By CAIN BURDEAU and KEVIN McGILL

Original Article

PORT FOURCHON, La. — A Coast Guard helicopter and rescue plane resumed the search Thursday for 11 workers missing after a massive explosion aboard an oil platform off the Louisiana coast.

The rig continued to burn as supply vessels shot water into it try to control the flames enough to keep it from sinking.

Rescue crews have covered the 1,940-square-mile search area by air 12 times and by boat five times, Petty Officer Casey Baker said. The boats searched all night, hoping the missing workers might have been able to get to a covered lifeboat with supplies.

Families waited anxiously for hourly updates. Rhonda Burkeen said her husband, crane operator Aaron Dale Burkeen, 37, was among the missing. The Burkeens have two children and live in the Sandtown community in east-central Mississippi.

Transocean Ltd. spokesman Guy Cantwell said 111 workers who made it off the Deepwater Horizon safely after Tuesday night’s blast were ashore Thursday, and four others were still on a boat that operates an underwater robot. A robot will eventually be used to stop the flow of oil or gas to the rig, cutting off the fire. He said officials have not decided when that will happen.

Seventeen others hurt in the blast had been brought to shore Wednesday with burns, broken legs and smoke inhalation. Four were critically injured.

A slow trek across the water brought most of the uninjured survivors to Port Fourchon, where they were checked by doctors before being brought to a hotel in suburban New Orleans to reunite with their relatives early Thursday.

One worker said he was awakened by alarms and scrambled to get on a life boat.

“I’ve been working offshore 25 years and I’ve never seen anything like this before,” said the man, who like others at the hotel declined to give his name.

Stanley Murray of Monterey, La., was reunited with his son, Chad, an electrician aboard the rig who had ended his shift just before the explosion.

“If he had been there five minutes later, he would have been burned up,” Stanley Murray said.

The rig owned by Transocean was under contract to oil giant BP and was doing exploratory drilling about 50 miles off the coast of Louisiana.

The 400-by-250-foot rig is roughly twice the size of a football field, according the Transocean’s website. A column of boiling black smoke rose hundreds of feet over the Gulf of Mexico. Officials said environmental damage appeared minimal so far.

Adrian Rose, vice president of Transocean, said the explosion appeared to be a blowout, in which natural gas or oil forces its way up a well pipe and smashes the equipment. But precisely what went wrong was under investigation.

A total of 126 workers were aboard. Seventy-nine were Transocean workers, six were BP employees and 41 were contracted.

The blast could be one of the nation’s deadliest offshore drilling accidents of the past half-century.

One of the deadliest was in 1964, when a catamaran-type drilling barge operated by Pan American Petroleum Corp. near Eugene Island, about 80 miles off Louisiana, suffered a blowout and explosion while drilling a well. Twenty-one crew members died. The deadliest offshore drilling explosion was in 1988 about 120 miles off Aberdeen, Scotland, in which 167 men were killed.

Rose said the Deepwater Horizon crew had drilled the well to its final depth, more than 18,000 feet, and was cementing the steel casing at the time of the explosion.

“They did not have a lot of time to evacuate. This would have happened very rapidly,” he said.

According to Transocean’s website, the rig was built in 2001 in South Korea and is designed to operate in water up to 8,000 feet deep, drill 5 1/2 miles down, and accommodate a crew of 130. It floats on pontoons and is moored to the sea floor by several large anchors.

Workers typically spend two weeks on the rig at a time, followed by two weeks off. Offshore oil workers typically earn $40,000 to $60,000 a year — more if they have special skills.

Working on offshore oil rigs is a dangerous job but has become safer in recent years thanks to improved training, safety systems and maintenance, said Joe Hurt, regional vice president for the International Association of Drilling Contractors.

Since 2001, there have been 69 offshore deaths, 1,349 injuries and 858 fires and explosions in the Gulf, according to the federal Minerals Management Service.

Thu Apr 22, 2010 7:03pm BST

CALGARY, Alberta, April 22 (Reuters) – The pace of natural gas drilling in North America looks unsustainable given low gas prices and what appear to be higher than reported break-even costs, especially for some shale prospects, an analyst said on Thursday.

In lowering his outlook for gas prices for 2010-13, FirstEnergy Capital Corp analyst Martin King said he is surprised that the U.S. rig count has climbed steadily for 16 straight weeks, hitting a 14 month-high last week.

At least some of the gas drilling in the first half is likely being done so companies can retain leases, and for other operational issues, and some players have hedged output at above-market prices, he said.

“Once you get toward the end of this year and into 2011, what happens to the drilling rates then?” the Calgary-based analyst said after briefing an industry audience on his price forecasts.

“Your forward hedges look terrible, some of those lease retention agreements are probably going to expire … they’re going to get heavily impacted. When you get toward the end of this year and all these hedges expire, you’re facing probably a 50 percent reduction in cash flow from some of these projects.”

The New York Mercantile Exchange May contract was up 14.8 cents at $4.103 per million British thermal units on Thursday afternoon after supportive weekly U.S. gas storage data.

Prices remain close to last year’s levels, even though the economy has staged some recovery, as inventories in the United States and Canada build up. Meanwhile, industrial gas demand remains sluggish, King said.

King pegged the average 2010 NYMEX price at $5 per mmBtu, down from his previous forecast of $6.50. He forecast prices of $5.75 for 2011, $6.25 for 2012 and $6.50 for 2013.

The weak market is currently being driven by “fear of gross oversupply by the end of October 2010,” he said.

Last week, however, the number of rigs drilling for gas in the United States hit 973, the most in 14 months, according to oil services firm Baker Hughes.

Some companies have said their break-even costs in major shale plays have fallen toward $4 per mmBtu as technology for unlocking the gas trapped in the rock has improved. However, not all wells in all shale plays are cheap, King said.

