New Opportunities For Companies With Cash

All Commentary -  In the late 1990’s when oil prices were $20 per barrel or lower, the big oil company I worked for was interested in acquisitions. They didn’t like the idea of buying production or properties from other companies for cash, but rather they preferred to trade properties with other companies. These oil and gas properties were evaluated to determine any upside potential reserves and how they each fitted in with the company’s geographical and operating strategies. Our current situation with oil and gas prices dropping and capital budgets being cut, these type of transactions may come back into play. However, the large drop in oil company valuations may be a bigger target for companies with cash. The major oil companies need reserves and production growth and may be willing to achieve some of their goals through acquisitions of other oil and gas companies. For example, many of the oil and gas independents successful in the development of shale gas that have large acreage potential may become targets for Big Oil. I recall what Lee Raymond, the former President and CEO of Exxon Mobil, said in an interview just prior to his retirement in 2006 concerning acquisitions. He said that the current high oil prices would not hold and that oil and gas companies in general were over-valued. That may not be true any longer if oil and gas prices continue to fall. Oil companies with recent large natural gas reserve additions could also become acquisition targets.

U.S. Natural Gas Proved Reserves Increase

On October 16th, the Energy Information Administration (EIA) published an Advance Summary of the U.S. Natural Gas Reserves 2007 Annual Report. They reported that the United States added more than twice as much proved natural gas reserves than it produced in 2007 and ended the year with the highest total of proved reserves since 1977 when EIA first reported proved reserves. Proved reserves have a high certainty of being economically recoverable in the future. The 2007 increase in natural gas reserves was historic. It was the ninth consecutive year in which proved reserves grew. The record reserve additions are primarily a result of the rapid development of unconventional natural gas resources made up of coalbed methane and resources like shale and tight (low permeability) formations, using horizontal drilling with hydraulic fracturing. The proved natural gas reserves as of the end of 2006 was 211.1 Trillion cubic feet (TCF). The reserves added in 2007 was 46.1 Tcf and production for 2007 was estimated to be 19.5 Tcf. After adding the new reserve additions and subtracting production, year-end 2007 proved natural gas reserves are estimated to be 237.7 Tcf.

U.S. natural gas production grew by 9 percent between the first 7 months of 2007 and the first 7 months of 2008. U.S. natural gas production was essentially flat for 9 years from 1998 through 2006, before rising by 4 percent in 2007.According to the EIA, the growth in 2008 appears to mark an historic shift in U.S. natural gas production. The increased production meant that the U.S. has needed to import less natural gas in 2008 than in 2007, especially in the form of LNG. For the first 7 months of 2008, LNG imports fell by 64 percent compared with the same period in 2007.

Commentary -  The development of unconventional natural gas resources has been truly historic. The higher natural gas prices and the application of new and improved technology has changed the trend in domestic natural gas production. I agree that the shale gas development was the primary factor in the production and reserve growth. Of course this could change with the recent dramatic decline in natural gas prices. We have already seen a decrease in drilling budgets for some of the independent gas producers. I still believe that the increased use of natural gas for electrical power generation will keep the demand for natural gas strong and natural gas prices should move higher in the long-run. The reduction in expensive natural gas LNG imports are good for the nation’s consumer.

Renewable Energy Projects Are Cooling

All Commentary – Renewable energy projects such as wind, solar and other alternative technologies will be facing challenges because of plunging oil and gas prices. The investment capital for these projects could be drying up due to the current financial crisis. High oil and gas prices are the primary incentive for the development of renewable energy sources. Any progress in renewable energy will slow and become more dependent on governmental subsidies. Washington will find that other economic problems will have higher priority. Venture capital financing for major solar projects and for experimental biofuels is already drying up. At least two wind energy companies have had to delay projects due to problems raising capital.

