and baptisms.

His two partners are Jim Canty, a former securities lawyer who now oversees the energy, insurance, finance and industrial sectors for the firm, and Eric Brock, a former investment banker who looks after technology, telecom, media and health care. Both are sons-in-law.

THESE DAYS, CLOUGH IS ON THE HUNT for new themes. One might be hospital-management companies like HCA (HCA) and Community Health Systems (CYH), which have restructured and may be able to raise prices to health-maintenance organizations.

And his outlook for the market? Clough sighs. "What I miss the least is making the market predictions. It was a silly exercise. And I wasn't very good at it."

Still, he adds, "This is dullest market you and I have lived through. The S&P was at 1200 in 1998, and it's at 1200 now. It will be 1200 in 2009. We have a $55 trillion capital market in the U.S. and nominal gross domestic product is $12 trillion. A $12 trillion GDP has to huff and puff awfully hard to create high returns on $55 trillion on financial assets. The return will be fairly disappointing."

Yet there is still money to be made. "There are two huge migrations of capital: One from the developed world to the developing world, because returns on investment are higher there, and another is building consumer goods and infrastructure in the developing world. The real question is where will the investment opportunities be?"

E-mail comments to editors@barrons.com
URL for this article:
http://online.barrons.com/article/SB1132...

-- posted by SteveT

Top 1333. Nov 21, 2005 5:56 AM

» lcha - Shell Wake-up

Lcha here: As of Friday, 46% of Gulf oil and 33% of Gulf NG was still offline

Nov. 19, 2005, 8:38PM
REFINING THE ISSUE
When execs wake up and smell the oil
Some thoughts on the high prices that no one in business celebrates

By JOHN D. HOFMEISTER

Let us dispel one myth right from the start: At Shell, we do not wake up each morning thinking how fortunate we are to be experiencing $60-a-barrel oil prices.

Instead, many of us wake up in the morning and go to sleep at night thinking through a variety of challenges we are facing related to energy security. Some of these problems are the same things that our customers worry about each day, in the form of higher gasoline, heating oil and natural gas prices. No one, including Shell, is happy about higher prices.

To dispel a second myth — Shell and other energy companies do not control the price of oil, any more than a rancher controls the price of beef or a farmer controls the price of wheat. Oil is a commodity, and its price is set by an auction on a global bid-and-ask trading basis, just like shares of stock on a stock exchange. Prices are driven up when demand outpaces supply.

We produce less than three 3 percent of the world's daily crude oil at Shell, and therefore, must purchase oil on the spot market in order to meet our refining and retail demand. As a result, we are subject to market fluctuations, just like other energy companies, and just like our customers.

Right now, we are in the cross hairs of two kinds of market forces — short-term issues and long-term trends. Short-term, we are dealing with the effects of two hurricanes that have disrupted supplies on an ongoing basis, creating shortages. To compensate for lost production from our damaged Gulf Coast refineries, Shell imported gasoline and other fuels — and paid the market price for them. This means higher costs are passed along to our customers, who must make the difficult choice to buy or not.

Many of us at Shell wake up each day and think about the rebuilding and repairing that's left to be done in the aftermath of the hurricanes — our damaged Mars platform and other storm-affected offshore assets that caused us to lose production of more than 15 million barrels of oil through the end of September alone. We think about the unprecedented task of inspecting 1,000 miles of undersea pipelines in the Gulf for possible hurricane damage. We think about our distributors and operators in New Orleans who have yet to reopen their businesses.

And we think about the nearly 5,000 Shell employees who were directly affected by the hurricanes, and admire them for their resilience, generosity and resourcefulness in the face of tremendous personal loss. We think about our 1,000 Gulf of Mexico operations staff who will return to our offices in the heart of New Orleans during the first half of 2006. Along with many of their Shell and Motiva colleagues in South Louisiana, they will work to rebuild their lives, homes, schools and neighborhoods across the region.

Our pledge to customers
We are working hard to address the current short-term price issues, spending money on the repairs, rebuilding and safety checks needed to bring production and distribution back up to August levels. We expect to have the great majority of our Gulf platforms back in production by year-end, with the exception of our Mars platform — the most heavily damaged — which may not be in full operation until the second half of 2006. Our pledge to our customers is to work relentlessly to restore supplies wherever needed as quickly as possible.

Even without the effects of two major hurricanes, few industries deal with a commodity product whose price fluctuates so substantially and so dramatically. Contrast the current situation of constrained supply and high demand with the market just six years ago, when a financial crisis in Asia, combined with resumption of Iraqi oil exports, created a situation of oversupply and decreased demand. As a result, oil fell to $10 per barrel and the price of gas was less than a dollar a gallon.

