Toxic Water Plagues Australian Gas Project

There’s trouble in the water. Actually, no, there’s toxins in the water. PetroChina and Royal Dutch Shell owned Arrow Energy is reporting toxic levels of petroleum byproducts in water samples around its Moranbah Gas Project. The gas development project is based in Queensland’s Bowen Basin, Austrailia, and it has faced public opposition, specifically from farmers, amongst groundwater contamination concerns.

The contaminates are in no way a shocking discovery for Arrow, as their occurrence is relatively common in gas drilling sites. There seems to be no concern, however. Arrow claims that while the chemicals exist in their trace amount tests, they have not actively used any of them in their fraccing fluids. Further testing will hopefully show whether the chemicals, known as BTEX, are a natural occurrence or have been introduced by a third party.

Despite the fact that officials have declared the low amounts to be harmless and that there is no reason for public worry, skepticism remains, and I am skeptical myself. Considering the regulatory onslaught that’s occurring in the United States, it seems logical that companies are hoping to be as under the radar as possible. I’m not insinuating that Arrow would lie about the toxicity of the leak, but they instead may downplay the severity of the issue to a level they hope to be manageable. Whether or not this turns into anything remains to be seen, but even if there are no public health effects, I am left to wonder what damage the BTEX chemicals will do to the surrounding environment. 

Sources: The Wall Street Journal

Signs of What's to Come

US supermajors are expected to greatly increase capital spending in 2011 and beyond with Chervon leading the way. Besides the billions of dollars that this will involve, this is significant because it is a sign that better times are coming—at least for the oil and gas industry. The Great Recession proved to be a very difficult time for the energy industry, so much so that demand for oil declined for the first time since 1983. The narrower profit margins over the last couple of years have meant that energy companies are not spending nearly as much as they did before the financial crisis. Lesser capital spending means that companies are not doing as many exploration endeavors as they would like.

The reason that oil and gas companies are now able to afford greater spending is due to rises in demand which is bringing prices of crude oil back up to more normal levels. Oil prices had been $145 per barrel—an unprecedented high—just before the financial crisis in July of 2008, they then tanked to just $40 per barrel. Oil is now back up to $80 per barrel and it is expected to more than double in the next two years due to increased demand.

I believe the prospect of oil prices doubling in the next two years makes US oil companies a potentially very strong investment, and at least a very secure investment. Oil companies are using their greater profits to explore more oil producing regions within the US to tap large quantities of previously unattainable reserves. Marcellus Shale in Pennsylvania and New York is particularly promising and it could prove to be a safer bet than the Gulf Region and other off shore projects, which oil companies expect to made more expensive by increased government regulation in the wake of the BP oil spill.  Overall, US oil companies are poised for strong growth in the near future.

Sources: The Wall Street Journal, Picture, Standard & Poor

Vassar Cash Shell The World's Largest Exporter of Coal?

According to The Wall Street Journal, Nat Rothschild’s Vallar Cash Shell is now the world’s largest exporter of steam coal. This deal came to fruition because Mr. Rothschild arranged a complex 3 billion dollar reverse takeover with Indonesia’s Bakrie family. The deal will leave the Bakrie family with a 41% share in Vallar while Mr. Rothschild receives a 51% share in PT Bumi Resources, which is Indonesia’s largest coal producer. As a result of this transaction Vallar will be renamed Bumi PLC. Also simultaneously Vallar has invested 1.6 billion dollars in cash and shares to buy a 75% stake in PT Berau Coal Energy, which is a smaller coal producer that has various gold and metal-based assets.

