Local Company Celebrates Centennial

If you subscribe to the Midland Reporter Telegram's treeware edition, you might have noticed a large ad in today's publication announcing the 100th anniversary of St. Mary Land & Exploration Company. This milestone will be celebrated at a reception this afternoon at the Petroleum Club, and yours truly has wrangled an invitation, because of my well-known reputation as a media mogul and Influencer of Public Opinion.

Well, that and the fact that I'm married to a St. Mary employee. OK, probably mostly that second thing.

But, I'm not the only local blogger whose better half is a St. Mary employee. I don't think Jeff will mind my pointing out that his wife recently joined the company and is, in fact, one of their key employees. Unlike me, however, Jeff has a real job and I don't know that he'll be able to attend the ceremony. Jeff, I'll have a piece of cake in your honor.

St. Mary's presence in Midland is new, but growing. The office has been open for only about a year. Many Midlanders will be familiar with some of its management, however, as they served stints here with ARCO in the 90s and earlier. Tony Best is the President and CEO; Javan Ottoson is Executive VP and COO; Newt Newton is the VP and Regional Manager in the Midland office. And, of course, both my wife and Jeff's were ARCO employees, so it's sort of a mini-reunion from that perspective.

Given today's business climate, one wonders how many new relatively new companies (think Google, Microsoft, Apple, Verizon, etc.) will survive to celebrate a centennial. It's a big deal, and I wish the employees of St. Mary all the best. (Not that I have a vested interest or anything.)

Alon Refinery Explosion

Updated at 4:40 pm

Anytime you feel your house shake from an event 40 miles away, you know it's serious. This morning's explosion at the Alon Refinery in Big Spring was a reminder that the oil and gas business is a dangerous one.

Here's a photo circulating through the 'net, uncredited, from the initial explosion. I don't know if this was taken in Big Spring or in one of the nearby communities like Colorado City Coahoma. Judging by the shadows in the photo, the photographer seems to be looking north(ward), so it's probably set in Big Spring itself. My thanks to Kelly Stark for forwarding the image.

Update (3:00 pm): Robert Thomas emailed the following photo, again uncredited. This is a familiar view of the refinery from I-20, west of the facility (as you're leaving Big Spring). It looks like something from Dante's "Inferno," doesn't it?

Update (4:40 pm): Here's another photographic perspective, provided via email by Danny Lunsford. The flame coming from the "tower" on the right side of the photo is a flare of waste gas, a part of the normal operation of the plant. The flame near the middle of the photo is not.

Local news reports are that all employees are "accounted for," but I haven't heard any report about injuries. Update: Reports say that only one person was four people were injured, and no injuries are life-threatening. Amazing.

This refinery is not huge, compared to the big ones along the Gulf Coast, but its 70,000 barrel per day throughput will still be felt in a market where supplies are already tight.

FutureGen: West Texas dodged a bullet?

I realize that this won't be construed as anything but sour grapes by the good people of Mattoon, Illinois, but since the selection of that location for the FutureGen project had barely hit the ground yesterday before the DOE began waffling about the project's funding, it does seem appropriate to share one (or two) cautionary words that have a bit of relevance: Superconducting Supercollider.

It's tempting to say that if the availability of government funding is the primary motivator for undertaking a project, then that project is doomed from the start. However, that's not a fair nor accurate description of FutureGen, which has sound and desirable technological underpinnings. And there have been some noteworthy scientific achievements arise from federal government initiatives (the space program comes to mind). Still, the DOE is not NASA, and it's better known as a political pawn than an agent for technological breakthroughs.

So, the appearance of sour grapes notwithstanding, the West Texas FutureGen team is likely better off if it can move forward with a private initiative. And to the folks in Mattoon, best of luck; you're going to need it.

And the winner is...

...Illinois!?

Bummer.

[No clue? Here's an overview.]

A hidden challenge of $100 oil?

Now that crude oil prices have blasted through the $90/barrel level, the century mark is no longer unimaginable. Those of us whose livelihoods are inextricably tied to the oilpatch vacillate between exultation at good fortune and dread at the likely political and economic backlashes. But it occurred to me this morning that $100 oil presents a potential challenge to an unlikely group of folks: systems analysts.

First, a little history. I was a young pup working at ARCO back in 1977 when the Alaskan Pipeline was completed and production began to flow from the Prudhoe Bay oilfield. I had a great job in the Dallas office as an accounting systems programmer, creating data retrievals for various groups. I was not a programmer in the strictest sense of the word, as I used a program called MarkIV to build those retrievals, and I reported through the accounting department. The real code monkeys were in a separate IT group, and they worked in COBOL, FORTRAN, and other lost languages. They built and maintained the systems I and my co-workers accessed to pull data and format it into something useful to the end users.

Anyway, I remember that as the date drew closer for the first North Slope production to come flowing down the pipeline, a general panic began to spread through the systems analyst group. It seems that our production and revenue systems – which were perfectly fine for our company's business, pre-Prudhoe Bay – would not accommodate the anticipated volumes that would be recorded once that production came online. No one had anticipated that we'd ever be booking hundreds of thousands of barrels per day instead of tens of thousands.

As it turned out, the solution was fairly straightforward. The data fields for volumes and revenue were converted into packed decimal format, allowing more data to be squeezed into the database fields. It was still a huge task to make that conversion to the scores of databases, hundreds of programs, and thousands of ad hoc retrievals.

Fast forward to today. I've been out of that end of the business for decades, but I can't help wondering if there are any legacy systems still being used that won't accommodate three significant digits for crude oil prices. I suppose that from an oil company's perspective, there are worse problems to have, but if that is the case, the windfall to the bottom line will be tempered (albeit in a completely insignificant way) by the headaches to the IT folks who will have to make sure their accounting systems are up to the task.

I know that some of you are working in the oil and gas accounting systems business. How about it? Are you anticipating any systems problems due to triple digit oil prices?

It wasn't Big Oil's fault, after all...

Here's a story you won't likely see in most mainstream media: the recent sharp drops in crude oil prices, along with some other rather obscure -- but not invisible -- data make a strong case for the fact that it wasn't the oil companies responsible for the run-up in prices via withholding of supply, but, instead, speculators and commodities investors. From today's Wall Street Journal's MarketBeat blog:

The idea that speculators have a significant impact on oil prices has long been put forth by the industry, but the issue is seemingly too complicated -- and the industry viewed with too much skepticism -- for the general public to give it any credence. I don't think these new developments will change that. Companies like ExxonMobil and BP are simply too attractive as a target for blame.

[Wikipedia has a fairly concise explanation of the circumstances that give rise to contango, and the opposite state, backwardation, which typically exists when a commodity is in short supply. I doubt that most of you will be interested. Unfortunately.]

BP Blames Bacteria for Big Boo Boo

Besides being a great name for a band, "Bacteria Poop" is now the semi-official excuse being put forth by oil company officials for the thinning walls of the Prudhoe Bay (Alaska) crude oil gathering system pipelines.

