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By SHELL ARMSTRONG

Step one: Contain the spill. Done.

Step two: Cap the well. Done.

Step three: Kill the well. Done, finally.

Logic would deem lifting the moratorium the next step in reaction to BP’s Deepwater Horizon disaster. It’s set to run through Nov. 30, but with fall elections set for early November, locals are hopeful the Obama administration will show mercy on the oil and gas industry.

“The moratorium might nominally be lifted before the end of November just so [the administration] can say they did their best to expedite things,” said Eric Smith, a clinical finance professor at Tulane Energy Institute. I think most people are hoping it doesn’t go beyond that date, especially given the defacto moratorium on shallow-water drilling.”

In the five months since the Deepwater explosion, those in the oil and gas industry have found themselves tested to the core. A moratorium initially on deepwater oil exploration, but later extended to all drilling, has left oil and gas companies spending money daily while crews wait for the go-ahead to work.

All the while, pleas from state and local officials and those involved with oil and gas have fallen on seemingly deaf ears.

“We certainly hope it’s not Dec. 1 before the moratorium is lifted,” said Chris John, president of Louisiana Mid-Continent Oil and Gas Association. The organization has been working with the Bureau of Ocean Energy Management, Regulation and Enforcement to resolve concerns before the moratorium deadline date.

John said four task forces – one specific to the regulations in the Gulf of Mexico – have been developed in Washington, D.C.

In the aftermath of the BP incident, four major players in the oil and gas industry – Exxon-Mobile, Chevron, Shell and Conoco Phillips – put up $1 billion to set up a marine containment spill company. “In a nutshell, it sets up a repository or warehousing of pre-engineered, prefabricated equipment to handle any kind of incident with a well head accident like we had with the Deepwater Horizon. Coupling, fittings, riser pipes in a warehouse … ready to go,” John said.

And Monday, BP actually announced it was joining the proposed Marine Well Containment Company and making the equipment used to contain the Monacondo well available to all oil and gas companies operating in the Gulf of Mexico.

The question many are left asking, however, is will it be enough?

“The oil and gas industry has done, I believe, everything that a) has been asked of them; and b) I think they’ve gone over and above to make sure something like this doesn’t happen again,” John said. “If it does, we are prepared to handle it in a much better way than we ever were.”

Bottom line, according to Don Briggs, president of the Louisiana Oil and Gas Association, the damage … to the Gulf of Mexico, the coastline and the industry itself has been done.

Briggs estimates as many as seven companies are working on plans to abandon drilling projects in the Gulf. However, only three have actually left: a Transocean rig and two Diamond rigs are headed to Egypt and the Congo.

“They can’t afford to sit there and pay the $350,000 or $400,000 a day that’s having to be paid while the rigs are idle,” he said.

South Louisiana’s challenge is luring companies into drilling in the Gulf of Mexico. In recent years, the number of oil firms drilling in shallow water has sharply declined. Four or five years ago, the Gulf had 140 to 150 rigs in operation, Briggs said. Today, the number is closer to 14.

And after the April 20th explosion, with the stroke of a pen, President Obama discounted the biggest asset the Gulf afforded oil exploration companies: Political stability.

“If companies had a rig working here [in the Gulf], they would put up with a little higher cost because they knew that they weren’t going to be subject to expropriation or stuff like that that happens in Venezuela,” Smith said.

Long considered “the single-most expensive place to find a barrel of oil,” according to Briggs, the Gulf of Mexico’s finding cost per barrel is approximately $64.

“In other parts of the world, the finding cost isn’t that great,” he said.

But with the seemingly anti-oil sentiment emanating from the White House, the state’s oil and gas association leaders fear the Gulf may have joined the ranks of the rest of the world in regard to political safe havens.

“Uncertainty,” Briggs said, “is the magic word.”

No one knows what to expect. New rules? Stiffer rules? Required modifications to rigs in operation? Or permission to work?

“I think that enters into some decisions that will be made by companies when they are looking at where they are going to put their capital dollars,” John said. “A lot of the major companies that explore and produce in the Gulf are billion dollar outfits and have billion dollar cap budgets. They could go anywhere in the world.

