Leslie’s Notebook

Big Western oil companies are in final talks this month to re-enter Iraq with service contracts to help the country boost oil production. The world probably needs that oil, or will soon, although OPEC officials keep insisting it does not–they say there is plenty of oil and customers are not asking for more.

Companies bidding are ExxonMobil, Shell, Total, BP, Chevron and some smaller companies.

But what is worse–I can’t believe these new contrcats are no-bid. That will cause howls around the world. The U.S. and KBR already were in hot water for awarding no-bid service contracts in Iraq during the start of the war in 2003.

We cannot and should not allow these new oil-related no-bid service contracts to go through. It looks bad. It’s not fair. It is hypocritical to allow these, while at the same time trying to convince people in the Middle East to adopt a more open, fair, free-market economic system there.

–Leslie Haines, Oil and Gas Investor, lhaines@hartenergy.com  

TrimTabs Investment Research has predicted the price of crude oil will not reach $200 per barrel because the U.S. economy would be broken before that happened.“If oil prices hit $200 per barrel, America’s oil bill would be equal to a staggering 23% of the after-tax income of all Americans who pay taxes,” said Charles Biderman, CEO of TrimTabs.

In a research note to its clients, which include many of the world’s largest hedge funds, TrimTabs said recently that, given that the U.S. consumes about 21 million barrels of oil per day, at $200 per barrel, the cost of oil would reach $1.5 trillion annually!

This staggering sum would be equal to 23% of the $6.5 trillion in after-tax income of all Americans who paid individual income taxes in the past 12 months.

TrimTabs pointed out that when oil prices averaged $70 per barrel in 2007,  America’s oil habit cost a bit more than $500 billion, or 8% of after-tax income.

“At $135 per barrel, America is already spending $1 trillion per year on oil, which is equal to 15% of after-tax income,” Biderman said.  “Such massive spending on oil alone is completely unsustainable.”

TrimTabs also urged the Commodity Futures Trading Commission to boost the margin requirements on oil futures to at least 25%.

“The current margin requirements of no more than 7.5% must be increased to stem the speculation that has inflated oil prices,” said Biderman.  “Stratospheric oil prices are destroying the U.S. economy.”

Biderman disagreed with claims by large oil futures exchanges that high margin requirements would drive trading offshore.

“What really worries officials of the New York Mercantile Exchange and the Intercontinental Exchange is that higher margin requirements would prick the oil bubble, reducing the huge revenue streams of their exchanges and traders,” said Biderman.

He expressed skepticism that if the CFTC reduced margin requires, Dubai, where the volume of oil futures trading is a small fraction of the volume on the NYMEX and the ICE, would allow itself to become the dominant market for oil futures trading because of the political pressure such a move would attract.

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

Did a little more figuring today, after my colleague, financial editor Jeannie Stell, showed me some interesting data at www.ewg.org.

Bottom line is this: If an independent oil company called Marbob Energy Corp., based in Artesia, New Mexico, produced 2,992,879 barrels of oil in one year, that oil was consumed in a short 3.6 hours (based on 2003’s rate of U.S. oil consumption).

Today, four years later, the numbers are all going to be a bit bigger–more people, more cars, more electric generation, more petrochemical usage. But in the end, this equals about 0.83 million barrels per hour.

If the U.S. does not adopt energy efficiency to a greater degree than it already has, it will be closing in on consumption of nearly 1 million barrels per hour.

Is anybody finding that much new oil at that rate–and at a price anyone can afford?  

This has got to be reversed! 

–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

Oilman, hedge-fund investor and wind-power developer T. Boone Pickens is mad and he’s not going to take it any more. That’s a good thing.

He spoke with me in a lively Q&A format on June 10 at our Energy Capital Forum conference in Houston. I say lively because refreshingly, Pickens does not mince words. At age 80, he feels no need to worry about stepping on someone’s toes.

I asked him what the presidential candidates should be telling the American people about energy. ‘The truth,” he said.