In a Wall Street Journal report on yesterday's Congressional grilling of BP, Plc. officials, the poop theory was floated in front of a righteously hostile group of lawmakers:

The irony is that those oil-eating bacteria were introduced as a way to make the oilfield operations more environmentally friendly*. Once again, the Law of Unintended Consequences rears its ugly but reliable head to bite the needlessly careless on their sensitive parts.

BP's not exactly at the top of my Most Favored list at the moment. We own far too much of its stock to find any humor in its Keystone Kop-ish descent from what was once an fine example of a well-managed, properly British corporation. There's probably not much that I'd normally find in common with a Democrat congresswoman, but I have to agree with Rep. DeGette in one area:

This was a rather slick dig at BP for its "Beyond Petroleum" marketing campaign, which in itself is a stroke of genius -- but only if the company actually has the chops to rock it. It's becoming increasingly evident that it doesn't.

*Update: I don't mean to leave the impression that all such bacteria are intentionally introduced into oilfield operations. Some is naturally occurring. Here's an article that explains a bit more about the science behind this issue.

Technorati tags: BP, Plc. | Bacteria Poop

Aerial Photo Shoot

As I implied in the previous post, I had the privilege of doing an aerial photo shoot yesterday, the first time I'd done such a thing. It was a lot of fun, good experience, and I think the results were good (although the client will have the final word in that regard).

We departed from Midland's Skywest airfield mid-afternoon and headed south about 30 miles, toward a well site just north of Rankin where preparations were underway for a frac job (for the uninitiated, "frac" refers to "hydraulic fracturing"; this is a technique whereby liquid -- sometimes millions of gallons -- is pumped into the underground producing formation at pressures high enough to split the rock, thereby increasing the production of the well). We were asked to get aerial shots of the equipment on location.

The skies were mostly clear and winds were blessedly light, but the air was a still a little bumpy and it was very hot, in the mid-90s. The pilot, my friend Tommy, did such a good job of getting us to the location that we actually thought we were off course, because when it came time to look for the site, we couldn't see it -- because it was precisely below us. We made four passes at about 4,000' and I put the burst mode of my Canon digital SLR to good use, taking more than a hundred photos during the relatively brief periods that I had a clear shot through the open window and past the wing and strut of the Cessna 172.

My new 70-200mm zoom lens performed admirably. I put the camera in shutter-priority mode, setting the shutter speed to 1/1000 and varying the ISO between 200 and 400. At speeds of around 70 mph, there's plenty of buffeting through the open window, but those combinations were sufficient to make any evidence of camera shake insignificant in the resulting photos. And even though the conventional wisdom said to put the camera into manual focus at infinity, I got better results with Canon's autofocus.

So...what were the results of the shoot? Well, I can't show you the actual well site; those photos belong to the client, who hasn't yet seen them. But here's a photo of a windmill I took while we were banking to make another run:

As an interesting footnote that gives you an idea of the "community of Midland," my pal Wallace will be doing the same shoot today. As the logistics worked out, my pilot wasn't available today and his wasn't available yesterday. I expect he'll have his own report up over at Streams at some point.

Oh, and in case you're wondering about the top photo, the pilot's wife accompanied us on the trip.

Update: As promised, Wallace has his report up over at Streams. I'd link directly to it but his permalinks seem to have a hitch in their giddyup. Just look for the August 25th entry.

Technorati tags: Aerial Photography | Frac Job

Gotta love the oil bidness in Texas

I see that Chesapeake Energy was the high bidder for drilling rights in a new portion of the prolific Barnett Shale natural gas play in North Texas. They're paying $181 million in cash and giving up a 25% royalty for the right to drill -- are you ready for this -- under the Dallas-Fort Worth International Airport!

Chesapeake is already a big player in the Barnett Shale, and they've identified at least 250 potential drillsites on this new acreage. Based on their news release, it appears that they'll be working from pads similar to those used on the North Slope of Alaska, drilling multiple wells from one central, small footprint location, using directional drilling (once known by the pejorative term, "slant hole drilling") to stick those steel straws into the producing zones.

Since the lessees are the cities of Dallas and Fort Worth, along with the DFW Airport Board, Chesapeake also gets to deal with this wonderful little detail:

I'll bite my tongue at this point.

Anyway, if you thought flying in and out of DFW was interesting before, wait until it's underlaid by a dense network of flowlines carrying an abundant supply of flammable material. I can only imagine the interest that the federal Department of Homeland Security is going to take in this project.

Technorati tags: Chesapeake Energy | Barnett Shale

Beeville and Bolivia: Brotherhood of Boneheads

A few days ago, a fellow Texas blogger took the oil industry to task for paying out billions in dividends instead of reinvesting that cash in new oil and gas projects. If you've wondered about that yourself, you might want to view Bolivia's decision to nationalize (a euphemism for "steal") its natural gas fields. In one fell swoop, the government is forcing foreign companies to walk away from more than $4.5 billion invested over the past ten years in Bolivian infrastructure and producing properties. And these investments were made in one of the more stable and accessible parts of the world.

This is just one example of how the investment of significant amounts of capital and technical expertise will be appropriated in the short term in other South American countries such as Venezuela, Peru, and Ecuador. Bolivia has already announced plans to take over the crude oil and mining industries next, and all foreign owned private property thereafter.

I'm sure we're witnessing the creation of the next world-class power, as hundreds of thousands of skilled Bolivian geoscientists, engineers, and financial wizards will rush to fill the void left by the exodus of the foreign dullards who have been stealing them blind.

Which brings us to Beeville, the town in south Texas which has decided to bring ExxonMobil to its knees -- or at least to $1.30 gasoline -- via a boycott of the local filling stations. Well, actually, there's nothing to tie the good citizens of Beeville and Bee county to the Bolivian story other than my love for a good alliterative headline. Well, other than the fact that both are examples of the kind of wrongheaded lunacy that has made the oil bidness into a "damned if you do, damned if you don't" kind of industry.

Personally, I wouldn't blame any of the oil majors for just liquidating the whole shootin' match back to the shareholders and letting Bee county strike a deal with those good ol' boy jobbers in Bolivia for their future fill-ups.

Lileks + Midland = Kismet

As if we needed any additional confirmation that James Lileks was born to live in west Texas:

No Peak Oil theorist he. Deep down inside, we're all hopeful abiogenicists down here. Move toward the dust light, James, move toward the light.

Technorati tags: Lileks | Where's the Living's Easy and the Birds are Clean

Significant GOM Production Still Shut-in

The situation isn't getting a lot of press but the Minerals Management Service reports that almost 27% of oil production and almost 19% of natural gas production from the Gulf of Mexico is still shut-in due to damage inflicted by Hurricanes Katrina and Rita. That's more than 400,000 barrels of oil per day and almost 2 billion cubic feet of gas per day that's not making it to US refiners or into the nation's gas distribution system.