“Eventually low prices will come back to bite this industry at some point, it’s just a question of how long it’s going to take,” he said.

His outlook for the oil market is much more bullish. He forecast 2010 West Texas Intermediate crude at $83 a barrel, up $6 from his previous outlook and close to the current price.

Flattening and waning non-OPEC supplies and deteriorating spare capacity among OPEC members, in concert with economic growth in developing countries, should translate into strong markets for many years, he said.

King forecast WTI to average $87 in 2011, $95 in 2012 and $110 in 2013, all of which still well below the $147 a barrel peak hit in the summer of 2008. (Reporting by Jeffrey Jones; editing by Peter Galloway)

Futures Rise 4.4% on Inventory Report; Rally Has Skeptics

Original Article

By CHRISTINE BUURMA

Natural-gas futures finished more than 4% higher Thursday, propelled by government report showing a smaller-than-expected increase in U.S. inventories.

Following the release of the data, natural gas bucked the downward pressure experienced by other commodities, such as crude oil and gold. Persistent concerns about Greece’s ability to service its debts continued to roil markets on Thursday.

Natural gas for May delivery settled 17.3 cents, or 4.4%, higher at $4.128 a million British thermal units after hitting a high of $4.15. This is the first close above $4/MMBtu since Friday.

Money managers and speculative traders have been betting heavily on falling gas prices over the past several months, creating market volatility when storage data or other developments force traders to cover these so-called short positions. Above, the Pacific Gas and Electric natural-gas power station in Maxwell, Calif.

Futures rose into positive territory after the U.S. Energy Information Administration reported an injection into gas storage of 73 billion cubic feet for the week ended April 16; 79 billion cubic feet was predicted by analysts and traders.

Mild weather and robust supplies last week had some traders betting that prices would tumble if the storage build came in at normal levels for this time of year. Those traders rushed to cover their bets when the EIA report revealed a more modest build than forecast.

Money managers and speculative traders have been betting heavily on falling gas prices over the past several months, creating market volatility when storage data or other developments force traders to cover these so-called short positions.

“As long as the funds maintain a historically large short-holding, sessions such as today’s will develop in which a seemingly modest supportive development quickly translates to a quick 5% price advance,” wrote Jim Ritterbusch, the president of Ritterbusch & Associates, a Galena, Ill., energy advisory firm, in a note to clients.

Moderate spring temperatures and intense drilling activity in onshore fields continued to be bearish factors, however. Commodity Weather Group, a Bethesda, Md., private forecaster, was predicting normal or above-normal temperatures across the eastern U.S. from April 27 through May 6. The temperate weather was expected to curb the demand for natural gas for heating and cooling.

[COMMOD]

Meanwhile, gas producers continue to drill despite low prices, leading to sizable injections of gas into storage each week. Improved technology has led to a glut of gas supply from onshore shale-rock formations, and many shale-gas leases require producers to drill within a certain time frame to keep the acreage.

Total gas in storage is 1.829 trillion cubic feet, 18.5% above the five-year average and 5.5% above last year’s level as of April 16.

“I need to see what happens with prices tomorrow before I’ll believe that this ‘rally’ is real,” said Jay Levine, the president of Enerjay LLC, a Portland, Maine, energy brokerage. “We need another close about $4 if this market is going to move higher.”

In other commodity markets:

CRUDE OIL: Futures eked out a small gain after trading as low as $81.73 a barrel on worries about Greece and potential implications for the euro zone. Nymex light, sweet crude oil for June delivery settled 2 cents higher at $83.70 a barrel.

SUGAR: Evidence suggesting large global sugar supplies undermined futures prices. Dry weather in Brazil, the world’s top sugar producer, is favorable for the ongoing cane harvest, while sugar output in India’s main producing state is forecast to be 45% higher than last year despite weak early monsoon rains. Nearby sugar, for May delivery, fell 0.48 cent, or 3%, to settle at 16.07 cents a pound on the ICE Futures U.S. exchange.

Write to Christine Buurma at christine.buurma@dowjones.com

By Laurence Iliff, Of DOW JONES NEWSWIRES

Original Article

MEXICO CITY -(Dow Jones)- Officials at state oil monopoly Petroleos Mexicanos, or Pemex, can do little more than watch from the sidelines as oil majors break deep-drilling records on the U.S. side of the Gulf of Mexico.

The recent startup of the massive Perdido offshore drilling hub–a joint- venture of Royal Dutch Shell Plc (RDSB), Chevron Corp. (CVX), and BP Plc (BP)– even has some Mexicans fearful that oil from the Mexican side could seep over and get sucked up in what has been dubbed locally as “the drinking straw effect.”

Perdido is a floating complex 200 miles from the Texas coast that can be fed with oil and gas from nearby deposits. The first ones–Great White, Silvertip, and Tobago–are expected to reach average daily output of 100,000 or more barrels of oil equivalent.

As Pemex doesn’t have the technology to drill anywhere near the depth of the deep-water experts, and under Mexican law can’t share risk with them, government officials found themselves on the defensive as Perdido went on stream.

Energy Minister Georgina Kessel and Foreign Minister Patricia Espinosa said in a joint statement there was no clear information that cross-border deposits exist that would cause the “drinking straw effect.”

“The Foreign Ministry and Energy Ministry wish to stress that they are taking all the necessary measures to protect the sovereign rights of Mexico concerning natural resources in the Gulf of Mexico,” the statement said.

While a binational moratorium on drilling beyond the 200-mile territorial waters in the Gulf expired recently, the statement said, Mexico was seeking an extension.

Global oil giants have been learning the Gulf game drilling in U.S. blocks unaffected by the moratorium, and Pemex has just slipped further behind, said George Baker, head of the Houston-based consulting firm Energia.com.

Pemex “has no plan, no technology, no anything to show for the last 10 years,” he said.

At a conference last week on Mexico’s 2008 energy reforms, Pemex officials said they do have a Gulf strategy and have begun exploration.

