Energy, Energy Service, Natural Gas & Oil Sectors

» lcha - The Upside of the Oil Curse

The Upside of the Oil Curse
By MARC SUMERLIN
January 10, 2006; Page A14

Of all the long-term challenges facing the country, none touches as many areas of our national life as energy, particularly our dependence on a variety of unstable oil-exporting nations. It impacts our global competitiveness, our environmental policy and our foreign policy, both in the Middle East and in our own hemisphere. Moreover, our nation's major strategic competitor, China, is responding to a similar challenge by acquiring global energy assets and targeting its foreign policy on befriending a variety of oil exporters.

In echoes of the 1970s, many politicians complain that the price of energy is too high and that oil companies are making "windfall profits." But history shows us that the price mechanism is not the problem. Though it has downsides, particularly in the short run, it beats every alternative. And in the long run the price mechanism is a major part of the solution to our energy challenge.

The history of the '70s and early '80s also explains the advantages of the price mechanism to both energy efficiency and the environment. The most rapid gains in energy efficiency in the U.S. took place when prices were very high. In fact, a sharp break in the energy intensity of the American economy appears to have occurred in 1973, the year of the first price spike. Prior to that date, the energy intensity of the economy was fairly stable, declining at just 0.4% per year. Since that date, the amount of energy needed to produce each real dollar of GDP has fallen by 50%, a decline of 2% per year. Unfortunately, the pace of progress slowed after prices dropped markedly in 1986.

Today, we are again seeing the positive incentive effects of high oil prices. The recent run-up has encouraged a new class of entrepreneurs and scientists to search for technological solutions. Nanotechnology is improving battery life, which will make hybrids cars and solar electricity more realistic. Historically costly alternative fuels like ethanol are suddenly looking practical, especially with advances in biotechnology and new processing technologies. A look to Latin America shows that rapid change can happen faster than commonly thought. Over the last three years in Brazil, the share of new car sales that can run on high-content ethanol fuel has risen from 4% to 67%. Its sugarcane-based ethanol is priced competitively with gasoline.

There is little doubt that technology and innovation, along with steps toward conservation, will ultimately solve the oil supply problem. But given the instability in the countries northwest of the Strait of Hormuz (where 20% of the world's daily oil supply passes), it's less certain that this will come before an economy-crippling crisis.

Capital flows into new technologies and domestic production would be stronger if investors had more certainty about their potential return. Until recently the futures market converged on a long-term oil price of $20 per barrel, and memories persist of the collapse of the oil price in 1998 to just $10 a barrel. Domestic oil producers, venture capitalists and entrepreneurs don't know whether the price of oil in the next decade will justify the costs of investments they must make today in new technologies and new production techniques.

The market for long-dated oil futures contracts is not sufficiently large or liquid enough to fully and inexpensively hedge the vast quantity of investment that is needed for the U.S. to substantively reduce its dependency. Hedging is also too expensive for many small- to medium-size entrepreneurs. Even bigger domestic oil producers, who have endured extended periods of low prices in the past, aren't yet investing in line with their current profits. Some oil producers argue that they need prices consistently above $35 a barrel to justify unconventional projects. Coincidentally, potential investors in new ethanol technologies also say that oil needs to stay above $35 a barrel for their plans to be cost-effective over time. With oil now trading over $60 per barrel, many would think that $35 oil is only a fantasy. No doubt in the early 1980s few thought that oil would ever be at $10.

Ironically, the best way to cap the upside to the oil price is to encourage new energy producing technologies by limiting the potential downside to the price. If we could somehow guarantee that the price of oil would never be low again, so many new technologies would develop over time that the price would certainly fall from today's high levels. In fact, this is OPEC's worst fear and is the reason it becomes cooperative when prices start to climb rapidly.

The U.S. government could approximate a guarantee by taxing oil imports (and other petroleum products) dollar for dollar when the world oil price falls below $35. In effect, the government would be picking up the hedging costs by guaranteeing a long-term "put option" on oil 40% below the current market price. This policy has several advantages to our policies after the last energy price shock. It provides more certainty to private sector investors, which can provide a powerful multiplier to investment. It is likely to be used infrequently given the rapid development of Asia -- yet the plan still provides an incentive effect.

