Oil & Gas Journal - February 21, 2011

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SPE DIGITAL ENERGY CONFERENCE EXHIBITION AND

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With the support of the SPE Gulf Coast Section Society of Petroleum Engineers

International Petroleum News and Technology

5 NEWSLETTER 30 STATISTICS

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www.ogj.com

Feb. 21, 2011

12 LETTERS / CALENDAR

14 JOURNALLY SPEAKING

16 EDITORIAL

33 MARKETPLACE

34 EDITOR’S PERSPECTIVE / MARKET JOURNAL

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Volume 109.8

28 EQUIPMENT 28 ADVERTISERS’ INDEX

GENERAL INTEREST 18 Obama keeps pledge to end oil tax incentives in 2012 budget request Nick Snow

The White House followed through on US President Barack Obama’s promise to eliminate oil and gas incentives and preferences with a fiscal 2012 federal budget request that would increase direct taxes on the industry by an estimate $3.472 billion next year and $43.612 billion over 10 years.

20 Discussion of draft GHG bill turns into CAA debate

24 WATCHING THE WORLD Shell’s scenarios to 2050

24 Chinese hackers accused of cyber attacks on IOCs Eric Watkins

25 Study evaluates deepwater Gulf of Mexico overpressure 26 CNRL targets oil sands upgrader restart 27 Intertanko: Shipping routes ‘under threat’ from piracy Eric Watkins

Nick Snow

Democrats and Republicans quickly established their differing views as a US House subcommittee debated legislation designed to draft legislation to halt the US Environmental Protection Agency’s efforts to limit greenhouse gas emissions under the Clean Air Act.

27 Al-Shahristani: Baghdad wants changes in oil deals Eric Watkins

21 WATCHING GOVERNMENT GHG uncertainties

22 Baker Institute: Drilling in Gulf of Mexico evolves after Macondo blowout, oil spill Paula Dittrick

23 Industry reports many safety changes in GOM deepwater drilling practices Paula Dittrick

23 IEA warns of rising oil burden

Sakhalin-1 drills 7.67-mile extended-reach well Exxon Neftegas, operator of the Sakhalin-1 project, drilled the world’s longest extended-reach well at Odoptu field, off Far East Russia, ExxonMobil said. Photo from ExxonMobil.

we are the people of Baker Hughes. and we’re known collaborators.

George Vassilellis, Lead Reservoir Engineer

The best ideas never happen in a vacuum. They’re the result of

As part of our new Reservoir Development

listening, understanding, and getting to the heart of your challenge.

Services group, George works with

From reservoir planning through every phase of recovery and

customers like you in evaluating their

processing, we’ve found that working with the people we’re working

unconventional hydrocarbon assets to help

for is essential to crafting a fit-for-purpose solution and delivering

them improve efficiency and increase

flawless performance. Because when we’re all on the same team,

recovery. Learn about his model for shale

we’re pretty hard to beat.

resources at www.bakerhughes.com/george

www.bakerhughes.com © 2011 Baker Hughes Incorporated. All Rights Reserved. 31651

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South / Southwest / Texas / Northwest / Midwest / Alaska Marlene Breedlove, 1455 West Loop South, Suite 400, Houston, TX 77027; Tel: (713) 963-6293, Fax: (713) 963-6228; E-mail: [email protected]

PennWell, Houston office 1455 West Loop South, Suite 400, Houston, TX 77027 Telephone 713.621.9720 / Fax 713.963.6285 Web site: www.ogj.com Editor Chief Editor-Exploration Chief Technology Editor-LNG/Gas Processing Production Editor Pipeline Editor Senior Editor-Economics Senior Editor

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Senior Writer Senior Staff Writer Survey Editor/News Writer Publisher Vice-President/Group Publishing Director Vice-President/Custom Publishing

Bob Tippee, [email protected] Alan Petzet, [email protected] Warren R. True, [email protected] Guntis Moritis, [email protected] Christopher E. Smith, [email protected] Marilyn Radler, [email protected] Steven Poruban, [email protected] Sam Fletcher, [email protected] Paula Dittrick, [email protected] Leena Koottungal, [email protected] Jim Klingele, [email protected] Paul Westervelt, [email protected] Roy Markum, [email protected]

PennWell, Tulsa office 1421 S. Sheridan Rd., Tulsa, OK 74112 PO Box 1260, Tulsa, OK 74101 Telephone 918.835.3161 / Fax 918.832.9290 Presentation/Equipment Editor Associate Presentation Editor Statistics Editor Illustrators Editorial Assistant Production Director Production Manager

Jim Stilwell, [email protected] Michelle Gourd, [email protected] Laura Bell, [email protected] Mike Reeder, Kay Wayne Donna Barnett, [email protected] Charlie Cole Shirley Gamboa

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PennWell Corporate Headquarters 1421 S. Sheridan Rd., Tulsa, OK 74112

Chairman President/Chief Executive Officer

P.C. Lauinger, 1900-1988 Frank T. Lauinger Robert F. Biolchini

Member Audit Bureau of Circulations & American Business Media Copyright 2011 by PennWell Corporation (Registered in U.S. Patent & Trademark Office). All rights reserved. Oil & Gas Journal or any part thereof may not be reproduced, stored in a retrieval system, or transcribed in any form or by any means, electronic or mechanical, including photocopying and recording, without the prior written permission of the Editor. Permission, however, is granted for employees of corporations licensed under the Annual Authorization Service offered by the Copyright Clearance Center Inc. (CCC), 222 Rosewood Drive, Danvers, Mass. 01923, or by calling CCC’s Customer Relations Department at 978-750-8400 prior to copying. Requests for bulk orders should be addressed to the Editor. Oil & Gas Journal (ISSN 0030-1388) is published 12x per year - monthly the first Monday of each month in print and other Mondays in digital form by PennWell Corporation, 1421 S. Sheridan Rd., Tulsa, Okla., Box 1260, 74101. Periodicals postage paid at Tulsa, Okla., and at additional mailing offices. Oil & Gas Journal and OGJ are registered trademarks of PennWell Corporation. POSTMASTER: send address changes, letters about subscription service, or subscription orders to P.O. Box 3497, Northbrook, IL 60065, or telephone (800) 633-1656. Change of address notices should be sent promptly with old as well as new address and with ZIP code or postal zone. Allow 30 days for change of address. Oil & Gas Journal is available for electronic retrieval on Oil & Gas Journal Online (www.ogj.com) or the NEXIS® Service, Box 933, Dayton, Ohio 45401, (937) 865-6800. SUBSCRIPTION RATES in the US: 1 yr. $89; Latin America and Canada: 1 yr. $94; Russia and republics of the former USSR, 1 yr. 2,200 rubles; all other countries: 1 yr. $129, 1 yr. premium digital $59 worldwide. These rates apply only to individuals holding responsible positions in the petroleum industry. Single copies are $10 each except for 100th Anniversary issue which is $20. Publisher reserves the right to refuse non-qualified subscriptions. Oil & Gas Journal is available on the Internet at http://www.ogj.com. (Vol. 109, No. 8) Printed in the US. GST No. 126813153. Publications Mail Agreement Number 602914. Return Undeliverable Canadian Addresses to: P.O. Box 1632, Windsor, ON N9A 7C9.

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OGJ Newsletter

Feb. 21, 2011

®

International News for oil and gas professionals

GENERAL INTEREST Q U IC K TA K E S Chevron reacts to ‘adverse judgment’ in court Chevron Corp. has taken exception to what it called an “adverse judgment” from the Provincial Court of Justice of Sucumbios in Lago Agrio, Ecuador, in an environmental lawsuit involving Texaco Petroleum Co. “The Ecuadorian court’s judgment is illegitimate and unenforceable,” Chevron said, adding that is the product of “fraud” and “contrary to the legitimate scientific evidence.” Chevron said it will appeal this decision in Ecuador. In making its statement, Chevron said it plans to see that “the perpetrators of this fraud are held accountable for their misconduct.” Chevron said both US and international tribunals already have taken steps to bar enforcement of the Ecuadorian ruling, and that the judgment is enforceable in any court that observes the rule of law. On Feb. 9, an international panel of arbitrators presiding in the Permanent Court of Arbitration in The Hague took action in the case. The panel ordered Ecuador to “take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment” against Chevron in the Lago Agrio case pending further order or award from the international tribunal. On Feb. 8, Judge Lewis Kaplan of the Southern District of New York issued a temporary restraining order barring the RICO (Racketeer Influenced and Corrupt Organizations) defendants “from receiving benefit from, directly or indirectly, any action, or proceeding for recognition or enforcement of any judgment entered against Chevron in Ecuador.” Kaplan’s order also precludes “prejudgment seizure or attachment of assets based on any such judgment.”

Total to sell stake in CEPSA Total SA will sell its share of Spanish oil company Cia. Espanola de Petroleos SA (CEPSA) to IPIC, a wholly owned unit of Emirate of Abu Dhabi. Total is implementing its goal, said the company, of reducing its exposure to European refining. The sale is for all of its nearly 49% stake in CEPSA, Spain’s second largest oil company with refining capacity of 528,000 b/d, a network of about 1,750

Oil & Gas Journal

For up-to-the-minute news, visit www.ogjonline.com

service stations in Spain and Portugal, and hydrocarbons production of about 55,000 b/d. Previously, IPIC owned slightly more than 47% of CEPSA. Total’s announcement said the sale will occur as part of a public takeover bid for all share capital of CEPSA that IPIC has filed with the Spanish securities commission CNMV. IPIC will offer €28/share of CEPSA and a dividend of €0.50/share paid to existing shareholders. Total will receive about €3.7 billion. Chevron Corp. agreed to sell its Spanish fuels, finished lubricants, and aviation business to CEPSA (OGJ Online, Feb. 7, 2011). Despite the rulings, activist groups Rainforest Action Network and Amazon Watch hailed the decision against Chevron. “As of today, Chevron’s guilt for extensive oil contamination in the Amazon rainforest is official,” the two groups said. “It is time Chevron takes responsibility for these environmental and public health damages, which they have fought for the past 18 years.”

Bakken success turns private firms into targets Smaller private operators with some of the best acreage and wells in the Bakken/Three Forks shale play in North Dakota are “nearly certain to attract interest from potential suitors,” concluded a study by IHS Herold. In a study of 1,450 horizontal wells completed in either formation in Mountrail, McKenzie, Williams, and Dunn counties since 2006, IHS Herold found that a number of private companies ranked well with public operators in delivering median first-month production despite having much smaller well counts. The study compared the median wells’ average production in its first, second, and third months on line. Merger and acquisition values for undeveloped acreage in the play continue to set new highs, the study concluded. Well performance, it noted, is generally strong but varies considerably. IHS Herold said it expects the trend of acquisitions of private properties to continue because most of the prospective acreage is leased and few alternatives exist to establish or meaningfully expand a company’s presence in the play. Size is the primary driver of an acquisition, since a small leaseholding “can’t move the needle for a big, publicly traded company.” The company plans to study other plays of interest.

5

IPE BRENT / NYMEX LIGHT SWEET CRUDE $/bbl 102.00 99.00 96.00 93.00 90.00 87.00 85.00 84.00

US INDUSTRY SCOREBOARD — 2/21 4 wk. average

Latest week 2/4

Feb. 9

Feb. 10

Feb. 11

Feb. 14

Motor gasoline Distillate Jet fuel Residual Other products

Feb. 9

Feb. 10

Feb. 11

Feb. 14

–0.3 –0.1 1.6 5.0 3.1 0.8

8,655 3,696 1,410 550 4,745 19,056

8,668 3,703 1,367 526 4,588 18,852

–0.1 –0.2 3.1 4.6 3.4 1.1

Crude production NGL production2 Crude imports Product imports Other supply2, 3 TOTAL SUPPLY Refining, 1,000 b/d

5,423 2,060 9,077 2,783 2,184 21,527

5,426 2,152 8,294 2,957 1,634 20,463

–0.1 –4.3 9.4 –5.9 33.7 5.2

5,450 2,059 9,045 2,762 2,121 21,437

5,440 2,098 8,414 2,911 1,630 20,493

0.2 –1.9 7.5 –5.1 30.1 4.6

Crude runs to stills Input to crude stills % utilization

14,278 14,691 83.5

13,580 14,100 80.2

5.1 4.2 —–

14,368 14,794 84.1

14,283 14,593 82.6

0.6 1.4 —–

Feb. 15

Feb. 9

Feb. 10

Feb. 11

Feb. 14

Feb. 15

Previous week1

Change

345,057 240,891 164,366 42,938 39,147

343,159 236,228 164,078 43,769 40,141

1,898 4,663 288 –831 –994

24.2 27.9 44.1 20.7

23.9 27.2 44.4 22.8

Same week year ago1 Change

Change, %

Stocks, 1,000 bbl 331,418 230,445 156,192 42,374 39,431

13,639 10,446 8,174 564 –284

Change, %

Crude Motor gasoline Distillate Propane Futures prices5 2/11

1.3 2.6 –0.7 –9.2

86.69 4.02

90.68 4.37

4.1 4.5 5.2 1.3 –0.7

Change, % 24.3 26.6 41.9 20.4

–0.4 4.9 5.3 1.5

Change

Light sweet crude ($/bbl) Natural gas, $/MMbtu

Change

–3.99 –0.35

74.59 5.45

%

12.10 –1.43

16.2 –26.3

1

Based on revised figures. 2OGJ estimates. 3Includes other liquids, refinery processing gain, and unaccounted for crude oil. 4Stocks divided by average daily product supplied for the prior 4 weeks. 5Weekly average of daily closing futures prices. Source: Energy Information Administration, Wall Street Journal

Feb. 9

Feb. 10

Feb. 11

Feb. 14

Feb. 15

BAKER HUGHES INTERNATIONAL RIG COUNT: TOTAL WORLD / TOTAL ONSHORE / TOTAL OFFSHORE 3,900 3,600 3,300 3,000 2,700 2,400 2,100 1,800 1,500 300 0

3,437 3,100

336

Jan. 10

Feb. 9

Feb. 10

Feb. 11

Feb. 14

Feb. 15

NYMEX GASOLINE (RBOB)2 / NY SPOT GASOLINE3

Feb. 10

Mar. 10

Apr. 10

May 10 Jun. 10

Jul. 10

Aug. 10

Sept. 10

Oct. 10

Nov. 10

Dec. 10

Jan. 11

Note: Monthly average count

BAKER HUGHES RIG COUNT: US / CANADA 1,721

1,800 1,600 1,346

1,400 1,200 1,000 800

630

551

600 400 Feb. 9 1

Feb. 10

Feb. 11

Feb. 14

Feb. 15

available 2Reformulated gasoline blendstock for oxygen blending 3Nonoxygenated regular unleaded

6

Latest week

Stock cover (days)4

¢/gal 171.00 169.00 166.00

1Not

Latest week 2/4 Crude oil Motor gasoline Distillate Jet fuel-kerosine Residual

PROPANE - MT. BELVIEU / BUTANE - MT. BELVIEU

¢/gal 252.00 250.00 248.00 246.00 244.00 242.00 240.00 238.00

Change, %

Supply, 1,000 b/d

IPE GAS OIL / NYMEX HEATING OIL

135.00 133.50 131.00 129.50

YTD avg. year ago1

8,650 3,726 1,372 543 4,615 18,906

Feb. 15

NYMEX NATURAL GAS / SPOT GAS - HENRY HUB

¢/gal 278.00 275.00 272.00 269.00 266.00 263.00 260.00 257.00

YTD average1

8,620 3,724 1,394 570 4,757 19,065

TOTAL PRODUCT SUPPLIED

$/MMbtu 4.40 4.30 4.20 4.10 4.00 3.90 3.80 3.70

Change, %

Product supplied, 1,000 b/d

WTI CUSHING / BRENT SPOT $/bbl 102.00 99.00 96.00 93.00 90.00 87.00 84.00 81.00

4 wk. avg. year ago1

200

11/27/09

12/11/09

12/4/09

12/25/09

12/18/09

1/8/10

1/1/10

1/22/10

1/15/10

2/5/10

1/29/10

11/26/10

2/12/10

12/10/10

12/3/10

12/24/10

12/17/10

1/7/11

12/31/10

1/21/11

1/14/11

2/4/11

1/28/11

2/11/11

Note: End of week average count

Oil & Gas Journal | Feb. 21, 2011

CLEAN INNOVATION

Announcing the world’s first hydraulic fracturing system made from ingredients sourced from the food industry.