If those were good times for customers, they were hard times in the oil patch. A Senate hearing at that time, in marked contrast to the Senate testimony this month, noted the damaging impact of low prices on the oil industry, as wells were shut in and oil rigs taken out of operation because operators — many of them independent businesses — could not operate at a loss for extended periods of time.

Returns and investments
As recently as 2002, returns on investment for U.S. petroleum companies overall averaged only 6.5 percent, while returns on the marketing and refining portions of the business were negative. For the third quarter of 2005, overall energy-industry returns are 7.6 percent, compared with an average of 7.9 percent for all U.S. industry — still nothing to gloat over. Yet our business requires massive investment over long periods of time — even when prices are low — to ensure that there will be energy supplies in the future. The energy consumed today is made possible by investments made years or even decades ago.

In September, Motiva Enterprises LLC, a joint venture between Shell Oil Co. and Saudi Refining Inc., announced that it is studying options for major capacity expansion at its refineries in the U.S. Gulf Coast — a project that, once decided, will take years to complete. But we are we are investing in much longer-term solutions as well to unlock more resources. Over the past five years, Shell Oil Co. has invested virtually 100 percent of U.S. after-tax earnings in domestic projects to meet future energy needs. These projects also include development of unconventional and renewable energy sources and fuels that may help reduce our dependence on traditional energy resources.

Longer term, we are seeing the market effects of rapid economic growth in China and other developing countries. Global demand for primary energy is likely to continue to grow, and for the foreseeable future this demand must be met by oil, gas and coal.

Lcha here: The number below is staggering!!

The cost of keeping up
The U.S. Energy Information Administration estimates that it will take $16 trillion between now and 2030 to develop supplies and build energy infrastructure to keep up with growing global demand. The profits we earn today will help make that mind-boggling investment in both traditional and new energy sources possible. It is not as simple as drilling more holes. The "easy" oil is already being tapped. The energy development projects of the future will be complex, costly and technologically demanding.

The challenges are fundamental and urgent. There are no easy answers. Every route forward has significant environmental and technological challenges. Every solution will require significant investment. Lower prices will occur in a more supplied market.

These are the concerns that are with us at Shell when we wake up in the morning and when we go to sleep at night. These are concerns we should all share, as Americans. We can meet these challenges with thoughtful, reasoned approaches if we avoid hasty tactics driven by short-term fear. By working together to understand the basic issues and keep a long-term perspective, we can all contribute to a practical solution to our energy requirements — and that would be something to celebrate.

John D. Hofmeister is president of Shell Oil Co., the U.S. business unit of the Royal Dutch Shell Group.

-- posted by lcha

http://www.financialsense.com/stormwatch...

Top 1334. Nov 21, 2005 4:08 PM

» Normxxx - THERE IS NO PLAN "B!" --Part I

THERE IS NO PLAN "B!" --Part I

By Jim Puplava | 14 November 2005
www.financialsense.com

“The oil crisis is very, very near. World War III has started.
It has already affected every single citizen of the Middle East.
Soon, it will spill over to affect every citizen of the world.”
— Ali Samsam Bakhtiari,
Vice President of the National Iranian Oil Company

The oil crisis has arrived in the United States. This summer’s storm season exposed the Achilles heel of the U.S. economy: OIL. We have reached what system analysts refer to as ”a single point of failure.” It is the one item that, if it breaks down, brings the entire system down with it. Like it or not the U.S. economy runs on oil— cheap oil— and we are running out of it. Oil powers our economy in manufacturing, transportation, and agriculture. Without it, our economy would cease to function. There is no other commodity other than water that can have such an effect on how and what we do. [Cheap] oil is the lifeblood of our economy.

For three decades the energy infrastructure in the U.S. has been neglected and allowed to decay. Now those chickens are coming home to roost. Politicians can bluster and pontificate all they want, but this will not solve the predicament that we now find ourselves in. The plain fact is we are running out of oil and natural gas. Oil production in the U.S. peaked in 1970. Since then, the United States has not been able to supply its own oil needs. As a result of this failure, it lost control in its ability to influence the world price of oil. This has led to a loss of control over an important part of its economic destiny.

Today the U.S. economy is now totally dependent upon foreign sources of oil and natural gas. Our country has also moved to dependence on refined oil products such as gasoline, diesel and jet fuel due to a lack of refinery capacity; a problem that will only grow worse with time. Since reaching a peak in 1970 energy production has declined each and every decade. On land in the lower 48 states oil is tapped out. Production in the lower 48 is less than half of what it was in 1970. Production in the North Slope of Alaska peaked in 1988 at 2.017 million barrels per day (mbd).^[1] Alaskan production is now down to less than half of that. Oil production on the North slopes is expected to have fallen 4% in 2004 and by another 1% this year.