I believe that this investment by Vallar Cash Shell should put them in excellent positioning heading into the next decade and beyond. Vassar, or PT Bumi Resources, is not only the world’s largest steam coal exporter, but it also will have the greatest access to asia’s developing markets, specifically China. According to the EIA, China is the world’s largest coal consumer and I believe is likely to continue to buy coal as they develop there infrastructure and economy. I think that as a result of this and the various other developing countries in Asia including India, Vietnam and Singapore that PT Bumi Resources will be a good stock to invest in, in the long term as its profit margins will rise significantly due to the high demand it will receive from countries neighboring Indonesia. In addition PT Bumi Resouces will have low interest costs, as it has better access to the world’s capital markets than its competitors since PT Bumi is a London listed company. From a regional perspective in Indonesia and Southeast Asia it will be intriguing to see how the newly formed PT Bumi Resources will affect the coal market.
Sources: http://http://online.wsj.com/article/SB10001424052748704312504575618771973862424.html?mod=WSJ_Energy_leftHeadlines
http://http://www.eia.doe.gov/cabs/China/Coal.html

The informational interview provided me with different new ideas. Many times people don't know how prices of one product can affect another factor of production. Different types of industry look for specific job positions in their companies. When companies in are new to an industry, all of the job positions are increasing; they rarely reduce or decrease a specific position. This is the case of Ampacet in Mexico, which was established in this new area six years ago. Ampacet operates in 17 different countries. In general there are some key points of interest.

It is interesting how an increase or decrease in the price of petroleum can affect the price of another product when petroleum is an input for that factor of production.

I learned why the demand for all job positions can be increasing at the same time because a company has been recently established in a new area.

It is interesting as well, to see that the most common jobs are open to engineers. This shows that depending of the industry in which the companies belong, there is certain preference over job positions preferred by each company.

Changing Hands?

Vermont’s Yankee nuclear plant may be on its way to changing hands. Entergy Corp. has positioned itself to execute a possible sale of the plant in the midst of the troubles it’s facing. Combined with a depressed power market fueled by low natural gas prices, the Vermont plant is getting older. By some standards in fact, the plant is becoming ancient. The 39 year old plant is commissioned through March 2012, yet Entergy is hoping to extend its license for another 20 years before selling it off.

The plant is facing other issues as well. Last year the plant’s groundwater tests showed an increase in a radioactive material known as tritium—which can lead to cancer. Despite the levels being deemed innocuous after further testing, the plant’s ownership has fallen out of fashion with State and even Federal officials. Vermont, unlike most other states, has the ability to block proposed extensions of a nuclear plant operating there. It seems like the time is now for Entergy to get out.

It’s not all bad for the plant, though. The Yankee plant is responsible for producing about 1/3 of the state’s power, which bodes well for a potential buyer. Secondly, the state’s objection to the plant seems more with the current ownership, especially after their mishandling of the tritium leak, not with the plant itself. Is Vermont equipped to suffer a loss of a third of its power production and 650 jobs? I’m not sure, and I’m willing to say that in this economy, such a move is unlikely.

Wall Street Journal Analyst Naureen Malik deemed the possible sale a win-win situation, and I’m inclined to agree. The plant, who sells power a market price not a regulated one, could benefit immensely from a change in ownership. A new owner with a new focus would help to secure the plant’s jobs and power output, and would also be more likely to have a license extension granted.


Sources: The Wall Street Journal, Entergy Corp.

Chinese Imports of Crude Oil Decrease

According to Bloomberg, China’s crude oil imports in October of 2010 declined to their lowest level since May of 2009. This is especially surprising considering that in September of 2010 China recorded their highest amount of imports of oil at 3.8 million barrels of oil per day. Bloomberg News and JP Morgan analyst Brynjar Eirik Bustnes speculate that the reason for this sudden decline is due to the excess oil that was brought to China in September, which according to them lasted in to October. However, conversely China’s oil products imports that include gasoline and diesel rose for the third consecutive month to 840,000 tons.

This decrease in Chinese imports of oil brings several issues to mind including how this news will affect the world oil market. As well as, whether it will lead to an increase or decrease in gasoline prices at the pumps. I believe in the short term that as a result of this import decrease that gasoline will be cheaper to purchase than in the previous months. However, unfortunately for the American and global consumer, prices will most likely rise again as China begins to increase its imports. In addition, I think that from a macroeconomic perspective it will be interesting to see how the decrease in crude oil imports and increase in oil product imports will affect the global economy.