How ingredients sourced exclusively from food industry suppliers are helping produce more natural gas The world asked for cleaner fracturing chemistry and Halliburton delivered it. The new CleanStim™ formulation provides an extra margin of safety to people, animals and the environment. Laboratory testing indicates that it also produces higher retained conductivity than conventional fracturing fluids under many conditions. The CleanStim recipe is designed for downhole use, not dinner tables. But it will help satisfy the world’s appetite for natural gas. See if it’s right for you. Learn more at Halliburton.com/cleanstim.

Solving challenges.™ © 2011 Halliburton. All rights reserved.

EXPLORATION & DEVELOPMENT Q U IC K TA K E S Rosneft, ExxonMobil to develop Black Sea resources ExxonMobil Corp. and Russia’s state-owned OAO Rosneft have reached an agreement concerning joint development of oil and gas resources in the Black Sea, to include an initial focus on oil exploration and production in the Tuapse Trough in the Russian Black Sea basin. “ExxonMobil technologies will effectively complement Rosneft’s experience and resources,” said Russia’s deputy prime minister Igor Sechin, who added, “Development of this area will become the springboard for full-scale Black Sea basin development.” ExxonMobil Chairman and Chief Executive Officer Rex W. Tillerson welcomed the opportunity, saying, “ExxonMobil will bring its technology, project execution capabilities, and innovation to compliment Rosneft’s strengths and experience in the region.” Tillerson added, “We will build on the successful relationship we have with Rosneft through the Sakhalin-1 project to help meet energy needs in Russia and the wider Black Sea area.” Under the agreement, the two firms contemplate a joint operating company to conduct exploration and production in the Tuapse Trough, an 11,200-sq-km deepwater area along the Black Sea coast of the Krasnodar region. The agreement enables the two firms to consider additional opportunities to expand Black Sea energy sector cooperation, including additional exploration and production. The two sides may also cooperate on oil sales to Rosneft’s Tuapsinsky refinery and other Black Sea markets, development of regional transportation infrastructure, and deepwater technology research and development. Analyst IHS Global Insight said that for ExxonMobil, “the Rosneft agreement marks a greater commitment to Russia as well as the Black Sea, where the company also has secured acreage and a commitment to explore offshore Turkey and Romania.” ExxonMobil Exploration & Production Turkey BV plans to explore off Turkey this year with Deepwater Champion, a Transocean Ltd. drillship. The Hyundai Heavy Industries shipyard in Ulsan, South Korea, is building the ship, expected to drill in the Turkish Black Sea during the first half 2011 (OGJ Online, Mar. 19, 2010). ExxonMobil is the second company in weeks to sign a major offshore oil exploration agreement with Rosneft. Previously, BP PLC and Rosneft agreed to explore and develop the EPNZ 1, 2, and 3 blocks in the underexplored South Kara Sea basin in relatively shallow water on the Russian Arctic continental shelf (OGJ Online, Jan. 24, 2010).

The appraisal well was drilled to a total depth of 4,297 m and intersected 74 m of net gas pay. Of this, 31 m was encountered in a deeper, previously unexplored target horizon in the Orthus field. This is the tenth discovery for Chevron off Australia in the last 18 months and again it helps underpin potential expansion for the $42 billion (Aus.) Gorgon-Jansz LNG project. Chevron holds 50% of WA-25-R with ExxonMobil Corp. holding 25%, Royal Dutch Shell PLC 12.5%, and BHP Billiton 12.5%. The Gorgon-Jansz project currently stands at three trains each with capacity of 5 million tonnes/year. The plant has been designed with enough space to fit a total of five trains.

Trinidad gets rare onshore light oil discovery Parex Resources Inc., Calgary, and partner Primera Energy Resources Ltd. have reported an onshore discovery Primera calls the first onshore light oil discovery in Trinidad in 50 years. Snowcap-1, the second exploratory well drilled on the Cory Moruga block in south-central Trinidad, stabilized over 6 days on a three-point test at 578 b/d of 37° gravity oil and 4.6 MMcfd of gas from the primary objective Miocene Herrera formation at 4,597-4,603 ft. Tubinghead pressure at the end of the test was 600 psi. The well tested at rates as high as 1,450 b/d and 6.2 MMcfd. The zone produced no water. Deeper secondary targets, namely the Eocene and footwall Herrera zones, produced little or no hydrocarbons in commercial quantities (OGJ Online, Dec. 14, 2010). TD is 8,600 ft. Appraisal drilling is required to determine the hanging wall Herrera reservoir areal extent, oil leg, gas cap structural positions, and potential hydrocarbon height. Meanwhile, Parex Resources (Trinidad) is mobilizing a drilling rig back to the pair’s first well, Firecrown-1. Based on open hole wireline logs, mud logs, and cuttings samples, this well encountered hydrocarbon-bearing sandstones with oil shows at 6,600-7,200 ft and 8,150-8,275 ft in the Herrera. Drilling was suspended due to wellbore integrity problems. The well will be deepened to the commitment depth of 10,500 ft to investigate deeper prospective horizons, following which all potentially productive zones will be tested including the Herrera. Primera Energy said it has several additional “high impact,” seismically identified prospects on the block and is seeking regulatory approval for further exploratory drilling. The company is arranging for a drilling rig to resume drilling on its WD-4 block. The first well, PS 131 RD, will go to 5,600 ft and target the Lower Forest formation.

DRILLING & PRODUCTION Q U IC K TA K E S Chevron drills appraisal well in Orthus field Chevron Australia made a second natural gas discovery at its previous Orthus find in retention lease WA-24-R about 100 km northwest of Barrow Island.

8

Continental: Bakken’s giant scope underappreciated The Bakken play in the Williston basin could become the world’s largest discovery in the last 30-40 years, a senior man-

Oil & Gas Journal | Feb. 21, 2011

World GTL Trinidad Limited (In Receivership) Investment Opportunity Trinidad, West Indies

Offers are invited for the purchase of a Gas to Liquids plant and other assets of World GTL Trinidad Limited (In Receivership) which are located in Pointe-a-Pierre, Trinidad, West Indies. This Gas to Liquids plant is the first commercial gas to liquids facility in the Americas and is designed to produce between 2,050 to 2,400 barrels per day of ultra-low sulphur diesel and naphtha based on the conversion of used methanol plants to Fischer Tropsch GTL plants. The major process units of the plant are a Steam Methane Reformer, an Amine Unit, a Hydrogen Prism unit, 2 Fixed Bed FT Reactors and a Hydrotreating unit. The Gas To Liquids plant is being constructed by using equipment relocated from Methanol Plants located in the United States of America and Guatemala supplemented by new equipment to convert the process from methanol synthesis to Fischer Topsch synthesis. One of the assets is a gas to liquids technology with proprietary FT catalysts developed through extensive testing in pilot plants. The Gas to Liquids plant is now in the completion phase with significant construction completed. The Receiver is in the process of selling the plant and other related assets on an AS IS WHERE IS basis subject to the payment by the purchaser of all outstanding rates and taxes and the purchaser obtaining certification from the Trinidad and Tobago Ministry of Energy. Interested parties can make arrangements for viewing and/or inspecting the plant and other assets and receiving additional information from the Receiver at the under mentioned address. Offers must be communicated in writing to the Receiver and submitted in a sealed envelope addressed as shown below. The Receiver is under no obligation to accept any of the offers received. All correspondence and inquiries should be directed to: World GTL Trinidad Limited (In Receivership) c/o PricewaterhouseCoopers Limited GTL Drive, Petrotrin, Pointe-a-Pierre Trinidad, West Indies Attention: Mr. Varune Mungal Email: [email protected] Tel: 1 (868) 658-7980 or 1 (868) 623-1361 ext 162 Fax: 1 (868) 623-6025

ager at Continental Resources Inc. said Feb. 16. Ultimate recovery from the overall play is now estimated at 24 billion bbl of oil, compared with US reserves of nearly 20 billion bbl, he told the NAPE Expo in Houston. The 24 billion bbl figure is five times the US Geological Survey’s 2008 estimate and compares with the 151 million bbl the survey put forth as recently as the mid-1990s, said Jack Stark, Continental senior vice-president, exploration (OGJ, Apr. 21, 2008, p. 37). Close to 2 billion bbl of the 24 billion will come from the underlying Three Forks, which Continental helped prove to be a separate reservoir, Stark noted (OGJ Online, July 10, 2008). The increases resulted as technology evolved over a 20-year span from marginal or uneconomic vertical wells to open hole stimulations in single, dual, and trilaterals to liners with staged fracs that are resulting in 50% rates of return today, Stark said. Industry also began drilling into the Middle Bakken dolomite, which is more porous and permeable than the upper and lower Bakken shale source rocks. Production exceeds 400,000 b/d including Montana and North Dakota, Stark estimated, and smaller volumes are being produced in Canada. So recovery of that volume of oil will take years. Industry has completed 2,750 horizontal wells since 2000. It is running 165 rigs that likely will drill 1,800 more wells in 2011, and production could reach as much as 1 million b/d within a few years, Stark said. The Bakken is continuous under nearly 15,000 sq miles. The play’s numerous operators are drilling 18,000-21,000-ft wellbores that include 9,500-ft laterals and applying 18-30 frac stages/well, said Stark. In general, higher initial potential producing rates indicate higher estimated ultimate recoveries, but the correlation isn’t 1:1 “due to overriding geological factors,” he said. Operators seem to reach a point of diminishing returns between 18 and 24 frac stages and are still seeking the ideal number of stages, he said.

Plans for new Alberta upgrader move forward Canadian Natural Resources Ltd. (CNRL) and North West Upgrading Inc. (NWU) have decided to move forward with detailed engineering for the construction and operation of a $4 billion (Can.) bitumen upgrader near Redwater, Alta. In addition, the companies have an agreement with Alberta to process the province’s royalty-in-kind bitumen. CNRL also has agreed to provide 12,500 b/d of bitumen to Phase 1 of the facility. Provided the project is sanctioned following detailed engineering, CNRL said Phase 1 will process 50,000 b/d of bitumen to finished products. Also the companies may add two additional identical 50,000 b/d phases for processing bitumen at a future date. NWU noted that an ultralow-sulfur diesel will comprise nearly half of the facility’s output, with the remainder to in-

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clude products also in high demand, such as diluents, naphtha, and natural gas liquids. NWU said the project is the only one of its kind in the world to combine gasification technology with carbon dioxide management. The facility will capture 1.2 million tonnes of CO2/ phase, which will be sold to Enhance Energy Inc.’s Alberta Carbon Trunk Line for use in enhanced oil recovery before being sequestered. Alberta has awarded a portion of its carbon capture and storage fund to a joint application submitted by NWU and Enhance Energy Inc. The partnership will deduct its share of this fund from the processing fee the province will pay for refining its barrels.

Chevron upbeat about restart of deepwater drilling Industry and federal drilling regulators appear to be nearing the end of the process to enable the Bureau of Ocean Energy Management, Regulation, and Enforcement to restart issuing deepwater drilling permits for the Gulf of Mexico, a Chevron Corp. executive said Feb. 9. Gary Luquette, president of Chevron North America Exploration & Production, said he believes Chevron is “days away” from complying with all BOEMRE requirements issued since the April 2010 blowout of the deepwater Macondo well off Louisiana. BP PLC operated Macondo. The main factor delaying the permitting process has been that BOEMRE is waiting for industry to demonstrate its well control and subsea containment capabilities to prevent future oil spills in case of more blown-out deepwater wells. A massive oil spill followed the Macondo blowout. “We are very close to the end to getting all questions answered and to the point where we are going to get that certainty,” that industry could quickly intervene if needed, Luquette said. During questioning after his speech to a Credit Suisse Energy Summit in Vail, he forecast that BOEMRE could resume issuing permits for deepwater drilling well before yearend. Chevron is a member of the Marine Well Containment Co., a consortium of oil companies led by ExxonMobil Corp. to develop systems that can be quickly deployed in case of another deepwater well blowout. Separately in comments from Washington, DC, BOEMRE Director Michael Bromwich told reporters that he met with executives from major oil companies on Feb. 8 to discuss their spill prevention and containment efforts. Bromwich said he expects permitting for deepwater projects to resume before midyear. “I think they are making progress, and they answered some of the questions we had, and we will continue to work with them,” Bromwich said of the oil companies. Luquette said the restart of deepwater drilling also will hinge upon BOEMRE’s ability to issue new permits once industry has demonstrated its well control and subsea containment capabilities.

Oil & Gas Journal | Feb. 21, 2011

PROCESSING Q U IC K TA K E S Equatorial Guinea plans modular refinery The government of Equatorial Guinea has let contract to KBR for early work on a modular 20,000-b/d, low complexity refinery at Mbini in the country’s Rio Muni enclave. KBR will perform a conceptual study and associated project management services. The country produces about 322,000 b/d of crude oil and has no refining capacity. The new refinery will be designed to meet local fuel needs.

Indian Oil dedicates Panipat naphtha cracker Indian government officials on Feb. 15 dedicated a large naphtha cracker at state-owned Indian Oil Corp.’s 300,000-b/d Panipat refinery and petrochemical complex in Haryana north of New Delhi. The cracker, which went on stream last year, receives feedstock from Panipat and IOC’s 300,000-b/d refinery in Koyali, Gujarat, and 175,000-b/d refinery in Mathura, near Panipat. The unit has design production capacity of 800,000 tonnes/ year (tpy) of ethylene. It also will produce 600,000 tpy of propylene. Downstream units and their capacities include polypropylene 600,000 tpy, high-density polyethylene 300,000 tpy, linear low-density polyethylene 350,000 tpy (swing unit with HDPE), and monoethylene glycol 325,000 tpy.

TRANSPORTATION Q U IC K TA K E S Vantage applies to NEB for North Dakota-Alberta line Vantage Pipeline Canada Inc. applied to Canada’s National Energy Board (NEB) for a certificate to construct and operate the Vantage Pipeline Project. The proposed line would carry 45,000 b/d liquid ethane from a processing plant near Tioga, ND, through Saskatchewan to a gathering system near Empress, Alta. The Canadian portion of the 700-km Vantage system would consist of 580 km of pipeline and related facilities, of which 574 km would be in Saskatchewan and 4½ km in Alberta. Roughly 525 km of the proposed pipeline is along or adjacent to existing pipeline and road right-of-way. The 11-in. OD pipeline’s capacity would be expandable to 60,000 b/d if warranted by production expansion in the Williston basin. Pending regulatory approvals, Vantage expects construction to begin first-half 2012 and be completed late2012. Nova Chemicals in July 2010 signed a memorandum of understanding with Hess Corp. and Mistral Energy Inc. to purchase and transport ethane production from Hess’ Tioga gas plant in North Dakota via a proposed pipeline to Alberta. Nova will purchase 100% of the ethane produced at the Tioga gas plant under a long-term arrangement for use at its Joffre petrochemical complex (OGJ Online, Oct. 22, 2010).

Oil & Gas Journal | Feb. 21, 2011

Repsol inks agreement to send LNG to South Korea Repsol YPF SA signed a 15-month agreement to supply the natural gas equivalent of 1.9 billion cu m in LNG (about 1.7 million tonnes) to South Korea’s state-owned Korea Gas Corp. The deal is Repsol YPF’s first LNG sale into the Far East, the company reported. Repsol YPF will ship the LNG from the Peru LNG plant, to which the company has sole off-take rights (OGJ Online, June 15, 2010). It also holds supply contracts into Europe and North and South America. Repsol YPF currently also ships LNG from Trinidad and Tobago to the US and Europe. Last year, the company shipped 9 billion cu m of gas equivalent; with the start-up of Peru LNG, it expects to increase volumes by at least 50% in 2011. Repsol YPF has exclusive marketing rights to LNG production from Peru LNG, the company said. Two thirds of the plant’s production is dedicated for the Manzanillo terminal on Mexico’s Pacific Coast, which is to start up in this year’s fourth quarter.