“I think that this uncertainty short-term that [the moratorium] has created is going to be very difficult, not only on the oil and gas companies but the hundreds of thousands of people in the support services,” he added.

Those are the people, too, that Smith argues may have been missed in the federal government’s recent report arguing that the moratorium hasn’t resulted in the “gloom and doom” many predicted.

According to the report, only 2,000 rig jobs have been lost and 8,000 onshore positions eliminated.

“But my assumptions are a little different,” Smith admits. “Their assumptions are pitched to support the government’s case. My assumptions were always based on what was the worst case scenario.”

Although Smith and the feds worked from the same data and multipliers, the Tulane professor said his early estimates were based on all 33 of the deepwater rigs leaving the Gulf of Mexico. “Obviously, they haven’t,” he said.

But factor in the unknowns – how quickly the deepwater rigs can resume operations and how soon shallow-water permits are issued, for example – and the calculations change. Also, the federal report tallied its economic impact through July, but the moratorium remains in effect and bills continue to mount.

“Short-term, long-term, I think the damage – whether we lift the moratorium today or Dec. 1 – already has been done. It’s going to take a very long time to heal.”

Smith is even less optimistic.

“Even if these rigs stay in the Gulf and are on standby, they are not drilling,” he said. “They don’t need drilling mud; they don’t need supply boats running back and forth; they don’t need drill pipe or cement. They still need food, so the caterers might still have some business.

“But business is off the pace on 31 rigs,” the professor continued. “There might be two or three rigs out there helping with the Monacando thing, but the rest of them are parked if they haven’t left.”

Smith describes the Obama administration’s latest tome a “very self-serving report” at best. “It’s not that anything they said is not likely or plausible,” he said. “It seems to be more an effort to shift the blame … to say that none of this was caused by the moratorium.”

Whatever comes next, John said the new regulations will have to be “reasonably vetted” before the moratorium is lifted. “What I envision is an NTL that is going to make all these requirements that are going to satisfy the administration, and then they are going to lift the moratorium,” he said. “I think that would be the more common path to take, but there is not a lot of common sense in that administration.”

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In a very interesting and critical move, the U.S. Environmental Protection Agency (EPA) has issued letters to nine natural gas companies requesting detailed information about the chemicals used to hydraulically fracture shale rock formations to produce natural gas.  Furthermore, EPA is asking for any information that the companies have on potential health and environmental impacts of the process.  The companies are also requested to provide the locations of any sites where the process has been used, and the fracking procedures used there.

EPA is asking companies to volunteer this information for their study, which we blogged about earlier this summer.  Companies have 7 days to decide if they will play along, and 30 days to send over the data.  What happens if the companies do not want to comply with the request?  EPA is prepared to use their regulatory authority to force participation.

According to an E.P.A. spokeswoman, the agency will keep the exact hydrofracking formula composition confidential, as requested by the companies, unless it determines that “disclosure of the information is necessary to protect health or the environment against an unreasonable risk of injury.”

How this all plays out will be critical.  If you recall from America’s Most Endangered Rivers™ this year, we have been encouraging everyone to tell Congress to pass the FRAC Act.  That legislation would require disclosure of chemicals to the public, among other things.  We don’t know how this recent request from EPA will impact the efforts to pass legislation that includes disclosure language.

Of course, this request only went out to nine of over 20 companies, so that is important to remember.  Ultimately, people will still want to know what toxins their specific water supply should be tested for, so we will need full disclosure from all companies that are extracting natural gas in the Marcellus Shale.  Hopefully this move by EPA will encourage full disclosure from all companies, regardless if they were contacted by EPA for participation in the study.

Stephanie Meadows, the upstream senior policy adviser for the American Petroleum Institute, claims that the industry just wants to be helpful.  We will see if that proves to be the case, as it has not proven true this far.

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By A. F. Alhajji

The three major organizations that forecast long-term oil demand and supply – the International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC), and the United States Energy Information Administration (EIA) – along with oil companies and consulting firms, believe that OPEC will reconcile predicted global demand and non-OPEC supply. But they are wrong: OPEC output will not meet such projections, because they are based on flawed and outdated forecasting models.

