Economic researchers in Louisiana and Texas have been busy calculating the damage to the states’ economies caused by the Obama administration’s moratorium on deepwater drilling. It turns out that the economic impact to businesses and workers in both states may be more severe than the cost of the cleanup in the aftermath of the April 20 explosion and fire aboard the Deepwater Horizon drilling rig and the subsequent gusher of crude oil into the Gulf of Mexico. A small portion of that oil washed ashore on Louisiana beaches and marshes, and the spill shut down the fishing industry near the affected areas.

As costly as that has been (estimates range upward to several billion dollars), the long-term loss of jobs of offshore oil industry workers and the loss of business for related companies may be even worse, says a report by the Houston-based Institute for Energy Research.

More than 8,000 jobs and about $500 million in wages will be lost if the moratorium continues longer than six months, according to the report titled “The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region.” This will result in a total economic loss of about $2.1 billion to the area.

Joseph Mason, a professor at Louisiana State University in Baton Rouge, says that economic losses in Texas will be about $622 million, about half that of Louisiana. However, he says the data suggests that, “The moratorium could be more costly than the oil spill itself.”

There is no doubt that the oil spill will lead to tougher regulations on Gulf of Mexico drilling, and this may drive some drilling contractors and operators to other countries where the rules governing drilling aren’t as onerous to the petroleum industry. So the long-term loss of jobs and tax revenue from operators, industry vendors, and employees may be very detrimental to the economies in Louisiana and Texas.

One industry veteran told me recently, “We have come back from Katrina, from Gustav, from Ike, and from other natural disasters. However, I don’t know if the industry will ever recover if the government chases off [operators]. The oil and gas industry is the basis for our livelihood, and I don’t know what can take its place.”

The major Gulf of Mexico players like BP, Shell, Chevron, and others are large diversified corporations with worldwide operations. They will survive whatever the government throws at them. However, many of the independent operators that are focused almost exclusively on the Gulf may not. Neither will some of the family-owned and smaller suppliers to the offshore industry.

This is not obtuse economic theory. To those of us who live along the Gulf Coast, it is tangible and easy to understand. If the White House truly wants to turn the economy around and stop the loss of jobs, it must consider lifting the drilling moratorium immediately.

The North American gas market is suffering from oversupply and waning demand that have combined to keep natural gas prices low. Yet, despite this, there are several indications that prices may rally, although there is no consensus on this.

Crude oil prices have been hovering around $70 for some time, and at least one senior analyst, Darin Newsom with DTN, a market information service out of Omaha, Neb., says that oil may hit $90 before year-end.

Newsome added that even though oil has the potential to rise another $20, supply and demand fundamentals remain weak.

The EIA recently reported record-high gas storage. That, combined with robust production mainly from unconventional resource plays, will continue to depress the price of natural gas, the agency said.

In its August short-term energy outlook, the EIA projected a full-year average price of $3.92/MMBtu – a full 30 cents less than its previous forecast.

However, as the economy bounces back and the supply-and-demand dynamic starts to balance, the EIA expects the Henry Hub price to rise to an average of $5.48/Mcf next year.

The EIA said it expects storage inventories to set a record by the end of the injection season, reaching 3.8 tcf by the end of October, topping the record set in 2007 by 235 bcf.

Canada’s National Energy Board attributes current low gas prices to an expanded US natural gas pipeline network, higher LNG imports, and sluggish gas demand. The NEB says the low prices have put pressure on drilling activity since late last year, with Canadian drilling down about 60% and US activity down roughly 50%.

The NEB said it expects gas prices to hold at or below the $4/MMBtu level for the next few weeks at least.

What are your thoughts on natural gas prices and when you think the market will improve?

A new report from the Colorado School of Mines’ Potential Gas Committee concludes that the United States is sitting atop natural gas reserves much larger than previously thought – more than 2,000 tcf, according to the committee, or nearly 100 years worth of production.