 That truth includes the fact that ethanol is an “ugly baby” that will only go so far to satisfy our energy demand.

That truth includes that the U.S. is spending $700 billion a year on imported oil in what Pickens says is “the largest wealth transfer to other nations in history.”

Pickens vows to force himself and energy issues into the coming presidential election debate by his own activism and some new TV commercials.

For more on his remarks, go to www.OilandGasInvestor.com. 

–Leslie Haines, Editor in chief, lhaines@hartenergy.com

What if there is a link between what analysts affiliated with investment bankers predict on oil prices, and what their oil traders are up to in the futures markets? Speculation is rampant about the impact of speculation.
Billionaire investor George Soros told Congress this week that the blame lies in part at the feet of speculators.
            Fereidun Fesharaki, chairman of Facts Global Energy, told the Reuters Global Energy Summit this week that “the push beyond $100 to current levels was the result of excessive speculation. It is very likely and possible that we will go back again to the $100 range as speculators take profits and go out of the market. It could happen by end-August or at the latest by September.”
           Congress is looking for conspirators. Wall Street banks are already under scrutiny from lawmakers who “seek a convenient villain for skyrocketing oil prices,” says a daily note from Pritchard Capital Partners. 
            On June 5, Rep. Bart Stupak, D-Mich., complained that oil and products markets were being “manipulated” by the biggest trading houses in the futures markets, although he said a probe hasn’t uncovered anything illegal, according to a Pritchard daily note. 
            “In response to a reporter’s question, Stupak identified Goldman Sachs and Morgan Stanley as firms whose oil trading activities warranted closer review. The two firms quickly defended their conduct and Stupak later went on CNBC television to say no specific firms were under investigation.”
           We have to note that analysts from both Goldman and Morgan Stanley have said in recent weeks that oil will go higher. Goldman said it could be as much as $140 a barrel this summer and $200 later on.
            Meanwhile, Morgan Stanley’s shipping and tanker analyst, Ole Slorer, said oil could be $150 a barrel by July 4—not due to speculation, but due to oil shipping patterns.
            “We are calling for a short-term spike in oil prices,” said Slorer in his June 5 report. “Distribution patterns of crude oil out of the Middle East…are setting record volumes to Asia,” he said, “while supplies to the Atlantic Basin are at rock bottom.”
            He said that since March, oil in transit to the Atlantic Basin has collapsed by 30 million barrels and U.S. oil inventories are now down by 35 million barrels from March through early June.
–Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

• Analysis of the reported 2007 finding and development costs for most E&Ps continues, with each Wall Street firm slicing and dicing the data in different ways. One thing is clear –resource plays reign supreme.
• Increasingly, that means gas shales like the Barnett in North Texas and the Deep Bossier (Haynesville) in East Texas, or the Bakken oil play in North Dakota. But certainly when a company is drilling wells that flow 2- to 4 million, as in the Barnett and Fayetteville, or even 8 million cubic feet a day, as in North Dakota, that offsets a lot of big AFEs and high per-acre lease costs.
•  A Morgan Stanley report says that in 2007, for 17 E&Ps, F&D costs ranged from a low of $5.45 per barrel of oil equivalent for Ultra Petroleum, to a high of $35.03 per barrel for Talisman and $19.20 for Chesapeake. (This is an all-in number that includes exploration expense, development and acquisitions.) 
•  Analyst Lloyd Byrne’s report says, “The most recent E&P quarterly results (1Q 08) show rising cash netbacks (up 27% year-over-year)…despite rising cash operating costs (up 13% Y-O-Y).”
• Meanwhile, full-year drill-bit F&D costs for XTO Energy were just $1.36 per Mcfe, which was well ahead of Coker & Palmer’s drill-bit F&D estimates of $1.50 per Mcfe. More impressive is the company’s target of 15 Tcfe by year-end 2009. With an impressive inventory of development opportunities, XTO should be poised for consistent reserve growth over the next several years, the analysts say. 
• “ Further augmenting the impressive reserve and production growth, XTO has added 76,000 net acres in the San Juan Basin and Barnett, Fayetteville and Woodford shales for $1 billion. The acreage currently has 212 Bcfe of proved reserves and is currently producing 35 MMcfed. 
•  The growth driver for XTO continues to be East Texas and the Barnett Shale which make up about 50% of the company’s production. Coker & Palmer sees these assets as the backbone of the company, but with emerging assets including the Fayetteville, Woodford and Piceance, XTO should enjoy several years of high-quality, low-risk growth.

