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By Jonathan Tilove

WASHINGTON — The chief regulator of the offshore oil industry said Thursday that he expects new permits for deepwater drilling to be issued by summer, but that the pace of permitting will likely never return to what it was before the Deepwater Horizon disaster on April 20 led to the suspension of drilling in the deep waters of the Gulf of Mexico.

Michael Bromwich said that he is asked, “when will the pace of permitting return to the pre-April 20 level, and the honest answer is, probably never.”

But Bromwich, who was named in June to head the new Bureau of Ocean Energy Management, Regulation and Enforcement and lead the reorganization of the regulatory regime at the Interior Department after the disaster, said he did not think the current drought on new permitting will last past midyear.

“I would be stunned if we waited until the third or fourth quarter,” said Bromwich, who was delivering remarks on his reform efforts at the Center for Strategic and International Studies. He was responding to a question from Frank Verrastro, director of the Energy and National Security Program at CSIS, who noted that while only a couple of operators had moved rigs out of the Gulf since the accident, the industry’s patience may eventually run out.

“It’s around the corner, just a longer block,” Bromwich said of the return to deepwater drilling.

Bromwich said the Department of Interior is doing all that it can to bring the regulatory regime for deepwater drilling into the 21^st century without idling the industry for longer than necessary, pursuing an ambitious reform agenda very much in synch with the recommendations of the National Oil Spill Commission, which released its final report this week. But, he said, efforts have been “stymied” by the failure of Congress to provide, so far, additional resources.

The commission described increased financing for Interior regulators as one of its top three legislative priorities, along with increasing the Oil Pollution Act’s liability cap and directing 80 percent of fines assessed against BP for the accident to restoration of the Gulf Coast.

Mindful that Congress is loath to increase spending on anything right now, the commission recommended that “budgets for the regulatory agencies that oversee offshore drilling should come directly from fees paid by the companies that are being granted access to a publicly owned resource.”

“I care far less where the money comes from than we get what we need,” Bromwich said.

Bromwich noted that needed change often requires a catastrophe as a catalyst, and that the offshore industry in the Gulf was guilty of “hubris” before April 20.

He noted that after the Piper Alpha oil rig disaster in the North Sea in 1988 — the most deadly in history — “UK offshore production, which again is at a much smaller scale than in the Gulf, dropped off substantially for two years.”

“The major challenge facing us and the industry is to dramatically improve the safety of drilling in the Gulf of Mexico, particularly in deep water, while continuing with operations, keeping production flowing and keeping people working,” Bromwich said. “Over the past few months, especially since our new rules were announced at the end of September, we have heard from countless companies, trade associations and members of Congress about the significant anxiety that currently exists in the industry that we will soon change the rules of the permitting process significantly, thereby creating further uncertainty about what is required to conduct business on the (Outer Continental Shelf.) The phrases we hear repeatedly are that we are ‘changing the rules’ and ‘moving the goalposts.’ The implication is that we have other regulatory requirements up our sleeve that we have not yet unveiled.

“This is not the case,” Bromwich said. “Barring significant, unanticipated revelations from investigations into the root causes of the Deepwater Horizon explosion that remain in process, I do not anticipate further emergency rule-makings. Period.

“But at the same time,” Bromwich said, “we can no longer accept the view that the appropriate response to a rapidly evolving, developing and changing industry, which employs increasingly sophisticated technologies, is for the regulatory framework and the applicable rules to remain frozen in time. Over time, the regulatory framework and the specific requirements must keep pace with advances in the industry — and with industry ambitions to drill in deeper water in geological formations that have greater pressures.”

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The Organization of the Petroleum Exporting Countries it is not likely to call an emergency meeting, unless oil trading prices rise above USD 100 per barrel and stay there. They can informally increase the supply. This week Brent crude hit a 27 month high of USD 99 a barrel, raising fears of the impact that high oil prices could have an inverse impact on the fragile economic recovery process. OPEC members allay people by saying that they have the experience to act when it will be needed. One possible resolution is Gulf countries to start producing above their quotas.

Some officials in OPEC insist that there is no need for immediate action at the present stage and currently they are not planning to call another meeting before their scheduled meeting in June. Libya’s chairman of the National Oil Corporation said in a statement that he is convinced that a price at USD 100 per barrel will not harm the world economy and there is no reason to worry.