This expanded forecast is due mainly to the discoveries of large reserves of gas in America’s shale regions, including the Marcellus in Northern Appalachia, the Barnett in North Texas, the Woodford in Oklahoma, the Fayetteville in Arkansas, the Haynesville in Louisiana and Texas, and several others. The upward revision represents the largest jump in resource estimates in the 44-year history of the report.

Unfortunately, we may not be able to recover much of this newly discovered clean-burning natural gas. In a move that studies suggest could result in thousands of lost jobs, billions in taxpayer revenue, and massive amounts of energy left in the ground, Congress has introduced legislation that, if passed, will impose new restrictions on a safe and commonly used recovery technique known as hydraulic fracturing, which is a critical well stimulation technology.

Hydraulic fracturing has been used for more than 60 years to access and increase oil and gas production of resources that otherwise would have remained trapped under miles of rock. It’s also been regulated by state agencies for at least that long.

Now, members of Congress who apparently believe that hydraulic fracturing is unsafe and unregulated want to require the U.S. Environmental Protection Agency to regulate hydraulic fracturing as a form of underground injection under the Safe Drinking Water Act.

Doing so would place an unnecessary financial burden on a critical American industry without any tangible environmental benefit. Hydraulic fracturing has been aggressively regulated by the states and the process has an impressive record of safety and performance. Imposing an additional burden on companies that employ the technique could conceivably result in the loss of thousands of jobs, billions of dollars in taxpayer revenue, and leave massive amounts of energy in the ground.

Your thoughts….

The head of Mercator Energy, a Rockies drilling company, recently predicted “massive drilling curtailments” this summer due to a continuing “glut” of natural gas supplies, which will soon include large volumes of LNG scheduled to arrive in the United States at about the same time that gas storage capacity begins to fill up.

Mercator’s John Harpole, speaking at an oil and gas conference in Denver, said that a number of factors are contributing to the oversupply problems. First, at the current injection rate, he noted that storage facilities will be nearing capacity limits by late summer, which means the already saturated market will be flood with gas. In addition, Harpole said that LNG imports have increased more than 200% year over year as of early April. This, he said, could result in “massive shut-ins” as natural gas prices plummet lower and lower. Producers around the country will see this as a signal and will begin shutting in production, he added.

On the positive side, it was noted that there has been a 225% rise in gas-fired electric power generation since 1996, while coal-fired generation has remained fairly static during this time. Nuclear and hydroelectric power generation haven’t changed much either. Renewable energy, especially wind power, has risen significantly during the past decade but still remains a relatively small part of the total energy mix. In electric power generation, natural gas still affords the greatest opportunity for growth and increased market share.

Therefore, say many analysts, the long-term outlook for natural gas looks good, but in the short term, oversupply will lead to lower prices and further production cutbacks.

What’s your take on this? How low will natural gas prices drop this summer?

The Independent Petroleum Association of America rarely gets this upset about a new government policy. However, on Feb. 26, the Obama administration delivered a body blow to the industry when it proposed a colossal $30 billion tax increase (as part of the 2010 budget) on US energy producers. IPAA management and staffers were livid that the President would attempt to derail domestic oil and natural gas production at a time when the economy is in shambles and the country is importing more and more of its energy needs.
So much for energy independence.

There is faint hope that Congress will modify the proposed budget and remove some of the more loathsome provisions. However, any such changes would have to come in the Senate because the House leadership likely helped craft the budget proposal or at least contributed in some way to the anti-oil tax provisions.

The IPAA exists to help protect the interests of independent oil and gas producers – not so-called Big Oil, but the many small- and mid-sized companies that drill roughly 90% of the nation’s oil and natural gas wells. These companies produce 68% of American oil and 82% of our natural gas supplies, and in case the government hasn’t noticed, they are suffering along with the rest of America in the current economic turmoil.

A tax increase such as the administration has proposed would have a devastating effect on US producers, and it would run counter to the needs of the country. It could shut down thousands of domestic oil and gas wells and increase the need for imports. The government would ultimately lose much more in tax and royalty revenues than it would gain by such a proposal, and the loss of jobs would be catastrophic in petroleum-producing states. With the current unemployment rate at its highest level in years, this could not come at a worse time.