Cheniere signs another LNG sales agreement Sabine Pass Liquefaction LLC, a unit of Cheniere Energy Partners LP, Houston, has signed memoranda of understanding to sell two units of a Dominican Republic power generator up to 600,000 tonnes/year (tpy) of LNG. The two companies are Empresa Generadora de Electricidad Haina SA (EGE Haina) and Cia. de Electricidad de San Pedro de Macoris (CESPM), both of which are managed by Basic Energy. Under the agreements, Basic and Sabine will negotiate definitive sales and purchase agreements under which Basic will purchase LNG for receipt at a designated receiving terminal, delivered ex-ship. The agreements would be subject to certain conditions, said the announcement, including receipt by each party of requisite internal approvals and Sabine’s receipt of regulatory approvals and making a final investment decision to construct liquefaction adjacent its Sabine Pass LNG terminal in western Cameron Parish, La., on the Sabine Pass Channel. The terminal has sendout capacity of 4 bcfd and storage capacity of 16.9 bcf of gas equivalent. As currently contemplated, says Cheniere, liquefaction at Sabine Pass would be designed and permitted for up to four modular LNG trains, each with peak processing capacity of up to 700 MMcfd of gas and an average liquefaction processing capacity of about 3.5 million tpy. The initial project phase is to include two modular trains and capacity to process about 1.2 bcfd of pipeline-quality natural gas. The company intends to conclude contracts for at least 500 MMcfd/train of natural gas liquefaction capacity. Export could begin as early as 2015, said the company, assuming timely regulatory approvals and a final investment decision.

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2011-2012 EVENTEVENT CALENDAR 2011-2012 CALENDAR Denotes new listing or american-business-con- [email protected], website: ferences.com, website: www.spe.org. 1-3. a change in previously www.shale-gas-asia.com. published information. 23-24. APPEX/AAPG Property & Prospect Expo, London, AOG Australasian Oil & +44 (0) 207 434 13 Gas Exhibition & Confer- 99, e-mail: Europe@ FEBRUARY 2011 ence, Perth, +61 3 9261 aapg.org. website: www. 4500, +61 3 9261 4545 europetro.com. 1-3. Laurance Reid Gas (fax), e-mail: aog@divexConditioning Conferhibition.com.au, website: Turkmenistan Asia Oil & ence, Norman, Okla., Gas Summit, Singapore, (405) 325-2248, (405) www.aogexpo.com.au. +44 (0) 20 7328 8899, 325-7164 (fax), e-mail: 23-25. +44 (0) 20 7624 9030 [email protected], website: GPA Europe Conference, (fax), e-mail: info@ www.engr.outreach. Amsterdam, +44 (0) summittradeevents.com, ou.edu. 20-23. 1252 625542, website: website: www.summitwww.gpaeurope.com/ tradeevents.com/HoldIP Week, London, +44 0 20 7467 7116, e-mail: events/event/16. 23-25. ingA2011.php. 3-4. [email protected], Libya International Petro website: www.energyinst. Annual Petcoke Conference, San Diego, & Energy Fair, Tripoli, org.uk. 21-23. (832) 351-7827, (832) 00971 4 2988144, 00971 4 2987886 (fax), Nitrogen+Syngas Inter- 351-7887 (fax), e-mail: [email protected], e-mail: nafees@orangenational Conference & website: www.petcokes. fairs.com, website: www. Exhibition, Dusseldorf, orangefairs.com. 7-10. +44 (0) 20 7903 2438, com. 25-26. +44 (0) 20 7903 2432 Corrosion UAE ConferAPI Spring Committee (fax), e-mail: conference, Abu Dhabi, 00 971 on Petroleum [email protected], ment Standards Meeting, website: www.crugroup. 50 264 1202, e-mail: c.pallen@theenergyexDallas, (202) 682 8000, com. 21-24. change.co.uk, website: (202) 682-8222 (fax), www. www.theenergywebsite: www.api.gor. SUBSEA Tieback 7-10. Forum & Exhibition, San exchange.co.uk/3/13/ Antonio, (918) 831-9160, articles/157.php. Feb. 27-Mar. 1. CERA Week, Houston, (918) 831-9161 (fax), (713) 840-8282, (713) e-mail: registration@pen599-9111 (fax), e-mail: nwell.com, website: www. MARCH 2011 [email protected], website: subseatiebackforum. www.cera.com. 7-11. com. 22-24. NPRA Security Conference & Exhibition, Renewable Energy World SPE European ConferHouston, (202) 457Conference & Expo ence on Health Safety 0480, (202) 457-0486 North America, Tampa, and Environment in Oil (fax), e-mail: info@npra. (918) 831-9160, (918) and Gas Exploration, org, website: www.npra. 831-9161 (fax), e-mail: Vienna, +44 (0)1224 registration@pennwell. 318088, website: www. org. 1-2. com, website: www. spe-uk.org. 22-24. renewableenergyworldAnnual Arctic Gas events.com. 8-10. Symposium, Calgary, Pipe Line Contractors Association Convention, Alta., (877) 927-7936, (877) 927-1563 (fax), European Fuels ConferMaui, (214) 969-2700, website: www.arcticgas- ence Annual Meeting, e-mail: [email protected], symposium.com/index. Paris, +44 (0)207 430 website: www.plca.org. html. 1-2. 9513, +44 (0)207 430 22-26. 9513 (fax), e-mail: SPE/IADC Drilling Confer- e.huiban@theenergyexShale Gas Asia Conference, New Delhi, 1 (800) ence, Amsterdam, +44 change.co.uk, website: 721-3915, 1 (800) 714- 20 7299 3300. +44 20 www.wraconferences. 1359 (fax), e-mail: info@ 7299 3309 (fax), e-mail: com/2/4/articles/205. php. 8-11.

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DEA(e) Technical Oil & Gas Conference on Well Control, Bad Bentheim, +44 (0) 1483 598000, e-mail: dawn.dukes@ otmnet.com, website: www.dea-europe.com. 10-11.

(0)20 7840 2139, +44 (0)20 7840 2119 (fax), email: meos@oesallworld. com, website: www. meos2011.com. 20-23.

San Antonio, (202) 4570480, (202) 457-0486 (fax), e-mail: info@npra. org, website: www.npra. org. 27-29.

GPA Europe at GasTech Conference & Exhibition, Amsterdam, +44 (0) NACE Corrosion Confer- 1737 855000, +44 (0) ence & Expo, Houston, 1737 855482 (fax), e(800) 797-6223, (281) mail: [email protected], 228-6329 (fax), website: e-mail: www.gastech. www.events.nace.org/ co.uk. 21-24. conferences/c2011/index.asp. 13-17. GASTECH International Conference & Exhibition, AIChE Spring Meeting Amsterdam, +44 (0) & Global Congress on 1737 855000, +44 (0) Process Safety, Chicago, 1737 855482 (fax), e(800) 242-4363, (203) mail: [email protected], 775-5177 (fax), website: e-mail: www.gastech. www.aiche.org/conferco.uk. 21-24. ences/springmeeting/ index.aspx. 13-17. CIPPE China International Petroleum & Offshore West Africa Petrochemical TechnolConference & Exhibition, ogy and Equipment Accra, Ghana, (918) 831- Exhibition, Beijing, +86 9160, (918) 831-9161 10 58236588/6555. (fax), e-mail: registra+86 10 58236567 (fax), [email protected], e-mail: cippe@zhenweiwebsite: www.offshore- expo.com, website: www. westafrica.com. 15-17. cippe.com.cn/cippeen. 22-24. World Heavy Oil Congress, Edmonton, Alta., IADC Drilling HSE Asia (888) 799-2545, (403) Pacific Conference & 245-8649 (fax), website: Exhibition, Singapore, www.worldheavyoilcon- (713) 292-1945, (713) gress.com. 15-17. 292-1946 (fax), e-mail: [email protected], website: www.iadc.org/conferTUROGE Turkish ences. 23-24. International Oil & Gas Conference & Showcase, Ankara, +44 (0) 20 7596 OMC Offshore Mediter5000, +44 (0) 20 7596 ranean Conference, 5111 (fax), e-mail: enRavenna, +39 0544 [email protected], 219418, e-mail: conferwebsite: www.turoge. [email protected], website: com. 16-17. www.omc.it/2011. 23-25.

Howard Weil Annual Energy Conference, New Orleans, (504) 5822500, website: www. howardweil.com/energyconference.aspx. 27-30.

NPRA Annual Meeting, San Antonio, (202) 4570480, (202) 457-0486 (fax), e-mail: info@npra. org, website: www.npra. org. 20-22.

Middle East Downstream Week Annual Meeting, Abu Dhabi, +44 (0) 1242 529 090, +44 (0) 1242 529 060 (fax), e-mail: wra@theenergyexchange. co.uk, website: www. wraconference.com. 27-30. ACS National Meeting & Exposition, Anaheim, Calif., (202) 872-4600, e-mail: [email protected], website: www.acs.org. 27-31. Purvin & Gertz International LPG Seminar, The Woodlands-Houston, (713) 331-4000, (713) 236-8490 (fax), e-mail: info@purvingertz. com, website: www. purvingertz.com. 28-31. SPE European Well Abandonment Seminar, Aberdeen, +44 1224 495051, e-mail: jane. rodger@hulse-rodger. com, website: www.speuk.org. 29. Woodford Shale Summit, Norman, Okla., (405) 525-3556, ext. 117, (405) 525-3592 (fax), e-mail: amy.childers@ iogcc.state.ok.us, website: www.woodfordsummit.com. 29-30.

SPE Production and Operations Symposium, Oklahoma City, (800) 456-9393, (972) 952-9435 (fax), e-mail: GIOGIE Georgian [email protected], website: International Oil & Gas www.spe.org. 27-29. Energy and Infrastructure MEOS/SPE’s Middle East Conference, Tbilisi, +44 Oil & Gas Conference & NPRA International Pet- 207 596 5135, +44 207 Exhibition, Manama, +44 rochemical Conference, 596 5106 (fax), e-mail:

Oil & Gas Journal | Feb. 21, 2011

2011-2012 EVENT CALENDAR ilyas.idigov@ite-exhibiAPRIL 2011 tions.com, website: www. giogie.com/2011/. 29-30. Middle East Downstream Week Annual Meeting, Offshore Asia Conference Abu Dhabi, +44 1242 & Exhibition, Singapore, 529 090, +44 1242 (918) 831-9160, (918) 529 060 (fax), e-mail: 831-9161 (fax), e-mail: c.pallen@theenergyexregistration@pennwell. change.co.uk, website: com, website: www. www.wraconferences. offshoreasiaevent.com. com/2/4/articles/105. 29-31. php. 3-6.

ShaleCon Conference, Montreal, Q.C., (800) 882-8684, e-mail: info@ iapc.com, website: www. shalecon.com/Event. aspx?id=388398. 4-7.

Hannover Messe International Trade Show, Hannover, +49 511 89 0, +49 511 89 32626 (fax), website: www.hannovermesse.de/homepage_e. GPA Annual Convention, 4-8. IRO On & Offshore San Antonio, (918) 493Exhibition, Gorinchem, SPE/ICoTA CoiledTub+31 523 289866, e-mail: 3872, (918) 493-3875 ing & Well Intervention (fax), e-mail: pmirkin@ antoinettehulst@evenConference & Exhibition, gpaglobal.org, website: ementenhal.nl, website: www.GPAglobal.org. 3-6. The Woodlands, Texas, www.evenementenhal. (800) 456-9393, (972) nl/gorinchem/beurzen. 952-9435 (fax), e-mail: Hannover Messe Pipeline 29-31. [email protected], website: Technology Conferwww.spe.org. 5-6. ence, Hannover, +49 SEG Shale Gas Forum, 511 90992 22, +49 511 Chengdu, Sichuan, 90992 69 (fax), e-mail: SPE/IADC Managed (918) 497-5500, (918) Pressure Drilling & Un497-5557 (fax), website: [email protected], derbalanced Operations website: www.pipelinewww.seg.org. 30-31. Conference, Denver, conference.com. 4-5.

(800) 456-9393, (972) (918) 560-2679, (918) 952-9435 (fax), e-mail: 560-2684 (fax), website: [email protected], website: www.aapg.org. 10-13. www.spe.org. 5-6. APPEA. Conference and OilTech Atyrau Regional Exhibition, Perth, +61 Petroleum Technology (7) 3802 2208, +61 (7) Conference, Atyrau, +44 3802 2209, website: (0) 20 7596 5000, +44 www.appeaconferences. (0) 20 7596 5111 (fax), com.au. 10-13. e-mail: [email protected], website: GITA’s Geospatial www.oiltech-atyrau.com/ Infrastructure Solutions home.html. 5-6. Conference, Grapevine, Texas, (303) 337-0513, Atyrau North Caspian (303) 337-1001 (fax) Regional Oil, Gas and website: www.gita.org/ Infrastructure Exhibievents/futconf.asp. tion, Atyrau, +44 (0) 20 10-14. 7596 5000, +44 (0) 20 7596 5111 (fax), e-mail: SAGEEP Information enquiry@ite-exhibition. Exchange for New-Surcom, website: www. face Geophysics Forum, atyrauoilgas.com2011/. Charleston, (918) 4975-7. 5500, (918) 497-5557 (fax), website: www.seg. AAPG Annual Convention org. 10-14. & Exhibition, Houston,

Gas Turbine Users International Annual Conference (GTUI), Dubai, +971 4 8047883, +971 4 8873584 (fax), e-mail: [email protected], website: www.gtui.org. 10-15. The Project Forum, Moscow, +44 (0) 20 7357 8394, +44 (0) 20 7357 8395 (fax), e-mail: [email protected], website: www.europetro. com. 11-12. Process Safety Management of Chem/ Petrochem & Refineries Conference, Houston, (312) 540-300, ext. 6625, e-mail: Michelew@marcusevansch. com, website: www. marcusevansch.com/ OGJPSM. 11-13.

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13

JOURNALLY SPEAKING

A column for fun

BOB TIPPEE Editor

This column exists mostly for fun. Journally Speaking features are wonderfully fun to write and, when done right, equally fun to read. In this space, OGJ editors take turns addressing subjects that would be out of place elsewhere in the magazine. They write more breezily than would be appropriate in serious news and technical articles. OGJ Editor Henry Ralph set the light tone for Journally Speaking when he invented the feature in 1948 and wrote nearly every installment of it until he retired 20 years later. Ralph, who died in 1983, even invented a popular foil, the curmudgeonly Churly McCaustic, through whom he made painfully serious points in humorously human ways. Although fictive characters like Churly seem to have fallen from fashion, you never know: Creative license rules this space.

