Oil majors plan to spend more as costs soar

MOSCOW, March 21 (Reuters) - The biggest western oil firms plan to invest much more in finding and producing oil in 2006 than in 2005 but investors and consumers will be disappointed the extra spending has not translated into higher production targets.
Last year, as oil prices hit new records above $70 per barrel, politicians demanded the big, integrated oil and gas companies invest more of their bumper profits in finding oil, to boost supplies and cool prices.
However, rampant oil services inflation, the need to look for oil in more inhospitable locations and an increased focus on natural gas and heavy oil, which require costlier infrastructure than ordinary crude, mean that while capital expenditure is rising, growth plans are static.
"Higher capex and unchanged production growth targets were the clearest trends from the integrated oils year-end strategy presentations," Lehman Brothers said in a research note last week.
Rising costs will provide long term support for oil prices, and make it harder for oil firms to repeat the record earnings they reported last year, on the back of higher prices, analysts said.
"It's going to impinge on underlying profitability ... profitability is reaching a peak," Jason Kenney, oil analyst at ING in Edinburgh said.
Analysts cut their earnings forecasts for some firms, including Italy's ENI (ENI.MI: Quote, Profile, Research) and Royal Dutch Shell Plc. (RDSa.L: Quote, Profile, Research), because of the extent of their capex increases.
U.S. oil major ConocoPhillips (COP.N: Quote, Profile, Research) led the field with a 45 percent increase in projected investment spending for 2006 over 2005, followed by rival Chevron (CVX.N: Quote, Profile, Research), which boosted its budget by 35 percent.
Neither said how much was due to cost inflation but analysts said across the industry, higher costs accounted for between 30 and 50 percent of announced increases.
The rest largely reflected more expensive schemes, investment in acquired assets and projects that would not come on stream until the end of the decade.
CAPEX RISES SET TO CONTINUE
European oil firms were also forced to boost spending plans. Shell, the world's third-largest listed oil firm by market capitalisation, upped its 2006 capex budget to $19 billion from $15.6 billion last year.
The Anglo-Dutch company has been struggling to rebuild its asset base and halt production slides since admitting in 2004 that it had exaggerated its reserves for years.
Analysts believe Shell's reserves overbooking scandal was partly prompted because underinvestment in exploration in the late 1990s meant actual bookings were poor.
Shell is not seen as the only company to underinvest in finding oil in that period, when oil fell to around $10 per barrel. The industry has picked a bad time to make up for this mistake.
"The international oil companies' attempt to move back towards a reinvestment phase (is) in an inflationary cost environment," Credit Suisse said earlier this month.
Oil executives put inflation in the industry at more than 10 percent per annum although costs of some inputs have risen more sharply. Rates for some drilling rigs jumped 250 percent last year.
Most industry players expect the trend to continue.
"We expect oil company capex to grow 15-20 percent per annum until at least the end of the decade," Morgan Stanley said in a research note last month.
GOOD NEWS FOR SERVICE FIRMS
The higher costs that oil firms face reflect a jump in the prices of key inputs such as steel and a shortage of skilled labour, as the average age of engineers in the industry approaches 50 years.
However, the trend is largely because of stronger pricing power on the part of the companies which build and hire out drilling rigs, operate production platforms, lease ships and floating storage facilities, and design the equipment the industry uses.
Increased investment by the oil majors is good news for this group.
"(This) should lead to strong order intake and rising profit margins for European oil services firms," Morgan Stanley added.
The tightness in the oil services market and the majors' strong reliance on it, is also, at least partly, a result of the late 1990s move to limit capital expenditure.
"Major oil and gas companies started outsourcing everything from accounting to research and development (in this period) .. technology transferred to the oil service industry," Dennis Proctor, chief executive of drilling equipment maker Hunting Plc. said.
Environmentalists may also find some good news in the majors' increased spending plans because, in the case of the big European oil firms at least, these include a big jump in investment in renewable energy resources.
"We estimate a run-rate of capex (in renewables) going forward of around $2 billion per annum across the group; four to five times higher than the run-rate over the last 10 years," Merrill Lynch said.