Fortunately, it's been a mild winter and natural gas prices actually closed at a four-month low yesterday, although both crude and natural gas are up today.

The MMS issues twice-weekly status reports on the shut-in production in the GOM, if you're interested in tracking the industry's progress in getting things back online.

Signs of the Apocalypse, Oilfield Style

I could have also titled this post, "Quotes I never thought I'd see in my lifetime." To wit...

Source: Independent oilman Bob Landreth in today's Midland Reporter-Telegram

Technorati tags: Oil and Gas Prices | Oil Industry Costs

Evans to Rosneft?

I'm absolutely fascinated by reports that Midlander and former Commerce Secretary Don Evans has been asked by Russian president Putin to become Chairman of the Board of Russia's largest oil company. If true, and if it comes to pass, we may someday look back on this event as a watershed in the legitimization of the Russian oil and gas industry, which up to this point has been at best a doddering behemoth and at worst a disaster of the first stripe.

The implied message of the outreach is arguably much more important than the actual event. Putin seems to be admitting that his country's most valuable industry is basically out of control, and there's no one inside Russia who can master it. He's also taking proactive steps to give some assurance that when Rosneft becomes partially privatized next year via an IPO, it will have the kind of leadership necessary to ensure that investors feel comfortable in buying its stock.

It also is a vivid reminder of how different the Russian style of government and business is from what we're accustomed to. Of course, Rosneft is a state-owned company and thus you'd expect that the political leader would have a certain amount of control over or input to the selection of the business leader. But can you imagine Dubya inviting, say, Tony Blair to become head of ExxonMobil? OK, bad example. But, you know what I mean.

I doubt that anyone's naive enough to think that Evans will singlehandedly turn around an entire national industry. But if a west Texas oilman can't do it, nobody can. At the very least, it's a good start.

Technorati tags: Donald Evans | Rosneft

Where do I sign up?

Barnwell Industries Inc.'s latest press release detailing its quarterly earnings has nothing of particular interest to catch one's eye, other than the fact that it originates from Honolulu, Hawaii. A quick jump to the company's website reveals that its corporate headquarters are, indeed, located in Honolulu, even though the bulk of its earnings are derived from its oil and gas operations which are managed from Calgary, Canada.

I realize that it's not unusual for corporate HQs to be remotely located from the actual production, although this tends to be the case much more often with major corporations rather than small independents. But I think Barnwell has set a new standard for working both ends of the geographic spectrum. I'm thinking about buying a few shares so I can have a reason for attending the annual stockholder's meeting.

A Bostonian's Perspective on Big Oil (It's not what you think!)

In the wake of last week's post about Senate showboating hearings on oil and gas industry profits, I received a note from David Gerstman who blogs via several outlets, most notably Israpundit and Soccer Dad. David passed along a link to a column by Jeff Jacoby entitled "Big Oil's Real Profiteers" that appeared in the November 13th edition of the Boston Globe.

As David pointed out in a subsequent email, Jacoby is the Globe's "token conservative," but it's nice to know that the paper has even one. Anyway, Jacoby's column describes the financial risks of being in the oil and gas business, and the rather plebian returns made by the industry, compared to other businesses, on his way to identifying the real "fat cats":

Read the whole thing. It's a piece that could have -- and probably should have -- come from the Houston Chronicle or the Dallas Morning News or the Midland Reporter-Telegram. Still, it's nice to know that not everyone in the northeast has an agenda that mandates ignorance of the facts.

Technorati tags: Oil & Gas Prices | Oil Industry | Windfall Profits Tax

Oil Prices: Save us from the Senate

Yesterday's Senate grandstanding hearings about the causes and impact of increased oil, natural gas and gasoline prices in the wake of the hurricanes provided some disappointing but not surprising insights into why that body is exactly the wrong group to address the issue: an inability (or unwillingness) to grasp fundamental economic truths.

Witness this exchange between the Federal Trade Commission Chairman and the honorable senator from the great oil-producing state of Oregon:

One would hope that by referring to this conclusion as "astounding," the senator was implying that a door to understanding had been thrown wide open and he now saw the direct link between supply, demand and prices. One would probably be mistaken in this hope.

To the extent that interdiction of actual price gouging at the retail level can be achieved, the process is worthy. Price gouging -- the arbitrary setting of inflated prices with the primary purpose of profiting from a shortage of critical goods or services during a time of emergency -- is reprehensible. But the senators appear to be overreaching -- shocking, I know! -- by attempting to exert economic control all the way back through the supply chain, starting with the raw product coming out of the ground.

In light of those hearings, the irony of this becomes almost unbearable.

For a realistic take on what the Senate hearings are all about, you'd do well to see how our Australian mates view the process. In an article entitled "Big Oil takes Senate back to school," we get this insight:

This is a complex issue and there will be no solutions created by the Senate, or anywhere else in the US, for that matter. But the ability of the Senate to make things much, much worse in the long run should not be underestimated.

Technorati tags: Oil and Gas Prices | Price Gouging | Windfall Profits Tax

Gasoline Taxes > Oil Company Profits?

An interesting perspective on the growing call for a windfall profits tax on oil companies comes from the Tax Foundation (emphasis mine):

The report goes on to point out that since 1977, there have been only three years (1980, 1981, and 1982) in which domestic oil industry profits exceeded government gas tax collections. In 1995, the gasoline tax outpaced industry profits by a factor of 7.3.

If governments, both state and federal, are truly concerned about the hardship of high gasoline prices on citizens, they might consider reducing their share of the pie.

Tip o'the Green Eyeshade to the Tax Prof Blog

Technorati tags: Windfall Profits Taxes | Gasoline Taxes | Gasoline Prices

Germany to Midland: How's it going?

I just received -- and replied to -- an interesting email. The email was an inquiry from a Washington-based reporter for a German newspaper who wanted some insight as to how the recent run-up in oil and natural gas prices -- and the national reaction to those prices -- was affecting life in Midland. Here's the original and unedited email (I added the links for your convenience):

And, here's my response:

If you live in the Permian Basin and would like to weigh in with your perception of how life has (or hasn't) changed in our area due to the rise in oil and gas prices, feel free to do so in the comments. If you think I misspoke somewhere in my reply, please point that out also. If enough people respond, I'll send Uwe a link to the comments so he can have the benefit of your observations.

Technorati tag: Oil & Gas Prices

Let the Witchhunt Begin

Get ready to party like it's 1980.

Technorati tags: Windfall Profits Tax | Economics 101

Oil & Gas Stocks: Still good investments?

The numbers seem to say so. According to an article in today's Wall Street Journal:

It appears that the major oil companies are making up in margins what they're losing in volume as significant production and refinery runs continue to be shut in following Katrina. However, one must wonder just how much hammering their GOM investments can take before the market starts to write down their future prospects. With another hurricane apparently heading that way, I suppose we'll find out all too quickly.