Source: United States Country Analysis Brief, EIA/DOE

Running out of oil and natural gas isn’t the only problem. Spare capacity is disappearing throughout the entire energy infrastructure. As shown below “Houston, we have a problem.” Everywhere you look there are either energy bottlenecks or constraints. What little spare capacity we had left was eliminated by Katrina and Rita.

CAPACITY CONSTRAINTS

Oil and gas wellhead
Refineries
Pipelines
Tankers
Drilling Rigs
Processing plants
Personnel

STORM DAMAGE

108 oil & gas producing platforms destroyed
53 major platforms heavily damaged- offline until 2006
342 offshore platforms still evacuated- assessing damage
12 refineries & 21 gas processing plants remain offline
As of last week, 90% of Gulf crude oil production is shut-in
72% of Gulf natural gas production remains offline

To say we are in a crisis is putting it mildly. The United States will find itself moving from one energy crisis to another in quick succession. In the near future, we will see oil and natural gas price spikes, brownouts, gas lines and eventual shortages. There is nothing, I repeat nothing, we can do to prevent these crises from erupting. It is already too late for that. Decades of neglect, inaction and political dithering is the culprit. Rome burns while our politicians fiddle.

For the optimists energy conservation will not stave off the day of reckoning. You can’t conserve what you don’t have. Boosting CAFÉ standards by 6.8 miles per gallon by 2015 would only trim US oil demand by 2.5%, or 610,000 barrels per day, according to the E.I.A. The U.S. imports about 12 million barrels of oil a day, representing about 58% of our total energy demand. That percentage is growing every year and you can now add refined oil products to that growing list of imports. And if you think things are going to get better just because prices have fallen recently— think again. What is occurring is just a reprieve before other energy storms arrive. Prof. Michael Economides, who predicted $65 oil in the summer of 2004, is now predicting $100 oil within a year. Economides believes we will see $20 natural gas and $5 diesel fuel by next summer. Economides laments that his predictions of $100 oil no longer impress. On September 15th, in a speech at the Houston Petroleum Club, Matt Simmons talked about $200 oil by 2010. Simmons is so sure of his predictions that he’s willing to bet anyone $5,000 that he is right.

How We Got Here

Consumers, businesses, and government seem vexed at today’s rising energy prices. Yet we did not get here overnight. It has been a long process that has been building for decades. The current crisis is attributable to a combination of a growing demand for oil from growing economies, Asian industrialization, and declining supplies. Oil discovery peaked in the 1960s and since 1985 we have failed to replace the oil we consume each year. A bear market in energy gave us lower prices, which encouraged consumption at the same time it discouraged investment. Finally a combination of tight environmental restrictions and NIMBY (not-in-my-back-yard) and BANANA (build absolutely nothing, any time, near anybody) brought opposition to exploration and drilling, the building of refineries, pipelines, power plants and refineries. A look at the different aspects of our crisis in oil should illuminate the future problems we face.

Crude Oil Production

The crisis we now find ourselves in goes back decades as the gap slowly widened between demand and sources of supply upon which the world has come to rely. As shown in the table below, global oil demand has increased since the first oil crisis in the mid-'70s.

World Oil Demand
1975	55 mbd
1985	65 mbd
1995	70 mbd
2000	85 mbd
Source: Simmons International & Co.

Demand increased each decade and then accelerated in the mid-'90s as a result of the technology boom and the industrialization of China and India. While demand was growing the rate of increase in oil production began to slow during the early '80s. According to many oil experts, production appears to be approaching a well-defined limit in the not too distant future.

Oil discoveries peaked in the 1960s and most of the oil we consume today comes from giant Middle Eastern oil fields that were discovered and put into production over 40 years ago. Most of the world’s key oil producers have already experienced peak oil. According to Richard Duncan, director of the Institute on Energy & Man, 25 out of the top 45 oil producers are past their peak. These 45 producers account for 98.7% of the world’s oil production. Another study done by Washington energy consultants, PFC Energy, found that 33 out of the 48 major oil-producing countries have either peaked or plateaued.^[2] Moreover many of today’s large oil producers such as Russia and Mexico have failed to replace their production over the last decade. Mexico’s oil production is expected to peak this year with the peaking of its largest oil field, Cantarell. Even worse, we find Saudi Arabia may also be close to peaking as Matt Simmons posits in his book

<img align="left" src="http://images.amazon.com/images/P/047173876X.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy
by Matthew R. Simmons