Using contracted equipment, Pemex has drilled 10 deep-water exploratory wells since 2004, but so far hasn’t developed any.

Currently, Mexico has one deep-water platform in the Gulf, said Jose Antonio Escalera, deputy director for technical exploration at Pemex. In 2012, he said, Pemex expects to have four as it intensifies deep-water activity.

Pemex hit a crude production peak in 2004 at 3.4 million barrels a day before its biggest offshore complex, Cantarell, began a steady decline. The company expects to produce 2.5 million barrels a day this year.

In a January strategy report, Pemex identified nine areas in the Gulf for exploration, including the Mexican side of the area known as Perdido, which in Spanish means “lost.” Production from deep water deposits is a key part of Mexico’s strategic long-term energy plans.

Deep-water exploration and production requires drilling down to levels of a mile or more. The Perdido hub is moored at 8,000 feet. Traditionally, Pemex’s wells have measured in hundreds–and not thousands–of feet.

Pemex hopes to use new contracts to draw deep-water drillers into the Mexican side of the Gulf. Any company doing so can’t share any oil that’s found, nor be paid in oil, but could receive performance bonuses from Pemex.

Gulf experts speaking at the conference expressed caution on whether Pemex would generate much interest from deep-water experts such as Brazil’s Petrobras (PBR), which wanted to work with Pemex in the past but was turned down because of Mexican energy laws.

Oil exploration and production companies–like gamblers looking for the big win–usually want oil in return for risking billions of dollars on deep waters.

“Everywhere else, if I have success, I know I have barrels of oil to sell,” said Michelle Michot Foss, head of the Center For Energy Economics at the University of Texas–a conference sponsor. “You don’t get that in Mexico.”

Still, Foss said Pemex had a chance with its new contracts. “You have to get the bids out there transparently, and let people give it a crack to see if deals can be put together.”

President Felipe Calderon said recently the first incentive-based contracts would be for squeezing more oil and gas out of mature fields, and that a deep- water round of the contracts would come later.

By CHRISTOPHER S. KULANDER

Original Article

Most people are familiar with the iconic Texas image of the “gusher” — a derrick spewing oil because the reservoir pressure pushes it up the well. Oil and gas are harder to extract from “tight” rock formations that do not allow either to pass through and gush up a well like in the old movies. Such formations, often shale or coal, may be filled with gas or oil but allow them to flow only along pre-existing cracks — “fractures.”

Hydraulic fracturing — sometimes called “fracking,” “fraccing” or “fracing” — is a process in which fluid is injected into a well at very high pressures in order to either widen and deepen existing cracks or create new fractures in the tight formation. Generally, increased fracturing will allow more oil or gas to be produced from a well previously thought dry or in decline. Petroleum companies vary the type of fluid used for fracking depending on the rock type, depth or other factors. The fluids used can include water, water mixed with solvents, or drilling mud. Inside the fluid is mixed with the “proppant,” which is typically sand, aluminum pellets or some other small granular material that is carried into the fractures and is left to prop the crack open, thereby allowing the oil or gas to flow.

In June 2004, the EPA released the results of a study that found no confirmed instances of contamination of drinking-water wells by fracking fluids. This led the federal government to exclude hydraulic fracturing and the associated fracking fluids from coverage under the Safe Drinking Water Act. Environmentalists and some regulators attacked the findings of the study, saying it was limited to coal-bed methane (“CBM”) wells. Industry figures answered by pointing out that the type of well and formation commonly stimulated by fracking does not impact the basic finding of the EPA study — that injection of fracking fluids posed minimal threat to drinking water.

Environmentalists and some legislators have expressed concern that oil and gas producers are hiding the exact components of their fracking fluid from public scrutiny, and that federal regulation is necessary to enforce disclosure. Although concerned about the proprietary nature of their operations, executives in companies such as XTO Energy Corp. and ExxonMobil have expressed a willingness to disclose the ingredients of the fracking fluids used in their operations. In addition, petroleum engineers have noted that fracking fluids are primarily water and are not introduced to the aquifers containing drinking-water supplies. Instead, the fracking fluid is pumped through a concrete-lined borehole to formations hundreds — sometimes thousands — of feet lower than the drinking water, further minimizing the contamination threat.

Despite the EPA’s findings, some in Congress still want to expand regulation. In June 2009, two identical bills named the FRAC Act were introduced to both houses of Congress. Sponsors of the bills have asserted that chemicals used in the fracturing process could adversely affect drinking-water supplies. The proposed legislation would remove the exemption of hydraulic fracturing operations from the Safe Drinking Water Act. These bills, if adopted, would increase the possibility of litigation and give the EPA power to regulate all hydraulic fracturing that occurs in the United States.

In addition to nudging aside the states’ own laws on the issue, this new federal oversight would likely lead to operational delays or increased production costs because of the additional layer of regulatory burdens. This would, in turn, dampen domestic production in some instances, particularly for natural gas, and contribute to our dependence on foreign oil.

Study of the effect of fracking on drinking water is not complete and will continue. However, on such a limited and disputed body of data stand the calls for dramatically heightened federal regulation. Proponents of these laws need to show that existing or contemplated state laws governing fracking and water management are or will be ineffective. In addition, clear evidence must also prove that fracking poses a danger of contamination to surface or underground water supplies. Neither of these things has been shown. These bills should be tabled until they are.

It’s a question that matters to Main Street’s drivers and Wall Street’s investors. Is oil headed back toward $100 a barrel?

Since crude oil’s steep fall from a record high of $147.27 reached on July 11, 2008, consumers and traders have been guessing about when the commodity might return back above the century mark, a psychologically important barrier for the energy market.