Yergin on the Energy "Crisis"

Daniel Yergin is the "go-to" guy in the oil and gas industry when it comes to understanding the big picture. Author of "The Prize: The Epic Quest for Oil, Money, and Power", a book that was published in 1993 but undoubtedly is still within reach of every oil company CEO in the world, when Yergin speaks -- or writes -- wise people pay attention.

He's got a wide-ranging article in today's Wall Street Journal in which he touches on a number of aspects of Hurricane Katrina's impact on the status of energy in our nation. Here are a few of the more interesting excerpts:

• On the importance of the SPR: But, fortunately, the Strategic Petroleum Reserve, with 700 million barrels, can compensate for an extended period for the missing oil. The SPR is certainly demonstrating its value here. Without it, people would be apprehensively asking how deeply into recession the resulting $80 or $90 a barrel oil would push the U.S. While the trigger for its use is not what was anticipated, the SPR is proving its role -- not as a tool of market management, but to offset a major disruption, protect GDP, and maintain the viability of our economy.


• On Katrina's impact on natural gas: In terms of price, natural gas has actually been hit more. Until this week, commercial gas storage, banked for the winter, looked comfortable. But now those inventories may not be built up sufficiently for a cold winter, a prospect that is already stressing the natural gas market. Over the last four days, natural gas prices are up 20%, while crude prices are, by comparison, up 6%.


• On the differences between today's situation and previous "Energy Shocks": Unlike the crises of the '70s or the Gulf Crisis of 1990-91, this does not involve just crude oil: It includes natural gas, refineries and electricity. The 1.5 million barrels of oil production capacity that has been "shut-in" -- closed down -- is much less than was lost to the market when Saddam invaded Kuwait. But although it has received less attention, 16% of U.S. natural gas is also shut-in; and 10% of our refining capacity is under water at a time when there is no slack at all in the world's refining system.


• On the importance of the Gulf of Mexico to the US energy supply: The full extent of the Gulf of Mexico energy infrastructure is hard to grasp. Altogether, about 800 manned platforms, plus several thousand smaller unmanned platforms, feed their oil and gas into 33,000 miles of underwater pipelines, a good part of which eventually reaches shore at Port Fourchon at the mouth of the Mississippi. That adds up to 35% of domestic oil production (including oil from state as well as federal waters) and over 20% of our natural gas coming from off-shore. Add to that the 10% of U.S. oil imports that flow in through the same corridor, plus the string of refineries and pipeline networks that sprawl along the Gulf Coast, and you have a complex that constitutes our single most important energy asset.


• On the importance of letting the free market do its work, and resisting the self-defeating strategies of price controls and arbitrary product allocation: Some of the refining capacity may come back quickly, while flooding may have put others out of commission for some time. Increased product imports from Europe, the Caribbean and Latin America can help offset the losses, but that will take weeks. In the meantime, calls for price-controls and allocations will likely grow. As painful as the price hikes may be, those calls should be resisted: The gas lines of the '70s were largely self-inflicted, the perverse result of controls. More constructive, and hugely less cumbersome and costly, would be clear communication to consumers. A package of responses, such as properly inflated tires, adherence to speed limits, consolidation of trips, and tune-ups, could cut gasoline consumption by 10% to 20%. This needs to be reiterated again and again, for modest restraint on demand is the quickest way to take the pressure off the market. The flexibility of markets and the resilience of the energy sector are the most effective antidotes to high prices and disruption. We can see markets working, also, in the substantial build-up of supply from around the world that will occur over the next few years.

Perhaps most importantly, Yergin suggests that we need a new strategy for securing our nation's energy supplies:

Was Katrina the wake-up call we needed to make the hard decisions, or will the crisis send us into an unending cycle of finger-pointing and blame-laying? I'm not placing any bets at this point.

Technorati tags: Daniel Yergin | Energy Crisis | Katrina & the Oil Industry

PBPA Hurricane Katrina Relief Fund

The oil and gas industry has quickly rallied to provided significant financial support for Hurricane Katrina relief efforts. I identified the following announcements with just a few minutes of browsing (all contributions are going to the American Red Cross unless otherwise indicated):

• ChevronTexaco - $5 million ($3MM to ARC, and $2MM to local relief and service organizations in affected areas)
• Shell - $2 million plus matching of employee contributions up to $1MM
• ExxonMobil - $2 million
• OXY - $1 million plus matching of employee contributions
• BP - $1 million plus matching of employee contributions
• Duke Energy - $100,000 plus matching of employee contributions up to $100K
• Halliburton - Matching of employee contributions (no cap)

I'm sure that similar announcements from other major companies (including service companies) will be forthcoming.

In the meantime, the Permian Basin Petroleum Association has just announced the creation of a new relief fund and is asking smaller operators and producers throughout the Permian Basin to make contributions. The goal is to quickly raise $100,000; the fund balance is already at $20,000 after less than 24 hours. The funds will be forwarded to the Red Cross and the Salvation Army.

If you know an independent oil and gas operator or producer, please pass this information along to them and urge them to participate. Many of them may already have plans for making similar contributions and that's great. This fund is just another way to help make an impact. And, if it's not obvious, anyone can make a contribution to the fund. You don't have to be in the bidness!

Technorati tags: PBPA | Katrina Relief Fund

US to tap SPR

CBS MarketWatch is reporting that the administration has decided to tap the Strategic Petroleum Reserve in the wake of continued oil and gas production curtailment due to Hurricane Katrina. Details will be announced in a press conference later today.

Technorati tags: SPR | Hurricane Katrina

Hurricane Katrina's Impact on the Oil and Gas Industry

Here's the latest on how Katrina has impacted the US Gulf of Mexico's oil and gas producers and refiners (all statistics via John S. Herold, Inc.):

• Eight refineries with about 2 million barrels of day of capacity were shut in prior to the storm. This represents 12% of the nation's total refining capacity.


• The refinery shutdowns took about 1 million barrels per day (42 million gallons) of gasoline out of the market.


• It's estimated that just under 1.4 million barrels per day of crude oil production was shut-in in the Gulf of Mexico, out of a total of 1.5 million BPD.


• It's estimated that 8.3 billion cubic feet per day of natural gas production was shut-in in the Gulf of Mexico, out of a total of 10 billion CFPD.


• The closing of the Louisiana Offshore Oil Port (LOOP) takes 11% of the country's daily import of foreign crude oil off the market.

Herold goes on to note that while there are options for replacing any shortfalls in crude oil (increased imports; release from the SPR), the replacement of lost natural gas production is much more worrisome. Also, it's too early to assess the possible damage to shallow gas pipelines. If there's significant damage to those lines, resumption of natural gas production could be delayed even if the production platforms came back online quickly.

Herold does report that the Sabine Pipeline which serves the crucial Henry Hub (which is the centralized point for natural gas futures trading in the U. S.) and was shut down in advance of the storm, apparently had no significant damage.