PINR - The Increasing Importance of African Oil

PINR - The Increasing Importance of African Oil

frica is becoming an increasingly important factor in global energy markets. By the end of the decade, the continent's significance will rise dramatically. Africa currently contributes 12 percent of the world's liquid hydrocarbon production, and one in four barrels of oil discovered outside of the U.S. and Canada between 2000 and 2004 came from Africa. IHS Energy, an oil and gas consulting firm, calculates that Africa will supply 30 percent of the world's growth in hydrocarbon production by 2010. West Africa's low-sulfur oil is highly desirable for environmental reasons, is readily transported to the eastern U.S. seaboard, and can be easily processed by China's refineries. Fifteen percent of U.S. oil imports come from Africa; by 2010 this could reach 20 percent. In this decade, US$50 billion will be invested in the Gulf of Guinea's energy sector, according to a recent report by the Council on Foreign Relations. While U.S. companies will account for 40 percent of this investment, other major players -- particularly state-owned energy companies -- will play a critical role in determining the shape of Africa's energy industry. From 1995 to 2005, national oil companies more than doubled the number of licenses they hold in Africa, from 95 to 216. China's energy firms are the largest state-owned investors, but India has also made significant investments and is looking to expand its presence in the region.However, political instability, criminal syndicates and terrorism threaten growth in the region. These factors are the main reason the region's hydrocarbon industry has not fully developed in the past, but as China and India demand more oil and gas to fuel their rising economies and as major oil fields reach maturity in other regions, Africa's oil and gas supplies have become more attractive investments. The rise of Africa's energy industry is changing the geopolitical landscape of the region. The West has found its leverage in the region challenged by China's willingness to invest in oil-producing states in order to ensure Beijing's energy security. For instance, a $2 billion low-interest loan from China has all but scuttled the International Monetary Fund's (I.M.F.) attempts to tie economic assistance to reform in Angola. In other areas, China and the West find their interests aligned, such as on the north-south peace accord in Sudan. In the coming years, Washington will be forced to adjust its policies toward Africa in order to compensate for China's rising influence. China's Influence in AfricaChina has been involved in Africa since before the 1960s, but, recently, the nature and level of its involvement has changed. China is primarily invested in Africa in order to secure access to the region's natural resources to fuel its expanding economy. Beijing is outbidding Western contractors on infrastructure projects, providing soft loans, and using political means to increase its competitive advantage in acquiring natural resource assets in Africa. [See: "Sino-U.S. Energy Competition in Africa"]China's deputy foreign minister famously told the New York Times, "Business is business. We try to separate politics from business." This statement is not strictly true; China uses politics for different aims than does the West. China uses its geopolitical position in order to gain access to natural resources around the world without regard to the domestic political situation where these resources are located, making China an attractive partner for many countries marginalized by the Western powers for internal strife, corruption, and human rights violations. India, South Korea, Malaysia and Brazil are following China's lead. China, however, also has an asset that these other states cannot exploit -- a permanent seat on the U.N. Security Council. Beijing's willingness to use its seat to protect states from international sanctions is welcomed in a region not lacking in egregious violations of international law and is undermining Washington's influence in Africa. This can be seen in Sudan, where Beijing has helped to prevent any meaningful Security Council resolution from emerging that would help to end the conflict in the Darfur region. [See: "The Darfur Question at a Time of Increasing U.S.-China Competition"]Beijing has not shied from investing in countries that are being marginalized by the West in order to secure access to energy sources. In other regions, China has repeatedly lost contracts to large, multinational corporations. Russia's Siberian reserves were once thought to be all but wrapped up in a deal for China, but now Japan may win the contract. The Chinese National Offshore Oil Corporation's (C.N.O.O.C.) attempt to gain control of Unocal collapsed under pressure from the U.S. Congress. Such failures have pushed Beijing to take risks in unstable countries that it may not otherwise pursue, in part to avoid competition from the major multinationals. The Financial Times reported on February 28 that Nigeria is shifting its sourcing for military equipment to China because U.S. concerns about corruption within the Nigerian security forces have delayed the delivery of equipment. In July 2005, China signed an $800 million crude oil agreement with Nigeria, and Beijing is considering $7 billion worth of investments in Nigeria. Ethiopia called China "its most reliable [trading] partner" after Western states criticized its recent election irregularities and its continuing border dispute with Eritrea. A Chinese company, earlier this month, started drilling the first exploration well in the Gambella basin, west Ethiopia. Angola has delayed implementing I.M.F. recommendations after receiving a $2 billion soft loan from China. China recently won the rights to oil-exploration blocks in Angola away from Total and Shell. China, now the world's second-largest importer of oil, imports 28 percent of its oil from Africa, mostly from