Writing guidance Guidance for writing Journally Speaking appears at the bottom of an assignments document painstakingly assembled each year by editorial management: “Look for fresh approaches to subjects relevant to OGJ readers. Ideas can but don’t have to tie with special report topics. While trips can provide good Journally Speaking material, don’t write travel logs. Journally Speaking is the place to take readers behind the scenes at OGJ, to make serious points in light ways, to cover offbeat subjects relevant (in some way) to our readers, and to cover routine subjects in offbeat ways. Let your personality show in the writing without relying heavily on first-person pronouns.” Whether OGJ editors actually read helpful tips such as these from editorial management remains anyone’s guess. Results nevertheless suit the objective: Journally Speaking is eclectic, quirky, and—except when the report is about someone’s passing or changes to OGJ, and sometimes even then—fun. Word came recently from a reader who described one of many jewels Senior Writer Sam Fletcher has crafted in this space as “the highlight of my Christmas dinner party.” Otto R. Snel of Crudestope Mines and Oils (Private), London, said he read Sam’s Journally

14

Speaking of Dec. 2, 2002, aloud to guests after they had dined. In the column, “Oil patch Christmas,” Sam had reminisced in savory detail about holiday traditions years ago in the piney region of giant East Texas oil field. Sam and his brothers would don their “cowboyprint flannel pajamas” and be driven from home in Gladewater to nearby Kilgore, where derricks still standing had been decorated for the season. “Festive signs of ‘Merry Christmas’ and ‘Happy New Year’ stretched between derricks to span Kilgore’s streets,” Sam wrote. “And each year folks flocked from all over East Texas to see Kilgore’s lights.” Sam remembered: “Even before it came into view, Kilgore’s festive glow was visible beyond the tree-covered hills. The tall steel derricks sparkled with holiday magic. We would join the parade of cars cruising Kilgore’s streets, with us kids hanging out the windows for a better look at the brightly lit derricks.” In town, friends and relatives converged in parked vehicles. “We kids piled in the backseat like puppies, sharing snacks and comparing Christmas wish lists. Moms huddled in the front seat, sipping coffee and exchanging neighborhood news. Dads congregated outside, leaning against fenders as they swapped work experiences and tips on who was hiring.” Get the picture? With writing like that, how can you miss it?

Sharing the magic So, 8 years on, Otto Snel shared the magic with dinner guests, who, he reported in an e-mail to Sam, applauded at the column’s end. Here’s what Sam wrote: “It’s been a long time since I left East Texas, and I’ve seen many places in the ensuing years. But the bright lights of Las Vegas, New York, London, and Paris never impressed me much. “After all, I’ve seen Kilgore at Christmas.” Only one thing can be more fun than reading words so rich with transcendent fun, then hearing how Otto Snel and his Christmas dinner guests joined the celebration: envisioning Sam in cowboy-print flannel pajamas.

Oil & Gas Journal | Feb. 21, 2011

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EDITORIAL

What the budget means For the US oil and gas industry, the budget proposal of President Barack Obama arrives in company with one bit of good news: Deep gouges stand almost no chance of surviving Congress. Obama has proposed the same special mistreatment of oil and gas twice before, when both houses of Congress were controlled by Democrats as hostile to the industry as he is. The initiative failed both times. That it would succeed now, with the House under Republican control and Democrats in decline in the Senate, is very improbable. Even when never implemented, however, budgets have symbolic importance. Obama’s budget radiates a misguided orientation that should trouble the oil and gas industry—and its customers— deeply.

Twin confusions Obama’s misconceptions begin with twin confusions about job creation and green energy. His administration continues to assert that profligate state spending achieves net job growth. This assertion girds arguments for energy forms unsupported by markets. Obama’s budget message thus speaks of “investing in research and development—especially in the job-creating industries of tomorrow such as clean energy.” That might make sense if the program stopped at R&D. But Obama proposes to fund development of noncommercial energy through punishing taxation of oil and gas. This is a formula for systemically increased cost, which cannot yield net job growth. The link between subsidized green energy and jobs is a sham. Worse than that is Obama’s mischaracterization of the oil and gas tax incentives he would repeal. “We are eliminating subsidies to fossil fuels and instead making a significant investment in clean energy,” says the budget message. Wrong. Of the $43.6 billion Obama’s budget supposedly would save in 2012-21 by cutting oil and gas tax incentives, $12.4 comes the expensing of intangible drilling costs, and $18.3 billion comes from denying oil and gas companies use of the manufacturing tax deduction. The former is a timing preference, not a subsidy. The latter is a deduction available to all US manufacturers to boost international competitiveness. Another

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targeted item, percentage depletion, is available only to small producers and represents a subsidy only to the extent a taxpayer’s charges exceed total costs of the affected properties. The total amount by which that happens can be nowhere close to the $11.2 billion the administration claims the end of percentage depletion would save. The presumed savings from these moves are as illusory as Obama’s misuse of the word “subsidy” on which they’re based. If enacted, elimination of timing preferences important to independent producers would slash drilling. Denial of the manufacturing tax deduction, along with changes proposed for taxation of non-US income, would encourage large companies to move operations, if not headquarters, overseas. The net effect would be less money for the US government, not more. The jolt to drilling, moreover, would impede development of unconventional oil and gas resources, the most promising source of energy— much of it low-carbon natural gas—to emerge in decades. To jeopardize this potential source of energy, jobs, and incomes would be breathtakingly irresponsible. It also would punctuate the worst message in the budget proposal.

No moderation This administration doesn’t like oil and gas or the industry that supplies them. Its goal is not just to supplement conventional energy with renewable supplies, which is reasonable; it’s to push renewable energy into the market at the expense of hydrocarbons. The costly approach is evident and at work beyond the no-hope budget. It guides policymaking at an out-of-control Environmental Protection Agency and boot-on-neck Department of the Interior. The budget proposal confirms that Democratic setbacks in elections last November did nothing to moderate Obama’s hostility toward the oil and gas industry. The industry must account for this imbedded antagonism as it defends its interests and those of its customers, whose energy costs would soar if the president had his way. There can be no compromise with this administration. There can be only hope for better judgment in the White House come 2013.

Oil & Gas Journal | Feb. 21, 2011

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GENERAL INTEREST

Obama keeps pledge to end oil tax incentives in 2012 budget request Nick Snow Washington Editor

The White House followed through on US President Barack Obama’s promise to eliminate oil and gas incentives and preferences with a fiscal 2012 federal budget request that would increase direct taxes on the industry by an estimate $3.472 billion next year and $43.612 billion over 10 years. US producers and refiners operating internationally also would pay an additional $532 million in fiscal 2012 and $10.758 billion during 2012-21 under modified rules for dualcapacity taxpayers under “As the bipartisan fiscal the foreign tax credit. commission concluded, “As the bipartisan fisthe only way to truly cal commission concludtackle our deficit is to ed, the only way to truly cut excessive spending tackle our deficit is to cut excessive spending wherwherever we find it— ever we find it—in doin domestic spending, mestic spending, defense defense spending, and spending, and spending spending through tax through tax breaks and breaks and loopholes.” loopholes,” Obama said —US President as the White House OfBarack Obama fice of Management Budget released the proposed budget on Feb. 14. “We’ve begun to do some of this with $78 billion in cuts in the [US Department of Defense’s] budget plan, by ending tax breaks for oil and gas companies, and through billions of dollars in savings from wasteful health spending.” Oil and gas industry association leaders immediately condemned the proposed changes. “It’s no surprise the administration is proposing yet again to raise taxes on the US oil and gas industry. But it’s still a bad idea and comes at one of the worst times in our economic history,” American Petroleum Institute Pres. Jack N. Gerard said. “The administration continues to ignore the fact this industry is among the nation’s largest job creators and delivers enormous revenues to government at all levels. The industry pays income taxes, royalties and other fees totaling nearly $100 million every day and pays income tax at an effective rate far higher than most other industries.”

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The White House’s latest federal budget request differs from its predecessors’ proposals in one respect: It does not contain provisions that would repeal the enhanced oil recovery credit or the credit for oil and gas produced from marginal wells. But it contains other proposals to increase tax revenue from the oil and gas industry which have become fixtures the past few years, including: • Repeal of expensing for intangible drilling costs, which the White House OMB estimated would raise $1.875 billion in fiscal 2012 and $12.447 billion over 10 years. • Repeal of the deduction for tertiary injectants, which OMB says would raise $6 million in 2012 and $92 million over 10 years. • Repeal of the exception to passive lose limitations for working interests in oil and gas properties, which OMB says would raise $23 million in 2012 and $203 million over 10 years. • Repeal of percentage depletion for oil and gas wells, which OMB says would raise $607 million in 2012 and $11.202 billion over 10 years. • An increase of geological and geophysical amortization for independent producers to 7 years from 5, which OMB said would raise $59 million in 2012 and $1.408 billion over 10 years. • Repeal of the Internal Revenue Code Sec“It’s no surprise the tion 199 domestic manuadministration is profacturing deduction for posing yet again to raise oil and gas companies, which OMB said would taxes on the US oil and raise $902 million in gas industry. But it’s still 2012 and $18.26 billion a bad idea and comes at over 10 years. The deducone of the worst times in tion, which Congress apour economic history.” proved in 2004 as part of the American Jobs Cre—American Petroleum ation Act to help offset Institute Pres. foreign government subJack N. Gerard. sidies of competing firms, would continue to apply to other US businesses. Oil and gas producers would face additional expenses from production on federal lands in the Obama administration’s proposed fiscal 2012 budget for the US Department of the Interior, which would impose user fees for drilling

Oil & Gas Journal | Feb. 21, 2011

permit process and inspections on federal lands “Contrary to the presiand in federal waters, dent’s belief, his budget establish fees for new proposal does not target nonproducing offshore so-called ‘Big Oil,’ but and onshore oil and gas leases to encourage more instead goes after the timely production, and thousands of small adjust royalty rates and businesses, America’s terminate the royalty-inindependent oil and kind program as part of a gas producers, who on broader set of changes in the federal royalty system. average employ only 11 Onshore oil and gas workers.” royalties would increase —Independent by $349.8 million to an Petroleum estimated $2.98 billion Association of in fiscal 2012 from an estimated $2.63 billion in America Pres. Barry Russell 2011, while rents and bonuses would fall by $2.3 million during the same period. OMB projected offshore mineral revenue increases of nearly $1.22 billion in rents and bonuses, $875.6 million in royalties, and nearly $24.6 million in fees from nonproducing leases in DOI’s proposed budget. The budget request also proposes more than $500 million to restructure the US Bureau of Offshore Energy Management, Regulation, and Enforcement, the successor agency to the US Minerals Management Service; to hire new oil and gas inspectors, engineers, scientists, and other key employees to oversee offshore operations in federal waters; to establish real-time monitoring of key drilling activities; to conduct detailed engineering reviews of offshore drilling and production safety systems; and to implement more aggressive reviews of companies’ spill response plans. “These reforms also will facilitate the timely reviews of oil and gas permits,” OMB said. The US Department of Energy would receive $29.55 billion, 12% more than the $26.94 billion enacted for fiscal 2010 and continued in 2011, under the administration’s proposed budget. DOE would receive $5.4 billion for its science office, including $2 billion for basic research to discover new ways to produce, store, and use energy; but essentially eliminate its fossil fuel office, where approximately $4 billion/ year of what OMB considers tax subsidies for oil, gas, and other fossil fuel producers would be repealed. White House federal budget requests since the beginning of George W. Bush’s second term have called for the elimination of federal oil and gas research and development support, which has produced horizontal drilling, 3D seismic mapping, and other technologies in wide use now by producers.

Oil & Gas Journal | Feb. 21, 2011

Potential lost revenue In his statement responding to the Obama administration’s latest proposed federal budget, API’s Gerard said the tax increases, besides eliminating thousands of potential new jobs, would actually lower revenue to the government by many billions of dollars because the tax hikes would prevent many projects from going forward. “The irony is that the administration wants to increase taxes on the US oil and gas industry so the government can create green jobs, but the industry is already doing that more efficiently and with less burden on American taxpayers through its own green investments,” he said, adding, “It invested more than $58 billion from 2000 to 2008 on lowand no-carbon energy technologies, more either than the government or the rest of the private sector combined.” Other oil and gas industry association leaders condemned the White “This proposal is a House’s proposed federal sweetheart deal for the oil and gas tax changes. state-owned oil com“These provisions, if enpanies in Russia, Iran, acted, would have a chillChina, and other coming impact on the jobs our industry creates and petitor nations, and for on our nation’s energy the Chinese who proindependence,” observed duce almost all the rare American Exploration & earth minerals needed Production Council Pres. to make batteries for V. Bruce Thompson. “Our member compaelectric vehicles.” nies are responsible for a —National significant portion of the Petrochemical exploration for natural & Refiners gas and oil in the United Association Pres. States. Raising taxes on these and other similar Charles T. Drevna companies will not create jobs, nor will it increase the supply of clean, domestic and affordable energy,” he said. “While we recognize the need to deal with our nation’s ongoing budget challenges, tax increases on an industry that is creating jobs is not the way to reduce budget deficits.”

Independents targeted “Contrary to the president’s belief, his budget proposal does not target so-called ‘Big Oil,’ but instead goes after the thousands of small businesses, America’s independent oil and gas producers, who on average employ only 11 workers,” said Independent Petroleum Association of America Pres. Barry Russell. US production activities are dominated by independent producers who drill 90% of the total wells, and produce 72% of the nation’s gas and 44% of its oil, he noted. “Virtually no industry in the United States pays more in

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GENERAL INTEREST taxes, royalties, and revenues than America’s oil and gas producers,” Russell stated, adding, “The industry pays federal taxes at a rate of 48%, as well as substantial state and local taxes to drive local communities. For example, the Louisiana Department of Education reported that some school districts located near the Haynesville shale now have the highest paid teachers. According to the department, the increase in salaries is a direct result of the share of increased sales and property taxes received by the school districts from the Haynesville shale production activity. Simply put, lost capital investment due to increased taxes will reduce these tax payments over time, not increase them.” National Petrochemical & Refiners Association Pres. Charles T. Drevna, whose members would be most directly affected by the administration’s proposal to not have the Section 199 tax exemption apply to US oil and gas companies, said that it would effectively hurt consumers by driving up the cost of petroleum products and petrochemicals

produced in this country. “This proposal is a sweetheart deal for the state-owned oil companies in Russia, Iran, China, and other competitor nations, and for the Chinese who produce almost all the rare earth minerals needed to make batteries for electric vehicles,” he said. “It would weaken America’s oil production, refining, and petrochemical industries; would increase our reliance on foreign nations; would send more American jobs and more American dollars to our competitors abroad; and would increase unemployment here at home. “Oil companies do not get subsidies. Like other American businesses, [they] get tax deductions for the products they produce and the jobs they create,” Drevna stated, adding, “President Obama’s proposal would cut those deductions for oil companies to force up their taxes. It is not in our national interest to destroy good American jobs today in hopes of creating so-called green jobs that may never materialize tomorrow.”

Discussion of draft GHG bill turns into CAA debate Nick Snow Washington Editor

Democrats and Republicans quickly established their differing views as a US House subcommittee debated legislation designed to draft legislation to halt the US Environmental Protection Agency’s efforts to limit greenhouse gas emissions under the Clean Air Act. Democrats contended that the bill sponsored by Energy and Commerce Committee Chairman Fred Upton (R-Mich.) would gut the CAA. Republicans said that it simply would establish that the law was not intended to regulate GHGs. Debate quickly expanded to environmental regulation’s impact on US jobs, however. When Republicans on the committee’s Energy and Power Subcommittee argued that trying to limit carbon emissions would cost US businesses $300400 billion/year and discourage hiring of new employees, Democrats responded that regulation under the CAA has created thousands of jobs and produced millions of dollars in new income for US businesses by making them more efficient and globally competitive. “Cap-and-trade legislation failed in the last Congress, but now we face the threat of EPA bureaucrats imposing the same agenda through a series of regulations,” Upton said in his opening statement at the subcommittee’s Feb. 9 hearing. “Like cap-and-trade, these regulations would boost the cost of energy, not just for homeowners and car owners, but for businesses both large and small. EPA may be starting by regulating only the largest power plants and factories, but we will all feel the impact of higher prices and fewer jobs.” Upton said his draft bill, formally known as the Energy

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Tax Prevention Act of 2011, would restore the CAA to its intended purpose. EPA began to formulate regulations to limit GHG emissions under the law after it concluded that they threaten public health. It examined that question in response to a 2007 US Supreme Court decision saying that it had the authority to issue such regulations under the CAA. Republicans have charged that EPA has gone beyond its actual authority and that it’s Congress which should decide whether to impose limits on GHG emissions. Upton’s draft bill is similar to one developed by James M. Inhofe (R-Okla.), the US Senate Environment and Public Works Committee’s ranking minority member.