The tax is neutral on how we move toward independence -- everything from domestic tar sand production to hydrogen to solar power would have an equal chance to succeed. New alternative technologies would lower carbon emissions without the drawbacks associated with hyper-complex worldwide regulatory schemes. Politically, the tax would be spread more evenly than the gas tax, since home heating oil used in the Northeast would be included as well as the gasoline used in the West. Finally, this policy would allow a reduction in inefficient regulations and subsidies that try to pick winners among competing technologies.

Some might say that this is a "bailout for big oil." But domestic producers import a large share of their production from foreign fields and these imports would be subject to the tax. Moreover, the policy would increase the number of competitors oil companies face. Others would argue this is government interference with the market. True, but oil consumption comes with many externalities, from pollution to geopolitical concessions to the military expenditures needed to protect global supplies. Incorporating externalities into the price can increase efficiency. Others would object that this is a potential tax increase. If the tax were to kick in though, much of the burden would fall on foreign producers, especially if OPEC has pricing power. Even if the U.S. were in a period of economic weakness, the Congress could assure that consumers were held harmless by reducing another federal tax.

Allies abroad might cry that this would be an unjust and potentially illegal tariff. But they would benefit substantially from lower U.S. oil consumption when world prices fell and also from lower global pollution. At a minimum, there is strategic value in making the proposal to show the world we are serious about reducing our own oil consumption. Of course, the loudest cries would come from foreign oil producers, some of which are also important allies. But economic history teaches us that dependency on oil is harmful to the producers as well. The so-called "oil curse" has fostered corruption and made it hard for non-energy businesses to develop in these nations. Not only must the U.S. wean itself from foreign oil, but oil producers need to wean themselves from the American consumer.

All Americans would be better off if our nation's economic, foreign and environmental policies are freed from dependence on unstable sources of oil. Our competitors abroad, and our enemies, doubt that we have the will to make such a break. Naysayers at home doubt that it is possible to measurably reduce our energy dependency anytime soon. Great leaders, however, have the ability to imagine a different world and take us there. President Kennedy put it best: "Our problems are man-made, therefore they may be solved by man. No problem of human destiny is beyond human beings."

Mr. Sumerlin, formerly deputy director of the National Economic Council under George W. Bush, is managing director of the Lindsey Group, a global economic consulting firm.

-- posted by lcha

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» lcha - Beyond Oil. The view from Hubbert's Peak

Full text with graphs here:
http://www.princeton.edu/hubbert/current...

Beyond Oil. The view from Hubbert's Peak
by Kenneth S. Dreffeyes

February 11, 2006

In the January 2004 Current Events on this web site, I predicted that world oil production would peak on Thanksgiving Day, November 24, 2005. In hindsight, that prediction was in error by three weeks. An update using the 2005 data shows that we passed the peak on December 16, 2005.

"A decent respect to the opinions of mankind requires" that I present an update on the data sources and the interpretation.

1. The underlying methodology is Hubbert's postulate that the rate of new oil discoveries depends on the fraction of the oil that has not yet been discovered. Similarly, the rate of oil production depends on the fraction of oil that has not yet been produced. A test of Hubbert's hypothesis, using the long history of US oil production, is on pages 35—42 of my book Beyond Oil. An algebraic result from the Hubbert theory says that the production rate peaks when half of the oil has been produced.
2. The most accurate measure of the eventual total oil comes from the "hits" graph on page 48 of Beyond Oil. The input data for that graph are the dates of the first well in each oilfield. The February 2006 edition of Colin Campbell's ASPO newsletter contains his updated version of the ExxonMobil discovery dates. I enlarged Campbell's graph and scaled off data for 2004 and 2005. An update of the calculation reported on page 49 of Beyond Oil gives an unchanged estimate: 2.013 trillion barrels. (There is always a statistical nervousness when an estimate does not change. I make the estimates by stepwise trials, and the winning step was 2.013. What I know is that neither estimate was 2.012 or 2.014.)
3. The world peak would then happen when 1.0065 trillion barrels have been produced (half of 2.013). Following Hubbert, I used the Oil & Gas Journal end-of-year production numbers. It isn't that the Oil & Gas Journal reports are divinely inspired; their methodology is well explained and their reports constitute a relatively consistent data set. The cumulative world production at the end of 2004 was 0.9812 trillion barrels and at the end of 2005 it was 1.00748 trillion. During the year, we passed the halfway point. The graph shows the date of the crossover: December 16, 2005.