Sudan, Angola, Congo, and Nigeria. In each of these countries, a similar pattern emerges: China moves in after Western companies are forced to pull out because of domestic pressure, thus undermining the ability of Western countries to use economic isolation and economic aid to influence the policies of the oil-producing countries. China, however, is also buying oil that would otherwise be taken off the global market, which effectively reduces the price of oil for all oil-importing countries. Competition and Cooperation in SudanChina's role in Sudan is both in conflict and alignment with the West's agenda. Since 1996, China has invested heavily in Sudan as Western companies were forced to pull out or put their investments on hold. In 1996, C.N.P.C. took a 40 percent interest in the Heglig and Unity oil fields as part of the Greater Nile Petroleum Operating Company, in which India and Malaysia are also investors. In 1998, it participated in building a 1500-kilometer (930 miles) long pipeline from these fields to the Red Sea. China's Petroleum Engineering Construction Group is constructing a $215 million export tanker terminal in the Port of Sudan, where a pipeline being built by another Chinese firm from the Melut Basin terminates. C.N.P.C. also owns most of an oil field in Sudan's Darfur region. Beijing's investments have helped to double Sudan's proven reserves in the past three years, now estimated at 563 million barrels, and double production in the past two years, now at 500,000 bpd. China currently receives seven percent of its oil imports from Sudan, and it is Sudan's second-largest foreign investor with about $4 billion invested.Estimates reach as high as 80 percent for the amount of revenue generated by Sudan's oil fields that have been invested in fighting its recently resolved north-south civil war, the ongoing conflict in Darfur, and the mounting conflict in the country's northeast. China is also Sudan's largest arms supplier. Chinese-made tanks, fighter planes, bombers, helicopters, machine guns and rocket-propelled grenades have been purchased by the Sudanese government. China has also threatened to use its veto on the U.N. Security Council to protect Khartoum from sanctions and has been able to water down every resolution on Darfur in order to protect its interests in Sudan. Washington has called the conflict in Darfur "genocide" and has seen its ability to effect change in the region limited by Beijing.In January 2006, a U.S. Energy Department report said China's tolerance of despotic regimes could undermine Washington's strategic goal to spread democracy and free trade. The report warns that China may be tempted to intervene in order to protect its investments. China's thirst for oil is limiting Washington's influence in Khartoum, but there are some areas of agreement between Beijing and the West in regards to Sudan's future. The historic peace-deal that ended the 21-year north-south civil war has allowed for the return of foreign investors that were forced out due to domestic pressures and politics. France's Total, Marathon of the U.S., and the Kuwait Foreign Petroleum Company renewed their exploration rights in the south of the country in recent months. While the new competition may make Beijing nervous, it also means that Beijing and the West now have a similar stake in ensuring that the peace agreement holds. Angola: Competing Investment StrategiesIn 2004, China's Eximbank approved a $2 billion line of credit to Angola. The loan is being used to rebuild Angola's infrastructure, ruined by the 27-year civil war that ended in 2002. A large portion of the contracts has gone to Chinese firms. For example, the Benguela Railway is being refurbished for $300 to $500 million. Chinese firms have also won contracts to refurbish two other rail lines, government buildings, and a new airport in Luanda. Angola's 25 billion barrels of proven crude reserves make it an attractive target for China's aid. Already pumping 1.6 million bpd, the infrastructure improvements should help to increase this to two million by 2010. China's advancements have been welcomed by President Jose Eduardo dos Santos' government, which has historically been wary of bowing to pressures to introduce more transparency to the country's oil industry. Global Witness estimates that between 1997 and 2001, $8.45 billion of public money was unaccounted for in Angola. The country is still without a formal monitoring agreement with the I.M.F. because it has yet to fulfill most of the recommendations of a 2004 I.M.F study. With the price of oil hovering above $60 per barrel, China's $2 billion loan, as well as interest from India and Brazil in making similar loans, Angola is unlikely to make significant concessions to the I.M.F. Angola has also been willing to use its oil for political aims. Many observers believe that Total lost its lead-operator rights to Block 3/05 because of France's criminal prosecution of an oil-for-arms case involving the dos Santos government in the 1990s. The biggest owner on France's relinquished block is a joint venture between China's Sinopec and Angola's state-owned Sonangol. Chinese investors have also assumed a portion of Block 18 relinquished by Shell. China's investments in Angola are a major threat to the West's interests in the country, as evidenced by the limited influence of the I.M.F. Nevertheless, Western companies are still Angola's largest investors. ChevronTexaco and Exxon Mobil each produce about 500,000 bpd, and BP and Total both have major projects expected to come on-stream soon. There is little chance that Angola will turn its back completely on the West in the midterm.Nigeria's InstabilityIn Nigeria, political corruption, criminal networks, violent Islamist groups, and domestic rebels threaten to take the world's eighth largest oil exporter off the market. It is estimated that 70,000 to 300,000 barrels of oil are stolen daily in Nigeria. Even at the low end of this estimate, this