Despite plunging oil prices, Gulf on brink of boom

Offshore
1

PORT FOURCHON, La. – Whoever is warning that slumping crude prices will curb oil production hasn’t told the tenants of this bustling oil port.

Cranes line two enormous slips, expanding capacity and building more facilities. Louisiana-based Bollinger Shipyards is constructing four massive dry docks able to service 300-plus-foot vessels. Workers drive pilings into the ground for what will be the expanded site of Schlumberger, an oil-and-gas technology supplier.

All this activity will soon cater to huge floating facilities in the deepest waters of the Gulf of Mexico as they drill for and produce crude and other products.

“It’s an unprecedented time,” Port Director Chett Chiasson said recently as he drove past the construction. “This is the busiest it’s ever been.”

“It’s an unprecedented time,” Port Director Chett Chiasson
"It’s an unprecedented time," Port Director Chett Chiasson said. “This is the busiest it’s ever been.”(Photo: Edmund D. Fountain for USA TODAY)
Even as crude’s rampant price plunge rattles the industry, the Gulf of Mexico is on the brink of an unprecedented oil boom. Nearly five years after the Deepwater Horizon disaster briefly paralyzed gulf drilling, analysts predict deepwater oil production is headed into one of the biggest growth spurts in history. Production is likely to reach a peak of 1.5 million barrels of crude a day by 2016, surpassing the previous record set in 2009.

In 2015, production will jump 21% from 2014 levels and grow even more in 2016 – adding to America’s already bulging oil production, said Imran Khan, a deepwater Gulf of Mexico analyst at energy consultants Wood Mackenzie. The number of permits for deepwater drilling increased from 14 in 2010 and 274 in 2011 to 603 in 2014, according to the Bureau of Safety and Environmental Enforcement, which oversees the drilling.

All this while crude prices continue to free-fall as global supply outstrips demand. Western Texas Intermediate, a major benchmark, dropped to $48 a barrel in trading Tuesday, a 50% drop from last summer and its lowest mark in five years. The plunge in prices is good news for consumers – who enjoy an average of $2.20 a gallon of regular gas in the USA – but it weighs heavily on markets and some energy stocks. Monday, the Dow Jones industrial average took a 331-point plunge, the blue-chip stock gauge’s worst one-day decline in three months.

Some Texas shale producers have announced they’re scaling back operations, and energy giant BP plans to accelerate job cuts.

Unlike shale production in places such as South Texas and North Dakota, which rely heavily on steady crude prices to finance activity, deepwater drilling and production are long-term, multimillion-dollar projects that take several years to come online and aren’t as affected by fluctuating markets, Khan said.

“There’s no stopping those,” Khan said of the deepwater projects. “Once you start spending all that money, it’s hard to stop in the middle.”

Workers stand beneath a dry-docked ship at Port Fourchon,Workers stand beneath a dry-docked ship at Port Fourchon, La., on Dec. 15, 2014. Even as crude’s rampant price plunge continues to rattle the industry, the Gulf of Mexico is on the brink of an unprecedented oil boom. (Photo: Edmund D. Fountain for USA TODAY)
Fullscreen
Workers stand beneath a dry-docked ship at Port Fourchon, Ships used to service the oil industry are docked at A pipe used to pump sand onto beaches is seen at Port Equipment used by the oil industry at Port Fourchon. “It’s an unprecedented time,” Port Director Chett Chiasson Fishermen watch their lines on shore at Port Fourchon. A worker walks among pipe and other drilling equipment Equipment bearing the Shell Oil logo at Port Fourchon. Port Fourchon is the southernmost port in Louisiana
Next Slide
At the center of the deepwater surge is Chevron’s $7.5 billion production platform – the largest of its kind in the Gulf of Mexico – which started harvesting oil this month from the Jack/St. Malo fields about 280 miles south of New Orleans in 7,000 feet of water. The platform has the capacity to produce 170,000 barrels of crude and 42.5 million cubic feet of natural gas each day and be operable for the next 30 years.

“For the deepwater business, you really have to take a long-term view,” said Steve Thurston, vice president for deepwater exploration and projects. “Our investments occur over multiple decades.”