Market observers are split over where oil goes from here. Some say the recovery offers the perfect stage for $100 oil. Others say the outlook for the commodity is unclear because it has been trading within a relatively tight range since February, when it bounced off this year’s low of $71.15. When prices have reached the mid to high $80s, traders have found reasons to pull back, but dips below $80 have encouraged buying.

Traders have been responding to “really mixed messages” about supply, demand and the broader economy, says Mike Zarembski, senior commodities analyst with Optionsxpress in Chicago.

During the downturn, when supply began to exceed demand, the Organization of the Petroleum Exporting Countries reduced its production targets. Last week, Kuwait’s oil minister Sheikh Ahmad al-Abdullah al-Sabah said that OPEC would not raise targets – a move that would stifle prices by increasing supply — until oil tops $100 a barrel again.

Some oil watchers say the laws of supply and demand would allow for $100 oil for several reasons, including OPEC members’ refusal to produce only as much oil as their targets allow. By violating production targets, they’ve contributed to a steady rise in inventories. (The Energy Information Administration said Wednesday that crude inventories rose by 1.9 million barrels last week, topping expectations for a gain of 300,000 barrels.)

The EIA predicts world demand will rise this year, and that could help absorb some of the glut. Most of the increase in consumption is forecast to come from the Asia-Pacific and Middle East regions. The EIA expects global consumption to grow by 1.5 million barrels a day in 2010, and 1.6 million a day in 2011, as economies improve and the world’s gross domestic product grows by more than 3% annually.

In Asia, China’s efforts to pare back its stimulus haven’t affected the demand for oil in Asia, leaving prices elevated, says Zarembski. In the U.S., a pickup in gasoline demand and refinery rates could raise oil demand and help absorb the glut, he says, adding that longer-term fundamentals support a run in oil prices. “In a year or two years, I have no doubt that oil prices will have a serious attempt to run up to $100 a barrel.”

The EIA’s estimates are more modest. The agency predicts crude oil spot prices, which averaged $81 in March, are likely to average above $81 for the summer and slightly less than $81 for the year. The EIA expects that in the fourth quarter of 2011, spot prices will average only $4 higher ($85).

Still, prices can move within a wide range in a relatively short period. And the pace of the recovery and the extent to which the largest economies continue their stimulus and economic policies remain “major uncertainties” in oil’s outlook, according to the EIA.

Even if supply tightens and a robust recovery fuels demand, oil may still hold below $100 a barrel, says Phil Flynn, energy analyst at PFGBest. If the economy grows strong enough to tighten the oil supply, interest rates are likely to go up and the dollar will get stronger, ultimately limiting oil prices, he says.

Flynn says $100 oil will require “an event, whether it be a showdown with Iran, or a hurricane, or some other financial crises surprise, something along those lines.”

Other oil-related investments have paid off over the last quarter. The Philadelphia Oil Service Sector Index is up 12.8% for the year, outperforming the S&P 500 and Dow Jones Industrial Average, up 8.2% and 6.6%, respectively, for the same period.

Among individual stocks, smaller, more speculative oil and gas companies have done well, says Zarembski. The large-cap oil stocks are mixed: Exxon Mobil (XOM: 68.56, -0.36, -0.52%) is up 1.8% for the year, and ConocoPhillips (COP: 56.98, -0.24, -0.41%) and Chevron (CVX: 81.20, -0.72, -0.87%) are up 13.5% and 7.6%, respectively. Among the independent refineries, Tesoro (TSO: 12.90, +0.08, +0.62%) is 5.6% lower for the year; Valero (VLO: 19.45, +0.22, +1.14%) is up 17.2%.

Oil ETFs have also posted gains. The Oil Service HOLDRS Trust (OIH: 131.09, +0.79, +0.60%) has gained 9.6% so far this year, and the PowerShares DB Oil Fund (DBO: 28.65, -0.04, -0.13%) is up 4.1%. The United States Oil Fund (USO: 40.30, +0.03, +0.07%), one of the largest, is up just 2.5%.

Read more: Is $100 Oil in the Pipeline? – Investing – Stocks – SmartMoney.com http://www.smartmoney.com/investing/stocks/is-100-oil-in-the-pipeline/#ixzz0lvRVJTl8

Is $100 Oil in the Pipeline?

It’s a question that matters to Main Street’s drivers and Wall Street’s investors. Is oil headed back toward $100 a barrel?

Since crude oil’s steep fall from a record high of $147.27 reached on July 11, 2008, consumers and traders have been guessing about when the commodity might return back above the century mark, a psychologically important barrier for the energy market.

Market observers are split over where oil goes from here. Some say the recovery offers the perfect stage for $100 oil. Others say the outlook for the commodity is unclear because it has been trading within a relatively tight range since February, when it bounced off this year’s low of $71.15. When prices have reached the mid to high $80s, traders have found reasons to pull back, but dips below $80 have encouraged buying.

Traders have been responding to “really mixed messages” about supply, demand and the broader economy, says Mike Zarembski, senior commodities analyst with Optionsxpress in Chicago.

During the downturn, when supply began to exceed demand, the Organization of the Petroleum Exporting Countries reduced its production targets. Last week, Kuwait’s oil minister Sheikh Ahmad al-Abdullah al-Sabah said that OPEC would not raise targets – a move that would stifle prices by increasing supply — until oil tops $100 a barrel again.

Some oil watchers say the laws of supply and demand would allow for $100 oil for several reasons, including OPEC members’ refusal to produce only as much oil as their targets allow. By violating production targets, they’ve contributed to a steady rise in inventories. (The Energy Information Administration said Wednesday that crude inventories rose by 1.9 million barrels last week, topping expectations for a gain of 300,000 barrels.)

The EIA predicts world demand will rise this year, and that could help absorb some of the glut. Most of the increase in consumption is forecast to come from the Asia-Pacific and Middle East regions. The EIA expects global consumption to grow by 1.5 million barrels a day in 2010, and 1.6 million a day in 2011, as economies improve and the world’s gross domestic product grows by more than 3% annually.

