Energy Finance

The week of June 26 saw a natural gas storage injection of 70 billion cubic feet (Bcf) with total working gas in storage for the at 2,721 Bcf. The storage metric is 28% higher than last year, but significantly down from the 30% surplus last week. The lower injection is a positive indicator for prices, says Michael A. Hall, vice president of oil and gas equity research for Baltimore-Maryland based Stifel, Nicolaus & Co. Inc.

“Current storage fell to a 21% surplus, relative to the five-year average, and down from 22% last week,” says Hall. “This week’s injection was lower than the 85 Bcf injection for the corresponding week last year and the 84 Bcf feet five-year average injection.”

Marking the ninth week of the cooling season, gas in storage rose to 2,721 Bcf, 28% above (603 Bcf) the year-ago level and 21% ahead of the five-year average, he says.

“Our model currently suggests a 1.9 Bcf per day looseness in the supply and demand for gas, down slightly from 2.0 Bcf per day last week. Oversupply and the resulting storage levels in the producing region are quickly reaching an inflection point and we believe additional shut-ins, such as those recently announced by EnCana are increasingly likely. The weeks ahead will be key for front month gas prices for the remainder of 2009. We expect continued volatility.”

Gas prices are rising on the gas storage news, says Hall. ” While we view the dramatic weakness in natural gas prices as a long-term buying opportunity, we remain somewhat measured in the near-term as the current supply and demand balance remains loose. We do, however, continue to recommend building exposure on weakness, with Chesapeake Energy (CHK - $19.21, Buy), Cabot Oil & Gas (COG - $30.34, Buy), and Bill Barrett Corp (BBG - $27.06, Buy) as our top ideas, as well as Atlas Energy Resources (ATN - $19.69, Buy) for those able to participate.”

The U.S. economy could suffer a severe blow if federal regulators demand duplicative oversight of hydraulic fracturing, a commonly used well-stimulation and completion technology already regulated by the states, according to IHS Global Insight.

In the latest findings of a three-part study, IHS noted that additional hydraulic fracturing restrictions would damage the U.S. economy, leading to job losses and a widening trade deficit. The initial results of the study found that duplicative federal restrictions would result in “very significant adverse impacts on the supply of oil and natural gas” in the U.S. The study also quantifies state-by-state impacts on employment and gross state product.

“Hydraulic fracturing is a safe, proven, 50-year-old technology that is critical to developing the natural gas used to heat homes, generate electricity, and create basic materials for fertilizers and plastics,” said API President Jack Gerard. “More than one million wells have been completed using this technology. Unnecessary additional regulation of this practice would only hurt the nation’s energy security and threaten our economy.”

IHS’ study compared three scenarios to a reference case: elimination of hydraulic fracturing; a restriction of the fluids that can be used in hydraulic fracturing; and implementation of additional federal underground injection control (UIC) compliance regulations on top of the state and local regulations that currently govern the practice.

Implementation of hydraulic fracturing restrictions would further erode a U.S. economy already struggling to recover from the deep and sustained economic recession, the study found. Restrictions would limit oil and natural gas production, resulting in sharply increased imports by 2018, with purchases of foreign oil and natural gas surging nearly 60% under the no-fracturing scenario, almost 30% under the fluid-restriction scenario and nearly 14% under the UIC-compliance scenario.

Real gross domestic product losses could rise to $374 billion in 2014 (in $2008) under the no-fracturing scenario, $172 billion in the fluid-restriction scenario and $84-billion in the UIC-compliance scenario, according to the study.

Meanwhile, uUnemployment increases would accompany the GDP loss and the reduced spending, leading to peak employment losses in 2015 of nearly 3 million jobs in the no-fracturing scenario, 1.4 million jobs in the fluid-restriction scenario and 676,000 jobs in the UIC-compliance scenario, the study found.

The federal deficit also would expand in each of the restricted-fracturing scenarios, with the deficit expanding by $139 billion in 2014 in the no-fracturing scenario, by $66 billion in the fluid-restriction scenario and by $32-billion in the UIC-compliance scenario, the study found.

The study also found that the trade balance would deteriorate, with the most dramatic impact – a widening of $135 billion in 2014 – seen with the no-fracturing scenario. The current account deficit on trade in goods and services would widen by $95 billion in 2014 in the fluid-restriction scenario and by $46 billion in the UIC-compliance scenario.