The renewed Gulf activity has sparked questions as to whether the industry is any safer after the Deepwater Horizon disaster in 2010. In that incident, a drilling rig leased by BP exploded, killing 11 workers and unleashing millions of barrels of crude into the Gulf. It was the worst marine disaster in U.S. history and triggered ecological and economic effects still felt today. The event led to a temporary moratorium on Gulf drilling and a slew of regulatory requirements.

For starters, the federal government requires energy companies operating in the Gulf to show they have the capacity to plug deepwater spills. Oil companies hire marine spill specialists skilled in capping seafloor oil gushers, such as the one that took 87 days to plug during the Deepwater Horizon incident.

The number of inspectors regulating wells in the Gulf has climbed from 53 before the Deepwater Horizon incident to 99 today, according to the Bureau of Safety and Environmental Enforcement.

Those inspectors look after more than 2,400 production platforms, drilling rigs and other facilities in the Gulf – ratios that feel woefully uneven to environmentalists.

“They’ve taken some steps,” said Athan Manuel, the Sierra Club’s offshore drilling expert. “But unless they hire enough inspectors to go out and make inspections, you could see a repeat of the Deepwater Horizon.”

Still, deepwater drilling continues.

At Port Fourchon, which services 90% of the rigs operating in the Gulf of Mexico, officials have seen the port’s revenue grow exponentially the past few years. In 2010, when the Gulf was crippled by the Deepwater Horizon spill, the port lost $3 million. This year, it made $24 million, Chiasson said. “The sheer amount of investment that has taken place the last few years – and what’s planned for 2015 and 2016 – is really unbelievable,” he said.

One of the port’s tenants is LLOG, a Louisiana-based oil-and-gas producer that focuses on deepwater drilling. In the coming months, it will bring online a $2 billion project that will harvest 15 deepwater wells with the capacity of producing 80,000 barrels a day, said Rick Fowler, vice president of deepwater projects.

Investment on the project was sizable, but its “break-even point” – the cost crude would have to reach before the company scales back production – is low, less than $20 a barrel, Fowler said. More than 95% of the company’s upcoming projects are in deepwater, he said.

“We continue to get better at exploring for oil and gas,” Fowler said. “That trend will continue.”

2

So why are there boats tied up and crews getting laid off?

3

Shelf boats, less splurge spending on renewed contracts. Spot boats unable to pick up work or secure contracts.

4

remember that there are wells and projects already budgeted and underway which will continue to move forward but it are those not yet greenlighted by the operators which are now in a twilight zone of whether they will or will not be moving ahead and if the price of oil remains so low I fear a great many of those won’t in order for majors to preserve reduced revenue for shareholder dividends and to pay for ongoing operations and debt. I wonder about this new find that Chevon just made at their Anchor prospect? Sure they know they are sitting on oil there but will they want to spend the money now to extract it when they can just buy oil for cheap? It only makes sense to put new production online when you can’t go out and just buy oil for less than extracting it yourself. That is why the future of the GoM deepwater is looking weaker in this new paradigm…why spend all that extra money now when you can just buy what you need for so little? I do believe that the downturn is too new for the majors to have made any decisions about this but certainly believe that the longer the price stays so low, the easier it will be for them to not pull the trigger on going ahead with big new projects in the pipeline but not yet budgeted.

Remember also that even before the downturn, there was a big push by shareholders to reduce E&P spending at all the majors.

.

5

I know this isn’t strictly on-topic but it all ties together in the end. I can’t help but feel that now more than ever we have a desperate need for the Keystone-XL Pipeline. The phrase “make hay while the sunshines” comes to mind. That doesn’t necessarily bode well for the gulf because their oil is already becoming less important in the face of other sources but there are innumerable other people I can think of who stand to benefit from the inflow of oil from the north (refineries, product tankers, tug and barge units, to name a few). Whatever happens with the pipeline and oil prices I hope our friends in the gulf can survive and find a somewhat new and different but no less important place in the world.

6

I have to disagree. I don’t think it will create all that many permanent American jobs, and we carry the majority of the environmental risk from it.