Technorati tags: Katrina | Oil & Gas Industry | Energy Prices

India and China to Team Up for Oil & Gas Bidding

I'm not sure how I missed this, but the governments of India and China have announced that their state-run oil and gas companies are entering into an agreement whereby they'll be able to jointly bid on oil and gas assets.

Both countries are, of course, net importers of crude oil and natural gas and their growing demand for same is pointed to by many as one of the reasons for the high energy prices worldwide.

Some believe that this alliance will give the countries the financial wherewithal to compete on the global stage, and, indeed, it will eliminate one competitor from the picture.

But, as CNOOC found out when it set it sights on Unocal, there's more to being a player at that level than simple access to cash. It's a bit naive to think that by bringing India into the picture, China's politics will somehow be glossed over or appear irrelevant to governmental authorities having jurisdiction or influence over such transactions.

As for India, I trust they're simply adhering to the time-proven strategy of keeping their friends close, and their enemies even closer. But, there's another adage that might apply...something about lying down with dogs...

Technorati tag: India/China Partnership

Unocal: The Bidding War Begins

As expected, the China National Offshore Oil Company (Cnooc) has raised the stakes for Unocal, submitting an all-cash offer of $18.5B in an effort to stymie Chevron's current $16.5B cash-plus-stock deal. Here are some excerpts from the report in today's Wall Street Journal:

Wouldn't you love to make half a billion just for not doing a deal? That's the worst case scenario for Chevron, in the event that Unocal goes with Cnooc's bid. But, it also appears that $67/share may just be the starting point for the bidding. The real winners will be the Unocal shareholders.

Cnooc is quite sensitive to the potential "anti-foreign-takeover backlash":

Those of us who have been directly affected by corporate takeovers immediately recognize the phrase "seek to retain substantially all...employees," which is generally code for "most of them are history." However, Cnooc would presumably be more likely to retain employees than Chevron, given the lack of overlap with an existing employee base, especially in non-field personnel. Chevron has remained non-committal about its layoff plans, although it has already said that it would consolidate Unocal's headquarters into its own offices.

Cnooc's commitment to sell US-derived production to US markets seems to be window dressing, as selling that production to foreign markets is already logistically difficult, not to mention politically ill-advised.

Unocal remains coy about the new bid, and Chevron professes to be confident that its proposal is the best one.

My prediction? Unocal will end up selling to Chevron for around $70/share. I have nothing concrete to support that call, other than this seems to represent the fastest and cheapest way for Chevron to acquire new reserves. A $70/share bid equates to around $11/BOE (based on the published figure of 1.75B barrels of proved reserves), which still seems like a bargain given today's oil prices in the high $50s.

Technorati tags: Pure Resources | CNOOC | Unocal | Chevron

Unocal still in play?

The Wall Street Journal reports that the China National Offshore Oil Company (CNOOC) is contemplating offering more for Unocal than ChevronTexaco's $16B cash+stock deal that has been tentatively accepted by Unocal's management.

This would bring about an interesting showdown...a first-of-its-kind bidding war between an American and a Chinese company for an American company. It also has implications for the Midland employees of Pure Resources. Would CNOOC be content to leave the Midland office in place, rather than transferring it to Houston, as is ChevronTexaco's plan? Would the Chinese company even want to keep Pure's Permian Basin assets in its portfolio, or would it spin them off, preferring to focus on Unocal's offshore and foreign assets?

There's also the question of whether the next shoe to drop -- in case CNOOC is either unsuccessful or elects to pass on Unocal -- will land squarely on top of Claydesta Plaza in Midland. This article in the Los Angeles Times paints Occidental Petroleum Company as the juiciest acquisition target in the oil and gas business. OXY Permian is one of Occidental's biggest operating companies and is also the biggest E&P employer in Midland, as well as the largest oil producer in the state of Texas. The obvious issue is whether CNOOC -- or anyone else, for that matter -- is willing and able to come up with the $40B or so that it would probably take to buy Occidental.

Life in the oil patch is really interesting at $50 per barrel, in more ways than one.

Technorati tags: Unocal | ChevronTexaco | Occidental Corporation | OXY Permian | CNOOC

US Refining Capacity: A few statistics to ponder

Yesterday's announcement of Valero Energy's acquisition of Premcor, Inc., along with record high gasoline prices, has focused media (and investor) attention on the refining industry. The industry was even brought to the forefront in yesterday's meeting between President Bush and Saudi Crown Prince Abdullah at the Texas White House, where a Saudi spokesman pointed out that even if Saudi Arabia increased its oil production, the lack of refining capacity would limit the impact of that move on gasoline prices.

Today's Wall Street Journal analyzes the Valero acquisition and provides some interesting background regarding the refining industry as a whole. The numbers help to explain the elevated gasoline prices, at least as far as the supply side of the equation is concerned. Here's a selection:

• The number of refineries has declined to 149 today from 325 in 1981


• No new refineries have been built in the US since 1976


• Capacity for refining crude has fallen 10% to 16.8 million barrels a day from 18.6 million barrels in 1981

This paints a rather glum picture for the industry, and for gasoline-thirsty consumers. But there is a silver lining, however thin.

• Even though capacity is down 10% since 1981, refinery output is up 25% over the same period, indicating that the industry is capitalizing on technology to better use existing capacity.


• Valero itself has added 380,000 barrels a day to existing refineries since 1996, via plant expansions and improved technologies.

Unfortunately, the country's appetite for energy is growing much faster than the measly 1% annual refining capacity growth.

A couple of implications to consider:

1. Specific to Valero, whose return to shareholders over the past five years has been tops in the S&P 500...can it continue in its strategy of focusing on heavy/sour crude* for its refining feedstock, thereby enjoying the higher margins that come from buying that lower-priced oil? Some of Exxon's Valero's competitors (notably, ExxonMobil) don't think it's a viable long-term strategy, as supplies of lower-quality crude will decrease over time.


2. In terms of the refining industry as a whole, will Congress ever address the mountain of regulatory and environmental restrictions that has stopped refinery construction dead in its tracks, and led to the closing of many existing plants?

*"Heavy crude" is oil that has a low specific gravity; that is, it's quite thick. Some heavy crudes are not even liquid at room temperatures. Sour crude contains a relatively high percentage of contaminents like sulfur. Both heavy and sour crudes pose special challenges throughout the production, transportation and processing chain.

Technorati tag: Refining Capacity | Valero Energy

When Curves Collide: Shell seeking Petroleum Engineers

Today's Financial Times contains a report that Shell is planning to hire 1,000 engineers in an effort to shore up its technical credibility in the wake of last year's massive reserves writedowns.