The Oil and Gas Journal estimates that the United States has about 21.9 billion barrels of proven oil reserves as of January 1, 2005. The bulk of these reserves (80%) are concentrated in only four states, Texas (22%), Louisiana (22%), Alaska (20%), and California (18%). As of 2003, top producing areas of the U.S. include the Gulf of Mexico (1.6 mbd), Texas onshore (1.1 mbd), Alaska’s North Slope (. 949 mbd), California (.683 mbd ) , and Louisiana onshore (.244 mbd). Hurricanes represent a clear and present danger to the U.S. because nearly half of our oil and gas production and refinery capacity is located along the Gulf of Mexico. We saw examples of this last year with Ivan where 7 platforms were destroyed and 6 incurred major storm damage. Over 150 platforms and 10,000 miles of pipeline were struck by Ivan’s fury. This year hurricanes Katrina and Rita were far more devastating. Paul Hornell with Barclay’s Capital Inc., London, said, “The supply-side deficits in US oil product market remain cavernous, with demand effects dwarfed by the size of the product gaps.” In his October 5th report Hornell stated: “The cumulative loss of crude oil output due to Katrina and Rita is now close to 50 million bbl and is likely ultimately to extend beyond 100 million bbl. We now expect the cumulative level of forgone refinery output to close in on 200 million bbl, with the cumulative reduction in gasoline output alone now expected to stretch towards 100 million bbl.”^[3]

Hornell points out that all of this is occurring at the same time that US crude oil production is at it lowest level in 60 years. Moreover, the greater part of the storm’s disruption hasn’t been fully reflected in the energy supply data.

In summary US crude oil production has been in a multi-decade decline. US production began a steep decline after the price collapse of the mid-1980s. Production leveled off during the mid-1990s, and began falling again after the sharp price declines of that decade. By 2003 production had fallen to around 7.8 million barrels per day, of which 5.7 million barrels was crude oil. The average production is a little over 5.5 million barrels a day by the end of 2004.^[4]

The net result of falling production and growing demand is that the US has had to increasingly rely on energy imports. According to the Energy Department total net oil (crude and products) imports amounted to 11.8 million barrels a day during the January-October 2004. This represents 58% of total US demand. Of this amount 2.4 mbd comes from the Persian Gulf (1.5 mbd from Saudi Arabia), 1.3 mbd comes from Venezuela, 1.1 mbd comes from Nigeria. These areas remain politically unstable and could be subject to supply disruptions at any time. For now the only energy policy the US has is based on carrier battle groups.

Source: United States Country Analysis Brief, EIA/DOE

______________

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://www.financialsense.com/stormwatch...

Top 1335. Nov 21, 2005 4:16 PM

» Normxxx - THERE IS NO PLAN "B" --Part II

THERE IS NO PLAN "B" --Part II

By Jim Puplava | 14 November 2005
www.financialsense.com

Refining Capacity and Downstream Processing

The United States has experienced a steep decline in refining capacity between 1981 and the mid-1990s. The number of refineries fell from 324 in 1981 to 149 in 2003. This steep decline in refining capacity resulted from the removal of price controls and allocations, which kept many marginal refineries in business. Many of the early refineries that shut down had little downstream processing capability and were economically viable as long they received subsidies under Federal price controls. In addition to the removal of price controls, a bear market in energy and narrow refinery margins produced low rates of return on capital. Average returns on capital were not much more than 5.5% during this period. Other factors included environmental constraints that imposed major capital expenditures and legal suits which only added to costs. The net result of all of these factors is that refinery margins— the difference between the cost of input and the price of output— have squeezed profit margins at the same time that operating costs and the need for additional investment to meet environmental mandates has grown.

The net result of this combination of negative factors of poor returns on capital, environmental constraints, and narrow profit margins is that no new refineries have been built in the US in nearly 30 years. The industry consolidated and refinery capacity shrank from 18.6 mbd to 15.7 mbd by the end of the '80s. Since then existing refineries have increased capacity by 28% from 1990-98. As of September of last year capacity grew to 16.9 mbd.

Source: EIA.DOE.gov

Growing Demand and Stricter Guidelines

While refinery capacity in the US has shrunk over the last two decades gasoline, consumption has risen by 45 percent. The US Energy Information Agency is forecasting annual growth of 1.8% for motor gasoline, 3.1 % for jet fuel, and 1.5% growth for distillates.

Demand for refined petroleum and natural gas products is projected to continue to grow. However, these refined products are going to get more expensive due to environmental regulations. Robert Bryce at World Energy Monthly is forecasting that $5 diesel fuel is coming soon. “The surging cost of diesel over the next 12 to 18 months will be caused by new regulations, capacity constraints throughout the midstream and downstream, and soaring demand.”^[5] According to Bryce beginning next June, American refiners will have to reduce the amount of sulfur in their diesel from 500 parts per million (ppm) to 15 ppm. In addition, beginning in January of next year, refiners must also reduce sulfur in gasoline from 90 ppm to 30 ppm.^[6] This is the biggest change to motor-fuels since leaded gasoline was phased out three decades ago.