Saudi Arabia, Kuwait and UAE are the OPEC members that can pump extra oil, since they have the largest unused oil production capacity. Saudi Arabia which holds the largest reserves in the world is keen to preserve long term demand for oil. Traditionally they took initiatives when they consider that the market is rising too fast and they estimate that there are no signs of this so far.

An OPEC Gulf delegate stated that the price strength is not likely to last and there is no excess demand in the market. Oil supply disruptions this week which lifted the prices have been resolved. Investors say that investment inflows and technical factors which boosted the prices this year will evaporate soon. If economies can afford prices close to USD 98 a barrel then they can afford USD 100 a barrel, it is rather unlike to see prices close to USD 120 per barrel, and this is the general sentiment among most of the OPEC members.

Oil producing countries have no signs of supply shortages and they say that as soon as the weather gets warmer the prices will depreciate to levels between USD 70 and USD 90 per barrel. OPEC’s discipline with the system of supply targets agreed in 2008 has declined as the market has rallied. Gulf countries are producing within the limits so far but they will not hesitate to exceed the limits if there is need in the market. The International Energy Agency warned that there are risks for the economic recovery from the rising oil prices and OPEC might come under pressure to increase supplies in 2011.

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Houston Chronicle

Could this oil reserve become that reliable bridge to a sustainable energy future?

The news may not rate with a No. 1 ranking in the college football polls, but residents of North Dakota have reason — make that 11 billion reasons — to have their own celebration in this new year.

Eleven billion barrels is the latest estimate of reserves in the state’s share of the Bakken Formation, which extends for some 25,000 square miles from Canada down into Montana, Wyoming and the Dakotas. Increasingly, the Bakken is being viewed as a major oil resource in the United States.

Eleven billion barrels is double the previous estimate of reserves, and could eventually push North Dakota into second place among the states for oil production, leapfrogging over California and Alaska and trailing only Texas. We won’t know for sure for a couple of years, but this is considered likely by experts, according to an Associated Press story published in the Chronicle (“North Dakota oil patch larger than expected: If estimate is correct, state might soon pass all but Texas in production,” Page B1, Jan. 3).

Read More

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By: Timothy P. Carney

Ethanol has as many different subsidies as it has negative side effects, and today we get word about two of those subsidies that are currently on life support.

First there’s the 45-cent-per-gallon credit for gas stations that buy ethanol to blend with their gasoline. That credit, in the face of expiration, was extended last month by Congress, but only for a year. Right after the election I predicted that ethanol subsidies would be an early test for the GOP’s professed interest in free markets. But I also reported an interesting twist: due to the ethanol mandate (different from the tax credit) it would seem that the tax credit isn’t really helping ethanol companies — it’s just subsidizing gasoline consumption.

So, some parts of the ethanol lobby are asking for this subsidy to be transformed. Today Reuters reports:

Congress should transform the $6 billion a year ethanol tax credit into a program that underwrites the installation of “blender” pumps and pipelines so biofuels are more widely available, the largest U.S. farm group said on Tuesday….

Until now, the 6-million member American Farm Bureau Federation supported the tax credit as well as blender pumps, which can dispense fuel that is up to 85 percent ethanol. Delegates voted to change policy to emphasize biofuel infrastructure and to discontinue the tax credit.

And the other half of this subsidy is the tariff on imported ethanol — 54 cents a gallon. I guess John McCain went down and met with leaders in Brazil — where ethanol is much cheaper to make because (a) it comes from sugar instead of corn, (b) labor costs are lower, and (c) land costs are lower — and McCain and Wyoming’s John Barrasso are convinced that our ethanol tariffs couldn’t stand up to WTO rules. This from another Reuters piece:

“I believe the WTO would rule against the United States because it’s clearly a subsidy that is neither warranted nor in keeping with WTO regulations,” Senator McCain of Arizona told reporters after a meeting with Brazilian President Dilma Rousseff in Brasilia.

“We agree with the president here (Rousseff) that (the U.S. tariff) should not be there,” Barrasso said.