The obvious question from those who are familiar with the current state of the oil and gas business is "where will Shell find those engineers?" The FT article acknowledges this problem:

This is not a new problem. Many universities have cut back or even abandoned their petroleum engineering departments due to lack of interest on the part of incoming students. From the Houston Chronicle:

The long history of industry boom-and-bust cycles, the challenging curriculum and the prospect of job assignments in some of the least glamorous parts of the world seem to more than offset the appeal of entry level salaries of $50-60K and up.

Even if Shell can find enough engineers, its announcement should be interpreted by potential investors as much for what it did not say. If Shell had announced its intentions to hire 1,000 new geologists and geophysicists, that would have been your cue to sink some money into its stock.

Engineers don't find new reserves; geoscientists do. Engineers can accelerate the production of existing reserves, they can help to extend the limits and life of currently producing fields, and they can make reserves appear on paper via creative use of equations and "judgment" (which is what got Shell into trouble in the first place), but they are just a small part of the process that identifies the exploration prospects that are needed to actually increase the world's supply of oil and gas.

If Shell isn't investing in people to drive its exploration, then it seems to be acknowledging that it will be content with adding reserves by buying them from others, or in trying to squeeze more out of its existing asset base. Neither is a sound strategy for stellar long-term performance in the oil and gas industry.

Pure Resources at Risk?

According to this article in today's Wall Street Journal, Royal Dutch/Shell could be eyeing the acquisition of competing oil and gas companies as a way to rebuild its financial and operating performance following last year's disastrous writedown of reserves and resulting management shakeup. One potential target: Unocal.

If such a takeover comes to pass, it will have significant local implications. One of the largest employers among Midland independent oil and gas companies is Pure Resources, a wholly-owned subsidiary of Unocal. In its earlier life, Shell bailed out of the Permian Basin a long time ago, and it remains to be seen whether it would see any new value in keeping operations in this area, or if, like BP after taking over ARCO, it immediately downsizes the office to near zero and either ignores or sells the assets. At a minimum, such an acquisition could lead to a consolidation of the local office into the Houston area, where both Pure and Shell have headquarters.

This is all speculation, of course, but, unfortunately, recent history shows that it doesn't take a prophet to predict these things. Ironically, if a takeover occurs, having the Chinese National Oil Company as a parent could be better for Midland than Shell, as it would be less likely to micro-manage Pure out of existence.

Curiosity Piqued about Peak Oil?

A quick scan of my referer log tonight revealed a solitary hit from a site named Dry Dipstick. This is proof positive that there's now a website devoted to every conceivable topic, as this site bills itself as "a metadirectory of peak oil."

The visit in question went to my post on Tuesday which gave brief consideration to the conflicting theories regarding the source and supply of petroleum, namely: (1) oil is non-renewable and rapidly depleting vs. (2) oil can be created naturally from non-organic sources and thus is renewable.

I presume that Dry Dipstick had a link to that post under its Breaking News and Commentary section, although the moderators apparently came to their senses and now link to something else by someone who knows what they're talking about. Nevertheless, if you want to know more about the facts and theories of the world's supply of crude oil and natural gas, albeit mostly from a "peak oil theory" perspective, Dry Dipstick seems to be a pretty good place to start.

We're running out of oil! No, wait! We're making more!

Ran across another recent juxtaposition of opinons, this time relating to the state of the world's hydrocarbon supplies.

An article in today's Wall Street Journal documents the ecstatic reaction of members of the "peak-oil movement" who see the recent run-up in crude oil prices as vindication for their theory that we're approaching the end of the world's finite recoverable petroleum supply. (Assigning them a title like "peak-oil movement" makes them sound organized and cultish. The former is incorrect, but the latter is probably not too far offbase.) Their theory is based on the ironclad belief that petroleum is a non-renewable resource, and unless we have the creativity to engineer a bunch of dinosaurs and the patience to wait a few hundred million years for them to metamorphize into oil and natural gas, then we're just up the creek.

On the other hand, there's this little gem, appearing in last Sunday's Oil & Gas Report. It reports on renewed interest in the theory of deceased scientist Thomas Gold which holds that the earth itself is continually creating petroleum via naturally occuring inorganic sources.

It seems that some scientists have been able to demonstrate that when you squeeze and heat plain old water sufficiently, you can force it to turn into methane, the most common component of natural gas. The temperatures and pressures necessary for this transformation equate to those found 12 miles below the surface of the earth... about twice as far as the deepest gas well ever drilled.

I don't believe that any of us will live to see hydrocarbon-generating plants at work, but that may be because none of us will live to see the end of the supply of relatively cheap crude oil and natural gas. My personal opinion is that the peak-oil theorists will get their 15 minutes of fame and then disappear for another century or so. Never underestimate the creativity, tenacity and skill of the oil industry.

Music to My Greedy Little Ears

BP PLC, the company with which I have an ongoing love/hate relationship, announced today its intention to continue its share buyback program for the next three years, provided the oil price stays above $20/barrel. In fact, it says that it is entering into a period where it will focus on delivering production growth and increasing the value of its stock. This marks a change from the previous several years where the focus was on making acquisitions of both companies and properties.

The market reacted to BP's announcement with a 2% jump in its stock price. From a purely personal perspective, that puts another ten grand into our 401Ks, and while that represents only imaginary wealth at this point, it's still better than many of the possible alternatives.

When BP acquired my long-time employer, ARCO, the managements of both companies assured us that BP was a $60/share company. However, it promptly became a low-40s company, and even a mid-30s company. In the three years since the takeover, we haven't sniffed $60.

Lately, the stock has settled in around $50, and the program announced today may just be the boost needed to put it back into that $60 promised land. Will I keep my vow to sell out if it gets there? Beats me. It will probably depend on whether there's anything better to shift the money into; frankly, BP seems to be pretty well positioned for long-term success.* If the Fed still has interest rates in the under-2% range, I may just keep riding that limey horse a bit longer.

The Oil Industry: Exaggerations of Demise

Today's Wall Street Journal has an interesting interview with Amory Lovins, an energy analyst and think-tanker whose upcoming book, "Winning the Oil End Game: Profitable Energy Security by Mobilizing American Innovation," is co-funded by the Pentagon. In that book, Mr. Lovins will make the argument that oil companies can move away from their main product (crude oil) and still make a profit.

Mr. Lovins has some intriguing insights into the future of the "awl bidness," which he says is a great industry but a bad business. Some of his observations...

• China is now the second-largest buyer of oil in the world, and is attempting to address the situation by imposing car efficiency standards which are stricter than the US. He thinks they'll have only marginal success with this approach.
  
  Unfortunately, the implications for the failure of this strategy are global, and generally of the "not good" variety.


• Mr. Lovins points out that crude oil is a fungible commodity and it really makes no difference to the US whether we're producing our own oil or importing it...we'll still be at the mercy of price volatility. (My observation: It may make no difference to macro-economists and politicians, but it makes a huge difference to the people who live and work in the Permian Basin.)


• The preceding fact does provide incentive for the US to reduce its reliance on crude oil, "even if the security, economic and environmental costs of oil dependence were zero."


