March 2008 Archives

At a time when it seems everyone in industry is hunting for the US' next big exploitation play, the Haynesville shale in north Louisiana debuted on the energy stage early last month during conference calls by small operators Goodrich Petroleum and Petrohawk Energy. But the play really captured rave reviews when shale slugger Chesapeake Energy revealed its presence there a couple of weeks later.

Chesapeake said it already believed it had 7.5 Tcfe of Haynesville reserve potential across its net 200,000 acres, but estimated up to 20 Tcfe with anticipated company acreage increases to 500,000 net acres. Those kind of numbers, coupled with whatever Petrohawk and Goodrich acreage might hold, potentially class the Haynesville in almost the same league as the Barnett Shale, whose estimated 29 to 39 Tcfe (3 Tcfe of which have already been produced) have ranked it among the US' biggest gas fields.

Economist Philip Verleger has undertaken an effort to estimate the amount of money that is going into the commodity indexes such as the Standard & Poor's GSCI (like Platts, owned by McGraw-Hill) and the DJ-AIG index, and specifically, the amount of money flowing into exchange-traded contracts as a result of investments into the two funds.

His process for getting there is complex. It is based on three known pieces of data:

If there is an up-from-the-streets resistance to higher fuel prices in the coming months, it is not likely to come from American motorists. Higher gasoline prices are severely impacting incomes, but except in the most extreme cases, it isn't a matter of financial survival. For a lot of individual truck owner/operators, it is.

Elsewhere on The Barrel, we've written about the soaring price of diesel relative to both crude and gasoline. On Friday in the US Gulf Coast, Ultra Low Sulfur Diesel was more than 50 cts above conventional gasoline, an insanely high spread by historical norms, but one that seems to be a "new" normal.

The Barrel wrote yesterday about declining UK gas production. Some better news came from the oil side.

For the first time in several years, UK production of crude and natural gas liquids rose. In 2007, output totaled 76.75 million mt, or 1.598 million b/d) in 2007, up 0.2% from the previous year as nine new fields started production, helping to offset continuing declines from the country's older fields. The new fields in 2007 included Buzzard, the biggest field to come on stream in the UK North Sea for several years.

We aren't running an advertisement here for the Peak Oil crowd, but following up on the Mexico note from the other day, The Barrel believed that this item from today's news was worthy of being highlighted.

The UK government published statistics today that showed the country, its North Sea assets notwithstanding, saw its net imports of natural gas rising to 20.3 billion cubic meters in 2007, an increase of 74% on the year.

There isn't really a need for much editorial comment. The numbers tell the whole story.

Bottom line: it isn't getting any better in Mexico.

Will refiners ever escape the curse of swinging between capacity shortfall and overcapacity? Flash back to 2004 -- a shortfall of refining capacity globally stemming from years of little or no investment in new projects was fingered as one of the main culprits behind the global oil price rally.

In Asia, India was quick to seize the opportunity, setting itself on course to become an "export hub" of refined products. Fast forward to 2012, and the country will be sitting on an estimated 2.8 million b/d of surplus refining capacity, almost equivalent to adding another India in refining, but one exporting everything it produces.

E&P companies that placed eight-figure bids for properties in Central Gulf of Mexico Lease Sale 206 weren't the auction's only beneficiaries.

The record-breaking sale March 19, which captured a breathtaking $3.67 billion in total high bids -- the largest amount in the 54-year history of offshore US property leasing -- also shone new luster on the Gulf as a vital and prospective place to explore for oil and gas. And it showed just how far oil companies are willing to go to pick up choice deepwater acreage.

About 200 protesters gathered outside the American Petroleum Institute headquarters in Washington Wednesday, March 19, some carrying signs reading "No Blood for Oil."

