Category

Oil

Russian Arctic Oil to Give Exxon Mobil Leg Up on Rivals

With fresh sources of oil becoming increasingly scarce, Exxon Mobil Corp. (NYSE: XOM) scored a major coup on Tuesday by making a deal for access to the vast reserves of Russian Arctic oil.

Many companies were in the hunt for the Russian Arctic oil, including BP PLC (NYSE ADR: BP), Royal Dutch Shell PLC (NYSE ADR: RDS.A), Chevron Corp. (NYSE: CVX), Total SA (NYSE ADR: TOT) and Statoil ASA (NYSE ADR: STO), but it was Exxon that walked away with the prize.

The arrangement with state-controlled Rosneft (PINK: RNFTF) gives Exxon a significant advantage over its major rivals — all of which have struggled in recent years to replace the oil they're extracting with new sources.

Rosneft, in which the Russian government has a 75% stake, estimates the three Kara Sea blocks where Exxon will be exploring contain about 36 billion barrels of recoverable oil.

"If that figure is correct and Exxon is able to produce the fields, we are talking about one of the world's largest oil discoveries in the last 50 years," Fadel Gheit, an energy analyst at Oppenheimer & Co., told MarketWatch. "But it remains to be seen how much of that oil is economically recoverable."

Rosneft estimates total reserves in the area at about 110 billion barrels of oil equivalent – an amount four times the size of Exxon's proven global reserves.

Quid Pro Quo

Having access to reserves of that size will help Exxon rectify its replacement ratio for oil. Earlier this year Exxon reported that for every 100 barrels of oil it produced, it found just 95 barrels of new oil.

Exxon has been more successful in replacing natural gas resources – it finds 158 cubic feet of gas for every 100 it extracts. But with natural gas prices slumping, the company would much rather find more oil.

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Western Oil Majors Will Get the First Crack at Libyan Oil Production

Countries that supported the overthrow of dictator Moammar Gadhafi's regime are likely to get first crack at post-war Libyan oil production, while those that sat on the sidelines are at risk of losing out.

"We don't have a problem with Western countries like the Italians, French and U.K. companies. But we may have some political issues with Russia, China andBrazil," Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters.

Talk like that has many Western oil companies licking their chops. Meanwhile, officials from China and Russia are foundering for ways to deal with the emerging Libyan government, the National Transitional Council (NTC).

Although Libyan oil production before the uprising comprised just 2% of global output, it is prized because it is of the light sweet crude variety – it contains less sulfur than most other oil and is thus cheaper to refine.

The deputy head of the Chinese Ministry of Commerce's trade department, Wen Zhongliang, tried to stay positive when asked about Mayouf's statement last week.

"We hope that after a return to stability in Libya, Libya will continue to protect the interests and rights of Chinese investors and we hope to continue investment and economic cooperation with Libya," Wen told a news conference.

But other Chinese observers were indignant.

"I can say in four words: They would not dare; they would not dare change any contracts," Yin Gang, an expert on the Arab world at the Chinese Academy of Social Sciences in Beijing, told Reuters.

Although China was getting only about 3% of its oil from Libya, the Asian giant's rapidly growing economy has given it a ravenous appetite for energy – including oil.

China abstained from the United Nations vote that authorized force to protect civilians during the uprising, and along with Russia and Brazil opposed sanctions against the Gadhafi regime.

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The Libyan Factor

Now that Moammar Gadhafi is about to be toppled from power in Tripoli, international oil majors are poised to stream back into Libya. Italian leader Eni S.p.A. (NYSE ADR: E) already rushed back field specialists Monday morning to assess damage even before the smoke (or the politics) cleared in the capital.

The great unknown is how long it will take to ramp up production to pre-crisis levels. Anecdotal evidence is pointing in all kinds of directions. Some European analysts have already concluded it could take one or two years at some of the primary fields, while others are saying the brunt of production could be back on line within a month.