Bryce is predicting major disruptions in the ultra-low sulfur diesel (ULSD) market as a result of these new EPA mandates. The mandates add additional blends of gasoline to the already myriad blends required by different state, city, and federal environmental regulations. Now refineries will have to make up to 50 different blends of gasoline. These different blends will require special segregation in storage and shipping. Segregation of the different fuels will require more tanks and special pipes since they can’t mix different environmental blends of gasoline. That means more costs for refineries, which translates into higher costs for consumers.

All of this takes place next year when the US energy industry will still be making needed repairs to our damaged energy infrastructure as a result of the last two years of storms. Moreover, the US now imports over 1.1 million barrels of gasoline a day to meet demand. In the case of ULSD it is doubtful whether foreign refiners like Venezuela will make the added EPA changes to their refinery mix. US EPA standards are far stricter than those of Western Europe, Asia, or Latin America. Refiners could decide to ship their diesel outside the US in order to avoid the heavy costs of compliance. At the same time foreign exporters could refuse to comply with US EPA standards. Therefore the US may not be able to rely on foreign imports to meet its growing demands. Meanwhile demand will continue to grow for diesel fuel as many US and foreign car manufacturers are adding diesel engines to their product line due to better fuel efficiencies. What we have here is the classic case of the wrong policy at the wrong time. If you’re upset over $3 gasoline, you better buy some Zantac, because $4 and $5 gasoline is not too far away.

In a recent speech Saudi Arabia’s Foreign Minister Saud al-Faisal warned that the world energy crisis has reached a “very dangerous” situation, with lack of refinery capacity a major cause. He said that Saudi Arabia, the top exporter of oil is the only country left with spare capacity to produce oil. “The basic problem of the current energy crisis… is that current refineries are incapable of meeting demand on oil products, shortages in storage capacity and restrictions imposed on the oil industry thus paralyzing it from building more refineries…Not a single refinery was built in the United States in the last three decades, while the difference in standard requirements on oil products from one state to the other inside the United States, particularly due to environmental concerns, has greatly deteriorated the energy situation, he said."^[7]

Where We Are Now

So where does all of this leave us? I believe we are in the first stage of a developing crisis that will lead to further and even larger crises down the road, if not war. The first crisis, which we now find ourselves in, is related to the approaching peak and decline of non-OPEC oil production. This predicament is behind much of today’s high oil prices. Other factors include the combination of growing demand, driven mainly by China and the United States, and restricted output from Iraq.

Source: "Non-OPEC Fact Sheet," EIA Country Analysis Briefs, EIA/DOE

The inability of non-OPEC production to meet incremental demand after its projected peak after 2010 precipitates the second crisis when OPEC spare capacity runs out. As non-OPEC production declines, OPEC capacity will have to increase just to stay even, much less to increase supply. The third crisis arrives when OPEC production peaks. Many expect this to occur in the next decade. Of the eleven members of OPEC, the majority have already reached their peak— Indonesia, Iran, Kuwait, Nigeria, Iraq, and Venezuela. As mentioned earlier global oil discoveries replaced only half of the oil produced last year. We stopped replacing the oil we consume each year in 1985. We have been running increasing energy deficits since then. This tells me that the second stage of the energy crisis could soon be upon us.

The US now finds itself in an eerie parallel to the energy crises of the 1970s. In viewing the past crises I find similar parallels and list them as follows:

  Political turmoil in producing countries (Iraq, Saudi Arabia, Iran, Nigeria, Venezuela, Indonesia)
  High Import Concentration (Saudi Arabia, Venezuela, Nigeria)
  Declining US oil production
  High dependency on oil imports (58%)
  Low capex spending by oil companies

Low inventory levels

The US has now left itself vulnerably exposed on the energy front. We are more dependent today than we were during the crises of 1973 and 1979. Oil production in the US has fallen each decade, falling 40% since its peak in 1970. As a result of this decline imports now represent 60% of our energy needs. Even more worrisome is that even if we could import all the oil we need we wouldn’t have the refinery capacity to process it. As demand has increased we now have to import more of our refined energy products due to capacity constraints. The ability to import refined gasoline will be limited by the new environmental standards, which are unlikely to be adopted by foreign refineries.