Wednesday was the fifth anniversary of the start of the war in Iraq. Close to 4,000 US troops have been killed, more than 29,000 wounded, and tens of thousand Iraqi civilians have been killed. [Four US soldiers were killed March 23, bringing the total to 4,000]. The Pentagon says the direct financial cost of military operations thus far is $600 billion. Other estimates put the ultimate cost of the war at $2 trillion or more. Among the many self-serving calculations by administration officials was former defense secretary Donald Rumsfeld's estimate that the war would cost the US $50-60 billion.

While much of the media focus has been on rising US gasoline pump prices (which are still way below prices in other countries, but that's a blog for a different day), retail diesel prices have soared far above gasoline.

On February 11, the price of regular gasoline was $3.19/gal and diesel was $3.28/gal. One month later, on March 10, diesel has surged to $3.82/gal while gasoline only rose to $3.39/gal.

US gasoline prices have lagged crude's rally to record highs, and the major reason has been a perceived oversupply of gasoline inventories in the US. Refinery maintenance, possibly pushed forward and/or extended due to weak gasoline refining margins, could reduce the surplus quickly.

The EIA reported a 3.5 million barrel drop in total US gasoline inventories during the week ending March 14. However, stocks remain 22.9 million above the five-year average. A sharp drop in refinery utilization trimmed gasoline production in the US Gulf Coast and Midwest, causing suppliers to draw down inventories.

Petroplus Chairman and legendary US refinery maverick Thomas O'Malley has jumped back over the pond and all eyes are on him.

His highly anticipated return to the US market follows a stint as CEO of European refiner Petroplus, where he built that company into a leading independent after successfully creating two big US independents, Tosco and Premcor.

Imagine the feeling of vindication right now if you are Arjun N. Murti, who almost exactly three years ago issued the famous Goldman Sachs "super-spike" report that predicted a lurch in crude oil prices to $105.

It's a basic law of supply and demand: as the price rises for something, supply generally increases.

So as we plow through $109, $110 and $111 for a barrel of crude on the NYMEX, let's all stop and consider that last month, as the price of oil was breaking all sorts of records, OPEC added a whopping 80,000 b/d in supply to the market. That's about one-tenth of 1 percent of world supply.

Yeah, right, the weak gasoline market. Tell that to an American who in some cases might be paying $4/gal for gasoline. Or in the UK, where the tax-loaded retail price, combined with the weak dollar, is now in excess of $10/gallon.

But we have to keep pointing out to everyone that while the focus may be on gasoline, it's diesel fuel and its fellow distillates that are one of the key drivers pulling this market higher.

The Barrel received a rare opportunity Tuesday to peer behind the curtain on a vital, but little-considered, part of the oil business -- quality testing. Intertek Caleb Brett was kind enough to allow us to visit its testing lab in Carteret, New Jersey, and show us what it does.

Whether the product in question is crude oil or feedstock headed for a refinery, gasoline or diesel being produced in a local refinery, or residual fuel being blended for use in a power plant -- every batch of oil needs to be tested to ensure the quality is what the seller says it is.

With NYMEX crude breaking through $109/barrel earlier today, but retail gasoline climbing at a far less dramatic rate, the airwaves have been filled with predictions that pump prices will need to rise dramatically to make up for the rise in crude.

That would be true if crude went into a refinery and 100% gasoline came out. It's far more complex, of course.

ExxonMobil held its annual meeting with industry analysts on March 5 at the New York Stock Exchange.

I've covered the meeting several times and have always found it to be a very professionally-managed event. This week was no exception, as officials from ExxonMobil and the NYSE went out of their way to make sure the visiting reporters had everything at their disposal -- from phone lines and DSL connections to sandwiches, soft drinks and yummy-looking cookies.

Often at industry conferences, the subject of an impending squeeze on oil industry talent is mentioned as yet one more problem energy companies must face. It's presented along the lines of "we've got restricted access to reserves, we've got global warming issues to deal with, we've got governments wanting to tax us more, and oh, yeah, we've got an old work force."

But in a study just released by Ernst & Young, that issue is not viewed as an aside. It's presented as the number one problem facing the energy industry.