Democrats’ concerns Democrats maintain that the proposals not only would overturn the Supreme Court’s decision, but also throw out EPA’s determination that GHGs endanger human health and the environment, keep EPA from requiring stationary sources to reduce GHG emissions, and prohibit it from requiring additional reductions of GHG emissions from motor vehicles while repealing California’s authority to regulate such emissions. The latest GOP proposals also threaten implementation of the renewable fuel standard, prohibit EPA from enforcing existing GHG reporting requirements, prevent EPA it from considering impacts on climate change when approving alternatives to ozone depleting substances under Title VI of the CAA and the Montreal Protocol, create legal uncertainty about the status of the recent motor vehicle standards adopted by EPA, call into question EPA’s authority to implement voluntary programs to reduce GHGs, and create new liti-

Oil & Gas Journal | Feb. 21, 2011

WATCHING GOVERNMENT gation opportunities for opponents of regulation of conventional pollutants, according to Democrats. In her opening statement as she testified, EPA Administrator Lisa P. Jackson said Upton’s draft bill “appears to be part of a broader effort in this Congress to delay, weaken, or eliminate Clean Air Act protections of the American public.” She said in 2010 alone, EPA’s implementation of the CAA saved more than 160,000 US lives, avoided more than 100,000 hospital visits; prevented millions of cases of respiratory illness, including bronchitis and asthma; enhanced US productivity by preventing millions of lost workdays; and kept US children healthy and in school. EPA’s CAA implementation also has contributed to dynamic growth in the US environmental technologies industry and its workforce, Jackson continued. “In 2008, that industry generated nearly $300 billion in revenue and $44 billion in exports. Yesterday, the University of Massachusetts and Ceres released an analysis finding that two of the updated CAA standards EPA is preparing to establish for mercury, soot, smog, and other harmful air pollutants from power plants will create nearly 1.5 million jobs over the next 5 years,” she noted.

Scientific research Subcommittee Democrats joined her in saying that scientific research has shown that global climate change is real, that human activity is accelerating it, and that it poses a public threat. “The premise of the Inhofe-Upton legislation is that climate change isn’t real. There are a lot of scientists who would disagree with that,” said Henry A. Waxman (D-Calif.), the full committee’s ranking minority member. “I find it troubling that we’re discussing this without calling any scientists to testify.” Subcommittee chairman Ed Whitfield (R-Ky.) responded that US Energy Sec. Steven Chu was invited to appear, but had to decline because of a scheduling conflict.

Oil & Gas Journal | Feb. 21, 2011

NICK

SNOW

Washington Editor | Blog at www.ogj.com

GHG uncertainties The US Environmental Protection Agency can expect criticism when it hosts refiners at a listening session on Mar. 4 about its efforts to regulate greenhouse gases under the Clean Air Act. Steve Cousins, a vice-president of independent refiner Lion Oil Co., didn’t mince words when he testified Feb. 9 before a House Energy and Commerce Committee subcommittee hearing on the subject. “We believe these actions by EPA are contrary to the plain wording of the Clean Air Act, are unwise, and endanger America’s economic and national security,” he told the committee’s Energy and Power Subcommittee. “On top of this, EPA’s greenhouse gas regulations will have zero positive impact on our global environment, bringing the American people enormous pain and no gain. These regulations are not about environmental protection—they are about job destruction.” Cousins explained that Lion Oil operates a single refinery in El Dorado, Ark., which sells gasoline, diesel fuel, and asphalt to customers in seven states. “We can’t offset the costs of greenhouse gas regulation through profits from other lines of business, such as upstream oil production or retail,” he noted. “Our refining operation has to pay for itself or the plant cannot continue to operate. This is true not just for Lion Oil, but for the domestic refining industry as a whole.”

‘Economic engine’ Lion Oil directly employs 600 people at a unionized plant in an Arkansas county with nearly 10% unemployment, according to Cousins. “The jobs of more than 1,800 people—most with families—are supported indirectly by our company, making Lion Oil a leading economic engine in southern Arkansas,” he said. “We and our employees paid about $15 million in local, state and federal taxes last year, even though our company barely broke even.” He said one of the biggest problems with EPA’s GHG effort is the business uncertainty it creates. “In our industry, expansions in manufacturing capacity take years to design, permit, finance, and construct,” Cousins said. “With the breakneck pace at which EPA is spewing out new regulations, seeing a clear and feasible path 5 years into the future is impossible.” EPA’s GHG program already has had an impact on Lion Oil’s operation, he told the subcommittee. The refiner began a major expansion at the plant, costing several hundred million dollars, in 2007 which would have increased its capacity to 100,000 b/d from 70,000 b/d. The 2008-09 recession and several other factors kept it from reaching that goal, leaving it with an 80,000 b/d capacity, Cousins said. “The uncertainty and potentially prohibitive costs associated with possible capand-trade legislation and EPA’s greenhouse gas regulations was a critical factor,” he added.

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GENERAL INTEREST Inhofe, who was the hearing’s first witness, told the subcommittee that global climate change science is not conclusive but that the adverse impacts of hurriedly adopting economically onerous programs to combat it are. “We in the United States have the largest recoverable reserves of coal, oil, and natural gas of any nation in the world,” he declared. “We have to run this machine called America, and we can’t do it now without fossil fuels.” Other Republicans charged that EPA was formulating regulations without considering their economic consequences. Jackson responded that it’s not practical to consider this before regulations are proposed because information is not sufficiently specific to expect reasonable answers. “We will do economic analysis of regulations as they are proposed and finalized under the rulemaking process,” she told the subcommittee. Jackson also said EPA is adopting a tailoring rule that imposes the new regulations on the heaviest GHG emitters

first so that smaller businesses and other activities will have more time to prepare. “The tailoring rule was intended to give certainty that facilities emitting more than 100,000 tons of carbon dioxide each year,” she said. “It was an intended to be a reasonable first step and start with the large sources, not the small ones. By making our businesses more efficient, we make ourselves more competitive.” The agency has scheduled a series of hearings with businesses which would be regulated initially (including oil refineries on Mar. 4) to discuss impacts. There were no signs that either side was ready to change its viewpoint, however. “The bottom line is that this is scientific research, and it has been proven. We should accept decisions which have been made on that basis,” subcommittee member Eliot L. Engel (D-NY) said. “I don’t think anyone should conclude that carbon emissions aren’t having an impact on our air. They are. To believe otherwise is to simply put our heads in the sand.”

Baker Institute: Drilling in Gulf of Mexico evolves after Macondo blowout, oil spill Paula Dittrick Senior Staff Writer

Future oil and gas production from the deepwater and ultradeepwater Gulf of Mexico hinges on how US drilling policy and safety standards evolve following the April 2010 Macondo well blowout and subsequent oil spill, speakers said Feb. 11 at Rice University’s Baker Institute. “In 2010, the US Gulf of Mexico is expected to produce a combined 1.7 million b/d of oil and 6 bcfd of natural gas, equivalent to 23% of US oil and 10% of gas output,” said J. Robinson West, PFC Energy chairman and chief executive officer. He was among speakers at a Baker Institute day-long conference entitled “US Offshore Oil Exploration: Managing Risks to Move Forward.” Industry spokesmen, scientists, and government officials attended the conference to discuss how to improve the safety and effectiveness of offshore drilling. “If oil and gas drilling are able to continue without constraint in the gulf, it is the young fields in ultradeep water that will make the greatest contribution to US domestic oil production and energy security,” West said. “By 2020, over 50% of the gulf’s production is projected to come from ultradeep waters, which can produce 12.9 billion boe, or 45% of the gulf’s total projected output over the decade from 2011 to 2020,” West said of PFC Energy projections. PFC made its forecast before the Macondo blowout so the

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numbers exclude reduced production rates stemming from a deepwater drilling moratorium imposed shortly after the explosion and fire to Transocean Ltd.’s Deepwater Horizon semisubmersible. BP PLC operated Macondo. The forecast had projected 100 ultradeepwater wells to be drilled by 2020, but West said he believes that number is more likely to be 65-75 wells. “The deepwater industry is global and will take its capital, equipment and jobs to other basins if it cannot operate in the US,” West said. A Chevron Corp. executive attending the Rice University event believes industry and federal drilling regulators are nearing the end of the process to enable the Bureau of Ocean Energy Management, Regulation, and Enforcement to restart issuing deepwater drilling permits. Gary Luquette, president of Chevron North America Exploration & Production, said he believes Chevron is “days away” from complying with all BOEMRE requirements issued since the Macondo blowout and oil spill (OGJ Online, Feb. 10, 2011). BOEMRE has waited for industry to demonstrate its well control and subsea containment capabilities before resuming deepwater drilling permits. Michael Bromwich, BOEMRE director, recently said in Washington, DC, that he expects permitting for deepwater projects to resume before midyear. Bromwich also was expected to speak at the Baker Institute event.

Oil & Gas Journal | Feb. 21, 2011

GENERAL INTEREST

Industry reports many safety changes in GOM deepwater drilling practices Paula Dittrick Senior Staff Writer

Oil companies and drilling contractors are working together very closely to prevent any future oil spills in the Gulf of Mexico, speakers said Feb. 11 during a forum at Rice University’s Baker Institute about managing the risks of offshore oil exploration. “The best way to deal with an oil spill is to never have one,” said Gary Luquette, president of Chevron North America Exploration & Production Co. “What I wish is we would have an opportunity to demonstrate all our enhanced capability by getting [deepwater drilling] permits and getting back to work.” Luquette has served on various post-Macondo industry task forces. He said industry has worked on prevention, intervention, and recovery following the April 2010 blowout of the Macondo well off Louisiana. BP PLC operated Macondo. An explosion and fire on Transocean Ltd.’s Deepwater Horizon semisubmersible killed 11 crew members and a massive oil spill resulted. Kent Wells, senior vice-president of BP global deepwater response, said industry and regulators need to work together. “Whether you are a regulator or industry, we want to make sure this never happens again,” Wells said. “It’s not about just talking. It’s about being able to work together.”

‘Better prepared’ Wells said industry has changed the way it would respond to a future deepwater oil spill, adding he believes oil companies would be “much better prepared” if another deepwater gulf well were to blow out. “We will be drilling deeper,” Wells said. “We need to be sure our drilling is safe, and our response technology keeps responding. I sense we are committed to that.” Louis Raspino, Pride International Inc. president and chief executive officer, said he sees changes being made in safety procedures and drilling equipment worldwide as a result of the Macondo blowout. “Drilling contractors want to live up to the highest standards possible,” Raspino said. “Our customers want the best equipment possible, and they are willing to pay for it, particularly in the jack up world and also in deep water.” Charles Davidson, Noble Energy Inc. chairman and chief executive officer, said he supports the idea that the drilling fleet needs to change and to be updated. “Many of us already do peer reviews of each other,” Davidson said. “It makes sense to have a repository for best

Oil & Gas Journal | Feb. 21, 2011

practice. We do it in our own organizations all the time. I would support the ability to enhance the sharing of information.” Oil companies also are changing the way they evaluate potential deepwater partners, Davidson said. Previously, an oil company joined a project based upon how good the prospect looked, he said, adding that now oil companies are more likely to check the operator’s preparedness in case of problems before signing on as a partner.

IEA warns of rising oil burden The global oil burden in 2010 was the second-highest following a major recession and could rise this year to levels close to those that have coincided in the past with marked economic slowdowns, warns the International Energy Agency in its latest monthly oil market report. The ‘oil burden’ concept is defined as nominal oil expenditures (demand multiplied by the crude price) divided by nominal gross domestic product (GDP). A rising oil burden will not necessarily cause an economic recession, but it can greatly compound the effect of other economic and financial shocks, IEA said. Economic activity in developed countries of the Organization for Economic Cooperation and Development (OECD) had already been stagnating before oil prices began their final ascent to $147/bbl by July 2008 from about $90/bbl in late 2007. Thus, as much as the Great Recession can be attributed to financial factors, high oil prices were a final nail in the coffin for advanced economies at that time, the report said. The oil burden rose by roughly a quarter in 2010 to 4.1%, the second-highest following a major recession. The highest was reached in 1980, at 8%. For the OECD, this was equivalent to about 0.8% of its collective GDP. Moreover, under current assumptions for global GDP, oil price, and oil demand, the global oil burden could rise to 4.7% in 2011, getting close to levels that have coincided in the past with a marked economic slowdown, IEA said. The Paris-based agency warns of the unhealthy combination of higher oil prices with a fragile economic recovery, emerging inflationary pressures, and instability in the Middle East. IEA’s sensitivity analysis for 2011, holding GDP and oil demand constant, indicates that at current prices of around

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WATCHING THE WORLD ERIC

WATKINS

Oil Diplomacy Editor | Blog at www.ogj.com

Shell’s scenarios to 2050 Royal Dutch Shell PLC released a report entitled “Shell Energy Scenarios to 2050” and just in case anyone thought the future would be rosy, read on. With the subtitle, “An era of volatile transitions,” Shell’s report makes for a fascinating read. One of the more interesting sections of the report takes up the issue of future demand growth. And, like one or two other scenario planners, Shell has its finger on the key movement in saying, “Oil demand is swinging from west to east.” The recession-driven drop in oil demand occurred mainly in the countries in the Organization for Economic Cooperation and Development while developing economies continued their strong growth, Shell said, adding that in the medium term, demand will continue to fall in OECD countries as efficiency measures take effect. But how quickly this will happen?

CAFE standards take time According to Shell, postrecession and post-Copenhagen policy developments in major energy-consuming countries will determine investment in alternative energies and reward consumer behavior towards higher efficiency solutions. “But it will take time for the new Corporate Average Fuel Economy (CAFE) standards in the US to take effect by moving consumers away from SUVs to (plug-in) hybrid vehicles,” Shell says. Congress enacted the CAFE regulations in 1975 to improve the average

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fuel economy of cars and light trucks (as well as trucks, vans, and sport utility vehicles) sold in the US after the 1973 Arab oil embargo. Anyway, just as it will take a while for those changes to take effect in the US, so too will it take time for the EU and Japan to move towards passenger transport electrification.

Chinese cars drive demand Meanwhile, according to Shell, China’s “aggressive motorway building program and rising prosperity” are key to strong demand growth. Demand will also remain strong in the Middle East and in other developing countries. “The net effect is that global oil demand will increase,” according to Shell, which says that meeting this expected growth will rely increasingly on alternative sources of energy supply, like natural gas liquids, biofuels, and unconventional oil. Gas demand will grow strongly, driven by economic growth and the thrust towards lower-carbon fuels. Lower-cost gas-fired power generation will replace some coal-fired generation. Growth in renewable energy also means more gas-fired power plants are required to provide flexibility. The success in unconventional gas production in the US will underpin demand growth. The future may not be altogether rosy, but it is still a future in which the global oil and gas industry will play the leading role.

$90/bbl for WTI, the global oil burden is rapidly approaching the 2008 ‘recession threshold,’ and is already well above the $70-80/bbl price range described as ideal by some producing countries, which would entail an oil burden of 3.5-4%, the report said. A problem can occur when the rate of growth in prices moves out of sync with economic activity. “Following the price shocks of the 1970s and early 1980s, prices were arguably too low for the following two decades, in the sense that they undermined efficiency efforts, encouraged waste (both symbolized by the ascent of SUVs in North America) and removed economic incentives to promote more expensive renewables and other energy sources,” IEA said. By contrast, oil prices rose to unsustainable levels in the mid-2000s, supporting alternative energy sources but also helping to trigger the Great Recession of 2009. “Ideally, it might be better if the growth in both prices and GDP remained relatively proportionate, letting consumers gradually adapt and producers benefit from rising revenues. That may be wishful thinking, however, as subsidies and other market distortions persist, notably in emerging countries,” IEA said.