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With oil prices rising and the Gulf oil spill fading from the forefront of the American psyche, deepwater drilling is set to emerge as a very hot, and very controversial topic in the months ahead – particularly among Republican representatives.

The GOP traditionally has been the party that supports the development of fossil fuels, while Democrats tend to push for more environmental regulation and a move toward renewable resources.

Right now, oil industry lobbyists believe higher prices warrant more drilling off the U.S. coast, but environmental groups, congressional Democrats, the Obama administration – which relaxed drilling restrictions just months before BP PLC’s (NYSE ADR: BP) disastrous spill – aren’t likely to agree.

In fact, lawmakers are already sniping at one another, spurred by the findings of U.S. President Obama’s oil spill commission, which was tasked with investigating the Gulf oil spill.

The president’s oil spill commission said the spill was an “overarching failure” of management on the part of BP, Transocean Ltd. (NYSE: RIG), and Halliburton Co. (NYSE: HAL). However, the government shares responsibility in the disaster to the extent that the Department of Interior and the Minerals Management Service (MMS) failed in their duty to oversee offshore drilling.

“The Macondo blowout was the product of several individual missteps and oversights by BP, Halliburton and Transocean, which government regulators lacked the authority, the necessary resources and the technical expertise to prevent,” said former senator and commission co-chair Bob Graham.

The commission also hinted that government regulators might be too intimately involved with the industries they’re charged with regulating.

Three out of every four lobbyists who represent oil and gas companies previously worked in the federal government, a Washington Post analysis showed last year. For instance, Randall Luthi, who’s currently the president of the National Ocean Industries Association – a lobbying group of 23 offshore drilling concerns – was formerly the head of the MMS.

The presidential panel has called for “urgent reform,” including the establishment of an independent safety agency within the Interior Department. The new agency should be headed for a fixed term by someone with a background in management and science, and it should be funded with fees from energy companies, Graham said.

Graham also recommended boosting “significantly” the $75 million cap on liability for offshore drilling accidents. Lifting the cap would require action by Congress, which seems unlikely given the Republicans sweeping takeover of the House of Representatives.

Citing rising prices for oil and gas, Republican representatives and oil industry lobbying groups have already set about berating the Obama administration for its energy policy.

Energy companies remain dissatisfied with the slow pace with which new drilling permits are being issued in the Gulf, even though the Obama administration on Jan. 3 announced it would allow 13 companies to resume deepwater oil and gas drilling in the region.

“The pattern we’ve seen again and again is that the Administration makes an announcement when they’re under the gun, but there’s no change afterwards,” an industry official told The LA Times.

Meanwhile, the industry’s leading lobbying group, the American Petroleum Institute (API) has warned against the elimination of any tax breaks oil and gas companies currently receive.

“What we need today – and tomorrow – are policy choices that increase, not decrease, energy production,” the API said in a recent report.

Republican lawmakers agree.

“Congress needs to ensure that offshore energy production meets the highest safety standards, but as gasoline prices continue to rise we cannot allow ourselves to become increasingly dependent on hostile foreign nations for our energy needs,” said House Natural Resources Committee Chairman Doc Hastings, R-WA.

The price of oil rose as high as $91.53 a barrel last week and gas prices have surged more than 12% from year ago levels according to the AAA’s Daily Fuel Gauge report.

However, experts say more offshore drilling wouldn’t do much to affect prices.

“We probably couldn’t produce enough to affect the world price of oil,” Ken Green, resident scholar at the American Enterprise Institute, told the New York Times. “People don’t understand that.”

Even if the United States produced 100% of the oil it uses, supply disruptions elsewhere in the world could still cause oil and gas prices to rise in the United States.

“The world price is the world price,” he said.

Another analyst, energy economist Philip Vergler Jr., pointed out that the Organization of Petroleum Exporting Countries (OPEC) – which controls almost half of the world’s oil supply – could easily offset any U.S. contributions to global oil production.

“Suppose the U.S. were to boost production 1 million barrels per day,” he told The Times. “OPEC has the capacity to cut 1 million barrels.

Not wanting to hurt fragile demand in the depths of the financial crisis, OPEC was comfortable with crude prices of $70-$80 a barrel. But since demand has rebounded -driven mainly by emerging market growth – the cartel has shown an interest in making $100 a barrel the new standard.