• Asked about the overall state of the oil business, he observes: "The upstream and downstream [margins] have increasingly been squeezed out. You're a price-taker in a volatile market. It's a very capital-intensive business. Combine those three and it's a recipe for unhappiness. Then add to that, oil companies tend not to be popular and tend to be the target of unwelcome political attention." But, other than that, it's a great way to make a living! He goes on to point out that "the smartest oil companies have been trying gracefully and gradually to get out of the oil business since the '70s." In his view, hydrogen is the killer component of the hydocarbon equation; that's where the future lies.


• Here's where he really goes out on a limb, with a prediction of how effective substitute energy sources will be: "I think over the coming decades oil will probably become uncompetitive even at low prices before it becomes unavailable even at high prices. And although the conventional projections of demand growth may happen, there is a substantial and rising likelihood that the reverse will happen – that demand will go down because the substitutes work better and cost less." The real x factor is what "coming decades" means.


• As it turns out, Mr. Lovins is the creator of the "Hypercar" concept, a carbon-fiber vehicle powered by hydrogen fuel-cells. According to him, widespread production of such a vehicle (configured such that it displaced light trucks and SUVs, which is where most of the projected growth in energy consumption will come from) would eventually save the US the equivalent of eight million barrels of "product" per day, or, as he puts it, the "equivalent to discovering a Saudi Arabia under Detroit." (Come to think of it, putting Saudi Arabia under Detroit today sounds like an excellent idea, albeit for reasons that have nothing to do with energy consumption.)


• In a couple of closing observations, he opines that Shell's recent reserves booking woes were most likely due to the SEC's changing interpretations on how to define recoverable reserves (along with Shell's apparent bureaucratic inability to adapt to those changes), and he believes that nuclear energy is a non-starter: "It has no future in a market economy because it fails by factors ranging from roughly two to roughly 30 to compete on the margin with efficient use of electricity, with gas-fired co-production of heat and electricity and with wind power.

I'm looking forward to his new book. I think Mr. Lovins is ultimately optimistic about the future of the oil business, but based on what I read here, it's a future that will look very different from the present. But, then, isn't that what we all hope for?

Oil Production in India

I read in today's Herold Oil Headliner that Cairn Energy PLC has made another major oil discovery in the Rajasthan province of India. According to news reports, the British company's latest find could have recoverable reserves as high as 80 million barrels.

Cairn is on a roll in India. Just a month ago, it announced another discovery in the same area with estimated recoverable reserves of up to 200 million barrels. This is huge, not only for Cairn, whose stock has skyrocketed on the news that its booked reserves may double, but also for India.

According to the CIA Worldbook, India's oil reserves total only about 4 billion barrels, and the country imports 70% of its required oil. These two discoveries alone could eventually add 5% to the country's production capacity.

It remains to be seen whether an oil boom in one of the poorest nations in the world can provide meaningful economic benefits for the average citizen, but we do know that developing a big oilfield is a labor and capital intensive undertaking, and you just don't bring in a bunch of day laborers from the UK or US to twirl pipe on the India-Pakistan border. Cairn's discoveries haven't garnered a lot of press coverage outside the industry, but it can only be good economic news for a country that has far too little of it.

Sudden, but not surprising...

Sir Philip Watts has just resigned as chairman of Royal Dutch/Shell. As you may recall, Shell took a huge writedown of reserves back in January, and it didn't take a psychic to predict that some heads would eventually roll.

As the Bloomberg article points out, this was not the first "stumble" under Watts' leadership (if you can properly call a multi-billion dollar writedown a "stumble"). I guess £1.6m/annum just doesn't buy the kind of help it used to.

CWEI Stock: Do You Feel Lucky?

Local oil and gas independent Clayton Williams Energy Inc. (CWEI) has enjoyed an impressive — nay, amazing — run-up in stock value this year. From a 52-week low of $10.30/share last April, the stock price has appreciated about 350%, closing at $36.49 yesterday. The following chart, courtesy of the Wall Street Journal, documents this phenomenon over the past 12 months:

12 month stock price - CWEI

So, what would you do today, if you owned a few thousand shares of CWEI?

As they say, past performance is not necessarily an indicator of future performance. At the same time, only a very foolish person would ignore the potential lesson illustrated by the following chart...a five-year graph of CWEI stock price:

60 month stock price - CWEI

Oil & Gas Reserves Estimates: Science, Art & Magic

In response to my earlier post about Royal Dutch/Shell's decision to write down its proved reserves by 20%, my pal Daniel over at Behind the Wall of Sleep left this comment:

Daniel is referring to something that occurred about five or six years ago, when a Canadian company called Bre-X announced that it had discovered one of the largest deposits of gold in the world, in the jungles of Borneo. The alleged discovery eventually turned political, with the government of Indonesia getting involved, and finally the American company Freeport-McMoRan Copper & Gold was brought in to be a third-party objective project manager. (Daniel no doubt remembers this because FM is a Louisiana company, right there in Daniel's swamping grounds.) Anyway, it turned out that there was little or no gold and Bre-X collapsed under the weight of public opinion (investors are so fickle, you know?). Here's an interesting summary of the scandal, if you care to learn more.

Having refreshed my memory about the Bre-X scandal, I have to respectfully disagree with Daniel in that this was conscious fraud, compounded by corporate greed, from the get-go. In the case of Shell's writedown, however, I don't see the same smoking gun. Now, I do agree that corporate greed is probably a factor, but not in the obvious way that we see in many business scandals.

No, Shell's situation is hardly scandalous, as it simply reflects the reality of the difficulties in projecting the value of oil and gas reserves. The engineering challenges coupled with internal corporate politics make reserves estimates a game that's hard to win.

Let me say right off that I'm not a petroleum engineer, but I spent the better part of 15 years working alongside of engineers as they evaluated oil and gas reserves, and with management as it secondguessed and/or blessed those evaluations. So I feel pretty confident that a reservoir engineer for a major oil company wouldn't have much problem with this statement: you never really know how much oil (or gas) is in a given reservoir until you've plugged the last well and tallied up the production. (And even that's not true, as there will always be hydrocarbons left in an abandoned field...sometimes significant amounts. The abandonment decision is rarely based solely on how much oil or gas is left. But that's another post.)

If you're not from an oil-producing region, you may not realize that oil and gas is not found in a big underground lake, where you can drill down and just suck it up through a bunch of steel straws. Hydrocarbons are trapped in the pores of solid rock and those pores are often microscopic in size. We don't have time or space to delve into the intricacies of how oil and gas is produced from this rock; suffice it to say that it's a fascinating feat of engineering, physics and geology.