Chinese hackers accused of cyber attacks on IOCs Eric Watkins Oil Diplomacy Editor

The computer networks of at least five international oil companies, containing bidding plans and other confidential data, have been penetrated by Chinese-based hackers, accord to a report issued by a US computer security firm. “Starting in November 2009, covert cyber attacks were launched against

Oil & Gas Journal | Feb. 21, 2011

GENERAL INTEREST several global oil, energy, and petrochemical companies,” said George Kurtz, chief technical officer of the Santa Clara, Calif.-based McAfee Inc. “The attackers targeted proprietary operations and project-financing information on oil and gas field bids and operations,” said Kurtz, citing his firm’s report, entitled “Global Energy Cyber Attacks: Night Dragon.” According to Kurtz, the information obtained by the Chinese hackers “is highly sensitive and can make or break multibillion dollar deals in this extremely competitive industry.” A McAfee spokesperson told OGJ, “We are not releasing names of victims for confidentiality reasons. We know of the victims because we worked with many of them. Also, in our investigation we saw the documents that were being copied from these companies’ systems.” The McAfee spokesperson told OGJ that, “We have confirmed that five global oil and gas companies were successfully penetrated by the attackers, but we believe that there may have been as many as a dozen.” The spokesperson said, “We believe the attacks started in late 2009 but may have been going on as early as 2007. We see these attacks ongoing today.”

Tools, techniques identified Kurtz said McAfee has identified the tools, techniques, and network activities used by the hackers. “These attacks have involved an elaborate mix of hacking techniques including social engineering, spear-phishing, Windows exploits, Active Directory compromises, and the use of remote administration tools (RATs),” Kurtz said. “We have identified the tools, techniques, and network activities used in these continuing attacks—which we have dubbed Night Dragon—as originating primarily in China,” the McAfee report states. It said that hacking tools “widely available on the Chinese underground” were used to break into a company’s intranet and obtain access to sensitive desktops and servers. “They proceeded to connect to other machines (targeting executives) and exfiltrating e-mail archives and other sensitive documents,” the report said. McAfee noted that “many actors” took part in the attacks, but it identified one individual in Heze City, Shandong Province, who provided the “crucial (command and control) infrastructure to the attackers.” McAfee said, “Although we don’t believe this individual is the mastermind behind these attacks, it is likely this person is aware or has information that can help identify at least some of the individuals, groups, or organizations responsible for these intrusions.” McAfee said, “All of the identified data exfiltration activity occurred from Beijing-based IP addresses and operated inside the victim companies weekdays from 9:00 am to 5:00 pm Beijing time.” As a result, the firm concluded that “the involved indi-

Oil & Gas Journal | Feb. 21, 2011

viduals were ‘company men’ working on a regular job, rather than freelance or unprofessional hackers.” McAfee acknowledged the possibility that “all of these indicators are an elaborate red-herring operation designed to pin the blame for the attacks on Chinese hackers.” But it discounted that possibility as “highly unlikely” due to “strong evidence suggesting that the attackers were based in China.” In Beijing, a spokesman for China’s ministry of foreign affairs said he was not aware of any information on alleged cyber attacks from China on US oil firms. “I’m not aware of the information, but as for these types of reports, we see them quite often,” said Ma Zhaoxu, a spokesman for the Ministry of Foreign Affairs, adding that he thinks “there is nothing new” in the McAfee report.

Study evaluates deepwater Gulf of Mexico overpressure A recent study of 149 deepwater wells in the Gulf of Mexico found dramatic differences in the overpressure of the Lower Tertiary Wilcox play. IHS Inc. and GeoPressure Technology Ltd. made the study to gain an understanding of overpressure in the deepwater gulf in terms of its distribution and potential impacts on future exploration of the region’s petroleum system. The wells studied were in the Alaminos Canyon, Keathley Canyon, Walker Ridge, Garden Banks, Green Canyon, and Atwater Valley areas. Water depths ranged from 4,000 to 10,000 ft. Some wells had vertical TDs greater than 30,000 ft and reservoir pressures in the Wilcox greater than 20,000 psi. Forty-nine of the wells studied penetrated the Wilcox reservoir with the remainder encountering either Lower Miocene sediments or were used to supplement the fracture pressure and mud-weight analysis. IHS estimates that the upside recoverable oil potential of the Lower Tertiary Wilcox trend is 15 billion bbl.

Study findings The study found that all the wells with formation pressure data indicated overpressure with overpressures ranging widely from 9.1 ppg to 15.7 ppg equivalent mud weight across the Miocene and Wilcox. The highest Wilcox overpressures were primarily in eastern Keathley Canyon and across the Walker Ridge areas. The study analyzed the Wilcox data with respect to compartmentalization vs. lateral drainage as an explanation for the overpressure variation observed and also found that the

25

GENERAL INTEREST overpressure in the Miocene affected the subsalt play. The study noted that the area includes high-profile discoveries including Petroleo Brasileiro SA’s Cascade, Chevron Corp.’s St. Malo, and more recently BP PLC’s 2009-10 Tiber well in northwest Keathley Canyon, which are expanding the extent of the play. The play also has had problematic and costly dry holes such as Unocal Corp.’s Sardinia on Keathley Canyon Block 681 and ExxonMobil Corp.’s Hadrian well on Keathley Canyon Block 919. Sam Green, principal technical author of the study for GPT attributed the dry holes to the industry not fully understanding the play in terms of the petroleum system and its impact on the distribution of hydrocarbons. “Part of this problem lies in the fact that the majority of this play is subsalt, with the inherent problems of using seismic data to visualize structures below the salt canopy. Even if traps are identified, and the risks assessed for reservoir quality and charge, variable overpressure regimes exist in the subsalt, which can make drilling these prospects problematic,” Green said. Green added, “As part of this study, we developed a unique set of algorithms to calculate overburden gradients and fracture gradients across the many protraction areas, which aids engineers in the well design and planning process.” According to IHS, the US Gulf of Mexico had 6,269 actively producing wells at the end of October 2010. Of these 486 were deepwater wells (wells in 1,312 ft or greater water depth). So far in 2011, the US Gulf of Mexico has produced 820 million boe, of which 516 million boe or 70% has come from deepwater wells, IHS noted.

CNRL targets oil sands upgrader restart Canadian Natural Resources Ltd. (CNRL) said the upgrader coke drums damaged in a fire on Jan. 6 at its Horizon oil sands facility in northern Alberta may resume operations in the second and third quarters. Its preliminary target for restarting Coke Drums 2A and 2B is the second quarter. This would allow the upgrader to produce 55,000 b/d of synthetic crude oil, which is half of the plant’s capacity. Its target for restarting the remaining two coke drums (1A and 1B) is the third quarter. CNRL said its internal investigation team has determined that the fire resulted from opening the top unheading valve on an active low-pressure coke drum. This allowed the release of hot hydrocarbons within the coker cutting deck building, which was followed by ignition and the fire. Its investigation team is continuing to establish the how and why such an event occurred and plans to complete its findings in March.

26

Determinations To date it has determined that: • The coke drums appear to be serviceable. • Instrumentation to many areas of the plant remains intact. • Damage to the derrick structure over Coke Drums 1A and 1B appears to be minimal, but will require the derrick to be replaced. • The limited damage to the rails that guide the cutting tools over Coke Drum 2B will require repair before Coke Drums 2A and 2B can be restarted. • Damage to the structural beams supporting both derrick structures over the coke drums will require limited repair or replacement. • The control station used for cutting of Coke Drums 1A and 1B will need to be replaced. • Pipe work above the coke drums will require inspection and testing (x-ray and or pressure testing) to determine if certain pipe sections need to be replaced. • Collateral freeze damage occurred after the fire. Some pumps and more importantly, the air coolers and furnace tubes associated with the coke drum operation will require extensive repair or replacement. CNRL initiated material and equipment orders in January to replace components above Coke Drums 1A and 1B. It plans to use any excess material not needed for repair in the future expansion that includes the installation of Coke Drums 3A and 3B. The company said it has not determined a detailed cost estimate for the repair and rebuild, although it believes that costs will not exceed $250 million. The company has insurance to cover the cost of the repair and rebuild, as well as, business interruption insurance subject to a waiting period, to alleviate ongoing operating costs thereby mitigating financial impacts of the incident.

Upcoming maintenance CNRL also will undertake opportune maintenance of the facility during the shutdown. The maintenance includes: • Bringing forward maintenance activities related to a 5-day outage originally targeted for April. • Bringing forward about 25% of a turnaround planned for 2012, including required regulatory inspections of equipment. • Determining the feasibility of accelerating more of this work forward, given the better understanding of timelines to the restoration of production. • Implementing projects to reduce belt wear and increase vibrating screen reliability in the bitumen production plants. CNRL said the Horizon expansion continues with the construction and commissioning of the third ore preparation plant along with the associated hydrotransport pipelines schedule for completion in the fourth quarter. It also said engineering work for the expansion as originally targeted for 2011 also continues on schedule.

Oil & Gas Journal | Feb. 21, 2011

GENERAL INTEREST

Intertanko: Shipping ‘under threat’ from piracy Eric Watkins Oil Diplomacy Editor

Piracy in the Indian Ocean is rapidly getting out of control and is threatening to disrupt flows of oil to markets in the US and around the world, according to an oil shipping industry association. “The piracy situation is now spinning out of control into the entire Indian Ocean right to the top of the Arabian Sea over 1,000 miles from the coast of Somalia,” said Joe Angelo, managing director of the International Association of Independent Tanker Owners (Intertanko). “If piracy in the Indian Ocean is left unabated, it will strangle these crucial shipping lanes with the potential to severely disrupt oil flows to the US and to the rest of the world,” Angelo said. Angelo’s remarks came after pirates off the coast of Somalia captured a Greek-flagged supertanker carrying nearly 300,000 tons of crude oil to the Gulf of Mexico, the second successful attack against an oil tanker by sea bandits in as many days. The Irene SL was sailing 360 km east of Oman carrying 266,000 tons of crude and a crew of 7 Greeks, 17 Filipinos, and 1 Georgian when it was attacked, officials said. The value of the oil on board was estimated at $150 million.

Intertanko underlined the potential gravity of the hijacking, saying that that the Irene SL’s cargo of Kuwaiti crude represents nearly 20% of total US daily oil imports. This one cargo is 12% of all oil coming out of the Middle East Gulf each day, and 5% of total daily world seaborne oil supply. “The hijacking by pirates of 2 million bbl of Kuwaiti crude oil destined for the US in a large Greek tanker in the middle of the main sea lanes coming from the Middle East Gulf marks a significant shift in the impact of the piracy crisis in the Indian Ocean,” Intertanko said. That view was shared by John Drake, a senior risk consultant for London-based security firm AKE, who said the situation is only going to worsen, largely due to the payment of ransoms. “With rising ransoms, pirates are able to hire more men, bribe more officials and wait longer periods to negotiate,” Drake said. The Irene SL is the second oil tanker to be attacked in that region in 2 days. On Feb. 8, Somali pirates firing small arms and rocket-propelled grenades hijacked the Savina Caylyn, an Italian-flagged Aframax crude tanker transiting the Indian Ocean to Malaysia from Sudan with 80,000 tonnes of oil. After that attack, Adm. Giampaolo Di Paola, chairman of NATO’s Military Committee, said piracy “is spreading across the entire Indian Ocean, a fundamental crossroads for world traffic.”

Al-Shahristani: Baghdad wants changes in oil deals Eric Watkins Oil Diplomacy Editor

Iraq’s Deputy Prime Minister Hussain Al-Shahristani, who oversees energy for the government, said Kurdistan’s production-sharing contracts (PSCs) with international oil companies (IOCs) must be turned into service contracts in order to be approved by the central government. “All the contracts we [central government] have signed were service contracts, and we expect that all these [Kurdish PSCs] should be amended to be service contracts in order to be approved,” Al-Shahristani said, contradicting earlier remarks by Prime Minister Nuri Al-Maliki. Just a day earlier, in an interview with the AFP news agency, Al-Maliki appeared to signal an end to the long-running feud between Baghdad and the Kurdish Regional Government over the status of agreements signed with IOCs. “The Oil Ministry accepted these contracts because the nature of the extraction in Kurdistan is different from Basra,” Al-Maliki told AFP. “There is a need for bigger efforts there, while in Basra it [oil] is closer to the surface. It’s difficult to

Oil & Gas Journal | Feb. 21, 2011

have service contracts in Kurdistan, but it’s normal to have them in southern Iraq,” he added. “In fact, this was a misunderstanding and misquoting by the AFP of what the prime minister said,” Al-Shahristani told Reuters news service in a later interview. AFP said it stood by its story, despite the comments by Al-Shahristani. “Mr. Maliki was not misquoted, and we stand by our story in full. In no part of our interview did Mr. Maliki suggest revising the Kurdish contracts into service agreements,” said AFP Baghdad Bureau Chief Sammy Ketz, who conducted the interview. According to analyst IHS Global Insight, it is “virtually impossible” that AFP would have misquoted or misinterpreted Al-Maliki, given the rather extensive arguments he was giving as to why dual contract framework systems were justified. The analyst suggested that Al-Maliki might have been trying to create facts on the ground, or at least send up a test balloon, by increasingly tying himself to a solution, which is likely to be along the lines of what he has negotiated with the Kurds.

27

EQUIPMENT | SOFTWARE | LITERATURE

NEW REAMING TOOL The new Turborunner 5 in. completion reaming tool aids first time placement of the completion or liners at target depth. The company says the tool is suited for all rigs and easy to deploy. It helps reduce risk at depth, time, and costs, the firm points out. A 7 in. version of the tool was introduced last year. The 5 in. tool is specifically designed

to support smaller openhole completion placement, combines optimized washing with a rotational reaming capability, and avoids rotation of the completion string itself. The low operating pressure is suited for integration with completion systems. Product launch. During the central North Sea project for CNR International UK Ltd., Aberdeen, that successfully

launched the 5 in. tool, placement of the liner was seen to be a significant risk due to the stability of the sand shale sequences in the long openhole section. The CNR International drilling team selected the Turborunner to provide an operational advantage in the event of difficulties in running the liner. The tool was run on a 5,500 ft long 4½ in. liner into a 6 in. open hole. Upon reaching planned depth, the tool and the liner were successfully cemented in place. The maker notes that this application typifies the challenges faced by industry’s brown field opportunities. On one side, the challenge stems from balancing mud weights, particularly in long horizontals, to support the borehole. On the other, the challenge is to deliver what can be an expensive completion to target depth without rotation, premature setting, or damage. Source: Deep Casing Tools, Unit 2, 51 York St., AB11 5DP, Aberdeen, UK.

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28

Oil & Gas Journal | Feb. 21, 2011

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STATISTICS IMPORTS OF CRUDE AND PRODUCTS — Districts 1-4 — — District 5 — ———— Total US ———— 2-4 1-28 2-4 1-28 2-4 1-28 *2-5 2011 2011 2011 2011 2011 2011 2010 ––––––––––––––––––––––––— 1,000 b/d ––––––––––––––––––––––––— Total motor gasoline ............. Mo. gas. blending comp. ..... Distillate............................... Residual .............................. Jet fuel-kerosine .................. Propane-propylene .............. Other ...................................

1,021 873 296 458 58 81 57

1,159 1,032 318 261 74 138 (238)

16 16 0 0 3 (9) 77

14 14 0 23 53 (80) 135

1,037 889 296 458 61 72 134

1,173 1,046 318 284 127 58 (103)

1,168 889 630 576 109 312 (290)

Total products ......................

2,844

2,744

103

159

2,947

2,903

3,394

Total crude ...........................

7,814

7,746

1,096

1,267

8,910

9,013

8,342

Total imports ........................

10,658

10,490

1,199

1,426

11,857

11,916

11,736

*Revised. Source: US Energy Information Administration Data available in OGJ Online Research Center.

PURVIN & GERTZ LNG NETBACKS—FEB. 11, 2011 –––––––––––––––––––––––––––– Liquefaction plant –––––––––––––––––––––––––––––––– Algeria Malaysia Nigeria Austr. NW Shelf Qatar Trinidad –––––––––––––––––––––––––––––––– $/MMbtu ––––––––––––––––––––––––––––––––––––

Receiving terminal Barcelona Everett Isle of Grain Lake Charles Sodegaura Zeebrugge

8.46 4.05 7.45 1.90 6.28 7.80

6.21 1.89 5.11 -0.11 8.66 5.49

7.57 3.67 6.74 1.66 6.50 7.07

6.11 1.99 4.98 0.10 8.34 5.41

6.84 2.44 5.73 0.34 7.54 6.09

7.49 4.35 6.78 2.52 5.52 7.14

Additional analysis of market trends is available through OGJ Online, Oil & Gas Journal’s electronic information source, at http://www.ogj.com.