Without going into too much detail, here are some of the items in the budget proposal:

* Repeals expensing of intangible drilling costs (fuel, repairs, etc.);
* Repeals percentage depletion (without this provision, many small, barely economic wells will be shut down);
* Repeals marginal well tax credit (an important safety net);
* Repeals enhanced oil recovery credit;
* Eliminates expensing of geological and geophysical amortization costs;
* Imposes an excise tax on Gulf of Mexico production; and
* Repeals manufacturing tax deduction for oil and gas industry, a provision that is allowed other US manufacturers.

It is worth noting that this budget proposal slams the petroleum industry at the same time that Interior Secretary Ken Salazar has decided to cancel the planned oil shale lease sale. An earlier government study revealed that nearly 800 billion barrels of crude oil lay untapped in oil shale deposits in several Western states, and now it appears that they will remain unexploited.
In a conference call announcing the cancellation, Salazar commented: “Those who believe oil shale is a panacea for America’s energy needs have been living in a fantasy land.”

To that I would say: those who believe that alternative energy alone can fuel our vehicles, heat and cool our homes and businesses, and provide the necessary energy for American industry to thrive have followed Alice down the rabbit hole. This kind of thinking will cripple our energy infrastructure.

Earlier this year, Salazar said his office would “rework” the five-year offshore oil and gas leasing plan that proposed opening up parts of the Outer Continental Shelf, which have been closed to hydrocarbon development for decades. I can hardly wait to see the revised proposal.
Writing in the Wall Street Journal recently, BP CEO Tony Hayward noted that America needs to stop looking to others for its energy needs and develop its own hydrocarbon endowment. He said, “Even with the rapid growth of alternatives, fossil fuels will continue providing most of the energy Americans consume for decades to come.”

Oil imports, said Hayward, have more than doubled in the past 35 years – from 30% in 1973 to around 65% today. This figure needs to get smaller – not bigger.

With declining energy demand due to the recession, Hayward noted that now is the ideal time for Congress and the Obama administration to work with energy producers to craft an energy policy that creates jobs, expands and diversifies the nation’s energy supply, generates government revenue, and protects the environment.

We agree. Unfortunately, the current budget proposal is a step in the wrong direction.

Amid all the gloom and doom reporting about the economy and financial markets in the news media, a friend sent me an energy market assessment by Michael Smolinski, an industry analyst with Phoenix-based Energy Directions Inc. and a well-respected contrarian. In his analysis, Smolinski points to a number of factors that may indicate that:

a) the economy is stronger than we think; and
b) the situation is starting to improve already.

Although headlines are pointing out that unemployment has reached its highest mark in 26 years, they fail to mention that the US population was about 232 million then – 72 million fewer than today’s population. So, obviously, there are a lot more people gainfully employed today than there were in 1983. People are still working, consuming, using up, and wearing things out, says Smolinski.

Another sign that things may be on the upswing is electricity generation. For the last week of January, our nation’s power producers generated 81.253 billion kilowatt hours of electricity. That is nearly 25% greater than the same week last year and second only to the record of 83.459 needed two years ago.

Natural gas inventory is also on the decline, which if it continues, should foreshadow an increase in prices, which would be great news for hard-hit producers. Smolinski points out that Canada, our largest source of imported natural gas, is using more gas and supplying less of it to US markets.

Finally, our friend Allen Brooks over at Parks Paton Hoepfl & Brown recently said that he believes this energy downturn may be more like the 2001-2002 market correction rather than the 1980s energy bust. It’s a disservice to explain his theory and his rationale in a few short sentences (read his “Musings from the Oil Patch” dated Feb. 3 for a more thorough explanation), but Brooks notes the current downturn has seen 516 rigs idled so far, which represents a 25% retrenchment.

If this downturn were to match the 2001 decline, there would be another 357 rigs yet to be idled. This would be a net loss of 873 rigs from the rig count that peaked at 2031 active rigs last fall. This decline matches pretty closely the 2001 decline and that forecast by Nabors Industries late last fall as well as Brooks own forecast in November.