Mohammad Ali Khatibi, Iran’s representative at OPEC, in November said that the current price range of $70 to $90 was a “suitable” range, but noted that the global economy was capable of absorbing higher prices.

“Oil prices increasing to $100 (per barrel) would not hurt the global economy,” Khatibi told the oil ministry news agency SHANA. “Not only producers, but consumers have reached this agreement that $70 to $90 is a suitable price for oil because it encourages investment and does not hurt the global economy.”

In fact, prices that high are actually necessary for deepwater drilling to be a cost effective enterprise.

Whereas some onshore drilling operations in the Middle East are profitable with oil prices as low as $5-$10 a barrel, many deepwater drilling projects require oil prices of $75-$85 a barrel to stay economically viable, Matt Pickard, consulting manager at deepwater research firm Quest Offshore Resources told CNNMoney.

That shouldn’t be a problem for energy companies because oil prices are poised to keep rising – regardless of what happens in the United States – because global factors continue to dictate higher prices. Demand continues to grow in emerging markets, particularly China and India, and the weaker U.S. dollar makes oil cheaper for foreign nations.

“A lot of conditions affect oil prices. But over the long term, it’s safe to say that oil prices will go higher,” Energy Secretary Steven Chu told CNN.

Increased demand from India and China and exploration in more difficult environments will “conspire to say that oil prices in the mid- and long-term future will be higher,” said Chu. “The United States should prepare for that and take the steps necessary to use the oil we need as efficiently as possible, and also to begin to transition away from oil. For example, electrification of vehicles and things like that.”

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WASHINGTON — Nine members of the New York congressional delegation are among House Democrats urging federal officials to require natural gas drillers to disclose the chemicals they use under a technique called hydraulic fracturing.

Interior Secretary Ken Salazar announced in November that his agency, which oversees natural gas and oil drilling on public lands, is reviewing its regulations.

Although Interior mostly oversees public lands west of the Mississippi and a new federal disclosure requirement would only apply to those locations, it would effectively eliminate the secrecy claimed by major drillers around the country.

An estimated 90 percent of the drilling leases Interior has issued over the last 10 years have been for hydraulic fracturing wells, in which drillers pump chemicals, sand and water into the ground to break open rock formations and release natural gas trapped in fissures.

New York is a prime candidate for hydraulic fracturing because it’s home to the Marcellus Shale, a vast geological formation that stretches from Western New York and the Southern Tier into Pennsylvania, West Virginia, eastern Ohio, part of Maryland and the western edge of Virginia.

New York has a moratorium on new drilling leases as it reviews the potential environmental impact of widespread hydrofracking in areas adjacent to the Finger Lakes, the Chesapeake watershed and the New York City reservoir system.

Last September, Wyoming began requiring that gas drillers disclose the proprietary chemicals they use for hydrofracking. Drillers that refuse, citing trade secrets, still must give the information to state officials so they can decide whether an exemption is justified.

Efforts by congressional Democrats to enact new restrictions on hydraulic fracturing stalled in the last Congress. They originally wanted to amend the Safe Drinking Water Act to require drillers to disclose their chemicals but agreed to a compromise that called for the Environmental Protection Agency to study the issue.

With the Republican-controlled House unlikely to pursue legislation, 46 House Democrats sent a letter Thursday to Salazar, urging the Obama administration to issue new regulations.

New Yorkers who signed the letter include Reps. Maurice Hinchey, D-Hurley, Nita Lowey, D-Harrison and Eliot Engel, D-Bronx.

Hinchey, who helped spearhead the letter, acknowledged that no Republican lawmakers supported the request.

“We couldn’t find any who wanted to sign it,” Hinchey said.

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As the conventional and cheap oil and gas start to dry up in the Middle East, a bigger, even better opportunity seeks to replace it.

For many who aren’t familiar with the region, the Middle East comes across as an updated version of Lawrence’s Arabia, only with lots of oil. But this mosaic of cultures isn’t made up of only Arabs or Muslims, and most Middle East countries are neither awash with heavily armed, rather excitable citizenry… nor with black gold, which is what we’re interested in. Twenty-three countries comprise the Arab League, but only Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), and Iran are major oil producers.