In forecasts that carry forward to the 2030’s, the three organizations share the view that world energy demand will increase, that developing countries will account for most of the increase, and that fossil fuel will remain dominant. They also agree that dependence on oil from OPEC members will increase as non-OPEC oil resources dwindle and become more expensive to extract. But a major flaw in modeling world oil markets makes these forecasts as unrealistic as a projection that humans will land on Mars tomorrow.

Current forecasting models project world oil demand based on variables such as economic growth (or income), oil prices, the price of oil substitutes, and past demand. They also project non-OPEC output using variables such as oil prices, production costs, and past supply. But, after forecasting world demand and non-OPEC supply, these models simply assume that OPEC will supply the rest – without taking into account OPEC behavior or considering that OPEC members might not be willing or able to meet the “residual” demand. For this reason, these models estimate what is known as the “call on OPEC,” the difference between estimated world demand and estimated non-OPEC supply.

The idea to model the “call on OPEC” gained ground after the October oil embargo of 1973, a time when few economists were familiar with the oil market. The magnitude of the energy crisis attracted economists from a wide array of specialties. To diagnose the problem, they opened their tool kit and used what was available: if the supply-and-demand model did not work, then the monopoly model would.

Economists, politicians, and the media thus found the term “cartel” to be highly convenient. According to the monopoly model, the cartel would always supply the difference between total demand and the output supplied by non-cartel members. Although the situation has changed drastically since the early 1970’s, and the cartel model has been proved wrong and harmful, it is still used today.

According to the model’s main assumption – OPEC will always produce the difference between world demand and non-OPEC production. But OPEC ran out of spare capacity between 2005 and early 2008 and was not able to increase production as demand increased. Prices skyrocketed and exceeded all earlier forecasts.

It is nearly impossible for OPEC members to produce the difference between estimated world demand and non-OPEC supply. For example, in its recent forecast, the EIA’s base-case scenario is that, by 2035, OPEC will add about 11 million barrels of oil a day (mb/d) to its 2010 output. Is this possible when production is declining at a rate of at least 3 per cent?

Let’s check the math: at a 3 per cent rate of decline, OPEC needs to add an additional 17 mb/d by 2035 just to maintain 2010 production. If the EIA forecasts OPEC production to increase by about 11 mb/d, OPEC needs to add about 28 mb/d in the next 25 years, a feat that it has never accomplished – indeed, current production capacity is similar to that of the mid-1970’s.

The situation gets worse if non-OPEC production declines below forecasts; oil prices must increase substantially in order to ration demand and reconcile it with lower supply.

Five factors prevent the projected “call on OPEC” from being met:

* A shift in investment from oil to natural gas in oil-producing countries;

* Rising domestic oil consumption – and thus lower oil exports – by OPEC countries;

* The reaction of oil-producing countries to the rhetoric of energy independence in consuming countries, which has led to their developing energy-intensive industries that reduce oil and gas exports. Producing countries believe that if they cannot export oil to consuming nations, they can at least export the oil embedded in energy intensive products such as petrochemicals;

* Lack of “investment absorptive capacity” at high oil prices (the local economy’s ability to absorb investment), which makes OPEC members unwilling to produce more oil. If OPEC nations cannot invest the additional oil revenues, then they might prefer to keep oil in the ground;

* Most importantly, demand for new production to compensate for 3 per cent rates of decline in OPEC’s oil fields is so huge that it cannot be met in less than 20-25 years;

The inability to meet the expected “call on OPEC” and the higher prices resulting from shortages will create excellent opportunities for international oil companies, independent producers, and private-equity investors. It will also create an opportunity for other energy sources to fill the gap that OPEC members were expected to fill but did not.

Indeed, given the expected growth in energy demand in the next two decades, and the possible – even likely – shortfall in OPEC supply relative to the projected “call on OPEC,” the term “alternative energy” will lose its meaning. The only “alternative” to harnessing all feasible energy sources will be a slow-growth world of permanent shortages and increasing misery.

Original Article

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By Jane Van Ryan, EnergyTomorrow.Org