With the country’s increasing reliance on unconventional resources, where over 95% of wells are routinely treated using reservoir stimulation, the impact of eliminating hydraulic fracturing on production would be “permanent and severe,” the report noted.

Additional federal oversight of hydraulic fracturing is not necessary, the report concludes. The Ground Water Protection Council in May released a study that found regulation of oil and gas field activities, including hydraulic fracturing, is best accomplished at the state level where regional and local conditions are best understood and where state regulators are on hand to conduct inspections and oversee specific operations like well construction, testing and plugging.

In the first half of 2009, the LNG market proved to be truly global as supply and demand fundamentals forced regional prices to converge, according to a recent report by London-based Barclay Capital.

“With demand deteriorating sharply in Asia, spot prices for the majority of the Pacific basin have collapsed to levels below those in Europe and the U.S.,” says James Crandall, analyst. “Meanwhile, in the Atlantic Basin, as we had anticipated, the relative weakness in U.S. prices compared with European benchmarks is proving to be a limiting factor for U.S. LNG imports.”

Prospects for global LNG demand remain bleak at this point, he says. Economies in the major Asian LNG importing countries continue to struggle, and strength from some of the emerging market participants is only offsetting a part of the demand declines in Korea and Japan.

Europe, however, continues to take record LNG volumes as its prices remain strong. Given current supply and demand trends globally, Barclays expects LNG imports to the U.S. to show only modest growth for the rest of the year, and average 1.6 billion cubic feet per day in 2009.

“We look to European storage levels and the trans-Atlantic price differentials as a leading indicator for U.S. LNG import trends,” he says.

For more in-depth analyst, register for Oil and Gas Investor’s LNG webinar, to be held on July 8, at www.oilandgasinvestor.com.

The third annual “Energy IQ” survey, conducted for the American Petroleum Institute (API), finds that while Americans recognize the need more energy in the coming years, they continue to underestimate the amount of oil and gas that government experts predict will be needed to meet that demand. Conversely, respondents overestimate the role that renewable energy sources will play in meeting future demand, the amount of oil the U.S. imports from the Middle East, and oil and natural gas industry earnings.

“Americans understand fundamentally that we need more energy to grow our economy but they continue to undervalue oil and gas in meeting expected demand,” said Jack Gerard, API’s president and chief executive said.

“The American public wants to believe there is a silver bullet answer to our energy challenges despite what government experts predict,” said Jim Hoskins, senior vice president for Harris Interactive, which conducted the survey for API. “Americans have become more aware of how current policies limit increased domestic production, but they also continue to subscribe to common, yet critical, misconceptions regarding how the industry operates and the energy we’ll need to meet growing demand.”

Comparing the results to last year’s survey, respondents showed a continued misunderstanding on key issues such as the significance of North American oil and natural gas resources, the number of people employed by the oil and natural gas industry in the U.S. and the amount of taxes the industry pays every year.

API commissioned the online research by Harris Interactive of 1,298 U.S. adults between April 30 and May 8, 2009. Results were compared to the previous two years’ responses. Among the survey’s key findings:

More Americans understand that U.S. energy demand will increase during the next 20 years, but they underestimate the vital role that fossil fuels will play in meeting demand. While the U.S. Energy Information Administration (EIA) projects that U.S. energy demand will increase 9% during the next 20 years, only 5% of respondents chose the correct answer. The majority overestimated this number, believing that U.S. demand would increase 16% to 21%. When asked what percent of global energy demand will be met by fossil fuels such as oil, gas and coal, according to government projections, only 10% of respondents answered correctly that fossil fuels will meet 85% of energy demand. This is the second consecutive year this number has dropped, even though the EIA figure for future U.S. reliance on fossil fuels has risen by 5% since 2008. Similarly, while the EIA projects that more than 55% of U.S. energy demand in 2030 will be met by oil and gas, only 16% of respondents chose this answer.

Those surveyed overestimate the amount of oil and natural gas supplied to the U.S. by the Persian Gulf countries and underestimate the amount that is supplied from North America. According to the U.S. Department of Energy (DOE), 12% of the oil consumed last year in the U.S. came from the Persian Gulf countries. Only 7% of respondents chose correctly, while more than 40% of respondents believed that over 30% of our oil supply came from the Persian Gulf. About 53% of respondents believed that Saudi Arabia was the largest U.S. supplier of imported crude oil. In fact, according to the DOE, Canada is the largest supplier of imported crude oil. Only 5% of respondents knew that more than 73% of oil and gas consumed in the U.S. was produced in North America. This is down 3% from last year’s survey. A surprising 42% were under the misconception that the answer was less than 35%.