What do you think? Is the energy glass half full or half empty?

As this is written, we are exactly one week away from electing a new President of the United States of America. Regardless of who wins, it is critically important for the oil and gas industry and for America to adopt a comprehensive energy policy that includes an emphasis on developing domestic oil and gas reserves.

At this time, neither Barack Obama nor John McCain favors drilling in the Arctic National Wildlife Preserve (ANWR), although both say they favor greater exploitation of our natural resources. We hope that whichever candidate is elected will see the need to establish a plan to reduce our dependence on foreign oil imports in part by encouraging energy companies to drill and produce more petroleum from our abundant onshore and offshore oil and gas fields.
The new President will set energy policy for the next four years, but it is the Secretary of Energy who implements the plan. It is essential to have a strong person with a deep knowledge of the industry in this job.

Here are a few names being discussed:
• Congressman Joe Barton (R-Tex), ranking member of the House Energy and Commerce Committee;
• Senator Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee;
• Sen. Kay Bailey Hutchison (R-Tex), who has said she will not run for re-election to the US Senate;
• Congressman Gene Green (D-Houston), vice chairman of the House Energy and Commerce Committee;
• Former US Sen. John Breaux (D-La), a conservative Democrat and strong advocate for the oil and gas industry;
• Various high-profile members of the energy industry, including Chesapeake Energy Chairman and CEO Aubrey McClendon and investment banker Matt Simmons of Simmons & Co. International.

My question to you today: Who would you like to see become the next Secretary of Energy and why?

T. Boone Pickens, who has made billions in the oil and gas industry, is now touting the virtue and value of wind energy. He proposes that the U.S. spend roughly $1 trillion to install gigantic wind turbines from Texas to the Canadian border that he believes would eventually meet as much as 20% of our domestic electricity demand. By doing this, Pickens says we can shift away from using natural gas for power generation and use it instead to power our vehicles.

Although this sounds good in theory, the devil is in the details. One of those itty-bitty details is infrastructure. Pickens' plan leaves lots of unanswered questions:

• Who will build the transmission lines from the prairies to the cities where the power is needed?
• Who will pay for it?
• Who will build the natural gas fueling stations, complete with new pumps and storage tanks?
• Who will pay for it?

Investment banker Matt Simmons recently described his own wind energy project to Oil & Gas Financial Journal. He is investing in a large wind farm off the coast of Maine because the wind is fairly constant over the sea. Not so for land-bound locations such as the Texas panhandle where the winds tend to subside during summer months when electricity demand is greatest. This is where Pickens' own Mesa Power is pouring $12 billion into what he calls “the world’s largest wind farm.”

Pickens’ proposal is bold (some would say grandiose), but it is riddled with problems. Everyone knows that Americans need to wean ourselves away from our reliance on foreign oil, but I’m not convinced Boone has the solution.

What do you think?

If you think US oil companies are making obscene profits, think again. The latest Ernst & Young study shows that exploration and development costs are up sharply, while revenues have increased a little, and upstream profits have nudged upward by only a few percentage points. Nobody who can read a balance sheet would call this a “windfall.”

Yes, some petroleum companies have fared better than others, as is the case in other industries. But, taken as a group, US-based oil and gas companies are earning only modest profits. The ledger item that jumps out at you is the dramatic jump in costs.

Exploration costs increased 165% over the past five years from $4.8 billion in 2003. There was a 15% increase the past year, from $11.1 billion in 2006 to $12.8 billion in 2007.

Development costs have risen 180% from $18.4 billion in 2003. In the past year alone, the cost of development moved up a staggering 28% to $52.2 billion.

This year, preliminary reports indicate that the expense side of the balance sheet continues to edge upwards, as E&P companies move into deeper and deeper offshore waters in search of oil and natural gas, and onshore companies face increased technological challenges and steeper drilling costs operating in unconventional geologic formations.

As Matt Simmons says in this month’s cover story, oil is becoming a scarce resource. It’s not that we’re running out of oil. We’re running out of cheap, easy-to-find, easy-to-produce oil. Already we import about 70% of our oil, and forecasts are that this will rise to 80% in the next few years, making us ever more dependent on foreign sources and worsening our trade deficit.