No matter; with the exception of Kurdistan in northern Iraq, none of the oil heavies are currently open to us investors anyway. We’re digging for other finds, with three basic criteria. We’re looking for countries in the Middle East that:

* Have potential for unconventional production, such as oil shales

* Have incentive to develop it, and

* Are either net importers of oil or soon will be.

Why? In short, conventional production is in decline, but demand for oil isn’t. That means the state-owned oil companies and large companies operating in the region either need to find new fields and basins or apply new technology to get more out of established ones. Or both, of course. Nowhere is this reality more critical than in the Middle East, the world’s most important oil region, where oil production is the lifeblood of governments.

Our analysis, gleaned from data and on-the-ground experience alike, points to investment opportunities in new, unconventional technology and resources. Exploration costs will likely be lower, as companies aren’t starting from scratch. And in what we see as early days in the national drives for energy security, it makes sense to look close around your own turf.

We believe that blue-sky potential lurks in companies operating in the Middle East with expertise in unconventional production, access to good source rock, and management that can marry the two.

The Proving Grounds

It’s still early in the game, which can mean both good (high returns) and bad (high uncertainty) for investors. We believe the potential upside of unconventional development in the Middle East is just too big to ignore, however. So what we’ve done, is track down and lay out the most likely go-to countries for those explorers with the right stuff.

The following chart will narrow further the countries that meet the three criteria we outlined above. That is, who’s “in the red” when it comes to oil?

We see here that six countries currently rely on imports for their crude oil: Egypt, Cyprus, Lebanon, Jordan, Israel, Turkey.

In addition, two countries appear on their way to becoming net importers of oil: Syria and Yemen.

Egypt

Outlook: The oil and gas industry are an essential sector in Egypt’s economy, and the country’s reserves convey its potential to become a significant producer. In 2009, Egypt produced 678,300 of barrels of oil per day, while consuming 683,000 barrels per day. Egypt has traditionally been a net producer, but production peaked in 1993 and has been in decline. Combine that with its increase in domestic consumption, and Egypt is now a net oil importer.

Consequently, the Egyptian government has reversed its previously much harsher fiscal regimes and now actively encourages the exploration of domestic oil, which has resulted in an industry dominated by foreign players.

Natural gas, on the other hand, has tripled in production in recent years due to some major discoveries. Thus Egypt is a net producer here, and more important in the broad picture, a source for European natural gas. European countries are usually eager to decrease their reliance on Gazprom, the state-controlled gas giant from Russia.

Egypt has a developed network of pipelines to export its natural gas to Southern European and eastern Mediterranean countries. It also sends liquefied natural gas (LNG) to Europe, Asia, and the Americas.

However, as natural gas represents over 80% of Egypt’s source of electricity, the government has slowed plans for export expansion to ensure all domestic demands will be met before any further moves.

Cyprus

Outlook: Cyprus has no oil or gas production currently, and so must import all it needs. However, an oil deposit has been found recently in the seabed between Cyprus and Egypt. An oil licensing round took place in 2007, when 11 blocks were offered to potential investors.

This first round took place against a backdrop of opposition from the Turkish government. As a result of this territorial dispute, companies chose not to bid, and as of now, only Noble Corporation has a production-sharing agreement (PSA) with the Cyprian government.

In May 2010, Cyprus announced it was close to commencing a second oil licensing round for several offshore blocks. It’s again under Turkish protest. Turkey has even warned Lebanon and Egypt against working out a deal with Cyprus for oil exploration.

Lebanon

Outlook: Lebanon also has neither oil or gas production at this time. However, Cyprus has signed lineation agreements with Lebanon and Egypt to exploit large hydrocarbon reserves that cross borders offshore, as we mentioned above, and hope to begin exploration by 2012.

And according to Lebanon’s parliament speaker, Nabih Berri, gas reserves found off the coast of Israel are located in Lebanon’s territorial waters as well. These fields, however, may run into developmental difficulties as Israel and Lebanon to this day still dispute their maritime borders, leaving large fields such as Leviathan and Tamar in a state of limbo.