During the year, we passed the halfway point. The graph shows the date of the crossover: December 16, 2005.

There are some interesting additional bits in the end-of-year statistics. Compared to 2004, world oil production was up 0.8 percent in 2005, nowhere near enough to compensate for a demand rise of roughly 3 percent. The high prices did not bring much additional oil out of the ground. Most oil-producing countries are in decline. The rise in production was largely from Saudi Arabia, Russia, and Angola. The Saudi production for 2005 was 9.155 million barrels per day. On March 6, 2003 Saudi Aramco and the government of Saudi Arabia announced by way of the Dow Jones newswire that they were maxed out at 9.2 barrels per day. In retrospect, that statement seems to be accurate. Further details are in Matthew Simmons' book Twilight in the Desert.

Could some new discovery come along and reverse the global oil decline? The world oil industry is a huge system: Annual production worth 1.7 trillion dollars. I don't see anything on the horizon large enough to turn it around.

So what are the policy implications? Numerous critics are claiming that the present world economic situation is a house of cards: built on trade deficits, housing price bubbles, and barely-adequate natural gas supplies. Pulling any one card out from the bottom of the pile might collapse the whole structure.

1. There are calls for embargoing Iranian oil because of the nuclear weapons situation. Pulling four million barrels per day out from under the world energy supply might trigger a severe worldwide recession. In the post-peak era, we're playing a new ball game and we don't yet know the rules.
2. Ghawar, the supergiant Saudi oilfield, is producing increasing amounts of water along with the oil. When Simmons sent Twilight in the Desert to the printer, the water cut at Ghawar was around 30 percent. There are later reports on the Internet (home.entouch.net/dmd/ghawar.htm) of water cuts as high as 55 percent. Ghawar has been producing 4 million barrels per day; when the Ghawar field waters out, you can kiss your lifestyle goodbye.

Since we have passed the peak without initiating major corrective measures, we now have to rely primarily on methods that we have already engineered. Long-term research and development projects, no matter how noble their objectives, have to take a back seat while we deal with the short-term problems. Long-term examples in the proposed 2007 US budget (Feb. 9, 2006 New York Times page A-18) include a 65 percent increase in the programs to produce ethanol from corn, a 25.8 percent increase for developing hydrogen fuel cell cars, and a 78.5 percent increase in spending on solar energy research. The Times reports that solar energy today supplies one percent of US electricity; the hope is to double that to 2 percent by the year 2025. By 2025, we're going to be back in the Stone Age.

By 2025, we're going to be back in the Stone Age.

Ethanol, fuel cells, and solar cells are not the only shimmering dreams. Methane hydrates, oil shale, and the Yucca Mountain radioactive waste depository would be better off forgotten. There are plenty of solid opportunities. Energy conservation is by far the most important. Initiatives that are already engineered and ready to go are biodiesel from palm oil, coal gasification (for both gaseous and liquid fuels), high-efficiency diesel automobiles, and revamping our food supply. Every little bit helps, but even if wind energy continues its success it will still be a little bit.

That's it. I can now refer to the world oil peak in the past tense. My career as a prophet is over. I'm now an historian.

-- posted by lcha

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» Bill_Duffy - Boone Pickens on CNBC today

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T. Boone Pickens, Texas oil tycoon and chief executive of Dallas energy-investment firm BP Capital Management LP, took a relatively rosy view of oil in an interview Thursday with CNBC.