This is going to be a field-by-field approach. More to the point, the condition of pipelines, gathering and processing facilities, terminals and port facilities will be just as important as the oil fields themselves. We know that some of these were heavily damaged. And that means full export volume is not something we can expect to see resume anytime in the near-term.

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Why Oil Prices Won't Stay Down For Long

Oil prices, like stocks, took a few big hits last week.

West Texas Intermediate crude last week dropped below $80 a barrel before bouncing back up to $87 a barrel this week. Meanwhile, Brent crude fell to a six-month low below $100 a barrel before climbing back to $110 a barrel this week.

To hear the mainstream media tell it, much of the drop is based on the assumption that global growth is waning and oil demand is soon to follow.

But that couldn't be more wrong.

Energy is one of the most highly leveraged and most liquid trading vehicles on the planet. A good portion of the decline we've experienced in recent weeks can be explained by nothing more than trading houses raising cash to meet margin calls or redemption requests from hedge funds, pension funds, and other investors.

That's all there is to it. Firms simply need cash and are selling the most easily sellable assets they've got. In the past that's been gold, but lately it's been oil.

Longer-term, demand is still going up and $120 a barrel oil is our next stop, followed by prices of $150 or more in the years ahead.

What's happening now with the markets and energy prices is like being in the eye of a hurricane.
That is, it won't be long before we're once again caught up in the whirlwind growth of emerging markets and energy demand shoots sharply higher.

The Looming Demand Downpour

Global demand is still rising – and it's not going to slow down any time soon. There are huge swaths of the world now adopting gasoline engines.

Let me give you two examples.

Take the farmers in Cambodia. Many put up sheets in their fields at sunset. They then mount small incandescent light bulbs on sticks behind the sheets. The bulbs are powered by small gasoline generators to ensure they stay on all night.

In the morning, those farmers go back and harvest the thousands of crickets that have collided with the sheet after having been drawn to the lights. They wrap up the fallen bugs and head to the markets where they are sold as food.

It's much the same situation in Africa, where small villages require simple engines to pump water.

You may think bugs and small farm pumps are no big deal, but there's an even greater energy revolution going on in the transportation industry.

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The (New) Truth About Oil

Traditionally, demand levels would determine the overall condition of the oil market. Supply (and the investment required for that supply) would be based upon what demand told us.

Actually, oil never reflected the demand-supply relationship as well as other sectors of the market. Oil has an irritating habit of not reflecting what it should in the dynamics of market play. Until recently, petroleum economists would comment (or lament) about the demand inelasticity of oil. That means, due to the lack of available alternatives (especially in transportation), demand for oil products would not decline as the price rose.

Such a relationship has certainly been tested over the last several years. The New York market price for West Texas Intermediate benchmark crude (WTI) moved from a $147.27-per-barrel high in July of 2008 to below $33 by the end of that year, only to rise again to almost $114 by the end of April of this year. It's moved back down to the $85-$90 range since then.

We did witness some demand destruction in the summer of 2008, and then (to a much lesser extent) in the spring of this year, with the rise of prices at the pump to well over $4 a gallon.

Yet what must be remembered is the simple fact that developed countries no longer call the shots in oil demand.

This is now – officially – a global market.

On the production side, of course, it has been a global market for more than 50 years. The primary reserves are located in the Middle East, the former Soviet Union and offshore in places stretching from Vietnam and Australia to the Arctic basin. The supply side, therefore, has been global for some time.

But now the demand component also is global in scope. This changes everything, as you'll see. And there's even a way to track this new (and more accurate) demand for oil.

Three "Crude" Shifts

By fixating on U.S. demand, analysts exhibit an out-of-date tendency. The description of the American market as "having less than 5% of the world's population yet consuming 25% of the world's energy" no longer has the impact it once did.

Yes, the United States remains one of the two largest end users internationally (the other being China). But the spike in demand now is coming from developing parts of the world. As demand figures move laterally in North America and Western Europe, they are accelerating elsewhere.