would generate over $1.5 billion every year -- more than enough capital to buy arms and political influence and threaten the government's survival. Another 500,000 bpd have been taken off the market by the recent kidnappings and violence perpetuated by the Movement for the Emancipation of the People of the Niger Delta. [See: "Intelligence Brief: Iran, Nigeria"]In the midst of this instability, the world's largest and second-largest oil importers are playing an increasingly dangerous game of power politics. For both Washington and Beijing, the nightmare of rebel groups halting oil extraction in the delta -- which will dry up revenues on which the northern elites depend, potentially leading to a northern Muslim general ousting the president -- appears distinctly possible. Nigeria represents an area in Africa from which China and the U.S. would benefit by working closely together to achieve their shared goal of stabilizing the country and expanding its hydrocarbon industry. Such cooperation, however, has not materialized, and the competing tactics of each state may be pushing Nigeria further into instability.The path toward stability advocated by the West is characterized by democratic principles, transparency, and debt reduction. Washington has hinged its assistance to Nigeria's government on the continuation of the trends begun by the return to civilian rule in 1999 after 16 years of military rule. The Paris Club of creditor nations recently dropped 60 percent of the country's $30 billion debt in exchange for Abuja paying the remaining $12 billion.Washington has also made it clear that it does not welcome President Olusegun Obasanjo's desire to change the constitution in order to allow him a third term. Director of National Intelligence John Negroponte, in his 2006 Annual Threat Assessment, warned a third term in Nigeria could lead to "major turmoil and conflict" that would lead to a "disruption of oil supply, secessionist moves by regional governments, major refugee flows, and instability elsewhere in West Africa."In order to help combat the losses to criminal networks, on December 8, 2005, Nigeria and the United States signed a security agreement to jointly patrol the delta region for security assistance. However, Washington's uncertainty about Obasanjo's grip on power and concerns about human rights abuses and corruption led to the delayed implementation of the program. After seeing an opportunity to improve its relationship with the government and fearing that without security assistance Nigeria's oil fields could go off-line, China stepped in while the U.S. attempted to tie the program to political change. The Nigerian vice president told the Financial Times that U.S. cooperation was not "moving as fast as the situation is unfolding." Instead, Nigeria will obtain patrol boats from China to protect oil installations in the Niger Delta. China's main concern is to ensure the necessary political stability to keep Nigeria's oil pumping; it is not concerned what face this stability takes, whereas it is Washington's belief that democracy and transparent market economies are the best way to ensure stability. It is not clear whether the Chinese plan will help to bring the missing 500,000 bpd of oil back to the market in the Niger Delta, or if it will only ensure more violence in the chronically unstable region. ConclusionWith instability in other oil-producing regions, the rising energy demands of China and India, and the approaching maturity of major oil fields, Africa's hydrocarbons are an increasingly attractive resource. Competition for these resources, mostly between Washington and Beijing, will play an important role in determining the future of the continent. Divergent political philosophies between the world's two largest oil importers have raised the stakes in the competition. The West has seen its influence in Africa repeatedly challenged by China and India. Beijing has been consistently willing to aid resource-rich states that the West is attempting to marginalize and pressure for political change. There are limits, however, to China's willingness to frustrate the West's agenda. For example, China has allowed the U.N. Security Council to pass several resolutions condemning the government in Sudan for its actions in the Darfur region, although Beijing has also played a role in ensuring that these resolutions do not lead to any substantive measures. While competition is natural between the U.S. and China in the energy sector, both states recognize that cooperation in some areas would be mutually beneficial. The chair of the U.S. Senate Foreign Relations Committee, Richard Lugar, said last week that it was crucial for Washington to broaden its cooperation with China and India in order to prepare for disruptions in oil supply. Qin Gang, China's foreign ministry spokesperson, responded by stating, "China stands ready to cooperate with the U.S. and other countries…on the basis of equality and mutual benefit." Cooperation is unlikely to dominate the relationship between the West and China in Africa in the midterm, as the competition to secure access to hydrocarbons increases. The U.S., U.K., and France still account for 70 percent of foreign direct investment in Africa, according to the Council on Foreign Relations, and U.S. oil companies still lead in offshore oil extraction technology. China's advantage is that it is willing to invest in countries off-limits to many multinational corporations, and its state-owned companies can afford to invest in Africa at a loss in order to better Beijing's positioning. The remainder of this decade is likely to see great changes in Africa as a result of the competition between the West and Asia for energy security. Report Drafted By:Adam Wolfe
The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. This report may not be reproduced, reprinted or broadcast without the written permission of inquiries@pinr.com. All comments should be directed to content@pinr.com.