"I would rather buy it than sell it," he said, when asked to bet on a direction. He added: "Am I in there buying today? No...But I think it will be back up in the $60s again."

-- posted by Bill_Duffy

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» codfish - Boone Pickens on CNBC today

In response to Boone Pickens on CNBC today posted by Bill_Duffy:

All I know is the Valero energy I bought at 48 this week is doing quite well; much better than the GOOG I bought @ 384

-- posted by codfish

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» Bill_Duffy - Boone Pickens on CNBC today

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Value investing usually trumps chasing momentum. Just ask Warren Buffet.

-- posted by Bill_Duffy

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» lcha - The OPEC Protection Act

AAAAAAAAAHHHHHHHHHH!!!!!!!!

The OPEC Protection Act
February 17, 2006; Page A12

Now that President Bush has declared a national commitment to end our alleged addiction to foreign oil, naturally the first energy bill that Congress wants to enact this year would make America more dependent on foreign energy companies.

That would surely be the result if Congress passes two provisions buried in the Senate version of a tax bill now in House-Senate conference: One is a tax on oil company inventories, which is a disguised windfall profits tax on five big oil companies; the second would repeal the foreign tax credit for the same companies.

Democrats -- and Maine Republican Olympia Snowe -- promoted the provisions late last year as a way to punish the companies whose CEOs had defended their pricing policies before Congress. But the more you understand the details, the nuttier this looks. For example, the $4 billion to $5 billion windfall tax on inventories applies only to the reserves of U.S.-based oil producers (such as Exxon and Chevron), while foreign producers pay nada.

This is an energy policy only Arab oil sheiks could love, because it drives their production and profits up, at the expense of home-grown producers. When Congress last passed a windfall tax on oil in 1980, America's domestic crude oil production plunged and demand for foreign oil increased by almost 15%. We imposed a tax on ourselves and OPEC nations got the windfall.

Equally wacky is New York Senator Chuck Schumer's idea to deny the same companies the U.S. foreign tax credit -- a fixture of the corporate income tax since 1917. If this took effect, American oil companies would have to pay the U.S. corporate tax rate and the taxes in the country where it produces the oil. Almost no other nation in the world requires companies to pay a double tax on foreign profits.

So if Mr. Schumer has his way, U.S. oil companies would have to pay as much as a 25% higher tax on foreign-produced oil than if it were drilled from the ground by a French, Chinese or Danish firm. Mind you, the U.S. would still import the oil, but any profits from that oil would flow to foreign, rather than U.S., firms and investors.

Yes, oil companies are making big profits. Exxon's 2005 profit of $36.1 billion was the highest of any firm in American history. That sure seems preferable to the results of, say, General Motors, which is losing money and laying off workers. The S&P 500's earnings growth would have been one-third lower since the fourth quarter of last year if it were not for the energy industry. Investors beware: Tax away those profits and Washington may well promote a bear market.

The latest justification for these ideas is that the oil companies paid tiny royalties on many of their offshore leases. But Uncle Sam freely entered into these contracts. The companies then took the risk of investing billions of dollars in new production, even in the 1990s when prices were at less than $15 a barrel and profits were smaller. It's hardly equitable to retroactively tax the companies on deals consummated a decade ago simply because they turned out well for these firms. This isn't tax fairness; it's confiscation.

In any case, the biggest "windfall" from high oil prices hasn't gone to the oil companies but to federal, state and local governments. The Tax Foundation reports that the average tax on gasoline is 46 cents a gallon. The average profit that the oil industry earns on that gallon of gas, even at today's high prices, is 18 to 20 cents. The government already grabs $2 for itself for every dollar the energy companies and their investors receive. The harmful addiction problem here isn't Americans to oil. It is politicians to taxes.

-- posted by lcha

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» Kirk - The OPEC Protection Act

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In response to The OPEC Protection Act posted by lcha:

In any case, the biggest "windfall" from high oil prices hasn't gone to the oil companies but to federal, state and local governments. The Tax Foundation reports that the average tax on gasoline is 46 cents a gallon. The average profit that the oil industry earns on that gallon of gas, even at today's high prices, is 18 to 20 cents. The government already grabs $2 for itself for every dollar the energy companies and their investors receive. The harmful addiction problem here isn't Americans to oil. It is politicians to taxes.