Three elements are leading to this rise.

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The EPA Proposes New Drilling Regulations

Last week, the Environmental Protection Agency (EPA) released a new series of proposals concerning the capture of emissions that are currently being released into the atmosphere during oil and gas drilling.

These emissions increase pollution and run the likelihood of creating a greater danger for the incidence of cancer.

The problem is hardly a new one.

Environmentalists have long argued that increasing the volume of drilling in a given location disproportionately raises the emission levels. The pollution effects tend to increase beyond a simple arithmetical aggregate of individual well results.

There is, in other words, a "triggering" effect on environmental dangers.

This is of concern in both oil and gas production, but the particular concern these days results from the development of shale gas sites. There, the combination of hydro-fracking and horizontal drilling has resulted in a greater concentration of drilling locations per pad, while frac fluid introduces a wide variety of chemicals into the process.

That has drawn the interest of the EPA.

For the first time, last Thursday (July 28), the agency actually proposed regulations. (The issuance just beat a court-mandated deadline.)

The new regulations target air emissions resulting from fracking, including standards for volatile organic compounds, sulfur dioxide, and air toxins related to oil and natural gas production or transmission.

The objective is to reduce volatile organic compounds released from fracked wells by 95%, and lower overall harmful emissions from the oil and gas industry by 25%. By volume, annual reduction targets are set at 3.4 million tons of methane, 540,000 tons of volatile organic compounds, and 38,000 tons of other toxins.

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The Oil Supply Constriction Is Fast Approaching

Shortly I'll be off to Victoria Station, the train to Gatwick, and a welcome flight home to Pittsburgh. However, there is an accelerating development I need to tell you about before getting on the plane.

As you know, last month, the Paris-based International Energy Agency (IEA) and the U.S. government announced they were releasing 60 million barrels of crude oil into the international market, 30 million of which coming from the U.S. Strategic Petroleum Reserve (SPR).

I said at the time that this would only make matters worse. The market has already confirmed my conclusion.

The move hit an unprepared market while I was in Athens on the first leg of this five-week trip. And from the outset, neither the rationale provided by Paris nor Washington rang true.

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Don't Fret Over Europe's Debt Crisis – Oil Prices Will Bounce Back

The volatility in the oil market has notched up this week, courtesy of another bout with debt jitters in Europe. Oil and gasoline futures are moving down – and most of the energy sector along with them.

In a situation like the current European debt mess – where maximum uncertainty is channeled into a very focused concern – oil futures will generally overcompensate, exaggerating the downside.

Of course, that is of little consolation to the traders who in the past few days have seen about $3.00 cut from the near-month futures (July).

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Increasing U.S. Oil Production Won't Stop Rising Gasoline Prices

This year's surge in oil prices and resulting high gasoline prices have many calling for more U.S. oil production as a solution.

Rising oil prices have pushed the U.S. average price per gallon of gasoline to $3.98. Oil prices, despite a recent slip, are up about 11% this year. West Texas Intermediate crude oil hovered around $99 a barrel yesterday (Thursday), and many experts expect it to hit $150 a barrel this year.

Many consumers want an increase in U.S. oil production to lower oil and gasoline prices, as well as reduce U.S. dependence on foreign oil for a national security benefit. Domestic activity has slowed since BP PLC's (NYSE ADR: BP) Gulf oil spill last April. Critics claim that U.S. President Barack Obama hasn't done enough to support a U.S. oil industry that provides needed jobs and revenue and could help keep oil costs from rising much higher.

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Buy, Sell or Hold: Exxon Mobil Corp. (NYSE: XOM) Again Proves to Be a Profit Gusher

When it released its earnings last week, Exxon Mobil Corp. (NYSE: XOM) proved to the market why it deserves to be the largest company in the world.

The stock promptly sold off following the company's announcement, but that has absolutely nothing to do with fundamentals.

So let me explain why you should put Exxon at the top of your "Buy" list if you don't already own shares. (**)

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