The EPA is Now All the Way

 

 The EPA will now require United States oil and gas companies, along with certain electronics manufacturing plants to report their greenhouse has emissions. This requirement is part of the EPA's new (as of earlier this year) Greenhouse Gas Reporting Program which is designed not to directly regulate the emissions rates of companies, but rather to inform the public as to how much pollution a particular company or industry sector emits. Now that the energy sector is now accounted for, the EPA has all of the 'high-profile sectors[s]' under its monitoring, which amount to 85% of all industrial greenhouse gas emissions produced in the US. While the EPA estimates this tracking of emissions will cost the energy industry $62 million for companies to be able to a get the software and monitoring needed, others argue that cost may range from $123 million to $1 billion.

I believe the costs of this program will actually be worth the benefits; although, in the short term the balance will likely prove to be the other way around. I believe this because it will afford people to know if there is a particularly inefficient company which they are then able to compare with other companies who produce the same good, and then make an informed decision about purchasing the companies good or service. While there is no immediate possibility for regulation of oil and gas production companies, there does appear to be potential for future regulation of greenhouse gas emissions, especially given the analytical approach the EPA is taking to compartmentalize businesses into their specific sectors. If the EPA does choose to regulate the emissions that US oil and gas companies, I believe it will be making a big mistake, because it would force our companies to be potentially much less competitive than the state-run oil giants which give no regard to emissions produced. However, even if the EPA were to attempt to regulate oil and gas companies enough to hurt their competitive edge, the political upheaval that this would create would soon crush such hopes of the EPA.
Sources: New York Times, Photo, EIA

Analysts Observe Trends

Many analysts look at upstream, which refers to the exploration and production of oil and gas expenditures, from previous quarters to estimate future industry trends. For example, a decline in upstream expenditures usually drops down to other areas such as transportation and marketing.

Some analysts believe that rather than analyzing energy companies, you should just predict the trend in energy prices. More analysis is needed for a wise investment than simply looking at price trends in oil. However, it is true that there is a strong correlation between the performance of energy companies and the commodity price for energy.

The industry trend for the past five years has been that the upstream capital spending by oil and natural gas producers are the fundamental element for the revenue base of the equipment and oilfield services. Companies give significant amounts of money each year for exploration and development activities.

Analysts have been working carefully watching out the industry trends to see what type of investments can be made into the industry.

The Oil Services Industry

http://www.investopedia.com/features/industryhandbook/oil_services.asp

Devon Energy: Independently Moving Forward

The third largest independent producer of oil and gas in the U.S., Devon Energy Corp., reported that the sale of overseas assets and the spike in crude oil prices has increased their profits by fourfold. This great increase in profits caused their shares to reach even greater levels than expected by analysts. In fact, their shares reached their highest levels in five months. This comes as Devon's share prices have dropped 7.2 % this year alone. Although, the jump in shares amounted to 3.5% which was the largest one day leap of any oil and gas company of the 13 among the S&P 500. Devon sold $10 billion worth of BP Plc., Apache Corp., and in Chinese producer Cnooc Ltd.

I believe that Devon Energy's success is due, in large part, to being in the right place at the right time. While it made many valuable transactions in international asset sales, this, combined with a recently stronger dollar and federal stimulus that will buy $600 billion in government bonds makes Devon's success due to more than simply wise business practices. And, Devon is not the only company to back out of major overseas endeavors in recent days. In a similar move toward more domestic concentration of production, PDVSA sold great stakes it had in US oil deals; although, PDVSA also reinvested some of that into oil companies in Belarus and Syria. Even still, this recent move by Devon does seem to be the right move because the company will have greater control and oversight into its production; enabling much needed boost in productivity.