In Asia, China’s efforts to pare back its stimulus haven’t affected the demand for oil in Asia, leaving prices elevated, says Zarembski. In the U.S., a pickup in gasoline demand and refinery rates could raise oil demand and help absorb the glut, he says, adding that longer-term fundamentals support a run in oil prices. “In a year or two years, I have no doubt that oil prices will have a serious attempt to run up to $100 a barrel.”

The EIA’s estimates are more modest. The agency predicts crude oil spot prices, which averaged $81 in March, are likely to average above $81 for the summer and slightly less than $81 for the year. The EIA expects that in the fourth quarter of 2011, spot prices will average only $4 higher ($85).

Still, prices can move within a wide range in a relatively short period. And the pace of the recovery and the extent to which the largest economies continue their stimulus and economic policies remain “major uncertainties” in oil’s outlook, according to the EIA.

Even if supply tightens and a robust recovery fuels demand, oil may still hold below $100 a barrel, says Phil Flynn, energy analyst at PFGBest. If the economy grows strong enough to tighten the oil supply, interest rates are likely to go up and the dollar will get stronger, ultimately limiting oil prices, he says.

Flynn says $100 oil will require “an event, whether it be a showdown with Iran, or a hurricane, or some other financial crises surprise, something along those lines.”

Other oil-related investments have paid off over the last quarter. The Philadelphia Oil Service Sector Index is up 12.8% for the year, outperforming the S&P 500 and Dow Jones Industrial Average, up 8.2% and 6.6%, respectively, for the same period.

Among individual stocks, smaller, more speculative oil and gas companies have done well, says Zarembski. The large-cap oil stocks are mixed: Exxon Mobil (XOM: 68.56, -0.36, -0.52%) is up 1.8% for the year, and ConocoPhillips (COP: 56.98, -0.24, -0.41%) and Chevron (CVX: 81.20, -0.72, -0.87%) are up 13.5% and 7.6%, respectively. Among the independent refineries, Tesoro (TSO: 12.90, +0.08, +0.62%) is 5.6% lower for the year; Valero (VLO: 19.45, +0.22, +1.14%) is up 17.2%.

Oil ETFs have also posted gains. The Oil Service HOLDRS Trust (OIH: 131.09, +0.79, +0.60%) has gained 9.6% so far this year, and the PowerShares DB Oil Fund (DBO: 28.65, -0.04, -0.13%) is up 4.1%. The United States Oil Fund (USO: 40.30, +0.03, +0.07%), one of the largest, is up just 2.5%.

Monday, April 26, 2010

Original Article

If you think the health care debate is a tangled mess, try wading into the thickets of the energy sector, which is high on the Obama administration’s list of targets to subjugate. Few areas of national policy offer as bad a ratio of blather to substance as energy. It is a field where cliché, wishful thinking, and wince-inducing ignorance dominate the discourse. No matter how patiently or repeatedly the myths and realities of energy are explained, a large portion of the public, along with giddy pundits like Tom Friedman, persist in thinking an energy revolution is one government-sponsored gadget away from being willed into existence. Liberals are the worst offenders, but conservatives have their own energy shibboleths that deserve to be candidly recognized as such. The energy industry itself, meanwhile–including old-line fossil fuel companies, but also rent-seeking manufacturers such as GE and Siemens–contributes to public ignorance and confusion by jumping on the “green energy” bandwagon for mostly bad reasons. Everyone from T. Boone Pickens to Ralph Nader has a plan to “solve” America’s energy crisis, while Obama is practicing Clintonian triangulation to see whether Republicans will be cheap dates on an energy bill.

For more than three decades American energy policy has mostly been a muddle, and often a farce. But the time for muddling through is over. As the global economy recovers, oil prices will likely head back over $100 a barrel, with $4 gasoline returning to the United States. American oil production continues its needless long-term decline. Our electricity grid is antiquated and vulnerable to disruptions. As the economy recovers, electricity shortages may begin to appear, even in (or especially in) anemic California. New discoveries of domestic natural gas, however, are revolutionizing our energy outlook, but also complicating ambitions to develop more costly non-fossil fuel energy. Polls reveal significant shifts in long-term public opinion about energy, with majorities now expressing support for more domestic fossil fuel exploration and expanded nuclear power. This is no doubt a large part of the reason for Obama’s insincere recent initiatives on oil drilling and nuclear power. But it may be possible to press for more serious steps over the next few years.

The chief reason for the lack of a coherent or serious energy policy is that we’ve never been able to decide exactly what problem we are trying to solve. At the time of the first “energy crisis” in the early 1970s, the chief concern was the purported scarcity of oil along with worry about securing an adequate supply of electricity for future population and economic growth. The Arab oil embargo of 1973-74 that helped plunge Western economies into recession highlighted the geopolitical risk of dependence on the Persian Gulf for oil. But there was another new force that arose coincident with the awareness of geo-political risk: environmentalism. In the early 1970s we were getting serious about reducing air pollution, predominantly the byproduct of fossil fuels, although the harmful effects of mining and oil exploration on land and oceans were also prominently on the mind of environmentalists and added to their animus against fossil fuels. So from that very early moment the energy debate has broken down along the familiar fault line of whether to emphasize production (more supply) or conservation (less use), with a dollop of “alternative” or “renewable” energy romanticism thrown in.

The chief reason for the lack of a coherent or serious energy policy is that we’ve never been able to decide exactly what problem we are trying to solve.