Jordan

Outlook: Large corporations have been eyeing the unconventional potential in Jordan for quite some time, but were put off due to both political as well as economic reasons. However, with advancements in oil shale technology and a gradual shift towards liberalization by the Jordanian government, which has long been envious of the hydrocarbon wealth of its neighbors, Jordan’s government has established plans to liberate the oil market in the next five years. If that happens, it will be a first for investors since 1958. Under the National Energy Strategy’s initial phase, four companies will be offered 25% of the kingdom’s reserves. The remaining 75% will remain under the control of the state-owned Petroleum Refinery Company (JPRC) until full liberalization.

This development will pave the way to exploit Jordan’s oil shale resources. Oil shale deposits underlie more than 60% of the Kingdom of Jordan and have enormous potential. The World Energy Council estimates Jordan’s oil shale reserves at approximately 40 to 60 billion tons, making it the second richest state after Canada in rock oil reserves.

Furthermore, the oil shale quality is very high compared with the oil shale in the United States. Jordan has recently signed a deal with Shell Oil to extract oil shale in the central part of the country. First commercial quantities are expected by 2020, with an estimated amount of 50,000 barrels of oil per day.

Modest natural gas reserves were discovered in 1987, and the Risha field near the Iraq border produces approximately 30 million cubic feet of gas per day. However, production is pretty flat and looks to stay that way. That means imports.

Israel

Outlook: Israel relies on importing resources to meet the majority of its energy needs. It boasts no major reserves, and thus oil production is minimal. However, as we said above, Israel has found substantial natural gas reserves located in Mediterranean deep water. This discovery has prompted increased exploration off Israel’s coastline, not to mention increased territorial disputes.

The U.S. Geological Survey reports that Israel’s offshore reserves could hold 122 trillion cubic feet of recoverable gas. That makes it one of the world’s richest deposits.

As a result of this discovery, Lebanon has rushed through approval of a law that outlines the guidelines of surveying, exploring, and producing of gas. The legislation also calls for a sovereign wealth fund to manage the potential revenues.

Nevertheless, Lebanon is still three to four years behind the Israelis, as it still must secure investors, select bidders, and begin exploration work. Israel is already well on its way.

Turkey

Outlook: Although Turkey has both oil and natural gas reserves, the country is a net importer for both resources. It may become energy independent as new oil and natural gas reserves have been discovered off the coast of the Black Sea, Eastern Thrace, the Gulf of Iskenderun, and in the regions near the borders of Syria and Iraq.

Due to its location, Turkey is vital in energy transportation between major oil-producing areas, in the Middle East and the Caspian Sea, and consumer markets in Europe. In 2009, the pipeline network in Turkey covered over 3,636 kilometers for crude oil and 10,630 kilometers for natural gas.

One of the pipelines, the Baku-Tbilisi-Ceyhan, is the second largest oil pipeline in the world. It’s responsible for delivering crude oil from the Caspian Sea to the port of Ceyhan on Turkey’s coast. From Ceyhan, the crude oil is distributed to oil tankers, which will further transport it to the world’s markets.

Another pipeline, Nabucco, is in the planning stages. It is expected to provide European markets with natural gas from the Caspian Sea basin.

Syria

Outlook: Compared with some of its neighbors, Syria’s oil and gas production is fairly unassuming. On the other hand, Syria is the only significant producing country in the Eastern Mediterranean region. Oil production had declined, then flattened out for several years before new fields were discovered. They’re expected to bump up future production.

Syria’s known oil reserves are located mainly near the Iraq border and along the Euphrates River, while some smaller fields are located in the central part of the country. Upstream production is controlled by the state-owned Syrian Petroleum Company (SPC). The main foreign consortium which is currently producing is Al-Furate Petroleum, a joint venture made up of SOC (50%), Shell Oil (32%), and a collection of other companies.

Contracts have been awarded to Shell, in 2008, and TOTAL, earlier this year, for exploration at greater depths in existing oil fields in the Euphrates and central areas. Offshore exploration came up dry in 2007, but recently there’s been renewed interest. The SPC has commenced plans to issue tenders for the offshore blocks in the future.

Syria is also strategically important as a transit hub and will provide a larger role with the ongoing plans for pipeline network expansions in the area.