President George W. Bush was correct in saying we’ve become addicted to oil. But even if we implement draconian conservation measures in the United States, the demand for energy in developing nations is likely to more than make up the difference. As long as demand is rising and production is stagnant, prices will rise. That’s a basic economic principle.

Although speculative trading no doubt factors into the current high price of crude, it is not the main driver. At most it accounts for $20 to $30 of the current price, according to some analysts. If you examine the problem closely, you’ll see that energy consumption is increasing dramatically in developing countries and that more mature economies like the United States have not reduced their consumption significantly. We all still have hypodermic needles in our veins.

Here are some recent predictions about where oil prices will go:

Chakib Khelil, president of OPEC, predicted on July 6 that oil prices could go as high as $170 a barrel this summer.
Paolo Scaroni, head of Italy’s Eni SpA, said in late June that he could see prices hitting $200 a barrel this year.
On June 9, Gazprom’s Alexei Miller commented: “We think it [the price of oil] will reach $250 a barrel.” A company spokesman specified that Gazprom believed that level would be hit in 2009.
And, finally, the legendary T. Boone Pickens, a billionaire oil investor, said on July 22 that he believes oil will hit $300 a barrel in 10 years.

Of course not everyone agrees with these assessments. Most analysts, in fact, believe oil prices will range between $100 and $200 in 2009. Forecasts beyond that date are probably not very reliable.

As of this writing, crude has fallen to $123 a barrel – about a $20 drop in the past weeks – after hitting an all-time high of $145.85 in early July. This shows the futures market is in quite a bit of flux. Crude oil prices averaged $72 a barrel in 2007, so even the current seven-week low of $123 is a significant increase ($51/bbl) over last year’s average.

Peter Fusaro, co-founder of the Energy Hedge Fund Center and a contributor in this issue, notes, “We are not running out of fossil energy, but cheap energy days are gone forever. Live with it and see it as an investment opportunity.”
Have an opinion on this?

Each year Oil & Gas Financial Journal editors and staff travel to a wide variety of energy investment presentations to gather information and intelligence on companies operating in our sector. This year, we’ve been to IPAA events in New York, San Francisco, and London, as well as that organization’s small-cap conference in Florida. We regularly attend the Howard Weil Energy Conference in New Orleans, John S. Herold’s Pacesetters Conference in Connecticut, and Ener-Com’s investor conferences in Denver and San Francisco.

What has been conspicuous by its absence is an investment symposium of this type in Houston, widely regarded as the center of the oil and gas industry in the United States, if not the world. Last year, PennWell and Oil & Gas Financial Journal decided to do something about it. We organized and hosted the fi rst annual Houston Energy Financial Forum, or HEFF.

One presenter, Jeff Johnson, chairman and CEO of Fort Worth-based Cano Petroleum, called HEFF “long overdue,” adding, “We regularly participate in investor presentations in New York and elsewhere. It’s about time we had one in Houston, Texas, the energy capital of the world.”

The purpose of the event is to provide independent oil and gas companies with the opportunity to make their corporate presentation before an audience of analysts, investors, bankers, and other members of the fi nancial community. Typically these presentations are made by the CEO or CFO and include up-to-date fi nancials and a fairly detailed look at company operations.

Our first investor conference exceeded our expectations in the caliber of presenting companies, 55 in all, as well as the quality and number of attendees. More than 560 attended the inaugural HEFF in November, and an additional 1,000-plus viewed the live webcast or saw the presentations online after the event, making this one of PennWell’s most successful web presentations to date.

This year, PennWell and OGFJ plan to build on last year’s success for the second HEFF event, scheduled for Nov. 18-20 at the Houstonian Hotel, Club & Spa. We anticipate between 70 and 100 presenting companies, including separate tracks for E&P, midstream, and oil service companies. Just a few of the companies that have confirmed their participation include Anadarko Petroleum, Ultra Petroleum, Kinder- Morgan, Range Resources, and W&T Offshore. Major sponsors include CIT Energy, Bucking Horse Energy, Cameron, Halliburton, Seismic Micro-Technology, Flotek, and Gardere Wynne Sewell.