What we in the United States have yet to deal with is the fact that the era of high energy and mineral abundance is gone. Whether we will be able to maintain our present standard of living is questionable. At present we are financing that living standard with borrowed money, most of it from overseas. This presents a problem. According to Dr. Walter Youngquist, in order to maintain our standard of living, each person in the US requires 20 tons of mineral resources each year.^[8] Since our ability to produce these resources diminishes each year, we have to rely on imports to provide them. This in turn impacts our balance of payments. This cannot go on forever. The US may reach a point where foreigners are no longer willing to accept dollars in payment or if they do they may demand higher rates of return. As Youngquist states, “It is a clear statement that the oil industry is no longer centered in the United States as it was for nearly 100 years. The significance of this is that oil resources, so vital to American industry and the national economy and way of life, are now chiefly in foreign hands. The oil companies may still be nominally American, but they are subject to the rules, regulations, taxes, politics, and whims of foreign governments. That is a vastly different situation from before 1970 when the United States was self sufficient in oil.”^[9]

Stuck On Stupid - S.O.S.

Given the crisis that the U.S. now finds itself in you would think the nation would be mobilizing and moving forward to solve its problems. Instead politicians and the media are still playing the blame game focusing on irrelevant issues which distract from the problem at hand. In the words of General Honore at a press conference at a time of an approaching emergency (Hurricane Rita) he responded to a reporters irrelevant question by answering, “You are stuck on stupid, I’m not going to answer that question.” [view statement] This is where we still find ourselves today. We’re still stuck on stupid. With 12 refineries and 21 gas processing plants still out of commission, 90% of our Gulf oil production shut in, 72% of our natural gas production offline, 503 oil platforms destroyed, heavily damaged, or abandoned, energy imports soaring, and a rapid decline in non-OPEC oil production it would be time to be putting “Plan B” into effect. Instead our politicians dither. Last week the House of Representatives narrowly approved an energy bill aimed at encouraging construction of new refineries. With close to 50% of the US refinery capacity concentrated in the Gulf States in the direct path of hurricanes, supporters said the recent storms demonstrated that the country needed more refineries, including new ones outside the hurricane belt. The bill passed 212-210. Not one Democrat voted for the bill and several Republicans broke rank in opposing it. The prospects of the bill passing in the Senate are uncertain. Maybe another hurricane season is needed to convince our fiddlers. Not having built a refinery in over 30 years one might think it would be time to add capacity, especially given the fact that gasoline consumption has increased by 45% since the last time one was built in this country.

Adding new refineries is only one [minor] aspect of ”Plan B.” We need to seriously look at our whole energy infrastructure in transportation, our energy power plants, the electrical power grid and alternative sources of energy. Does it make sense to be building natural gas power plants, if US and Canadian natural gas production is in decline and we’re unwilling to allow natural gas exploration or LNG terminals to be built? We need to be exploring new technologies for developing coal into gasoline as well as sources of electricity. Rethinking nuclear power is another option that should be explored along with wind and solar. With non-OPEC oil production close to peaking the clock is ticking with not a minute, hour, or day to waste. God help us, if Matt Simmons is right. In that case, we move quickly to the second and third stage crisis in energy. And if that happens, then it is war.

We should also be rethinking the transportation of goods in this country. The cost of trucking goods coast-to-coast will be too expensive and impractical as oil prices escalate. The movement of goods by rail and boats is far more energy-efficient. This means it is time to rebuild our rail system which is a shadow of its former self. Our transport sector relies on oil for 97% of its energy needs. It also accounts for 68% of our oil consumption.^[10] Alternative forms of transportation such as mass transit in our larger cities and more fuel efficient cars— hybrids and diesel— should also be explored. And to ameliorate the bottlenecks in gasoline we need to agree on only a few varieties of environmental grade gasoline. Do we really need 50 different varieties of gasoline? Does every major city or state need its own version of environmentally clean gasoline? Can’t the experts agree on one formula? A Heinz-57 approach to our environmental needs is not only costly and inefficient, it is also insane.

As Matt Simmons points out in his book [see above], the purpose of “Plan B” is to buy time until “Plan C” where new sources of energy are developed or invented. “Plan B’ is essentially a series of bridges that buys us time in the period of transition to new forms of energy. It means doing everything that works. We know that wind and solar work as do coal and nuclear. But none of these sources of energy is a silver bullet. The problem regarding oil is that there is no [cheap] energy replacement on the horizon that can replace it. Creating new forms of energy is no easy task. We’ve only done it twice in the last 1,000 years. Coal replaced firewood and oil replaced coal. As the price of oil and natural gas inexorably rise, all other forms of energy naturally become more competitive. Finding a new source of energy to replace fossil fuels may prove to be the most daunting task to face mankind, but it must be done. Otherwise it will be forced upon us— the alternatives are too ghastly too imagine or tolerate. Once the world arrives at peak oil, rationing and rigid conservation will become the norm. This is why “Plan C” is so critical. But getting to “Plan C” involves accelerating R&D efforts which should begin immediately and that means today.