The first innings of energy policy in the 1970s saw an old-fashioned compromise. We adopted fuel economy mandates for the auto fleet and several other conservation measures (most notably the 55 mile per hour speed limit), but also okayed the Alaska pipeline, enabling the development of the huge North Slope oil field, which went from producing almost nothing in 1973 to nearly 2 million barrels of oil a day by 1988 and accounted for much of the increase in domestic oil production in the late 1970s and early 1980s–the last time American domestic oil production increased. Since then environmentalists have successfully lobbied Congress and several presidents of both parties to bottle up development of major new fields in Alaska or offshore, putting off limits nearly three-quarters of an estimated 112 billion barrels of oil recoverable with existing technology. Obama’s recent announcement of expanded offshore oil drilling is largely a sham, despite the howls of protest from environmentalists. Obama’s policy involves a very slow rollout for new leases and locks up many areas that were in play with the Bush administration’s lifting of the offshore moratorium in 2008.

Here emerges one of the most glaring insincerities of the energy debate: While it is neither realistic nor sensible to attempt to produce all of the oil we need from domestic sources (more on this in a moment), we could easily produce enough additional domestic oil to replace all of our current imports from the Persian Gulf, i.e., the “people who hate us,” probably from new fields in Alaska alone. Expand production from the outer continental shelf, and we could nix imports from Venezuela (currently about 10 percent of our oil), too. Drilling opponents often argue that oil from Alaska’s Arctic National Wildlife Refuge (ANWR) would amount to only six months’ worth of U.S. oil consumption. This is superficial logic, akin to arguing that the farms of Iowa only produce six weeks’ worth of food for American consumers, so why bother planting. While no one knows how much oil may be located in ANWR until serious exploration is undertaken, even a “six-month” field would be substantial. The average oil field may represent only a few weeks worth of total oil consumption, but oil fields aren’t produced all at once. Rather, they are pumped out over several decades.

We’ve done it before. The surge in North Slope oil in the early 1980s enabled us to reduce oil imports by 2 million barrels a day. Oil imports from the Persian Gulf plummeted from 2.2 million barrels a day in 1978 to a low of 311,000 barrels a day in 1985. North Slope production has been steadily dwindling since its 1988 peak; today North Slope production has fallen to about 650,000 barrels a day. Since the 1980s oil imports from the Persian Gulf have risen in almost exact proportion as North Slope production has fallen. Today we are back to importing about 2.3 million barrels a day from Persian Gulf nations, about 13 percent of our consumption.

One remarkable fact is that American oil consumption has remained virtually flat over the last 30 years. Today, we use only slightly more oil than we did in 1978, even though the economy has more than doubled in real terms. This is testimony to the steady improvement in energy efficiency over the last generation, including–yes–our cars and trucks. Since 1975, energy consumption per dollar of economic output has fallen 50 percent. Though efficiency and conservation measures are beloved of environmentalists, it is doubtful any of the government’s manifold mandates, tax incentives, or direct subsidies have made a significant difference in the overall trend of energy efficiency in the United States. The basic market drivers–higher energy prices and expanding profits through resource efficiency–account for most of the improvement. So when we hear the handwringing about our growing dependence on foreign oil, now over 60 percent of our total oil consumption, we should be clear that this trend is entirely the result of declining domestic production and not any soaring demand for oil. Domestic oil production has fallen by more than 1 million barrels a day over the last 10 years. The United States now produces less oil than it did in 1947. This is pathetic. And unnecessary.

The two main reasons oil and other fossil fuels became environmentally incorrect in the 1970s–air pollution and risk of oil spills–are largely obsolete. Improvements in drilling technology have greatly reduced the risk of the kind of offshore spill that occurred off Santa Barbara in 1969. There hasn’t been a major drilling related spill since then, though shipping oil by tanker continues to be risky, as the Exxon Valdez taught us. To fear oil spills from offshore rigs today is analogous to fearing air travel now because of prop plane crashes in the 1950s. Technology has similarly put us on the path to virtually eliminating air pollution from fossil fuel use. Since 1980 we’ve reduced tailpipe emissions from cars by 98 percent, with corresponding nationwide reductions in ambient ozone (–22 percent), carbon monoxide (–77 percent), and lead (–92 percent). The same is true for coal: Since 1970 we’ve doubled the amount of coal burned to generate electricity (a consequence of the successful environmental campaign to shut down nuclear power development in the 1970s), but sulfur dioxide emissions have been cut in half, with more improvements to come.

Of course, global warming came along as a handy new reason for opposing fossil fuel use. Although the Supreme Court doesn’t get it, carbon dioxide is not analogous to conventional air pollutants that are byproducts of fuel combustion, and it can’t be reduced through similar technological means. Confusion about this basic point lies at the heart of the enthusiasm for cap and trade legislation soon to be introduced in the Senate. A favorite cliché of the cap and trade boosters is that because cap and trade worked well to reduce sulfur dioxide (this is actually overstated, but never mind), it will work the same way for carbon dioxide. It was possible to reduce SO2 emissions without reducing fuel use, through scrubbers or the switch to low-sulfur coal. But CO2 is the product of complete fuel combustion. There is no such thing as “low-carbon coal,” and there is no economically available CO2 “scrubbing” technology, though the coal industry is happy to try to come up with it as long as the government will provide subsidies. It would surely be cheaper to switch from coal to natural gas or nuclear power than to carbon capture from coal.

The point is, unlike conventional air pollution, which was reduced without any constraint on fuel use, the CO2 in the atmosphere can be reduced only by the use of massively less coal, oil, and natural gas. But even if the case for catastrophic global warming weren’t in free fall, the energy ambitions of the climate campaign remain so extreme as to make King Canute blush. The target the climate campaigners have set for the United States–an 80 percent reduction in CO2 emissions by the year 2050–would require replacing virtually our entire fossil fuel energy infrastructure. Substituting natural gas for coal would deliver only about a 15 percent reduction in CO2 emissions, and even if we replaced every coal plant with a carbon-free nuclear plant, we’d still be less than halfway to the policy target. For the United States, the 80 percent reduction target means reducing our fossil fuel use to a level the nation last experienced in 1910. But since our population in 2050 will be nearly five times larger than the population of 1910, on a per capita basis we’re talking about going back to the fossil fuel use of about 1875. This is patently absurd.