It’s not like they are going to build any new refineries at the gulf end of it. Dollars to donuts it all gets put on ships and sent somewhere else, with minimal taxes and revenue made on it.

What we need to do is stop subsidizing cheap oil production in the Middle East with our military. Iraq announced they are boosting oil production next month, all the while our military is spending millions of dollars on air strikes to allow their useless government to keep operating with their heads in place.
Let’s see how cheap they can go with oil when they have to spend billions of their own dollars on internal security!

Let’s pump our own oil, refine our own products, and buy what we can’t pump from Mexico and Canada.

Of course that won’t happen because energy indpendence is a catch phrase invented by politicians, not something they are actually interested in. Not to mention the military industrial complex needs a reason to continue to build useless shit.

7

you know that the prohibition against exporting US produced crude is being steadily eroded and expect the new Congress to accelerate the call to lift the ban entirely.

[B]Did The White House Just Signal It Wants A Major Oil-Export Deal With Congress?[/B]

1/07/2015

The U.S. Department of Commerce set off some alarms—or cheers, depending on your perspective—in the energy industry when it published a set of new oil products export guidelines over the holidays.

Some outside observers shrugged and said the new rules didn’t really change anything. A few others, however, are insisting the move was something important: a “wink and a nod” by the White House to more exports, or even an invitation to Congress to end the ban on exports of American crude oil products.

So what was it, really?

You’ve undoubtedly noticed that crude oil prices in the U.S. are plummeting thanks largely to the energy industry’s embrace of shale oil exploration and the resulting gusher of new supply. Federal law prohibits producers here from exporting crude, so the glut has produced some nice benefits for U.S. consumers, most notably in the form of super-low gasoline prices at the pump.

With so much oil around, the topic of ending the restrictions on crude exports has been hot for the last year and will be a big item on the new Congress’s agenda in 2015. But it hasn’t been clear what the White House’s stance is on the topic.

There are all kinds of political, geopolitical, and business pressures in favor of letting the U.S. share its oil production boom with the world. And in fact, it has already been happening. The U.S. has been a major net exporter of petroleum products, to the tune of about two million barrels a day, since 2010. President Barack Obama has touted that in speeches, but he hasn’t said he’d be willing to end the ban on crude oil exports.

Given the ban, you ask, how did the U.S. get to be a net exporter of oil? Well, federal law only prohibits the export of crude itself and not “refined products distilled from domestic crude” or crude that has been “processed through a crude oil distillation tower.” All of this is set out in an arcane set of federal regulations housed in a mysterious office at Commerce called theBureau of Industry & Security (BIS).

The rule seems simple enough, right? Wrong. What had been a relatively moot set of regulations when the U.S. was a net importer of oil has now become a full employment act for lawyers. In true Aristotelian fashion, there are legions of well-paid people who spend time answering the question: How much processing counts as “processing” under the rules? Surely, converting crude oil to diesel counted. But could something as simple as, say, filtering the crude count?

Companies started flocking to the BIS for individualized rulings that whatever they were doing was enough processing to be processing. Why did exporters need confirmation of what was already legal, you ask? They didn’t, really. They could legally “self-classify” their product as “processed.” But exporters, courter-parties, and banks (and all their various lawyers) were leery of signing on to export deals nonetheless. To those risk-averse parties, exports without the stamp of approval by Commerce was “driving blind”—even though it really isn’t. Hence the demand for the government’s blessings (what lawyers call “belt and suspenders”).

A few players started looking for cover. Companies like Pioneer Natural Resources and Enterprise Products Partners obtained such blanket “commodity classification” rulings by the BIS that their exports passed legal muster. Those rulings attracted a ton of unexpected political and media attention, even though the BIS rulings hadn’t really broken new ground at all.

It was all enough to make even Aristotle’s head spin. So last summer, Commerce basically turtled up and closed shop on private rulings. Some reports said that move amounted to a “wink and a nod”—there’s a startling amount of that in government—to encourage more producers to self-classify products as processed without any need for any blessing from Commerce. BHP Billiton became the first last year to export without explicit permission from Commerce—running without belt or suspenders, if you will.