Latin America and Asia are at last breaking free of Washington's grip - Chomsky

Guardian Unlimited Guardian daily comment Latin America and Asia are at last breaking free of Washington's grip

The US-dominated world order is being challenged by a new spirit of independence in the global south Noam ChomskyWednesday March 15, 2006The Guardian
The prospect that Europe and Asia might move towards greater independence has troubled US planners since the second world war. The concerns have only risen as the "tripolar order" - Europe, North America and Asia - has continued to evolve.
Every day Latin America, too, is becoming more independent. Now Asia and the Americas are strengthening their ties while the reigning superpower, the odd man out, consumes itself in misadventures in the Middle East.

Regional integration in Asia and Latin America is a crucial and increasingly important issue that, from Washington's perspective, betokens a defiant world gone out of control. Energy, of course, remains a defining factor - the object of contention - everywhere.
China, unlike Europe, refuses to be intimidated by Washington, a primary reason for the fear of China by US planners, which presents a dilemma: steps toward confrontation are inhibited by US corporate reliance on China as an export platform and growing market, as well as by China's financial reserves - reported to be approaching Japan's in scale.
In January, Saudi Arabia's King Abdullah visited Beijing, which is expected to lead to a Sino-Saudi memorandum of understanding calling for "increased cooperation and investment between the two countries in oil, natural gas and investment", the Wall Street Journal reports.
Already much of Iran's oil goes to China, and China is providing Iran with weapons that both states presumably regard as deterrent to US designs. India also has options. India may choose to be a US client, or it may prefer to join the more independent Asian bloc that is taking shape, with ever more ties to Middle East oil producers. Siddharth Varadarjan, the deputy editor of the Hindu, observes that "if the 21st century is to be an 'Asian century,' Asia's passivity in the energy sector has to end".
The key is India-China cooperation. In January, an agreement signed in Beijing "cleared the way for India and China to collaborate not only in technology but also in hydrocarbon exploration and production, a partnership that could eventually alter fundamental equations in the world's oil and natural gas sector", Varadarjan points out.
An additional step, already being contemplated, is an Asian oil market trading in euros. The impact on the international financial system and the balance of global power could be significant. It should be no surprise that President Bush paid a recent visit to try to keep India in the fold, offering nuclear cooperation and other inducements as a lure.
Meanwhile, in Latin America left-centre governments prevail from Venezuela to Argentina. The indigenous populations have become much more active and influential, particularly in Bolivia and Ecuador, where they either want oil and gas to be domestically controlled or, in some cases, oppose production altogether.
Many indigenous people apparently do not see any reason why their lives, societies and cultures should be disrupted or destroyed so that New Yorkers can sit in their SUVs in traffic gridlock.
Venezuela, the leading oil exporter in the hemisphere, has forged probably the closest relations with China of any Latin American country, and is planning to sell increasing amounts of oil to China as part of its effort to reduce dependence on the openly hostile US government.
Venezuela has joined Mercosur, the South American customs union - a move described by Nestor Kirchner, the Argentinian president, as "a milestone" in the development of this trading bloc, and welcomed as a "new chapter in our integration" by Luiz Inacio Lula da Silva, the Brazilian president.
Venezuela, apart from supplying Argentina with fuel oil, bought almost a third of Argentinian debt issued in 2005, one element of a region-wide effort to free the countries from the controls of the IMF after two decades of disastrous conformity to the rules imposed by the US-dominated international financial institutions.
Steps toward Southern Cone [the southern states of South America] integration advanced further in December with the election in Bolivia of Evo Morales, the country's first indigenous president. Morales moved quickly to reach a series of energy accords with Venezuela. The Financial Times reported that these "are expected to underpin forthcoming radical reforms to Bolivia's economy and energy sector" with its huge gas reserves, second only to Venezuela's in South America.
Cuba-Venezuela relations are becoming ever closer, each relying on its comparative advantage. Venezuela is providing low-cost oil, while in return Cuba organises literacy and health programmes, sending thousands of highly skilled professionals, teachers and doctors, who work in the poorest and most neglected areas, as they do elsewhere in the third world.
Cuban medical assistance is also being welcomed elsewhere. One of the most horrendous tragedies of recent years was the earthquake in Pakistan last October. Besides the huge death toll, unknown numbers of survivors have to face brutal winter weather with little shelter, food or medical assistance.
"Cuba has provided the largest contingent of doctors and paramedics to Pakistan," paying all the costs (perhaps with Venezuelan funding), writes John Cherian in India's Frontline magazine, citing Dawn, a leading Pakistan daily.
President Pervez Musharraf of Pakistan expressed his "deep gratitude" to Fidel Castro for the "spirit and compassion" of the Cuban medical teams - reported to comprise more than 1,000 trained personnel, 44% of them women, who remained to work in remote mountain villages, "living in tents in freezing weather and in an alien culture", after western aid teams had been withdrawn.
Growing popular movements, primarily in the south but with increasing participation in the rich industrial countries, are serving as the bases for many of these developments towards more independence and concern for the needs of the great majority of the population.

