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Oil industry - June 15

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Russia's new oil order

Financial Times via Euro2Day
Over the past decade, Russia's oil and gas companies have held two big lures for investors. The first was their privileged position in a country brimming with oil and gas. The second was the silver lining of decades of Soviet mismanagement. By applying western methods and technology to existing, poorly developed sites, Russia's majors could milk them for cash with less need to invest in exploration.

For independent domestic operators, Moscow's recent "realignment" of the energy sector has undermined both these advantages. As the state's favourites, Rosneft and Gazprom have first dibs on the best prospects inside the country. The problem is compounded by a crushing tax rate that hits new fields from the moment they start producing, rather than allowing a grace period for the recovery of upfront capital spending.

...The state's grip on energy is already distorting investment: witness Gazprom's boundless appetite for acquisitions ranging from foreign pipelines to domestic newspapers, even as growth in gas output has stalled. Meanwhile, rather than buy into more efficient independents such as Lukoil, foreign investors seeking exposure to Russian energy may feel safer backing the Kremlin's anointed firms, or refining and transportation stocks in Russia or its neighbours.
(12 June 2007)


Oil companies go deep into Gulf's potential

Brett Clanton, Houston Chronicle
They are taking the bet they can extract oil lying 30,000 feet below the sea floor
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Last fall, a team led by Chevron Corp. became the toast of the oil industry when it demonstrated that an alluring deepwater region of the Gulf of Mexico could deliver on its promise.

Now, oil companies are taking concrete steps to unlock the area's potential, with an eye toward extracting oil from there in as little as two years.

Devon Energy Corp., an Oklahoma City-based firm with about 2,000 employees in Houston, is planning to drill what could be the first commercially producing oil field in the region by late 2009. Chevron has assembled a 60-person team to explore how it will develop the offshore frontier.

...The activity has been spurred by predictions that up to 15 billion barrels of oil - enough to increase the nation's reserves by 50 percent - could be trapped in an ancient rockbed known as the lower tertiary.

...But the challenges of pulling oil from the region still loom large. Not only are the reservoirs more than 30,000 feet under the sea floor in places, they are hidden under nearly 10,000 feet of water. Getting to the rock means sending drills into densely compacted formations that will be stubborn in yielding resources and that may require new tools that can withstand higher temperatures and higher pressures. All of that means huge costs.
(13 June 2007)


Gasoline Prices Part II: Long-Term Factors

Robert Rapier, The Oil Drum
In Part I, I discussed the short term factors that have resulted in the recent, rapid increase in the price of gasoline.

But there are a number of underlying, long-term issues that have been major contributors. I will attempt to address them and answer a number of related questions, such as: Why have no new refineries been built in the past 30 years? Are U.S. refineries breaking down more than normal? Are oil companies purposely withholding supplies to keep prices high? Have environmental regulations played a role? Does the use of ethanol influence gasoline demand growth?

The answers to some of these questions may surprise you.

...Conclusions

While the immediate cause of skyrocketing gas prices is a combination of record demand and low gasoline inventories in the U.S., several longer-term factors have contributed.

Following years of poor returns and expensive new environmental regulations, investments into expanding existing refineries dried up. Many refineries closed their doors permanently, as a number of smaller producers went completely out of business in the 80's and 90's.

The cumulative effect was that refining capacity fell starting in the early 80's, but has recently been climbing back as margins have improved. Just as we were in an oversupply situation in the 80's, we are now in an undersupply situation if the goal is to keep gasoline below $3.00/gallon.

However, refining capacity has increased significantly in the past 10 years, and looks to continue this trend in the foreseeable future. But demand growth has remained robust in the face of higher prices, so an oversupply situation in which gasoline returns to $2/gal does not appear likely in the foreseeable future.
(13 June 2007)


Changes by the barrelful

Loren Steffy, Houston Chronicle
...Oil markets are growing increasingly complex, affected by an array of factors - from changing benchmarks to the introduction of alternative fuels - that may redefine them in coming years.

For those of us who drive, the changes are likely to mean higher gasoline prices over the long term.

"It's not been a good thing for consumers," said Ray Carbone, president of Paramount Options.

For most of us, deciphering the intricacies of the market is difficult.

"You've got to weigh in so many variables," said Chris Motroni, an options trader with Man Financial.

Even the meaning of "oil prices" may be changing. When we use the term, we're usually referring to West Texas Intermediate crude, a low-sulfur type of oil that most U.S. refineries were designed to process.

West Texas' dominance of the world markets faded long ago, but the benchmark remained. Increasingly, the North Sea's Brent crude, which feeds refineries across Europe, is the price more closely followed by traders. Although West Texas Intermediate is still the official measure, most of the oil supplied from the Middle East is priced to Brent.

"The world benchmark is really Brent, not WTI," Carbone said. "It affects more people, and there's less relief in sight when there's a problem."

...Regardless of which contract sets the benchmark, though, prices are probably going to keep rising as worldwide demand increases.

Most of the traders said they believe the late spring price increases in gasoline that we've experienced in the past few years are now perennial.

With average prices gliding past $3 a gallon nationally, many traders are predicting $4 in some parts of the country. A significant terror threat or a hurricane in the Gulf of Mexico might cause a spike.

"Anything that threatens anybody is going to make panic buying come in," Motroni said.

The market is vulnerable right now because prices remain high, historically speaking, and demand shows no sign of abating, even with the recent surge in prices.

"Three dollars didn't even faze our drivers," said Eric Bollinger, who's been a Nymex trader for 20 years. "We're constantly chasing our tail on this thing."
(9 June 2007)

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