Fossil fuels will remain preeminent for a simple reason: They are abundant and offer energy superior to so-called renewables or other alternative sources. One pound of gasoline, for example, has 100 times more energy than a one pound lithium ion battery, which is the main reason why electric cars still aren’t very practical and aren’t likely to be for some time. Renewables–solar, wind, and biomass–are vastly more expensive, often five to ten times more expensive than fossil fuels, and their costs are not coming down very fast. Nuclear power is cheaper than renewables, but still pricier than fossil fuels. And even if renewables fell in price, they couldn’t be deployed on a large enough scale to replace fossil fuels completely, which is the professed goal of environmentalists and the Waxman-Markey “cap and trade” bill that passed the House last June. Even if all the mandates and subsidies of Waxman-Markey worked as designed, renewable sources would provide only about 20 percent of our energy needs a generation from now.

For all of the bipartisan talk of developing new energy sources, we’re going to exploit most of our available hydrocarbons sooner or later. And one reason this is likely to happen is the nation’s fiscal catastrophe. Some estimates of potential government royalties from opening up more fossil fuel production top a trillion dollars. At some point in the future, even liberals will be forced to decide whether they really want to back environmentalists on locking up domestic fossil fuel production and forgo this revenue while finding other means of propping up the welfare state.

Before conservatives and Republicans revive their “drill, baby, drill” chant, however, there needs to be some clarity about the goals of sensible energy policy. Conservatives are not alone in advocating “energy independence”–a phrase that polls well and hence has been invoked by every president since Richard Nixon. But meant literally as energy self-sufficiency–supplying 100 percent of our energy needs from sources within the four corners of U.S. territory–it makes no more sense than total self-sufficiency in textiles, food, autos, or timber. The United States has in recent years imported as much as one-fifth of its wood product, yet there are no calls for “ending our dangerous dependence on foreign timber.” The merits of free trade and globalization are just as strong for energy as for any other commodity or economic activity. Energy independence as self-sufficiency is tantamount to energy protectionism and, like all kinds of protectionism, would make us poorer in the end, in part because our costs of production are higher than those of producers in the Middle East and Latin America. (Ironically, one of the many paranoias in the Arab world is that environmentalist opposition to domestic production is actually a cover for the U.S. strategy of using up Arab oil first while it is relatively cheap, while saving our own resources for the time when oil gets more expensive. There is just enough superficial rationality to this to make it plausible.) Dump our Arab suppliers by all means (though it won’t hit their pocketbooks at all), but there is nothing economically wrong or strategically dangerous about continuing to import oil from our largest foreign suppliers, Canada and Mexico.

The phrase “energy independence” ought to be retired along with its cousin, “energy security.” What we should be talking about is energy resilience, that is, a diversified portfolio of energy technologies and global supplies that minimizes the economic and political risk of disruptions from any particular region or energy source. To a degree little understood by the public or the political class, the United States is actually less vulnerable to oil price or supply shocks than it was in the 1970s, even though we import much more of our oil. The main reason is that oil accounts for a much smaller share of our energy use than it did in the 1970s, and we have developed backstops to short-term supply disruptions such as the Strategic Petroleum Reserve and the International Energy Agency. In fact, it was IEA actions, through its standby Coordinated Emergency Response Measures (CERM), to supply the United States with gasoline after hurricanes Katrina and Rita disrupted Gulf Coast refineries that prevented serious gasoline shortages and severe price increases in the fall of 2005.

Another reason not to overemphasize the potential for increased domestic oil production is that it will not have a significant impact on world oil prices, chiefly because of surging demand from China and other developing nations. Although the “peak oil” panic is probably overestimated, the era of cheap oil is over. Between rising global demand and higher production costs, a diversification of primary energy sources makes sense. Of course, higher global prices will make possible the economic development of America’s vast oil shale deposits–as much as 800 billion barrels worth.

And one area where diversification of supply is already happening–where, ironically, we’ve been “drilling, baby, drilling”–is natural gas. As recently as five years ago, long-range projections from every public and private forecaster expected that the United States would have to import as much as 20 percent of its natural gas by the year 2025. Price volatility and supply worries led some American companies (Dow Chemical in one spectacular case) to locate new plants in the Persian Gulf rather than in the United States. But in the last five years a revolution in directional drilling technology has unlocked huge new natural gas supplies in the United States, chiefly in old coal beds on private land in the east. (This latter point is crucial: The new gas has been developed largely on private land, immune to the political obstacles of drilling on public land. Environmentalists are doing their best to slow this up anyway, with worries about the effects of the “hydraulic fracturing” that is essential to new production techniques.) It is now conceivable that the United States could become an exporter of natural gas over the next few decades. In any event, abundant supply will diminish the severe price volatility that has roiled the natural gas market over the last two decades.

Natural gas may be a serious alternative to gasoline as a transportation fuel, as T. Boone Pickens and others are recommending, but there are some difficulties. To use gas as a transportation fuel requires it to be compressed, which presents safety risks that gasoline and diesel fuel do not have. Some major fleet operators such as Federal Express have already considered and rejected for the time being converting their fleets to natural gas, chiefly because of the safety risk of having to operate large on-site systems for compressing natural gas. A deliberate government policy or mandate to switch to gas might forestall development of hybrid-electric cars or new biofuels. Gas is also a plausible alternative to coal if we are serious about reducing greenhouse gas emissions, yet all of the proposals on Capitol Hill ironically set about to preserve coal-fired power indefinitely.