[Normxxx Here: Also, developing the infrastructure for “Plan C” may require large inputs of [rapidly diminishing] amounts of energy. How do we decide between oil for fertilizer to feed a starving world and oil to support the development of a “Plan C” which may fail? ]

Crisis or Opportunity?

Today’s high energy prices are a warning to mankind. They can be ignored in the hope that the problem will go away or they can be faced head-on by acknowledging that the problems are real, and must be dealt with ASAP. As I was penning the final words to this Storm Update I was made aware of an article published on the web called “Oil Shockwave.”

On June 23, 2005, a group of nine former White House cabinet and senior national security officials gathered to simulate a future energy crisis. Their task was to advise an American president on options in dealing with a major oil crisis over a seven-month period. The key findings of this group were as follows:

  Oil is a fungible global commodity. A change in supply or demand anywhere will effect prices everywhere.
  In a tight demand/supply market the removal of a small amount of oil can have dramatic effects. A 4% global shortfall could lead to a 177% increase in crude oil ($58 to $161 a barrel).
  A price shock of that magnitude would send the US economy immediately into recession/depression.
  Military options offer little recourse in the event of a supply crisis.
  The US energy infrastructure, both at home and abroad, is highly vulnerable to terrorist attacks.
  Political unrest in key oil producers represents a greater threat than terrorism.
  Relying on Saudi Arabia as supplier-of-last-resort is suspect given the kingdom’s susceptibility to terrorist threats and political tensions.
[Normxxx Here:  And wildly disputed reserve estimates. ]

All of the supply-side and demand policy options take time to develop. Their benefits could take a decade or more to mature. The time to act is now.

Rather than review Oil ShockWave in this Update, here is a direct link to the Energy Commission's presentation. The point is that high level personnel in government and in the private sector are thinking about these things. This summer's storms are a case in point. They demonstrated just how vulnerable we really are. These officials met on June 5th, before this summer's disasters, but cognizant enough of our own vulnerabilities to supply side disruptions.

While their study deals with different geopolitical scenarios from political unrest in Nigeria (a key oil supplier to the U.S.) to a terrorist attack on Saudi oil facilities, this report only scratches at the surface of our vulnerabilities. Other key tipping points would include the following:

Iran going nuclear
The collapse of the Saudi Monarchy
Implosion of Iraq due to a US withdrawal
The complete marxification of Venezuela under Chavez
Confrontation with China over trade and oil resources
Growing totalitarianism in Russia

China, An Emerging Giant

What the world faces is growing competition over increasingly scarce oil and other natural resources like water and minerals. The reality of this scarcity is just beginning to be understood. The race is on to secure these limited resources. No one understands this better than the Chinese. A booming domestic economy, rising exports, rapid urbanization, and a growing domestic appetite for automobiles is driving China’s foreign policy. State-owned companies are scouring the globe, buying resource companies in North and South America, securing exploration and supply agreements with states that produce oil and gas, while at the same time courting these same governments through investment and the building of goodwill. Like the US, China is attempting to secure access to foreign resources, the cornerstone of its economic growth. A growth which is totally dependent on foreign resources, a fact that makes China insecure and vulnerable.

Its insatiable appetite is giving various governments concern, especially the United States and Japan. Like China, both countries are dependent on foreign oil, a fact that makes all parties uncomfortable. David Zweig and Bi Jianhai writing in Foreign Affairs describe this delicate balance. “While China struggles to manage its growing pains, the United States, as the world’s hegemon, must somehow make room for the rising giant; otherwise, war will become a serious possibility. According to the power transition theory, to maintain its dominance, a hegemon will be tempted to declare war on its challengers while it still has a power advantage. Thus, easing the way for the United States and China— and other states— to find a new equilibrium will require careful management, especially of their mutual perceptions.”^[11] Similar rivalries in the past forced Britain into an arms race with Germany that eventually led to two world wars. Likewise, US foreign policy initiatives designed to check Japan’s imperial ambitions by cutting off access to oil led to conflict with Japan. History shows us that resolving these competitive conflicts is not done easily. More often than not, the need for resources has led to war.

China’s success on the trade front and its ability to use its economic weight in securing trade deals is making the US uncomfortable. China has made major inroads into America’s backyard. It has secured oil deals with Venezuela, made agreements to develop Canada’s natural gas, oil sands and uranium deposits, gained access to minerals in Brazil, and formed oil agreements with Iran, Sudan, and Myanmar.

The next big test according to Zweig and Jianhai will be if China decides to flex its economic muscles by expanding its military influence. While many nations are disposed favorably to Chinese trade, they are increasingly uncomfortable with China's developing military power. Meanwhile, China believes it must protect its trade routes. It is expanding its navy, giving it the flexibility of both defensive and offensive positioning. It is helping Pakistan build a port at Gwadar. It is also upgrading a military airstrip in the South China Sea, monitoring stations in Myanmar and it is negotiating naval facilities in Bangladesh.^[12] China’s military power is growing and Washington has taken notice. So far its expansion has been relatively frictionless, out of necessity to protect trade (especially with the U.S.). Interested parties (the rest of the world) hope it remains that way.