People underestimate the contributions the industry makes to the U.S. economy through jobs and taxes, and overestimate the industry’s profits. Only 15% of respondents knew that six million Americans are employed directly or indirectly by the oil and gas industry. Only 9% of respondents knew that oil companies pay more than 40% in income taxes as a share of their income. The majority thought that it was less than 30%, with 33% of all respondents under the misconception that companies pay less than 15% in income taxes. Similarly, when asked how much the oil and gas industry paid in taxes over the past three years, 25% of respondents believed that the U.S. oil and gas industry contributed less than $100 billion. 43% of respondents chose “not sure” and only 10% answered correctly — $242 billion, according to the EIA. More than 40% of respondents believed that the oil and gas industry earned more than $0.20 per every $1 of sales. In fact the industry earns just below $0.06 on every $1.

To honor the memories of the King of Pop and the Princess of Television, this blogger is in a quiet mode today.

KeyBanc Capital Markets has revised its 2009 and 2010 crude oil and natural gas pricing assumptions. It incorporated an updated price deck into its individual company models and will revisit individual production growth targets, capital spending plans and costs structures due to the increasing price for crude oil.

“We are increasing our second-quarter 2009 crude oil pricing assumption from $45.00 per barrel to $58.25 per barrel,” says Jack Aydin, senior managing director. “Our second-quarter West Texas Intermediate price assumption reflects the average actual price to date.

“Concurrent with our second-quarter price adjustment, we revised upward our third-quarter and fourth-quarter assumptions from $48.00 per barrle and $52.00 per barrel, respectively, to $56.00 per barrlel for both quarters, reflecting slightly better expectations for global demand and higher than expected compliance by OPEC members, as relates to production cuts. Thus, we are increasing our 2009 full year WTI assumptions from an average of $47.04 per barrel to $53.36 per barrel. Additionally, we are increasing our 2010 estimate from $58.00 per barrel to $62.00 per barrel.”

The bank’s average natural gas pricing assumption for 2009 decreased due to the second-quarter actual bid week price coming in at $3.51 per million Btu, slightly below its expectation of $3.60 per million Btu. However, the bank is maintaining its other prior pricing assumptions for the balance of the year and 2010.

On June 23, the U.S. Bureau of Land Management suspended the sale of all 31 oil and natural gas drilling tracts in Utah that had been purchased earlier in the day during a regularly scheduled lease sale. After the bureau accepted last-minute protests from two environmental groups about the sale, BLM put all the leases on hold to conduct an environmental assessment.

“While we appreciate the need to address all protests to proposed lease sales, the deviation from the set procedures by accepting the late protests does not promote confidence that the Obama administration is committed to an orderly and predictable lease sale process that allows development of energy resources that belong to the American people,” says the American Petroleum Institute’s president, Jack Gerard.

“This apparent policy of delaying oil and natural gas development, which flies in the face of public sentiment that favors greater access to domestic oil and natural gas resources, serves as a disincentive to companies who are willing to spend billions of dollars in America to hire American workers to produce American fuel for the American consumer.”

The energy industry has seen unprecedented volatility in world energy markets, followed by an extraordinary period of uncertainty in the financial markets, and is now experiencing an economic downturn that has affected almost every nation in the world, said Sherri K. Stuewer, vice president of environmental policy and planning for ExxonMobil Corp. Stuewer made her comments at the Business and Sustainability Conference held in Washington, D.C. on June 17, 2009.

“Rapidly changing market realities are nothing new, of course, but I believe the magnitude of the recent changes has added to the challenges of addressing sustainability — for both business leaders and policy makers,” she said. “Given the attendance at this conference, I think it is apparent that U.S. businesses believe that sustainability is an enduring issue that deserves our focus — even in the most difficult economic circumstances.”

Affordable and accessible energy supports long-term economic and social development, and at the same time, economic growth drives increased energy usage, she said. Today, global energy use is equivalent to some 245 million barrels of oil per day, used for transportation and to run farms and factories, power schools and businesses and heat and cool homes. Despite the current economic downturn and projected energy-efficiency improvements, ExxonMobil predicts 2030 global energy demand is likely to be about 30% higher than today.

“The core sustainability challenge for the energy industry is how to provide the energy which enables economic development while at the same time reducing the environmental footprint of energy. Too often, however, the magnitude of this challenge is understated. The enormous anticipated growth in energy use will mean increased emissions, much of it in the developing world. If we are to make progress reducing the environmental footprint of energy, it is imperative that we find ways to address the emissions challenge in both the developed and the developing world,” she said.