The real trick is, of course, to guess the size of that section of rock containing the oil. Then you have to guess how much oil is trapped in the rock's pores, and how much you can expect to recover, given some very strong natural tendencies of the rock to hang onto the oil. And, finally, you have to figure out how quickly you can pump out the petroleum...and "as quickly as possible" is not the right answer. Contrary to logic, those rock reservoirs can be quite fragile, and many a good oilfield has been ruined by failure to treat it with the equivalent of kid gloves during the producing stage.

But that's just the beginning of the reserves estimation process. It's not enough to produce oil and gas; you have to produce it profitably (darn those stockholders!). That means being able to estimate such "simple" things as: the price you'll receive for future production; the future costs involved in developing the field (capital investment); the future costs of producing and transporting the oil and gas; future tax rates imposed by all the various governmental entities that want a piece of the action; the amount of overhead burden the corporation is going to saddle your group with (remember, we're talking about a major oil company here). Oh, did I mention that by "future," I mean up to 40 years or longer?

As you might imagine, an error in one of these estimates can affect the outcome, but taken in aggregate, the potential for compounding of errors is significant.

Then there are the "soft" factors that play into the equation. At some point in the past, it's a certainty that your executive management has made a commitment to the stock analysts about reserves additions and the percentage of current production that your company will replace via new reserves. You, as a lowly reservoir engineer, have no idea where the numbers behind this commitment came from; all you know is that it's a huge number and it's your job to achieve the goal.

It's important to make that reserves goal, because the stock market expects it. But it's even more important because incentive bonuses and stock options are depending on it. And not just for the executives, although they surely get the lion's share. But every major oil company has an incentive bonus program that extends throughout the ranks, and reserves replacement is part of the computation (in some form or fashion) that determines your bonus and that of your co-workers.

In addition, your estimates are subject to a long line of second-guessers and tweakers, as the numbers move up the line and are aggregated with those from other producing fields and projects and operating divisions and subsidiaries. At each step of the way, because of the aforementioned "soft factors," any adjustments in numbers will almost surely be made in a mindset of "imposed optimism." At one level, 9.45 is legitimately rounded up to 9.5; at the next level, 9.5 is deemed to be meaninglessly precise...let's make it a nice round 10. And so on. Apply this optimism to all the components of the estimate, and then to the estimate itself, and you'll clearly see how easily the numbers get inflated, with absolutely no single person along the way taking an intentionally fraudulent or misleading step.

Sure, every publicly traded company has a series of checks and balances and audits and reviews that should mitigate these tendencies. That's apparently how Shell discovered the current situation. But these are times of endless cost-cutting and "productivity-enhancements" (fewer people doing more work), and quality control isn't exactly optimized.

So, every now and then the estimating errors and unintentional biases and irrational exuberance catches up to you, and if you're someone like Shell, you own up to it, take your licks and move on. A few people will get demoted or assigned to Uzbekistan; there may even be a firing or two. But in the end, it still comes down to how much oil and gas you can coax out of that rock, and you'll never know for sure until it's over.

Shell Cuts Oil & Gas Reserves by 20%

In the oil and gas business, this story is the equivalent of "Existence of UFOs Confirmed by US Government." It's huge, and I don't remember ever seeing a similar announcement.

It's one thing to write off your investment in a big exploration project where you rolled the dice and came up snake eyes, or to announce that a tricky technological play (remember the Canadian tar sands projects of the late 70s/early 80s?) isn't going to be economic after all, but the announcement by Royal Dutch/Shell seems to indicate a more widespread systemic reserves estimation problem. The company got hammered in the overseas markets immediately following the announcement, and you can look for that to continue. I wouldn't be surprised to see some ripple effects in other international oil and gas stocks, like BP (bad news for my portfolio...again), ChevronTexaco and Exxon (the latter two being big partners in the Gorgon gas project in Australia, the biggest project being written down by Shell).

Energy stocks have made a remarkable recovery over the past six months, but this news is liable to be a major setback to that trend, despite the continuing strength in oil and gas prices. The energy market is characterized by jitteriness, more so, in my opinion, than almost any other segment. People are just hunkered down, waiting for the bad news that they feel is inevitable. Shell's announcement is exactly the sort of thing they need to justify their pessimism.

Update [20:52]: Well, I wasn't too far off on my prediction about the market's reaction to this announcement. Royal Dutch Shell's stock dropped almost 8%, ExxonMobil's dropped 1.5% and ChevronTexaco's dropped just over 1%. Thankfully, I missed the prediction with regard to BP, as it was actually up a penny. What I didn't know at the time of my original post was that neither Chevron nor Exxon had booked any proved reserves in conjunction with the Gorgon Gas Project, and therefore would not have to follow Shell's lead in the reserves writedown. In that respect, my observation about the market's jitters was also affirmed; both companies were apparently unfairly tarred by the brush directed at Shell.

Exxon Verdict in Alabama

I predict that this will never stand up on appeal.

The verdict might, but the punitive damages won't.

Another Domino Falls

Yesterday's announcement of the effective closing of Marathon Oil's Midland office (OK...how would you characterize a reduction in staff from 166 to 10?) was not surprising. After all, the perceptive folk over at Jessica's Well have been predicting it for months. Like watching the replay of a wreck in slo-mo, the inevitability doesn't diminish the gruesome impact.

The upside -- and I'm really grasping at straws here -- is that we're much closer to the bottom than the top of this trendline, now that only two majors are left in Midland.

The article linked above tries to draw further consolation from the observation that these downsizing moves are really opportunities in disguise... opportunities for folks to strike out on their own and start new businesses. It might be instructive to someday analyze how successful that strategy was after BP downsized the ARCO Permian office. ARCO had a reputation of being one of the more entrepreneurial large oil companies, with the implication being that if anyone could be successful with new startups in Midland, it would be those ARCO professionals: engineers, geoscientists, accountants and marketers.

The reality is that the barriers to successful entry into the exploration/production side of the business are significant, and most of those efforts have, frankly, failed. Those who aimed for the niche or service side of the business have done better, but overall, there are few, if any, stories of grand success. One lesson to be learned is that being good at what you do is not always enough. From a purely anecdotal and statistical perspective, if you want to maintain your income, if not your quality of live, moving to Houston is a no-brainer.

Oil Company for Sale

Not long after announcing the closing of their local office to join the Houston consolidation lemming herd, Anadarko is revealing its true hand: selling out. This has been rumored for a while, but it was confirmed by Reuters today, and the stock took a nice bump.

Look for another heartwarming story of corporate executives getting a windfall and the average employee getting, well, you know. I wonder about the fate of those Midland employees who have their houses on the market, and are looking for new homes in Houston even as I type this (my neighbor being one of them). Nothing like a little uncertainty to keep you on your toes.

Anadarko's CFO, Mike Rose, took a spin through Midland in the early 80s as a mid-level accounting guy working for ARCO. Even then, he had a rep as a "conspicuous consumer"...but then, who didn't, in Midland, in the early 80s? I suspect that he and his amigos are grinning ear-to-ear now, as that "Executive Severance Package" begins to materialize on the horizon.