Whichever way this competition resolves itself, the world— and especially the United States— must acknowledge the impact of China’s energy needs. Its voracious demand for energy will only get bigger as its economy continues to develop and expand. After the United States, China has become the second largest consumer and importer of oil. In 2004 it accounted for 31% of global energy growth. Politicians, economists, and analysts will have to get use to a new variable in the international oil markets, a variable that will impact demand, supply, and prices— named China. You can throw the old energy models out the window. They are no longer relevant.

The ideas expressed in this update may startle and stun but they are real. The US now finds itself facing the first of many energy crises to come. We should have been working on “Plan B” years ago. While a few experts admit we have problems, Washington (especially Congress) and the mainstream media are caught up in denial and the blame game. In the words of General Honore, they are still “stuck on stupid.” Politicians love to point figures at everyone but themselves. In trying to assess blame they avoid dealing with the issues at hand. There are three basic reasons that we have crises:

Failure to anticipate a problem before it arises.
Failure to perceive the problem once it arrives.

The tendency of society’s elites to misperceive the problem,
which distracts from the real problem at hand.

These failures and the unwillingness to face hard facts are why we find ourselves stuck in a crisis. Many of the issues of new sources of energy, declining refinery capacity, and deterioration of the electrical grid system have been evident for decades. It seems it takes a crisis [maybe several] to bring them to the forefront. Let’s hope we can get beyond “stupid” soon; it could mean the difference between peace and war, or worse.

P.S.

There are many today that feel oil prices are heading back to $40 a barrel. I’m not one of them. Oil prices are more likely to see $100 a barrel before we see $40. There are others that believe oil stocks are overvalued. I don’t agree. Oil stocks are still cheap and the recent pullback only makes them cheaper. As shown in the three P/E graphs below, after peaking in 1999, P/E multiples have fallen and are at an all-time low. Even though many energy stocks have doubled or tripled in price they still remain undervalued. This is because earnings have grown at a far faster pace than stock prices. Many energy companies like ExxonMobil, Chevron-Texaco, and Apache have seen their earnings triple or quadruple while their stock prices have only doubled. Price earnings multiples in the energy sector are close to the bottom of their historical range. This means they could have ample room for expansion. Finally, there are quite a few experts that believe the energy bull market is over. I disagree. We’re a long way from the final inning. We are going to need more oil and natural gas as demand continues to outstrip supply. We are going to need more alternative energy sources as non-OPEC oil production peaks. Finding and developing new energy sources takes time as does building infrastructure. The first energy train left the station long ago. The second train is about to embark. All aboard!

<img Width="520" src="http://www.financialsense.com/stormwatch/2005/images/1014/apa.gif">
Click Here, or on the image, to see a larger, undistorted image.

<img Width="520" src="http://www.financialsense.com/stormwatch/2005/images/1014/cvx.gif">
Click Here, or on the image, to see a larger, undistorted image.

<img Width="520" src="http://www.financialsense.com/stormwatch/2005/images/1014/xom.gif">
Click Here, or on the image, to see a larger, undistorted image.

P. P. S.

For those not familiar with the peak oil argument or its political ramifications, I suggest you do some cramming on the subject!

Jim Puplava

______________

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

-- posted by Normxxx

Top 1336. Nov 22, 2005 7:54 AM

» lcha - Re: THERE IS NO PLAN "B" --Part II

In response to THERE IS NO PLAN "B" --Part II posted by Normxxx:

Excellent articles Norm! When I first started posting at Suite101 I posted figures from the Texas Railroad Commission showing the decline in natural gas production in the state. This was during the CA electricity crisis I think. While aspects of that crisis were fraudulent, it masked a real problem.

The congressmen who paraded the oil execs around last week accussing them of price gouging did this country a GREAT disservice. As long as they pander to the price gouging theme people will not take this REAL crises seriously. That is a national tradegy and our politicians are fully to blame. They squelched a genuine opportunity to showcase the true energy crisis we have to the American public. Instead of Barbara Boxer showing charts of oil company execs salary and bonuses she could have shown the production decline charts and the refinery capacity decline charts.

I do have a very cynical view of where we are headed on our energy path. There is still such
a hatred for our domestic energy producers and the energy industry in general that we will wait until well after a major energy crisis beforfe taking steps to deal with it and by that time it will be too late. The result. Resource wars. I'm thankful that my 9 year old is a daughter and not a son.

-- posted by lcha