To address the needs of developing countries, ExxonMobil champions a variety of economic support and incentive programs for capacity building, called “national content development.” The strategy focuses on workforce development, supplier development and strategic community investments to address current economic and social needs while supporting the growth of in-country business.

An examples is the company’s effort to increase the number of national employees over the life span of a project and to train them in technical and professional skills necessary for working on existing and future projects.

“We also seek to create economic opportunities for local businesses by investing in developing the capabilities of local contractors, suppliers, and vendors to help them meet global industry standards to qualify for contracts with ExxonMobil and others,” she said.

By purchasing goods and services in-country and developing long-term supplier relationships, ExxonMobil supports the development of the local business community and reduces costly delays by easing demand on the global supply chain. But in many emerging economies this is easier said than done.

“While our goal is to nationalize the workforce and contract with as many local suppliers as possible, often the local capacity simply does not exist, ” she said. “So we must invest significant amounts of time to train both employees and suppliers with the technical and professional skills to meet our high business standards. In many cases, we must start from scratch, because adequate training facilities do not even exist. For example, at our Sakhalin-1 Project in Russia’s Far East, we helped establish a rigorous two-year training program for Russian technicians. And in Nigeria, we set up a technical training center for local recruits. To date, nearly 500 students have graduated from this program.”

Anohter challenge is the pressure to balance short-term and longer-term needs. Few industries require longer time horizons for planning and execution than the energy industry. Yet, producers are confronted with strong pressure from some sectors of society to deliver short-term fixes, sometimes at the expense of longer-term progress.

“The projects we undertake can span generations from start to finish, and for our industry to continue to draw investors, these projects must remain viable and attractive throughout different business cycles. Balancing our need for long-term viability, while managing expectations by some in society for quick fixes, can be difficult — particularly when energy prices swing or short-term political interests dominate public dialogue,” said Stuewer.

With rising global energy demands, energy-related carbon-dioxide emissions are expected to rise by an average of 1% per year through the year 2030. The energy industry must continue to provide the energy necessary to help billions of people move up the economic ladder, while mitigating the risk posed by growing CO2 emissions. ExxonMobil’s conclusion is to work to improve energy efficiency and to develop and deploy new technologies that will provide energy with lower emissions.

“At ExxonMobil, our primary role is to responsibly provide the energy to sustain and improve standards of living for people worldwide while delivering a return to our shareholders. We are committed to fulfilling this role while balancing the three drivers of sustainability — economic growth, social development, and environmental protection<” she said.

We’ve all heard about the financial crisis, but I finally understood how serious it is when….

12. CEO’s are now playing miniature golf.

11. I got a pre-declined credit card in the mail.

10. I went to buy a toaster oven and they gave me a bank..

9. Hot wheels and Matchbox car companies are now trading higher than GM in the stock market.

8. Obama met with small businesses - GE, Pfizer, Chrysler, Citigroup and GM, to discuss the Stimulus Package.

7. McDonalds is selling the 1/4 ouncer.

6 People in Beverly Hills fired their nannies and are learning their children’s names.

5. The most highly-paid job is now jury duty.

4.. People in Africa are donating money to Americans.

3. Motel Six won’t leave the lights on.

2. The Mafia is laying off judges.

And my most favorite indicator of all.

1. If the bank returns your check marked as “insufficient funds,” you have to call them and ask if they meant you or or them.

The Houston area’s unemployment rate rose to 6.9% in May, up from 6.3% the previous month, according to the Texas Workforce Commission.

The local rate a year before was 4.4%. The figures, unlike statewide and national numbers, are not seasonally adjusted.

According to the agency, 194,500 area workers were unemployed in May, compared to 176,700 in April.

Statewide, the seasonally adjusted unemployment rate rose to 7.1% in May, up from a revised 6.6% in April. The national rate currently stands at 9.4%.

Texas has lost 222,600 jobs in the last 12 months.

“The Texas unemployment rate continued to follow the national unemployment rate’s upward trend,” said Texas Workforce Commission Chairman Tom Pauken. “Few industries were spared in May as Texas employers continued to report job losses. Continued unemployment claims increased in Texas as well.”

The Lubbock area had the state’s lowest jobless rate, at 4.6%. The highest rate was in the McAllen area, at 9.4%.