The resiliency and adaptability of the American energy sector over the last generation, along with the protection of existing energy interests such as coal, raises a fundamental question: Do we need a national energy policy? Yes, but it shouldn’t simply double-down on what we’ve been doing for the last generation–subsidizing severely limited renewable technologies such as solar and wind power and corn-based ethanol, mandating new energy efficiency standards, or trying to force a new technology that can’t hope to make it on its own, such as Jimmy Carter’s Synfuels Corporation or more recently various hydrogen schemes. (Hey Governator–how’s that “hydrogen highway” working out for you in California?) Unfortunately this is what most proposals on Capitol Hill–Republican and Democratic alike–would do.

There are some areas where national policy is essential. In addition to removing barriers to oil and gas production, there is the electricity grid, which the private sector cannot renovate alone, and next-generation nuclear power. Once again, Obama has played bait-and-switch on nuclear power, promising support for new designs of small, safe, proliferation-proof reactors, but with such a tiny commitment of funding that the program could barely get off the ground even if the morass of the Nuclear Regulatory Commission were reformed. There is an easy way around this: Have the Defense Department, which is exempt from the maw of the Nuclear Regulatory Commission when it designs and deploys its own reactors, order up a bunch of small modular plants for use on military bases. If the technology proves itself, it can be scaled up quickly for civilian use.

But the chief obstacle to most sensible changes remains the obstructionist NIMBY mentality of environmentalists, which extends even to modernizing the electricity grid. (Their talk about a “smart grid” is mostly deceptive: Environmentalists have in mind not the expansion of capacity that would aid the efficiency of the overall system, but big-brotherish mechanisms that would allow a central authority to turn off your air conditioner at peak periods in the summer.) Two years ago, $4 gasoline proved to be the threshold at which opposition to more domestic oil production eroded. The prospect of $4 gasoline returning soon is probably why Obama decided to try to get out ahead of the game with an offshore drilling announcement. It may require more blackouts such as the Northeast experienced in 2003 or California in 2000 before lawmakers get serious about upgrading the grid.

Above all what needs to be understood is that energy transitions take a long time. As OPEC’s Sheik Yamani once remarked, the Stone Age didn’t end because we ran out of stones. Moving beyond fossil fuels will happen eventually for the same reason we moved into fossil fuels in the first place–when a superior and cleaner form of energy is developed and scaled for mass use. Lots of entrepreneurs are working on it–my favorite is Craig Venter’s algae biofuels project. But a full-fledged transition to a post-fossil fuel world is still a long way off, and we should stop kidding ourselves that all we need is another bill-signing ceremony at the White House to make it happen.

He expresses frustration with U.S. policies

Original Article

Four key issues face oil and gas producers in the U.S. today, the president and director of Swift Energy Co. said Wednesday.

Energy taxes, new energy regulations (particularly hydraulic fracturing and climate change), increased oversight and regulation of financial markets, and increased costs involved with production and access to resources are challenges the industry faces, said Bruce H. Vincent at Texas Alliance of Energy Producers luncheon.

“There is more going on today with energy policy than in my entire career … and 95 percent of it is not good,” he told the crowd of more than 1,000 at the Alliance’s annual Expo at the Multi-Purpose Event Center.

Vincent, who is also chairman of the Independent Petroleum Association of America, said energy taxes would have a devastating effect on American energy producers, listing intangible drilling costs, percentage depletion, marginal well tax credits, enhanced oil recovery credit, amortization costs, manufacturers tax deduction, passive loss exception and repeal of the deduction for tertiary injectants.

“While the president continues to speak about ways to turn the economy around, address the global climate issue and promote a balanced energy policy to reduce the nation’s reliance on foreign oils, his proposal demonstrates the complete opposite,” Vincent said.

He also said the Interior Department has taken several steps to delay energy production and increase costs, saying it has canceled leases on 77 parcels of federal land in Utah, ended a royalty-in-kind program, scrapped the 2010 five-year plan, added user fees on producers, new inspection fees for offshore production, new fees to address the “use it or lose it” issue, and plans to increase royalty rates.

Vincent said that keeping domestic resources “locked up” would mean an annual decrease of nearly 15 percent in domestic crude production and that imports from OPEC for oil are projected to increase by 4.1 billion barrels, resulting in increased cumulative payments to OPEC amounting to $607 billion.

That would mean an annual decrease of about 9 percent in domestic natural gas production.

He also said that it would mean a 75 percent increase onin total natural gas imports annually and that employment in energy intensive industries is projected to decrease by 13 million jobs.

He encouraged the members of the alliance to get involved with all the issues being considered by Congress.

“We all need to get involved,” he said. “We need a policy that thrives and creates more jobs in our industry. We need policies that will spur growth.”

He said the proposed tax legislation would reduce oil and gas production by 20 to 40 percent.

Also during the luncheon, State Rep. David Farabee of Wichita Falls was presented the Alliance’s Distinguished Service Award for his “exemplary service in the Texas House” from 1999 to 2010.

Texas Railroad Commission chairman Victor Carrillo was recognized with the Alliance’s Chairman Merit Award, and State Rep. Yvonne Gonzales Tourielles of Alice was given the Joe Hanna Outstanding Legislator Award.

The morning session got under way with a presentation by Carl Michael Smith, executive director of the Interstate Oil and Gas Compact Commission, who gave an overview of the agency that is viewed as the authority on domestic oil and gas issues.

“The IOGCC is a multistate government agency that promotes the conservation and efficient recovery of domestic oil and natural gas resources while protecting health, safety and the environment,” Smith said.

He said the priority of the agency is to ensure the oil-producing (member) states maintain their regulation authority through the IOGCC — and limit federal jurisdiction of the industry.

“It (compact) is our bedrock … to be the leader and driver of national oil and gas policy from the ground to retail,” Smith said.

He also said, “We (compact) have a voice nationally, and we need your help. We want to help the industry through policy.”

Smith outlined its current federally funded projects: specialized training targeted toward regulators, specialized training targeting small and independent operators, regulatory guidance materials development, research projects and technology demonstration projects.

He said the sole purpose of the compact is advancing the nation’s energy future.