OGJ CRACK SPREAD *2-11-11 *2-12-10 Change Change, ———–—$/bbl ——–—— % SPOT PRICES Product value Brent crude Crack spread

107.33 98.94 8.38

FUTURES MARKET PRICES One month Product value 108.27 Light sweet crude 86.69 Crack spread 21.58 Six month Product value 113.02 Light sweet crude 96.63 Crack spread 16.39

80.39 70.75 9.64

26.93 28.19 -1.26

33.5 39.8 -13.1

80.90

27.37

33.8

73.91 6.99

12.78 14.59

17.3 208.9

85.26

27.76

32.6

76.28 8.98

20.35 7.41

26.7 82.6

*Average for week ending. Source: Oil & Gas Journal Data available in OGJ Online Research Center.

Definitions, see OGJ Apr. 9, 2007, p. 57. Source: Purvin & Gertz Inc. Data available in OGJ Online Research Center.

CRUDE AND PRODUCT STOCKS —–– Motor gasoline —–– Blending Jet fuel, ————— Fuel oils ————— PropaneCrude oil Total comp.1 kerosine Distillate Residual propylene ———————————————————————————— 1,000 bbl —————————————————————————

District PADD 1 ..................................... PADD 2 ..................................... PADD 3 ..................................... PADD 4 ..................................... PADD 5 .....................................

11,076 97,819 170,782 16,102 49,278

64,439 53,995 81,359 6,970 34,128

52,556 28,369 55,570 2,361 29,982

9,744 7,979 13,968 788 10,459

57,752 33,756 55,919 3,438 13,501

12,593 1,493 20,515 188 4,359

3,220 14,965 15,929 1 1,015 —

Feb. 4, 2011 ............................. Jan. 28, 2011 ............................ Feb. 5, 20102 .............................

345,057 343,160 331,418

240,891 236,229 230,445

168,838 167,685 144,740

42,938 43,769 42,374

164,366 164,078 156,192

39,148 40,141 39,431

35,129 37,929 32,588

1

Includes PADD 5. 2Revised. Source: US Energy Information Administration Data available in OGJ Online Research Center.

REFINERY REPORT—FEB. 4, 2011 REFINERY –––––– OPERATIONS –––––– Gross Crude oil inputs inputs ––––––– 1,000 b/d ––––––––

District

–––––––––––––––––––––––––––– REFINERY OUTPUT ––––––––––––––––––––––––––– Total motor Jet fuel, ––––––– Fuel oils –––––––– Propanegasoline kerosine Distillate Residual propylene –––––––––––––––––––––––––––––––– 1,000 b/d –––––––––––––––––––––––––––––––

PADD 1 .............................................. PADD 2 .............................................. PADD 3 .............................................. PADD 4 .............................................. PADD 5 ..............................................

1,112 3,482 7,431 541 2,341

1,129 3,446 7,077 539 2,153

2,756 2,254 2,039 295 1,547

96 212 643 26 378

386 1,022 2,273 180 401

52 46 326 9 110

41 234 704 1 60 —

Feb. 4, 2011 ........................................ Jan. 28, 2011 ...................................... Feb. 5, 20102.......................................

14,907 14,860 13,993

14,344 14,302 13,590

8,891 8,775 8,807

1,355 1,400 1,219

4,262 4,182 3,413

543 429 579

1,039 1,052 1,069

17,594 Operable capacity 1

84.7% utilization rate

2

Includes PADD 5. Revised. Source: US Energy Information Administration Data available in OGJ Online Research Center.

30

Oil & Gas Journal | Feb. 21, 2011

STATISTICS OGJ GASOLINE PRICES

BAKER HUGHES RIG COUNT

Price Pump Pump ex tax price* price 2-9-11 2-9-11 2-10-10 ————— ¢/gal ————— (Approx. prices for self-service unleaded gasoline) Atlanta .......................... 265.3 304.5 Baltimore ...................... 267.0 308.9 Boston ........................... 261.3 303.2 Buffalo .......................... 251.7 314.9 Miami ............................ 265.1 317.5 Newark .......................... 276.0 308.9 New York........................ 263.3 326.5 Norfolk........................... 264.6 302.5 Philadelphia .................. 256.2 306.9 Pittsburgh ..................... 267.2 317.9 Wash., DC...................... 276.3 318.2 PAD I avg .................. 264.9 311.8

260.3 265.9 262.0 276.9 277.6 259.6 275.3 256.9 270.6 269.3 271.3 267.8

Chicago ......................... Cleveland ...................... Des Moines .................... Detroit ........................... Indianapolis .................. Kansas City ................... Louisville ....................... Memphis ....................... Milwaukee ..................... Minn.-St. Paul ............... Oklahoma City ............... Omaha .......................... St. Louis ........................ Tulsa ............................. Wichita .......................... PAD II avg .................

284.7 261.0 271.3 270.9 268.5 264.7 269.2 256.6 262.0 267.1 259.8 261.6 272.4 262.3 256.8 265.9

342.7 307.4 311.7 325.1 321.6 300.4 310.1 296.4 313.3 312.7 295.2 308.0 308.1 297.7 300.2 310.0

296.2 286.1 261.2 288.2 279.1 256.1 269.1 157.8 277.2 261.2 236.1 260.1 248.1 234.1 246.2 257.1

Albuquerque .................. Birmingham .................. Dallas-Fort Worth .......... Houston ......................... Little Rock ..................... New Orleans .................. San Antonio ................... PAD III avg ................

258.3 259.9 257.8 256.5 257.3 261.5 263.1 259.2

295.5 299.2 296.2 294.9 297.5 299.9 301.5 297.8

256.4 255.6 249.7 251.7 247.7 255.9 259.4 253.8

Cheyenne....................... Denver ........................... Salt Lake City ................ PAD IV avg ................

261.4 263.6 256.7 260.6

293.8 304.0 299.6 299.1

252.4 275.5 257.5 261.8

Los Angeles ................... Phoenix.......................... Portland ........................ San Diego ...................... San Francisco................ Seattle........................... PAD V avg ................. Week’s avg. .................. Jan. avg......................... Dec. avg........................ 2011 to date ................. 2010 to date .................

267.9 274.7 271.9 270.9 291.7 280.4 276.2 265.6 261.9 249.1 262.7 223.5

335.3 312.1 315.3 338.3 359.1 336.3 332.7 310.9 307.2 294.4 307.9 268.3

295.6 276.8 289.0 296.9 299.0 292.1 291.6 264.6 269.7 259.2 ---

*

Includes state and federal motor fuel taxes and state sales tax. Local governments may impose additional taxes. Source: Oil & Gas Journal. Data available in OGJ Online Research Center.

REFINED PRODUCT PRICES 2-4-11 ¢/gal

2-4-11 ¢/gal

Spot market product prices Motor gasoline No. 2 Distillate (Conventional-regular) Low sulfur diesel fuel New York Harbor ......... 241.30 New York Harbor ......... Gulf Coast .................. 237.80 Gulf Coast .................. Los Angeles ................ Motor gasoline Kerosine jet fuel (RBOB-regular) New York Harbor ......... 251.80 Gulf Coast ..................

275.30 271.80 272.50 275.80

Propane No. 2 heating oil New York Harbor ......... 270.40 Mt. Belvieu ................. 132.30

OGJ PRODUCTION REPORT

2-11-11

2-12-10

Alabama............................................ Alaska ............................................... Arkansas ........................................... California .......................................... Land................................................ Offshore .......................................... Colorado ............................................ Florida ............................................... Illinois ............................................... Indiana.............................................. Kansas .............................................. Kentucky............................................ Louisiana .......................................... N. Land ........................................... S. Inland waters .............................. S. Land............................................ Offshore .......................................... Maryland ........................................... Michigan ........................................... Mississippi ........................................ Montana ............................................ Nebraska ........................................... New Mexico........................................ New York............................................ North Dakota ..................................... Ohio................................................... Oklahoma .......................................... Pennsylvania ..................................... South Dakota..................................... Texas ................................................. Offshore .......................................... Inland waters .................................. Dist. 1 ............................................. Dist. 2 ............................................. Dist. 3 ............................................. Dist. 4 ............................................. Dist. 5 ............................................. Dist. 6 ............................................. Dist. 7B ........................................... Dist. 7C ........................................... Dist. 8 ............................................. Dist. 8A ........................................... Dist. 9 ............................................. Dist. 10 ........................................... Utah .................................................. West Virginia ..................................... Wyoming............................................ Others—NV-4 ...................................

8 6 35 38 38 0 60 1 0 0 23 4 173 115 15 20 23 0 3 9 8 1 79 0 150 8 159 108 0 751 3 1 70 49 44 44 74 56 5 61 213 28 33 70 27 20 46 4

4 10 41 25 24 1 52 1 1 2 18 8 205 136 13 17 39 0 0 10 6 2 53 1 81 7 116 66 0 546 4 0 24 20 38 47 76 71 10 52 108 17 33 46 24 23 38 6

Total US ........................................ Total Canada ................................

1,721 630

1,346 551

Grand total ................................... US Oil rigs ......................................... US Gas rigs ....................................... Total US offshore ............................... Total US cum. avg. YTD .....................

2,351 805 906 26 1,718

1

(Crude oil and lease condensate) Alabama ................................. 18 Alaska .................................... 629 California ............................... 618 Colorado ................................. 71 Florida .................................... 3 Illinois .................................... 25 Kansas ................................... 109 Louisiana ............................... 1,560 Michigan ................................ 14 Mississippi ............................. 61 Montana ................................. 68 New Mexico ............................. 174 North Dakota .......................... 347 Oklahoma ............................... 189 Texas ...................................... 1,460 Utah ....................................... 62 Wyoming ................................. 137 All others ................................ 66 Total .................................. 5,611 1 OGJ estimate. 2Revised. Source: Oil & Gas Journal. Data available in OGJ Online Research Center.

Alaska-North Slope 27° ......................................... South Louisiana Sweet .......................................... California-Midway Sunset 13° .............................. Lost Hills 30° ........................................................ Wyoming Sweet ..................................................... East Texas Sweet ................................................... West Texas Sour 34° .............................................. West Texas Intermediate........................................ Oklahoma Sweet.................................................... Texas Upper Gulf Coast ......................................... Michigan Sour ....................................................... Kansas Common ................................................... North Dakota Sweet ...............................................

Data available in OGJ Online Research Center.

WORLD CRUDE PRICES

1,897 443 891 45 1,277

SMITH RIG COUNT 2-11-11 Percent footage*

0-2,500 2,501-5,000 5,001-7,500 7,501-10,000 10,001-12,500 12,501-15,000 15,001-17,500 17,501-20,000 20,001-over Total

169 54 141 321 382 282 164 152 58 1,723

4.1 55.5 21.9 2.8 11.2 3.1 ---7.4

INLAND LAND OFFSHORE

16 1,689 18

2-12-10 Rig Percent count footage* 101 48 134 265 276 210 185 78 45 1,342 14 1,285 43

*Rigs employed under footage contracts. Definitions, see OGJ Sept. 18, 2006, p. 42.

3.9 68.7 28.3 7.5 9.7 2.8 ---9.5

2-11-11 $/bbl* 85.74 91.00 82.45 91.05 76.83 81.50 77.00 82.00 82.00 75.00 74.00 81.00 70.50

*Current major refiner’s posted prices except North Slope lags 2 months. 40° gravity crude unless differing gravity is shown. Source: Oil & Gas Journal.

Source: Baker Hughes Inc. Data available in OGJ Online Research Center.

Rig count

17 638 617 73 4 23 109 1,538 18 65 55 167 249 181 1,423 59 139 71 5,446

US CRUDE PRICES

Rotary rigs from spudding in to total depth. Definitions, see OGJ Sept. 18, 2006, p. 42.

Proposed depth, ft

2 2-11-11 2-12-10 –—— 1,000 b/d —–—

$/bbl1

2-4-11

United Kingdom-Brent 38° ..................................... Russia-Urals 32° ................................................... Saudi Light 34° ...................................................... Dubai Fateh 32° ..................................................... Algeria Saharan 44°............................................... Nigeria-Bonny Light 37° ........................................ Indonesia-Minas 34°.............................................. Venezuela-Tia Juana Light 31° ............................... Mexico-Isthmus 33° ............................................... OPEC basket........................................................... Total OPEC2 ............................................................ Total non-OPEC2 ..................................................... Total world2 ............................................................ US imports3

99.70 97.05 97.66 95.15 101.39 102.21 102.61 93.18 93.07 97.92 97.28 93.60 95.71 91.00 -

-

1

Estimated contract prices. 2Average price (FOB) weighted by estimated export volume. 3Average price (FOB) weighted by estimated import volume. Source: DOE Weekly Petroleum Status Report. Data available in OGJ Online Research Center.

US NATURAL GAS STORAGE1 2-4-11

Producing region ................ Consuming region east ...... Consuming region west ...... Total US ............................. Total US2 ............................

1-28-11

2-4-10

–——––—— bcf —––——– 789 856 745 1,055 1,165 1,152 300 332 346 2,144 2,353 2,243 Change, Nov. 10 Nov. 09 % 3,773

3,837

Change,

% 5.9 -8.4 -13.3 -4.4

-1.7

1

Source: DOE Weekly Petroleum Status Report. Data available in OGJ Online Research Center.

Oil & Gas Journal | Feb. 21, 2011

Source: Smith International Inc. Data available in OGJ Online Research Center.

Working gas. 2At end of period. Source: Energy Information Administration Data available in OGJ Online Research Center.

31

STATISTICS INTERNATIONAL RIG COUNT ––––––– Jan. 2011 –––––– Land Off. Total

Region

WESTERN HEMISPHERE

Argentina ................................ Bolivia ..................................... Brazil....................................... Canada ................................... Chile........................................ Colombia ................................. Ecuador ................................... Mexico ..................................... Peru......................................... Trinidad ................................... United States .......................... Venezuela ................................ Other ....................................... Subtotal ..................................

OIL IMPORT FREIGHT COSTS* Jan. 2010 Total

67 — 7 — 36 39 562 3 2 — 54 — 11 — 61 18 6 3 1 — 1,686 26 79 15 3 1 --------------- --------------2,574 104

67 58 7 2 75 64 564 459 2 2 54 34 11 10 79 125 9 9 1 3 1,711 1,267 94 65 4 2 --------------- --------------2,679 2,099

5 9 1 4 — 32 83 32 47 16 1 — — 9 2 — 5 — 5 — 7 1 — — 3 9 — 15 — — --------------- --------------159 127

14 17 5 4 32 17 115 101 63 58 1 3 9 13 2 5 5 6 5 3 8 4 — — 12 12 15 10 — — --------------- --------------286 253

32 — 2 3 — 14 7 — 3 3 --------------64

— 8 1 1 — 1 7 — — 4 --------------22

32 8 3 4 — 15 14 — 3 7 --------------86

18 11 5 2 — 16 9 — 5 8 --------------74

8 — 51 — — — 25 43 15 3 51 — 31 10 3 --------------240

3 1 9 — — — — — — 8 8 — — — — --------------29

11 1 60 — — — 25 43 15 11 59 — 31 10 3 --------------269

11 1 55 — — — 21 45 18 8 68 — 19 12 2 --------------260

— 2 1 7 3 5 2 — 6 14 12 2 9 --------------63 3,100

— — — — — 1 5 23 1 — 1 21 2 --------------54 336

— 2 1 7 3 6 7 23 7 14 13 23 11 --------------117 3,437

1 3 1 5 1 4 4 22 3 9 7 15 11 --------------86 2,772

ASIA-PACIFIC Australia ................................. Brunei ..................................... China-offshore ........................ India........................................ Indonesia ................................ Japan ...................................... Malaysia.................................. Myanmar ................................. New Zealand ........................... Papua New Guinea .................. Philippines .............................. Taiwan..................................... Thailand .................................. Vietnam................................... Other ....................................... Subtotal ..................................