No kidding!

Here in CA, higher energy prices have led to a huge increase in tax collections. Between higher energy and a housing bubble inflating property taxes, CA doesn't have the budget troubles it once had... Don't forget CA taxes every dollar spent on gasoline at 8.25% for sales tax in my county. There are other taxes, but that is a tax states with no sales taxes don't have.

-- posted by Kirk

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» SteveT - Gas Oversupply May Dull Driller Stocks

INVESTORS' SOAPBOX PM

Credit Suisse First Boston
11 Madison Ave.
New York, N.Y. 10010-3629
(Tel) (212) 325-2000

WE ARE DOWNGRADING our ratings on the U.S. land drillers based on our forecast that record gas inventories will lead to further deterioration in U.S. natural-gas prices and potentially to a short-term drop in demand for land rigs.

Our exploration and production (E&P) team estimates that natural-gas storage inventories could exit the heating season as high as 1.7 trillion cubic feet (Tcf), approximately 70% above normal levels, which could put the lid on U.S. gas prices in 2006, with $6.00 per million cubic feet (mcf) gas potentially necessary to win back lost industrial and utility demand.

We believe the combination of falling gas prices and onshore capacity additions will slow the pace of dayrate increases and possibly lead to declining dayrates in the spot market, particularly if more producers follow EnCana's lead and trim spending budgets. While we do not expect to see a decline in the rig count, and we are not forecasting lower dayrates, we believe the perception of possible rate declines will continue to drive bearish investor sentiment toward the land drillers.

We estimate the U.S. land rig fleet could increase by up to 200 rigs per year in 2006 and 2007 based on announced capacity expansion plans. While we believe onshore capacity additions will be necessary to offset anticipated production declines offshore and high decline rates, the timing of the capacity additions in the face of weak gas prices makes it difficult to step up to the plate in for land-drilling stocks, in our opinion.

The most compelling arguments to own land-focused drillers are the strong growth prospects and attractive (absolute) valuations based on 2007 estimates following recent share-price declines. However, we believe visible improvement in natural-gas supply/demand trends is required for investors to change their negative perception of the land drillers. We see a more favorable risk-reward in the offshore drillers, which trade at similar valuations.

We are lowering our rating on Nabors Industries (the largest land-drilling contractor in the world) to Neutral from Outperform and lowering our 12-month target price to $82 from $92.

We are downgrading Patterson-UTI Energy (the second-largest land-drilling contractor in North America) to Neutral from Outperform and lowering our 12-month target price to $37 from $46.

We recommend for investors to focus on the premium jackup drillers such as GlobalSantaFe and ENSCO International rather than on the (gas-exposed) land drillers. In the oilfield-service group, we favor National Oilwell Varco and W-H Energy Services.

--Ken Sill
--Arun Jayaram, CFA

The opinions contained in Investors' Soapbox in no way represent those of Barron's Online or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s).

To be considered for this feature, please send material to Soapbox@barrons.com

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

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-- posted by SteveT

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» SteveT - Smaller Energy Firms Could Be Energized

By DIMITRA DEFOTIS

Editor's Note: We conclude our Online Exclusive special report, "Small Companies, Big Futures," with a look at a couple of smaller energy companies that could see big growth in the years ahead.

IN THE SHADOW OF BEHEMOTHS like Exxon Mobil and Royal Dutch Shell, hundreds of small North American energy companies are exploring niches that have big growth potential -- especially if the multiyear rise in oil prices continues.

Refiner Frontier Oil, for instance, can expand its existing facilities and process heavier crude oil, which is cheaper and more available worldwide.

And as the U.S. seeks more alternatives to Middle Eastern oil, oil-production equipment needed in harsh environments like the deep waters of the Gulf of Mexico could help small oil field services companies such as Oceaneering International double in size over the next few years.