New this year is a golf outing on Monday, Nov. 17, at the Redstone Golf Club, home of the Shell Houston Open and Houston’s only PGA tour course.

Nicole Durham, OGFJ publisher, says that PennWell is “looking outside the traditional box” for conference attendees. “We’re not content with merely inviting the same people who attend PennWell, OGFJ plan second investor forum Don Stowers Editor-OGFJ other investor presentations. We’re actively pursuing representatives from institutional investors, energy hedge funds, and buy-side analysts from throughout the United States and even overseas.”

She added, “Presenting companies want to make sure they are reaching new people – not just the analysts and investment bankers who regularly follow their company. Although this will be a Houston event, our attendees will come from all over to hear the latest news from these companies and to have the opportunity to talk with their top executives one-on-one.”

Although there are a number of bank-sponsored investor conferences, both presenters and attendees are attracted to events sponsored by a neutral third-party, such as PennWell. No favoritism is shown to clients, and there is greater exposure to the entire community of analysts and investors.

This year’s Houston Energy Financial Forum will be held shortly after thirdquarter financial results are released for most public companies, so HEFF will be the first opportunity for attendees to hear this latest information.

With the overall economy slowing and oil and gas prices on the rise, there has seldom been a better time to consider investing in the petroleum industry. This November’s HEFF provides an opportunity for participants to see and hear fi rst hand some of the outstanding companies operating in the sector. We hope to see you there.

Crude oil traders and energy company executives seem to disagree about which way oil prices are going. Commodity traders in New York, London, and elsewhere apparently believe the sky is the limit, judging from the current run-up that has given us $133 oil in recent days. Conversely, a recently-released KPMG survey of oil and gas industry executives indicates that most believe the price-per-barrel of crude oil will drop below $100 by the end of the year.

So, who are we to believe?

KPMG surveyed 372 financial executives from oil and gas companies in April 2008 and made the results available on May 9. Here’s what they had to say:

55% think that crude will drop below $100/bbl by year’s end;
21% think the price will close between $101 and $110;
5% think between $111 and $120; and
9% believe it will close at above $120.

Bill Kimble, executive director of KPMG’s Global Energy Institute, noted, “The combination of traders moving resources into commodities and the weak dollar has had a signifi cant role in the surge in pricing in recent weeks. However, in addition, there are underlying issues in the energy industry, such as escalating energy demand in emerging markets and declining oil reserves, which will continue to contribute to upward pricing pressure for years to come.”

Last month, Goldman Sachs, one of the world’s most infl uential investment banks, hiked its oil price forecast for the second half of 2008 to $141/bbl, up from its previous forecast of $107. With steadily escalating prices and significantly higher prices at the retail level for gasoline and diesel, it would seem some consumers might begin to change their habits and reduce the number of miles they drive to conserve fuel or begin to buy more fuel-effi cient vehicles. Actually, there is anecdotal evidence that both are occurring.

However, even if Americans suddenly decide to become as fuel-effi cient and eco-minded as, say, most Europeans, there is steadily increasing demand for energy in emerging economies such as China and India that will tend to prop up oil prices.

Legendary oilman T. Boone Pickens recently told CNBC, “85 million barrels of oil a day is all the world can produce, and the demand is 87 million. It’s just that simple. It doesn’t have anything to do with the value of the dollar.”

If Pickens is correct in his facts, we simply aren’t producing enough oil to meet global demands. However, the dollar has fallen 12% against a broad range of other world currencies over the past year, including 15% against the euro. So it’s likely the relative value of the dollar has something to do with the price of oil.

Most KPMG survey respondents overwhelmingly felt that opening up domestic drilling on public land, in the Arctic National Wildlife Reserve, and in offshore waters that are currently offlimits to drilling is our best option for increasing oil and gas production and enhancing US energy security.
What do you think about oil prices and opening up more land to domestic drilling?