AFRICA Algeria..................................... Angola ..................................... Congo ...................................... Gabon...................................... Kenya ...................................... Libya ....................................... Nigeria .................................... South Africa ............................ Tunisia .................................... Other ....................................... Subtotal ..................................

Source

Discharge

Cargo

Cargo size, 1,000 bbl

Freight (Spot rate) worldscale

$/bbl

Caribbean Caribbean Caribbean N. Europe N. Europe W. Africa Persian Gulf W. Africa Persian Gulf Persian Gulf

New York Houston Houston New York Houston Houston Houston N. Europe N. Europe Japan

Dist. Resid. Resid. Dist. Crude Crude Crude Crude Crude Crude

200 380 500 200 400 910 1,900 910 1,900 1,750

— 136 117 169 129 62 34 66 35 53

— 1.37 1.17 2.38 2.66 1.42 1.46 1.10 1.10 1.32

*Jan. 2011 average. Source: Drewry Shipping Consultants Ltd. Data available in OGJ Online Research Center.

WATERBORNE ENERGY INC. US LNG IMPORTS Change Jan. Dec. Jan. 2011 2010 2009 ————— MMcf ————

Country

PROPANE PRICES Dec. Jan. Dec. Jan. 2010 2011 2009 2010 ——–—––––––––– ¢/gal —––—–––––——–

from a year ago, %

Egypt Nigeria Norway Peru Qatar Trinidad and Tobago Yemen

2,930 0 5,780 3,200 13,280

0 0 0 6,440 4,620

16,810 0 5,820 0 11,900

— — — — 11.6

Mont Belvieu Conway Northwest Europe

19,740 2,790

18,440 2,930

21,820 0

-9.5 —

Source: EIA Weekly Petroleum Status Report Data available in OGJ Online Research Center.

Total

47,720

32,430

56,350

-15.3

129.60 NA

134.80 NA

119.00 NA

131.20 NA

NA

NA

NA

NA

Source: Waterborne Energy Inc. Data available in OGJ Online Research Center.

MIDDLE EAST Abu Dhabi ............................... Dubai ...................................... Egypt ....................................... Iran ......................................... Iraq ......................................... Jordan ..................................... Kuwait ..................................... Oman ...................................... Pakistan .................................. Qatar ....................................... Saudi Arabia ........................... Sudan...................................... Syria ........................................ Yemen ..................................... Other ....................................... Subtotal .................................. EUROPE Croatia .................................... Denmark.................................. France ..................................... Germany .................................. Hungary................................... Italy ......................................... Netherlands............................. Norway .................................... Poland ..................................... Romania.................................. Turkey ...................................... UK ........................................... Other ....................................... Subtotal .................................. Total ........................................

MUSE, STANCIL & CO. REFINING MARGINS US US US US North– South– Gulf East Mid– West west east Coast Coast west Coast Europe Asia ––––––––––––––––––––––––––––––––––– $/bbl ––––––––––––––––––––––––––––––––––– January 2011 Product revenues Feedstock costs Gross margin Fixed costs Variable costs Cash operating margin December 2010 YTD avg. 2009 avg. 2008 avg. 2007 avg.

106.75 –96.85

103.63 –97.90

103.52 –88.33

105.40 –90.40

104.77 –96.23

102.58 –98.06

9.90 –2.20 –1.58

5.73 –2.55 –1.14

15.19 –2.48 –1.43

15.00 –2.89 –2.41

8.54 –2.48 –2.07

4.52 –1.93 –1.82

6.12 4.46 6.12 4.46 3.04 9.09

2.04 2.06 2.04 1.82 0.18 –22.64

11.28 9.70 11.28 8.15 5.23 11.26

9.70 10.22 9.70 9.39 10.30 13.54

3.99 4.08 3.99 3.50 2.01 7.34

0.77 0.86 0.77 0.28 –1.35 1.77

Source: Muse, Stancil & Co. See OGJ, Jan. 15, 2001, p. 46 Data available in OGJ Online Research Center.

Definitions, see OGJ Sept. 18, 2006, p. 42. Source: Baker Hughes Inc. Data available in OGJ Online Research Center.

MUSE, STANCIL & CO. GASOLINE MARKETING MARGINS December 2010 Retail price Taxes Wholesale price Spot price Retail margin Wholesale margin Gross marketing margin November 2010 YTD avg. 2009 avg. 2008 avg. 2007 avg.

MUSE, STANCIL & CO. ETHYLENE MARGINS

Los Chicago* Houston Angeles New York ———–———— ¢/gal ————–——— 315.38 57.85 239.61 250.78 17.81 -11.17 6.64 4.05 18.43 23.46 33.11 26.96

279.24 38.40 240.77 228.45 0.07 12.32 12.39 15.84 21.56 21.99 32.15 23.12

324.06 61.29 244.84 239.82 17.93 5.02 22.95 29.18 29.53 26.60 27.22 19.05

319.36 52.23 251.36 234.47 15.77 16.89 32.66 26.99 33.26 30.61 41.81 31.10

*The wholesale price shown for Chicago is the RFG price utilized for the wholesale margin. The Chicago retail margin includes a weighted average of RFG and conventional wholesale purchases. Source: Muse, Stancil & Co. See OGJ, Oct. 15, 2001, p. 46. Data available in OGJ Online Research Center. Note: Margins include ethanol blending in all markets.

32

MUSE, STANCIL & CO. US GAS PROCESSING MARGINS

Ethane Propane Naphtha ——–——– ¢/lb ethylene –—–———

Gulf Mid– Coast continent ———–– $/Mcf —–—–—

January 2011 January 2011 Product revenues Feedstock costs

60.17 -25.26

105.64 -76.60

134.13 -129.20

Gross margin Fixed costs Variable costs

34.91 -5.38 -3.44

29.04 -6.36 -4.00

4.93 -7.19 -5.27

Cash operating margin

26.09

18.68

-7.53

December 2010 YTD avg. 2009 avg. 2008 avg. 2007 avg.

17.83 26.09 21.98 12.93 21.00

8.09 18.68 17.34 9.63 22.89

-20.68 -7.53 -5.24 -13.72 -5.91

Source: Muse, Stancil & Co. See OGJ, Sept. 16, 2002, p. 46. Data available in OGJ Online Research Center.

Gross revenue Gas Liquids Gas purchase cost Operating costs Cash operating margin December 2010 YTD avg. 2009 avg. 2008 avg. 2007 avg. Breakeven producer payment, % of liquids

4.30 1.36 4.79 0.07 0.81

3.94 3.59 5.28 0.15 2.10

0.83 0.81 0.67 0.41 0.45

2.22 2.10 1.73 1.14 1.61

39%

40%

Source: Muse, Stancil & Co. See OGJ, May 21, 2001, p. 54. Data available in OGJ Online Research Center.

Oil & Gas Journal | Feb. 21, 2011

MARKETPLACE DEADLINE for MARKETPLACE ADVERTISING is 10 A.M. Tuesday preceding date of publication. Address advertising inquiries to MARKETPLACE SALES, 1-800-331-4463 ext. 6301, 918-832-9301, fax 918-832-9201, email: [email protected]. • DISPLAY MARKETPLACE: $390 per column inch, one issue. 10% discount three or more CONSECUTIVE issues. No extra charge for blind box in care. Subject to agency commission. No 2% cash discount.

• UNDISPLAYED MARKETPLACE: $4.00 per word per issue. 10% discount for three or more CONSECUTIVE issues. $80.00 minimum charge per insertion. Charge for blind box service is $60.00 No agency commission, no 2% cash discount. Centered/Bold heading, $12.00 extra. • COMPANY LOGO: Available with undisplayed ad for $85.00. Logo will be centered above copy with a maximum height of 3/8 inch. • NO SPECIAL POSITION AVAILABLE IN MARKETPLACE SECTION. • PAYMENT MUST ACCOMPANY ORDER FOR MARKETPLACE AD.

EMP LO YMENT

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EOG Resources Inc. subscribes to a smoke-free/drug & alcohol free workplace. EOE, M/F/D/V

Cameron International Corporation in Houston, TX seeks Supply Chain Specialist. Qualified applicants will possess a Master’s degree in Mechanical Engineering, Logistics or Supply Chain Management or closely related field and two (2) years of experience in mid-level negotiations with suppliers regarding pricing, delivery and performance, procurement processes and cost consciousness and strategic thinking. Email resume to [email protected]. Resume must include job code MN-1301-23C. BU SIN ESS O PPO RTUN ITI ES 200 Million Barrels For Sale Shallow One dollar per barrel. Ready to go. Need financial partner. 503-253-7400, Fax 503-253-8888 Email: [email protected]

Intertek USA, Inc. in Houston, Texas seeks Client Services Technical Specialist. Qualified applicants will possess a Bachelor’s degree in Physical Sciences, Marine Engineering or Chemistry and three (3) years of experience in survey, inspection and testing of oil, gas and chemicals. Experience must include global operations and experience in monitoring of ship/shore and ship-to-ship surveys. Resume must be emailed to: [email protected]. Resume must include job code: KCHQ00532MP

EMP LO YMENT SBM Atlantia, Inc. in Houston, TX seeks Project Engineer. Qualified applicants will possess a BS in Naval Architecture or related engineering discipline and five years of experience in the job offered or five years of experience in offshore construction techniques, planning, and budget control methods. E-mail resume to [email protected]. Must put job code 3052009 on resume. CONSULTANT BRAZIL: EXPETRO CAN BE YOUR GUIDE INTO THIS NEW INVESTMENT FRONTIER. EFFECTIVE STRATEGIC ANALYSIS, QUALITY TECHNICAL SERVICES, COMPELLING ECONOMIC/REGULATORY ADVICE, AND REALISTIC APPROACH REGARDING BRAZILIAN BUSINESS ENVIRONMENT-120 SPECIALISTS UPSTREAM, DOWNSTREAM GAS AND BIOFUELS. EMAIL: [email protected] WEB: WWW.EXPETRO.COM.BR-RIO DE JANEIRO, BRAZIL

EDU CATI ON Introduction to Petroleum Refining, Technology and Economics: Colorado School of Mines. April 20-22 and Sept. 2123, 2011. Overview of the integrated fuels refinery of today, from the crude oil feed to the finished products. Emphasis is placed on transportation fuels production and the refinery process used. Introduction to Petroleum Refining Economics: April 27-29 and Sept. 28-30, 2011. Overview of petroleum refining technology and economics with a focus on transportation fuels refineries. Contact: 303/279-5563, fax: 303/277-8683, email: [email protected], www.mines.edu/ Educational_Outreach EQU IP MEN T FOR SALE

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THE EDITOR’S PERSPECTIVE

MARKET JOURNAL

Though regulations surge, not all, says president, are bad

Brent tops WTI as benchmark

by Bob Tippee, Editor To expressions of concern that the US faces, in one business leader’s words, a “regulatory tsunami,” President Barack Obama responds, “Not all regulations are bad.” Obama smacked that straw man during a peace foray Feb. 7 at the US Chamber of Commerce in Washington. The chamber has steadfastly criticized the administration’s urge to regulate. Chamber Pres. and CEO Thomas J. Donohue used the “tsunami” metaphor in a Jan. 11 speech in which he decried “an unprecedented explosion of new regulatory activity.” Donohue pointed to: • Health care reform, which “creates 159 new agencies, commissions, panels, and other bodies” and “grants extraordinary powers to the Department of Health and Human Services to redefine health care as we know it.” • Financial reform enshrined in measures such as legislation enacted last year that “contains 259 mandated rulemakings, another 188 suggested rulemakings, 63 reports, and 59 studies” and an SEC initiative that “expand[s] the ability of special-interest shareholders such as unions to exploit proxy access rules.” • “Unprecedented” labor market regulatory activity and case law changes. “Over 100 such efforts are under way covering compensation, contracting, leave, ergonomics, workplace safety, hiring and firing, and union organizing,” Donohue said. • The EPA’s regulation of greenhouse gases under the Clean Air Act and “342 rulemakings in various stages of development and completion” in other areas. “Of these, 30 are deemed ‘economically significant’—each with a cost to our economy of $100 million or more.” Now that Republicans have reclaimed the House and gained strength in the Senate, Donohue added, “The administration is likely to turn increasingly to the regulatory agencies.” The chamber president didn’t say all regulations are bad. He said the administration is generating too many of them, too quickly. And, yes, too many of them are bad. “Not every regulation is burdensome on business,” Obama assured the chamber. “A lot of the regulations… are things that all of us welcome in our lives.” What a dodge.

by Sam Fletcher, Senior Writer As the international benchmark other crudes are priced against, “West Texas Intermediate is dead, long live North Sea Brent,” said analysts in the Houston office of Raymond James & Associates Inc. WTI’s recent disconnect with other crude prices in the global market “is here to stay—for awhile,” they predicted. For some 50 years, WTI traded at the key Cushing, Okla., hub as proxy for global oil prices and at a slight premium above most other crudes because of its low sulfur content and its high API gravity. Occasionally, this normal trading pattern has been disrupted for brief periods, such as the 2007 refinery fire in Sunray, Tex., or the US oil demand collapse in 2009 that led to $4-5/bbl discounts on WTI. But those blips self-corrected within months. During a temporary blowout in the WTI-Brent price spread in February 2009, Raymond James analysts said, “The main reason for the roughly $5/bbl WTI discount was that oil demand in the US took a steeper hit than in just about any other major economy. This was not surprising, given that the US was the epicenter of the global economic crisis.” However, they said, “Unfortunately for US oil producers, it appears this disconnect is more structural in nature than prior disconnects.” US demand has recently rebound faster than either Europe or Japan, while the spread between WTI and other types of crude has blown out to unprecedented levels,” Raymond James analysts said, with Brent “at a huge $15.02/bbl premium” to WTI at the close of trading Feb. 11.

Infrastructure problems “That tells us the current glut at Cushing is not a function of cyclical or temporary supply-demand interruptions, but rather a longer-lasting infrastructure problem,” Raymond James analysts said. “Specifically, an increasing amount of inbound oil from emerging horizontal plays in Canada, the Bakken, and Permian basin has outpaced the outbound pipeline capacity.” Cushing storage has a major influence on WTI pricing due to pipeline bottlenecks that cause more oil to accumulate at the hub than can be shipped to the Gulf Coast. Earlier this month, Cushing inventories reached the highest level on record. The outbound transportation bottlenecks will force WTI to trade at a discount to other crudes though 2011 and into 2012. “That means WTI will become much less relevant than it has been historically. This is true for US oil producers [who] don’t transport their oil to Cushing and even more so for companies with international operations,” the analysts said. Raymond James analysts said, “It appears that the long-term solution to the glut— more outbound pipeline capacity at Cushing—will take at least 18 months to materialize. With this in mind, we have initiated our first-ever forecast for Brent, which we believe will be the principal benchmark for global oil prices for the foreseeable future.” They continued, “We are projecting a full-year 2011 Brent average of $97.50/bbl (vs. $90/bbl for WTI), followed by $104.50/bbl in 2012 (vs. $100/bbl for WTI). While the current record-setting WTI discount vs. Brent should narrow over time, we doubt that WTI will revert back to its traditional premium until 2013 at the earliest.” The WTI contract for March closed at $85.58/bbl on Feb. 11 in the New York Mercantile Exchange, with a net loss of $3.45/bbl during that week, compared with a net gain of $1.60 to $101.43/bbl during the week for Brent as the two benchmarks continued to diverge, said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Meanwhile, Zhang said, “Most of the rest of the world is already paying over $100/ bbl for crude.” In addition to the higher price for Brent, Louisiana Light Sweet crude closed at $103.08/bbl, and Urals crude at $98.07/bbl. “In other words, global and US coastal oil (and oil product) prices are likely to be much higher than WTI for the next 18 months,” Zhang said. ONLINE FEB. 14, 2011 | [email protected]

ONLINE FEB. 11, 2011 | [email protected]

34

Oil & Gas Journal | Feb. 21, 2011