"Many small-cap energy companies tend to have higher growth rates because they supply big players or [help get] oil from the ground to an end user," says Anthony Sutton, co-manager of the Putnam Small Cap Growth Fund.

Big energy companies were big winners in crude's recent price surge, but the race may go to the small and swift in the next round.

The long-term argument for sustained high oil prices is solid: Americans gobble up a big chunk of the global oil supply. And a growing middle class in China, India and elsewhere is buying more cars and consuming more fuel.

Yet supplies are harder to find and extract, and political unrest could mean disruptions in Nigeria, Venezuela and Iran.

In his State of the Union address, President George W. Bush spoke of using alternative fuels to break America's dependence on oil that comes from unstable countries (see Weekday Trader, "Can Ethanol Pump Up Investors' Returns?6," Feb. 9).

But it will take years for gasoline alternatives to make a real dent in demand. And no new U.S. refineries have been built since the 1970s.

At its Kansas refinery, however, Frontier Oil can increasingly process heavy crude, which is harder to refine because of its sulphur content, says Jacques Rousseau, an analyst at Friedman, Billings, Ramsey. Frontier has another refinery in Wyoming.

Roughly 70% of Frontier Oil's refining capacity is for heavy crude, according to FBR research.

That's important as heavier crude from Canada's oil sands -- which Frontier's refineries can handle -- makes its way to the U.S. The oil sands could hold 300 billion barrels of recoverable oil, more than Saudi Arabia's current reserves, according to Lysle Brinker, an analyst at energy research firm John S. Herold.

Frontier sells refined products like gasoline and diesel, mostly in the Midwest and West. It's more profitable than some other refiners because heavy crude can cost half as much as the standard version.

Refiners have been wildly profitable for energy investors: Frontier's stock has skyrocketed by roughly 870% in the past five years, and its market capitalization has leaped to $2.3 billion. But it still has plenty of room to grow.

"Oil could drop to $40 and Frontier would still be making money hand over fist," because it can refine heavy crude oil, says Sutton, who owns the stock.

Frontier trades below its median 9.2x projected earnings for the next 12 months, according to Thomson Financial/Baseline. The stock could double if it returned to its previous valuation peak near 14x forward earnings, Sutton says (see At a Glance).

Deutsche Bank Securities downgraded Frontier's shares this week. But Rousseau believes that improving refining margins in the coming months will boost Frontier's fortunes.

Another group, oil field services, has performed the best in the energy sector so far this year. These companies benefit when exploration-and-production (E&P) companies invest big bucks in long-term projects.

Oceaneering International, known for leasing equipment for research on the ocean floor, has seen demand rise for its devices in the Gulf of Mexico, says Sarah Hunt, an energy analyst at New York money manager Capital Management Associates.

The result: higher rates for Oceaneering's equipment and thus higher profits.

She expects the company, whose market capitalization is $1.4 billion, to boost earnings by 27% this year and 16% next year (see At a Glance).

Now the stock trades below its growth rate, but "over time that growth could catapult its market capitalization to twice the current size," Hunt says.

Of course, much of the argument for energy stocks, especially small ones, requires oil prices to move higher.

But even if crude prices moderate, "oil above $50 is still a lucrative business," says Timothy Flannery, manager of the FrontPoint Energy and Utility Fund.

That's why some smaller energy companies like Frontier and Oceaneering could emerge from Big Oil's shadow and make a big splash of their own in the years ahead.

Full Disclosure:
• The Putnam Small Cap Growth Fund holds an undisclosed number of shares of Frontier Oil and Oceaneering International, according to Morningstar.com

• Friedman, Billings, Ramsey does not have an investment banking relationship with Frontier, according to Jacques Rousseau, an analyst at the firm. Rousseau said he does not own the stock.

• Capital Management Associates owns 4,600 shares of Oceaneering, according to Sarah Hunt, an analyst at the firm.

Comments? E-mail us at online.editors@barrons.com7

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-- posted by SteveT

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» axolotl - PEAK OIL WEBSITE.......................

.........http://www.theviewfromthepeak.com This site has a very good list of links for the oil industry.

-- posted by axolotl

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