 –Leslie Haines, Editor in chief, Oil and Gas Investor, lhaines@hartenergy.com

There are a lot of huge numbers in the oil and gas industry–dollars, barrels, MMcfs. It’s hard to grasp their true meaning and context. What’s a billion, anyway?
But I got a new and frightening perspective when I came across the following insight at a peak oil website recently, the ASPO-USA (Association for the Study of Peak Oil):

If some E&P company were fantastically lucky and announced a headline-making discovery of 500 million barrels of oil–recoverable– that may not be so much of a big windfall after all. Why not, you say? It is the equivalent of only 25 days of current U.S. oil consumption! Not even a month.
–Lhaines@hartenergy.com

Which investment do you prefer–a barrel of oil or a share of Goldman Sachs?

On May 28, 2008, an analyst at UBS Securities rated the shares of Goldman Sachs neutral or unchanged, with a price target of $185. That’s higher than what Goldman’s famed oil analyst Arjun Murti thinks will be the average price of oil this summer–$145 a barrel.

Now, if you are an investor with a longer-term horizon, you could short Goldman and buy oil, if Murti’s forecast of up to $200 oil ends up coming true.

Buy the hard asset (a barrel) or buy the paper (a share).

–Leslie Haines, at lhaines@hartenergy.com
Oil and Gas Investor magazine, Houston

We hear that GE may sell its famed appliance unit for as much as $5 billion. Might it deploy that capital in faster-growing businesses–getting away from GE Profile refrigerators to selling more wind turbines?

If the U.S. housing slowdown means it would sell fewer appliances, then moving to renewables like wind power makes sense. Just call T. Boone Pickens, who plans the world’s largest windfarm in the Texas Panhandle.

– Leslie Haines, Editor in chief, Oil and Gas Investor

British prime minister Gordon Brown says, in a column this week in The Guardian:

“…every country must find ways of being more efficient and diversifying supply.  And as continuing high oil prices present us all with an immense challenge, the way we confront these issues will define our era.”

No kidding. Our era is already being defined by passionate debate on what to do with higher energy prices, which affect every economy in the world. Protests in the U.K., France and elsewhere are increasing as the price of energy heads higher.

Like many politicians and pundits in this country, Brown said the U.K. should encourage a greater dialogue between consumers and producers, such as OPEC, in order to maximize supply. As if talk could coax more oil out of a spigot somewhere.

Brown said the U.K. should accelerate its development of alternative, renewable energy sources.

Easier said than done. At The Guardian’s website, Brits complain about high government taxes on diesel–Brown is blamed. They cite the bungled Iraq war that has taken some oil off the market and disrupted the Middle East, and blame the U.K. government for that too (along with George Bush).

They demand that the U.K. step up its efforts to go green and get off oil.

The U.K. is trying to make oil and energy prices one of the key issues at the G8 summit in Japan in July.

OPEC planners must be reeling–why spend more money to add production capacity if every country in the world is now figuring out how to reduce its oil use, and eventually, get off oil entirely? As the cost of adding incremental barrels soars, and weakened dollars flow into the sovereign wealth funds in the Middle East, it will make less sense to use those petrodollars to drill more.

When do the lines cross?

–Leslie Haines, editor in chief, Oil and Gas Investor, lhaines@hartenergy.com