North Sea oil and gas | The long goodbye | Economist.com

North Sea oil and gas The long goodbye Economist.com

Mar 16th 2006 ABERDEENFrom The Economist print edition
High oil prices have helped slow the North Sea's decline. Government flip-flopping could accelerate it again
NOBODY disputes that Britain's part of the North Sea is past its prime. Oil and gas production peaked at 4.5m barrels a day in 1999 and has fallen steadily ever since, to 3.3m now (see chart). Yet in Aberdeen, Britain's main oil town, talk of an old “province” in decline is not tolerated. “The North Sea is enjoying a vibrant middle age,” insists one oilman. “I think I'd describe it as mature rather than declining,” muses another. Indeed, most of the industry's problems seem to be the sort associated with a boom, not a bust. Oil bosses complain about a shortage of skilled labour and the astronomical price of rig rentals, which have doubled since 2003.
A combination of high oil prices and some new government policies have made it profitable to keep working in what is an increasingly difficult and expensive place to drill for oil and gas. Investment has risen by 30% this year, and more exploration and appraisal wells are being drilled than at any time since 1997. The UK Offshore Operators Association (UKOOA), a trade body, thinks that the rate of decline will slow markedly next year. By 2007, production should be slightly higher than last year.
That will be music to the ears of a government determined that the North Sea should still be pumping 3m barrels a day in 2010. The petrochemical wealth off Britain's eastern shores supports a quarter of a million jobs and has helped to insulate the country from the vagaries of the international oil market for decades. Were the decline to continue at historic rates, production would be all but finished in 20 years.
There is no shortage of hydrocarbons: although 34 billion barrels have been produced, some 23 billion barrels are thought to remain. But many of the big, easily accessible fields are running down, and what is left is much harder to reach. That is changing the character of the industry.
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One way to keep production up is to explore the waters off northern Scotland, the Shetland Islands and the deep Atlantic to the west of Scotland, where little exploration has so far been done. Two of the biggest recent finds—Buzzard (with around 500m barrels of oil and gas) and Lochnagar (perhaps 250m barrels)—were found off the beaten track. But developing them can be difficult. Rhum, a big gas field in the northern North Sea, was first discovered by BP in 1977, but the high pressure and temperature in the field meant that gas was not produced until December of last year. “A decade ago, a lot of this stuff would have been literally impossible to extract,” says Mike Tholen, UKOOA's economics director. “But technology has moved on.”
Another option is to scrounge every last drop of oil and gas from existing fields. Finance, not geology, determines when an oil company quits a field, and it may leave behind substantial amounts of oil that are technically (but not economically) recoverable. The dregs of the big fields are often of only marginal interest to the big firms, which prefer chasing bigger and easier finds in other parts of the world such as the Gulf of Mexico or west Africa. Smaller, leaner companies are often able to pull the remaining oil out at a profit.
With all that in mind, ministers have been changing the rules to encourage smaller and more innovative firms. New licences allow companies to explore patches of ocean before they have finance arranged, and to hold on to difficult areas for six years instead of four. New rules prevent companies from sitting on unexploited discoveries for years at a time. And changes to the code of practice on access to pipelines (which are often owned by big oil companies) ensure that smaller companies can get their oil to market.
The new rules have proved popular. The latest licensing round, held in the summer of 2005, was the most successful in years. A total of 152 licences were offered to 99 companies, many of them in the frontier areas around northern Scotland and the Shetlands. A quarter of the companies were new to the North Sea.
But government can hinder as well as help, and not all its policies are so popular. The oil industry's relations with the Treasury have been poisoned by a series of sudden tax changes.
The first came in 2002, when Gordon Brown, the chancellor of the exchequer, raised the corporation tax for oil firms to 40% (most companies pay 30%). In November last year, he bumped it up to 50%. Furious oilmen accused the chancellor of risking the North Sea's future. UKOOA says that the changes create uncertainty, threatening future investment, and that they will do the most harm to the small firms that the government wants to attract. In its defence, the Treasury points to record oil company profits and insists that its only aim is “a fair deal for the taxpayer”.
“The new taxes will probably bump the North Sea a few notches down the competitiveness ladder,” says Geoff Gillies, an analyst at Wood Mackenzie, an energy consultancy. “But at today's oil price, the impact on development will be minimal.” The danger will come if prices start to slip, as Wood Mackenzie thinks they will do over the next few years. Kieron McFadyen, a director at Shell UK, says that if expensive oil justifies higher taxes, then cheaper oil ought to bring tax cuts to compensate.
The death of the North Sea has been predicted many times before, points out Melfort Campbell, the head of the Scottish branch of the Confederation of British Industry. Yet technological advances have always confounded the gloom-mongers. The region will be even more dependent on innovation in its old age than it was in its youth. Most of the government's reforms reflect that. It would be a shame to see them undone by another tax grab.