Sources: Image, Bloomberg, Reuters

Trouble in the Water

Offshore drilling company Transocean Ltd. is facing a huge drop in their third quarter profits. The company reported a 48% drop which was fueled by a decrease in their utilization rate, average daily revenue, and the BP Deepwater spill. Transocean has not been held responsible for the spill, but they have been speculated to have been a contributing member to the chain of events that resulted in the disaster.

As I blogged about in late October, the lifting of the Obama administration’s moratorium won’t take real effect until January 2011 in all likelihood, due to the slow process of approving permits for drilling. In conjunction with the additional new regulations that have been imposed, the business climate has been transformed from explosive production and consumption into lukewarm stagnation.

Yet I don’t think that Transocean is a completely fair example of the effects the new regulations are having. Despite that shallow-water drilling companies are already reporting delayed approvals because of the new process, I think that there is something else going on with Transocean. As previously discussed, the company has been in the spotlight since April’s Deepwater disaster, and I think this is the biggest reason for the skepticism around the company.  The stock has dropped 23% from this point last year, and while increased costs of production via regulation are contributing, the uncertainty around the legal action the company may face is an even bigger issue.

Sources: The Wall Street Journal

The effects of the Deepwater Horizon Rig Explosion Continue

According to The Wall Street Journal Houston, Texas-based offshore oil driller, Pride International Inc., is evaluating strategic options for the future, which could include selling to a larger offshore drilling company. Pride is considering this option because of the potential onslaught of offshore drilling regulations soon to be passed by congress. Other possible options that Pride International are currently evaluating include a strategic alliance with another offshore drilling company such as Norway’s Seadrill Ltd. or Britain’s Ensco PLC. Other companies currently facing this uncertainty include another Houston, Texas-based offshore oil driller Seahawk Inc., a former affiliate of Pride International, who are at the moment weighing their options on what to strategically do.

I believe that Pride International Inc.’s current situation reflects that of many other offshore oil drilling companies, who are presently struggling to make ends meet due to the recently lifted Moratorium and the oncoming regulations. If Pride International does decide to allow themselves to be acquired by another company then a good match for them could be Seadrill Ltd., who employs similar equipment to them on drill sites and at the moment has a small stake in Pride International Inc. According to The Wall Street Journal further solidifying my belief that Seadrill Ltd. will acquire Pride International is the news that they have been aggressively courting Pride for an acquisition for months. As a result of this speculation on Pride International’s future their stocks rose 11% on the evening of November 2, 2010, which could lead to interest from other companies as more investors are beginning to buy stock in Pride International. Pride appears to be a good investment both in the short and long term as their stock prices go up and the potential of further earnings from a merger become ever greater.

Oil Peak

Alternatives for oil have already began. The peak oil theory sees the Hubert curve (Hubert from the Shell Company created this theory), which sees oil production increasing at one point, but then decreasing. The curve works for any limited natural resource. The curve predicts a “steep fall off, or a high rate of decline of production” as existing assets go down. Peak oil debates tend to argue that global oil production will decline too fast for the world to develop sufficient alternative sources of energy to replace the use of oil.

Shell doesn’t promise to peak oil theory but agrees that since the year two thousand the demand for oil has increased. Research shows that demand for oil will continue to increase, the highest being 2.5%. At this rate, the demand in the year 2030 will be more than double what it was in 2000. Shell is not promising to pursue the oil peak theory, however the company does agree that oil is being depleted in the Middle East. Shell has been looking for options. Some of the options include stepping up the progress on renewable resources.

The environmental lobby, however, is strongly opposed to oil sands exploitation, arguing that they are easily one of the worst (most polluting) forms of energy. Some argue that the extraction of oil from oil sands creates “three times the carbon emissions of oil production and destroys the local environment. Oil shal is worse according to many other companies.

It is very important to fin better ways of replacing consumption of oil with probably renewable resources. The demand is increasing and natural resources are decreasing.

Q-finance- The Ultimate Financial Resource

http://www.qfinance.com/sector-profiles/oil-and-gas