I think BHP got it right. Commerce’s move to close shop on private rulings really was intended to encourage nervous exporters that they were not at risk by self-classifying. And I think the industry was ready to export much more minimally-processed crude this year.

Then in comes Commerce, captained by Forbes 400 member Penny Pritzker, again to muddy the waters on December 30. The department published a new set of answers to frequently asked questions on how much processing counts as “processing.” The guidance talked about six major factors, including things like whether “the distillation process materially transforms the crude oil by using heat (not just negative pressure)” and “change in percentage of different types of hydrocarbons between the input and output of the process.” (For any lawyers out there, look at the bottom of this story for the full text of the six factors.)

What did it mean?

Matthew Thomas, a Washington international trade lawyer here at Blank Rome who advises global energy and commodities companies, tells me that the test “seems vague, complex, and highly subjective, since it requires Commerce to consider the technical details of the ‘distillation tower’ equipment, the characteristics of the output streams, and the end use of the products. At first glance, the test seems surprisingly restrictive, although it will remain to be seen how it is applied in practice.”

An industry insider tells me that these FAQs send the message to potential exporters that the BIS intends to keep the waters muddied over what constitutes crude oil and distillation, and therefore it is probably portends more exports.

For good measure, I ran all this past a constitutional scholar friend. He said to me, rhetorically and with a bit of sarcasm: “Has this Administration taken executive power to ‘royal levels’ by going from the controversial making of law via executive order to now making it by FAQs quietly posted on the web?”

The bottom line is that all of these machinations last year, and especially in the year-end law by FAQs, will likely increase processed crude exports by nudging exporters to be more comfortable with self-classification. But the past year’s soap opera on this will also have the therapeutic effect of putting the question of whether we should or shouldn’t scrap the crude export ban law altogether into even sharper focus than it is already. And my constitutional scholar friend will take heart in the fact that the discussion will likely take place in Congress where the light of day can shine on it.

As promised, here’s the list of six factors that the Commerce department says determines how much processing counts as “processing” in the crude oil game:

whether the distillation process materially transforms the crude oil by using heat (not just negative pressure) to induce evaporation and condensation, into liquid streams that are chemically distinct from the crude oil input;
the change in API gravity between the input of the process and the output of the process;
the change in percentage of different types of hydrocarbons between the input and output of the process;
whether the streams resulting from distillation have purposes other than allowing the product to be classified as exportable petroleum products, such as use as petrochemical feedstock, diluent, and gasoline blendstock;
whether the distillation process utilizes temperature gradients and has significant internal structures, such as trays or packing, and differentiated output streams;
whether the distillation uses towers with more mechanical complexity and heat, higher residence time, internal structures that promote condensation and better separation, and a consistent quality liquid streams (also called cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.

Is your head spinning? Even faster now, I’m sure.

Michael L. Krancer is Partner & Energy, Petrochemical and Natural Resources Practice Group Leader at Blank Rome LLP and a former secretary of the Pennsylvania Department of Environmental Protection. His blog, Energy Trends Watch, follows developments in energy, petrochemical and natural resources.

Selling out US strategic interests to provide great profits for corporations is what all that is about. There is absolutely no good reason why we should sell one barrel of our oil as long as we need to still import even a small percentage of our demand!

9

at the same time Saudi Arabia says that it is prepared to let oil go to $20/bbl if need be

[B]As Saudia Arabia refuses to ride to the rescue, oil traders give up betting on how low prices can fall[/B]

Crude oil’s freefall from $100 a barrel to under $50 has struck at the heart of a core belief in the markets: that Saudia Arabia would always ride to the rescue

Reuters

Thursday 8 January 2015 09.15 EST

Oil traders can agree on only one thing about when the second-biggest price rout on record will be over: not yet.

Crude oil’s freefall from more than $100 a barrel last summer to a near six-year low under $50 a barrel has been unrelenting, shocking traders and baffling analysts who have all but given up trying to pinpoint the bottom of the market.

The scale of the uncertainty reflects a market stripped of a core belief that has underpinned prices for the past decade: that top oil exporter Saudi Arabia would always ride to the rescue.