As for gas, new fields are expected to ensure that Syria’s domestic demands are met after several years of decline in production. About 35% of natural gas production is reinjected into oilfields for enhanced oil recovery techniques, with the remainder going mostly to generate electricity and for domestic use. By the end of 2010, Syria expects to double its natural gas production.

Yemen

Outlook: Like Egypt, Yemen is a strategic hub for oil shipping. More than 3.7 million barrels of oil pass daily through shipping lanes off its coast. The alternative is a very costly trip around the southern tip of Africa, so governments and oil companies are anxious to avoid any disruptions.

Hydrocarbons currently account for approximately 25% of Yemen’s GDP and over 70% of government revenues. Accordingly, the government is actively seeking to increase foreign capital in this sector.

Barring significant change, however, its harsh fiscal regime is strangling exploration. Yemen is currently a net producer of oil, but it won’t be for much longer at this rate. Production is currently limited to two major sedimentary basins, but another 10 basins are believed to hold oil reserves.

A number of companies are interested in the area of Yemen’s border with Saudi Arabia, though activity has been very limited due to a combination of limited infrastructure and continued security concerns. An initial licensing round in 2007 for offshore exploration also stirred interest, but the rise of Somali pirate activity in the Gulf of Aden has more or less put the kibosh on that. A fourth round of bidding was postponed in August 2009 because of the pirates and the exorbitant insurance rates that companies would need to pay to operate in the region.

Up until 2009, all natural gas produced was reinjected to provide enhanced oil recovery. Natural gas export only became viable when a milestone agreement was signed in 2005 with Korea Gas Corp. Yemen also signed an agreement Swiss GDF Suez Company and TOTAL. All three contracts run for 20 years.

Yemen’s first liquefied natural gas (LNG) plant, located on the port of Balhaf on the Gulf of Aden, went online in October 2009. Yemen has the ability to export over 200 million cubic feet of LNG per year, and much of the future investment into Yemen is expected to be used in the natural gas infrastructure.

What It All Means

So the question is, what do we have and, more importantly, how can we make money?

When investing in the Middle East, there’s evaluating infrastructure, fiscal policies, and, perhaps most important of all, Middle East politics.

Much of the Middle East is well developed, particularly around urban centers. But many places where a company would be looking for unconventional oil are a ways off the beaten track, and that means additional infrastructure. A prominent example is Kurdistan, where billions of dollars’ worth of infrastructure upgrades are needed to turn the region into prolific oil-producing center. A junior company alone could not possibly have the connections to build such infrastructure. Countries such as Yemen and Oman have similar stumbling blocks to investment and development. The Catch-22 is that these places are precisely where the remaining “elephant deposits” could be hiding.

Behind the scenes in the Middle East is always politics, much of it nuanced and layered by generations of history and family ties.

It takes a management team that has been in the arena before and knows the intricacies of the particular area of interest. A good security detail may be a must in some places as well.

Lastly, the fiscal systems in the Middle East are relatively tough compared with the rest of the world, and in some countries, such as Saudi Arabia, there are very few, if any, opportunities for foreign companies to even come in and share the wealth.

Countries with the highest petroleum shortfalls tend to have the lowest government take. But that’s relative. Any company that operates in the area needs to remember the Middle East holds the dubious record of the highest number of “two-stars” (80-90% government take) and “one-stars” (90%+ government take) in the world, leaving contractors with very little with which to recuperate their costs and justify their investments. Southern Iraq and Kuwait can even reach 95%+.

Who’s Got It

Nevertheless, opportunities are definitely available for those looking for them. Some are conventional, but the big upside that we see in the Middle East is in its unconventional potential. Reconnaissance and seismic data for the region are readily available due to decades of exploration in the area, saving companies millions, if not billions of dollars that would have been needed to do the same work. There are also a good number of pipelines here that, where geography and geology meet, can convey a premium to any unconventional oil production. As several countries begin to look for the oil shale opportunities, the unconventional story has the potential to be the biggest boom in the energy market in decades.

Month after month, Marin and his energy team analyze the global energy markets to find the best small-cap companies that provide vast upside potential. And with oil prices shooting up again, returns could easily match – or even surpass – the 400% and 818% gains subscribers made within the past year. Try Casey’s Energy Report now for 3 months with full money-back guarantee… details here.