Mexico proved oil reserves dip again

Stock Market News and Investment Information Reuters.com

MEXICO CITY, March 16 (Reuters) - State oil monopoly Pemex said on Thursday that Mexico's proved oil and gas reserves dipped to 16.470 billion barrels of crude oil equivalent (bce) at the end of 2005 from 17.6 billion bce a year earlier.
That level of proved reserves equates to around 11 years worth at current production levels, Pemex Chief Executive Luis Ramirez told a news conference.
Earlier this week Pemex, one of the main suppliers of crude oil to the United States, reported a slip in total oil and gas reserves to 46.418 billion bce at the end of 2005, down from 46.914 at the end of 2004.
Ramirez said total reserves were equivalent to 29 years worth of oil and gas.
Within the total reserves figure, probable reserves stood at 15.784 billion bce versus 15.8 billion a year earlier and possible reserves rose to 14.159 billion bce from 13.4 billion a year earlier, Ramirez said.
Oil markets watch reserves closely, especially proved reserves, defined as oil and gas deposits recoverable from known reservoirs under existing economic and operating conditions.
Despite the latest slip in reserves data, President Vicente Fox said on Tuesday that Mexico is moving closer to its goal of completely replacing extracted oil with new finds.
Increased spending on exploration in recent years mean Pemex should be able to lift Mexico's total reserves replacement rate to 75 percent in 2006, Fox said.
Mexico's reserves replacement rate -- the rate at which it makes new finds to replace extracted oil and natural gas -- was 57 percent at the end of 2004. Pemex has yet to give the rate for end-2005 but has predicted little change from end-2004.
Pemex is battling to get its reserves replacement rate up to the industry ideal of 100 percent, meaning overall reserves remain steady from year to year, from the very low 14 percent it stood at in 2001 when Fox took power.

barrels of unconfirmed oil and gas deposits in Mexico, much of it beneath deep waters of the Gulf of Mexico, which if confirmed could hugely bolster reserves in the years ahead.
Pemex believes that some 10 billion barrels of that unconfirmed oil could be within reach of its new deepwater exploration well, Noxal. The well, drilled in water 935 meters (3,068 feet) deep and 102 km (63 miles) from the port of Coatzacoalcos, will seek oil deposits 4 km beneath the seabed,
Mexico, the world's No. 5 oil producer by volume, has its oil and gas reserves data independently verified each year.
Pemex shipped an average of 2.052 million barrels per day (bpd) of crude oil in January out of total oil production of 3.372 million bpd.

Australian oil output peaks on slippery slope

Reuters Business Channel Reuters.com

By Maryelle Demongeot - ANALYSIS
SINGAPORE (Reuters) - Australian oil output may be basking in a three-year boom but shrinking fields, tougher geology and speedy development technology will force projects to peak quicker and decline faster than expected.
A flush of new fields will make Australia the biggest contributor to Asia-Pacific's production growth for a second year running, giving regional refiners -- who import about two-thirds of their crude from outside of Asia -- new options.
Those gains may be fleeting if recent developments are any guide, analysts and exporters say, making it tricky for buyers to plan future supplies as oilfields in Asia Pacific's fifth-largest producer ramp up fast but taper off just as quickly.
For instance, output from the Mutineer-Exeter oilfield, off Western Australia, has nearly halved since it came onstream 11 months ago, surprising traders who had counted on a more sustained and prolonged source of supply.
"The most recent developments in Australia -- Enfield and Mutineer-Exeter -- have been developed using Floating Production, Storage and Offloading (FPSO) systems," says Richard Quin, lead Australia analyst for upstream consultancy Wood Mackenzie.
"This type of offshore development is capital-intensive and therefore the operator will try to recover the oil quickly in order to recover costs."
The trend is reinforced by the shrinking size of oilfields in Australia, considered a mature province where output will soon peak, as well as the more costly and sophisticated technology required to exploit difficult or complex reservoirs that have been made economical by oil's three-year price boom.
The average size of a commercial oil discovery in Australia has been 23 million barrels over the past 10 years, one-quarter of the worldwide average, Wood Mackenzie estimates in its Global Oil and Gas Risks and Reward Analysis from 1994 to 2003.
QUICK DEPLETION
The decline mirrors the unexpectedly fast depletion rates in areas such as the North Sea but is in contrast to most other major new oilfields in places like West Africa, where six-digit output rates are typically maintained for a decade or longer.
The Australian Bureau of Agricultural and Resource Economics (ABARE) estimates that output could peak at around 557,000 barrels per day (bpd) in 2007-2008 as new fields come onstream.
But Australian production of crude oil and condensate, an ultra light form of oil, will fall back to 500,000 bpd in 2010-2011 as fields mature.
"In the medium term, additional capacity that is coming online will more than offset the declining fields," said Muhammad Akmal, senior economist, Energy and Minerals Economics, at ABARE.
The biggest contribution will come from Australian producer Woodside Petroleum Ltd. (WPL.AX: Quote, Profile, Research), which will bring its 100,000-bpd Enfield oilfield onstream in the third quarter, ahead of the initially scheduled October start.
Other smaller fields will also contribute to the upturn in Australia's upstream.
OUTPUT MUTINY ON MUTINEER
In 2005, Australia made the single-biggest contribution to the Asia-Pacific upstream sector with the early start-up of Santos's Mutineer-Exeter in the prolific Carnarvon basin, off Western Australia.
But the field, initially forecast to start flowing at 110,000 bpd, never reached that rate. It fell to 62,000 bpd in the fourth quarter, partly due to natural decline, and stands at around 55,000-60,000 bpd so far this year, Santos said.
The lower-than-expected output comes as Santos downgraded the field's proven and probable reserves by almost half to 61 million barrels on geological complications, implying just three years of output at current levels, though it added some 10 million barrels of proven and probable reserves this year.
The top of the main oil reservoir proved deeper than expected in some parts of the field and the oil pay was thinner in a number of key wells, making oil recovery more difficult.
Other fields have also peaked quickly as producers seek to maximise short-term recovery to cash in on roaring prices.
The Laminaria oilfield started pumping in late 1999 at close to 140,000 bpd. Now it produces around 20,000 bpd.
The offshore 10,000-bpd Cliff Head oilfield in the Perth Basin, is set to come onstream by end-March, only a year after the final investment decision was made.
But the field's 14 million barrels of oil reserves mean its production rate could fall from 10,000 bpd very rapidly, says the chairman of Australia-based Roc Oil Co. Ltd (ROC.AX: Quote, Profile, Research).
"It could flow at 10,000 bpd from a few to many months," John Doran said recently. "The field's declining rate will depend on oil prices. It will produce for five to 10 years."
Despite diminishing prospects for big new oilfields, explorers have not given up on Australia, but are shifting their focus away from crude.
"For us, the strategy in Australia is about gas," said Wouter Hoogeveen, Vice President, Exploration-Asia Pacific for Shell (RDSa.L: Quote, Profile, Research), which was awarded six exploration licenses last month.