Ever since the Kingdom pivoted late last year to defending its market share rather than a near-$100 oil price, traders have been scrambling to search for other indicators that might suggest the stunning slide is over.

Time and again in recent months, traders have sought to identify levels that might mark a bottom, or bet that the Organization of the Petroleum Exporting Countries’ resolve to do nothing would eventually crumble, forcing supply curbs.

But with no sign of the cartel bending, each pause has been followed by a new wave of selling. Most traders now appear to have either given up, or are riding the frenzy lower.

“I’ve been scared and amazed by what is happening - oil has been falling without any technical rebound for the last six months,” said one futures and options trader in London. “There is no reason to define a bottom under those circumstances.“

With the US shale revolution still pumping out near record volumes, the debate over which producers will be the first to slash output has intensified as prices sink below costs, demand erodes and the global surplus grows.

“While oil supply growth will be less than it would have been at higher price levels, we are not confident making artificial calls on a market bottom,” ex-Goldman trader Jonathan Goldberg said in a letter to investors in his hedge fund, BBL.

Some are suggesting prices could fall lower than the levels of the financial crisis seven years ago - when U.S. crude plummeted from nearly $150 a barrel to a low of $32.40 - as everyone waits to see which producers blink first.

“How low can oil go?” asked analysts at BofA Merrill Lynch Global Research this week. After 12 pages of explanations, analysis, charts and caveats, they posit a possible answer: $35 for U.S. crude, and as low as $40 a barrel for Brent. Research firm PIRA Energy say it is “too early to get long.“

REACHING FOR THE KNIFE

In 2008, during oil’s biggest ever crash, prices plunged 80% in less than six months as demand growth came to a halt. The turning point came in early 2009 when Saudi Arabia led OPEC in big output cuts to shore up the market. By the end of 2009, prices were closer to $80 a barrel.

This time, with no sign of an OPEC cut, dealers looked first to the cost of drilling US shale wells, estimated at as high as $70 a barrel, as a potential trigger for a reversal. But with shale output still growing and many producers having locked in higher prices for the next 12 months, that floor disappeared.

Brent at $60 per barrel then emerged as a compelling level and a nice round number, bolstered by early suggestions that might be the line in the sand for Saudi Arabia.

But the selling continued, pushing below that level shortly after Saudi Arabia’s powerful oil minister Ali al-Naimi said the Kingdom would not cut output at any price.

“Everyone expected the week before Christmas around $60 a barrel to be the bottom,” said Abhijit Selukar, a crude oil futures trader in India, adding colder weather in the Northern Hemisphere would normally support the market in January.

As the oil market’s falling knife sliced through more and more traders who attempted to catch it, gallows humor emerged: What’s the difference between an oil trader who picks bottoms and a pizza? A pizza can feed a family of four.

GUESSING GAME

Even so, traders and analysts continue to hunt for clues that might signal a rebound, or at least an end to the rout.

Some are still scrutinizing U.S. oil production economics, but with short-term costs of $10 or $20 a barrel “it is perfectly conceivable that oil prices could fall further,” said Capital Economics head of commodities research Julian Jessop.

Others like Daniel Bathe, portfolio manager at Lupus Alpha Commodity Invest Fund, are watching the forward price curve. The oil market is now in contango, with prompt prices cheaper than longer-dated futures, encouraging companies to store oil. Once that contango stabilizes, oil may find a floor.

A few may even be waiting for signs that producers outside of OPEC are ready to start cutting their own output voluntarily, although any such measures will likely be greeted skeptically.

But for many, however, it is a game of waiting and watching for a period of stability that may suggest the worst is over.

“I’ll tell you two weeks after it happens,” said one New York-based trader.

remember that all the Gulf oil producing states have very substantial sovereign wealth funds they can tap if their oil derived revenues get too low although how liquid those funds are is a question…

10

I completely agree! And the cheap gas prices and politicians pointing at them will keep the mob in check. What they don’t realize is their countries most valuable resource is getting sold out from under their noses so corporations can make the most money possible.

People cheer on defense spending for creating jobs, that their taxes pay for. Yet internalizing our energy sources would actually create jobs that we weren’t paying for!