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By Nicholas Persac

Local oil and gas industry insiders are at odds with environmental experts over a presidential commission’s recommendations to drastically reform the oil industry in the wake of BP’s April 20 well blowout in the Gulf of Mexico.

“In general, the state feels the report was a good step forward,” said Garret Graves, chairman of the Coastal Protection and Restoration Authority of Louisiana.

The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling released Tuesday to President Barack Obama its report, “Deepwater: The Gulf Oil Disaster and the Future of Offshore Drilling.”

The commission calls for the “industry’s internal reinvention” because of “systematic failures.” The “sweeping reforms” and “fundamental transformation” would come with both increased governmental regulation and internal policing.

“The whole country, through the political realm and the news media, has lost touch with the safety practices and history of the industry,” said Richard Chalmers, president of Chalmers, Collins and Alwell Consulting Inc. on West Pinhook Road.

Chalmers’ company provides management, engineering and wellsite consultation to the industry. He said current regulations “are adequate,” and additional governmental measures would be harmful. He said there “are no systematic issues.”

“The administration is trying to fix something that isn’t broken,” Chalmers said.

Haywood Martin of Lafayette chairs the Sierra Club’s Delta chapter, which represents all of Louisiana. He said the organization supports the report’s recommendations and said the evaluation is “long overdue.”

“Those of us who live and work in the oil patch know there are frequent smaller failures in the execution of the technology that don’t make the news,” Martin said. “The Deepwater Horizon is certainly the worst to date, but it is not unrepresentative of the problems that can happen when the industry is pressing the limits of its technology and ability with such a narrow gap between the risk of failure the demand for increased production.”

Kenneth Kaigler, who owns Kaigler Consulting Service, Inc. on East St. Mary Boulevard, has worked in the offshore oil and gas industry for more than 50 years. He said the industry is able to learn from mistakes and increase precautionary measures on its own.

“When you consider the work we’ve done in deepwater for nearly 40 years and the existing rules and regulations, it’s ridiculous to say,

‘We’re going to revamp the whole industry,’ ” Kaigler said. “The industry will do a lot better job than any government regulations by people who don’t know what they’re talking about.” The seven-person commission includes a U.S. senator, academics, private-sector employees and nonprofit leaders.

Martin and Wilma Subra, president of Subra Company in New Iberia and technical adviser to the Louisiana Environmental Action Network, praised the commission’s call for advisory committees including civilian members.

Subra said the industry needs to more closely police itself, the government needs to increase regulation and the nongovernmental organization community needs to ensure the commission’s recommendations are implemented.

“This report is about much more than one event,” Subra said. “There are good actors, and then there are some that need to be watched more closely. The industry’s usual answer to more regulation is that it will hurt economically, but as it’s implemented, we will see the betterment for both the industry and the environment.”

Herman Rieke, a professor in UL’s petroleum engineering department, said the government faces an uphill battle in finding experts to work as regulators when they could make more money in the private sector.

“Government regulation is just another quick fix,” Rieke said. “The industry has good safety records. The government doesn’t have the technology and the knowhow to really solve this problem, but the industry does.”

Graves said Gov. Bobby Jindal spoke Wednesday with the commission’s co-chairs and expressed both praise and concerns.

“The report identifies a number of key issues that certainly needs the attention of the federal government in order to prevent a repeat of the Horizon incident,” Graves said. “But there was also an overly broad characterization of the offshore energy industry that is somewhat unfair.”

Graves said the state supports the commission’s call for increased preventative measures, like additional training, keeping cleanup supplies on hand and involving local governments more.

He said the state also supports the commission’s recommendation to use a large percentage of Clean Water Act fines for wetland and coastal restoration.

Graves said the commission’s report is conflicting by calling the industry’s problem’s systematic but identifying “a series of flawed decisions” that caused the BP blowout.

Graves also said the report should have addressed revenue sharing with the state and not just with the federal government. He said the report should have more greatly emphasized economic harm caused by the drilling moratorium and some factual errors were included.

“We think the industry’s self policing can be very effective rather than growing government and making it more expensive and bureaucratic,” Graves said.

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