Oil Find in Mexico Far From Success - Los Angeles Times

Oil Find in Mexico Far From Success - Los Angeles Times

The deep-water field will test the country's engineering and financial limits.
By Marla Dickerson, Times Staff WriterMarch 15, 2006
MEXICO CITY — About 60 miles from shore and three miles down through seawater and earth lies Mexico's best hope to replenish its slipping oil fortunes.Mexican President Vicente Fox announced Tuesday that state-owned oil giant Pemex had hit serious pay dirt in the Gulf of Mexico: A deep-water exploration known as Noxal had tapped a field off the coast of the southern state of Veracruz that could contain as many as 10 billion barrels of oil. If the field pans out, it would be one of the largest in the nation's history and go a long way toward bolstering Mexico's rapidly declining petroleum reserves, which some experts have warned could run out in as little as 11 years.
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"Noxal begins a new stage of petroleum exploration in our country," said Fox, speaking in the Veracruz city of Coatzacoalcos after visiting the drilling rig. But the undersea riches won't come quickly, easily or cheaply. Not only could it take a decade for the new field to begin producing, but officials also acknowledge that the undertaking could push Mexico's engineering and financial capabilities to the limit.The world's fifth-largest oil producer has little experience drilling in deep water, a technically challenging and expensive endeavor. Mexico's inefficient oil monopoly, Pemex, is indebted to the hilt. And the nation's constitution forbids equity investments by foreigners, which prevents Mexico from teaming up with major oil companies to find and extract more crude.Despite high oil prices, Pemex lost about $4 billion in 2005, the eighth straight year that the company has bled red ink. It's a consequence of interest payments on its $50 billion in debt and staggering taxes. About 60% of Pemex's revenue goes to the treasury to finance one-third of federal spending on such things as schools and sewers.That has left little for even basic maintenance, much less the big bucks needed for exploration and development. Privatization remains an anathema in Mexico, where the 1938 nationalization of the oil industry is celebrated as a federal holiday. Still, Pemex officials hinted Tuesday that they were looking for wiggle room to get Noxal pumping."We recognize that we should establish new mechanisms of collaboration with other petroleum companies with experience in deep waters," said Luis Ramirez Corzo, director general of Pemex.Industry analysts reacted cautiously to the news."Certainly it's going to be welcomed if, in fact, it turns out to be true," said William Herbert, co-head of research at Simmons & Co. International, a Houston-based energy investment bank. Herbert said that among the challenges Mexico faced was obtaining technical talent and equipment to get the Noxal project underway quickly. A major find by Mexico, the fourth-largest U.S. oil supplier, would be welcome news.Herbert said the world's two biggest fields — Saudi Arabia's Ghawar and Mexico's Cantarell — were on the decline. Located off the coast of Campeche state, Cantarell accounted for about 60% of the 3.3 million barrels a day that Mexico produced last year. The field's production peaked in 2004 at about 2.2 million barrels daily, and analysts say its output could begin falling by 10% or more annually within a few years."Replacing that much production is going to be a huge challenge" for Mexico, said Jed Bailey, senior director of Latin American research at Cambridge Energy Research Associates in Massachusetts.