11

I am flabbergasted that you and I actually do agree on something for once…maybe having that drink together ain’t such an unrealistic thought

12

You really didn’t read that post very well in the other thread hahahaha

13

[QUOTE=Traitor Yankee;151308]You really didn’t read that post very well in the other thread hahahaha[/QUOTE]

I did but for once I chose to not reply to it…we do likely share much in common as I feel most here believe there is likely one thing I stand for they agree with, even if they howl about what I stand for that they don’t.

.

14

Sooner or later, the Saudis will blink. They’ll have to. They spend a lot of money keeping their young people in make-work, school and other projects to keep them away from the jihadi mullahs. They fund terrorism in other parts of the world but are loathe to deal with it on home turf. Recall Riyadh in the early 2000s

15

[QUOTE=catherder;151354]Sooner or later, the Saudis will blink. They’ll have to. They spend a lot of money keeping their young people in make-work, school and other projects to keep them away from the jihadi mullahs. They fund terrorism in other parts of the world but are loathe to deal with it on home turf. Recall Riyadh in the early 2000s[/QUOTE]

I don’t know, they can produce Saudi light sweet crude for only $10/bbl so even at $20 they make $$$ and then make up their deficits with taking all the money they’ve loaned out to the planet back. If they call in notes, holy Christ we are all in some serious deep doo doo!

16

Because we spend hundreds of billions of dollars a year keeping them armed and using our own show of force to keep the region stable.

That and half their labor force is something akin to slavery

17

[QUOTE=c.captain;151355]I don’t know, they can produce Saudi light sweet crude for only $10/bbl so even at $20 they make $$$ and then make up their deficits with taking all the money they’ve loaned out to the planet back. If they call in notes, holy Christ we are all in some serious deep doo doo![/QUOTE]

That’s their break even? 10 bucks? Yikes. The brokers better lease a whole helluva lot of ULCCs then.

      • Updated - - -

[QUOTE=Traitor Yankee;151356]Because we spend hundreds of billions of dollars a year keeping them armed and using our own show of force to keep the region stable.

That and half their labor force is something akin to slavery[/QUOTE]

It may be time to pull back on some of that charity.

18

[QUOTE=Traitor Yankee;151356]Because we spend hundreds of billions of dollars a year keeping them armed and using our own show of force to keep the region stable.

That and half their labor force is something akin to slavery[/QUOTE]

agreed but the $10/bbl extraction is just the direct costs because the oil is coming out of wells in the desert and not from under 9000fsw

      • Updated - - -

[QUOTE=catherder;151360]That’s their break even? 10 bucks? Yikes.[/QUOTE]

that’s what I have read but makes sense since their wells are almost all on land in a desert…pretty east to bring oil to a loading facility with those conditions

19

[QUOTE=c.captain;151361]agreed but the $10/bbl extraction is just the direct costs because the oil is coming out of wells in the desert and not from under 9000fsw

      • Updated - - -

that’s what I have read but makes sense since their wells are almost all on land in a desert…pretty east to bring oil to a loading facility with those conditions[/QUOTE]

And as TY indicated, slave labor in those fields too…the movie Syriana depicts this with the two young Pakistani guys who are laid off, hook up with a radical mullah and go jihadi. When those guys enter the country the passports are seized- there’s no leaving till they kick you out.

20

[QUOTE=catherder;151362]And as TY indicated, slave labor in those fields too…the movie Syriana depicts this with the two young Pakistani guys who are laid off, hook up with a radical mullah and go jihadi. When those guys enter the country the passports are seized- there’s no leaving till they kick you out.[/QUOTE]

I thought he was talking about Filipina maids and nurses

21

[QUOTE=c.captain;151363]I thought he was talking about Filipina maids and nurses[/QUOTE]

They have a huge non-native work force over there. Outnumbers native Saudis. Everything from Filipina maids to Indian, Pakistani and African oilfield workers. Not many Saudis like to soil their fingers with dirty work- they truly believe it’s beneath them.

And it’s not just in the Kingdom. Read up on the abuses of construction workers in so-called “western friendly” nations like Qatar.