I suppose the climate change alarmists will continue with their agenda, but unless the politicians are pressured by the consumer to do something the emphasis by the government will wane like it has in the past. If the oil and gas prices continue to fall, the proposed policy or plans for ”Energy Independence” will go to the back burner like it has with all the previous Administrations. I don’t like being a pessimist or being cynical, but for the last 20 years President’s have proposed “Energy Independence” and where as it got us.We still need a sound energy plan to reduce our dependence on foreign oil regardless of the price. Gasoline prices in my town are close to $2.00 a gallon. It wouldn’t be surprising that the electric car prototype will start collecting dust and SUV’s will start selling again. The big question is how far will oil and gas prices fall and how long will credit be tight.

Coal Bed Methane: A Valuable Part Of Our Nation’s Energy Supply

The primary energy source of natural gas is a substance called methane. Coal Bed Methane (CBM) is simply methane found in coal seams. Often a coal seam is saturated with water and the methane is held in the coal by water pressure. Since the coal bed methane travels with ground water in coal seams, extraction of CBM involves pumping water from the seam in order to reduce the water pressure that holds the gas in the seam. CBM has a very low solubility in water and readily separates as pressure decreases, allowing it to be piped out of the well separately from the water. Water moving from the coal seam to the wellbore encourages gas migration toward the producing well.

Extraction of coal bed methane (CBM) involves pumping large volumes of water from the saturated coal seam. The disposal of the water is of much concern. Each well produces about 17,000 gallons of water per day with about three wells per 80 acres. Currently, disposal of CBM produced water is primarily handled by three methods: (1) discharge into streams, (2) pumped into evaporation ponds or (3) applied to crop or rangeland for irrigation. The CBM water has a moderately high salinity and often a very high sodium content which are some of the environmental concerns. Other concerns are the impact on groundwater levels and possible compaction or subsidence.

According to the U.S. Geological Survey, the Rocky Mountain Region has extensive coal deposits bearing an estimated 30-50 trillion cubic feet of recoverable coal bed methane. While impressive, this represents only one-third of the total 184 trillion cubic feet of natural gas in the Rocky Mountain Region. The lower 48 States is estimated to have 100 trillion cubic feet of economically recoverable Coal Bed Methane with the most prolific basins located in the western United States.

Commentary -  Coal Bed Methane has become a valuable part of our nation’s energy supply. Coal Bed Methane production has been increasing during the last 15 years and now accounts for about 8% of the United States natural gas production. There are many environmental issues related to the development of Coal Bed Methane. The State of Montana Department of Environmental Quality has a website that addresses many of the concerns. This nation’s coal bed methane resource is vital to our future energy needs but we must develop it in an environmentally acceptable manner.

Infrastructure For CNG: The U.S. Natural Gas Pipeline Network

The U.S. natural gas pipeline network is a highly integrated transmission and distribution grid that can transport natural gas to and from nearly any location in the lower 48 States. According  to the Energy Information Administration (EIA) June 2007 Report on natural gas pipelines, there are more than 210 natural gas pipeline systems with 300,00 miles of interstate and intrastate transmission pipelines. More than 1,400 compressor stations maintain pressure on the natural gas pipeline network and assure continuous movement of gas supplies. The pipeline network has more than 11,000 delivery points, 5,000 receipt points and 1,400 interconnection points that provide for the transfer of natural gas throughout the United States. The network also includes 29 hubs or market centers that provide additional interconnections, 394 underground natural gas storage facilities, 55 locations where natural gas can be imported or exported via pipelines and 5 LNG (liquefied natural gas) import facilities.

According to the EIA Report, two-thirds of the lower 48 States are almost totally dependent upon the interstate pipeline system for their supplies of natural gas. The 30 largest companies own about 77 percent of all interstate natural gas pipeline mileage and about 83 percent of the total capacity (148 billion cubic feet) available within the interstate natural gas pipeline network. Intrastate natural gas pipelines operate within State borders and link natural gas producers to local markets and to the interstate pipeline network. Approximately 29 percent of the total miles of natural gas pipeline in the U.S. are intrastate pipelines. Imported natural gas currently represents almost 17 percent of the gas consumed in the U.S. annually, compared to 11 percent just 10 years ago. Forty natural gas pipelines, representing 23 billion cubic feet per day of capacity, import and export natural gas between the U.S. and Canada or Mexico.

Commentary -  With the natural gas distribution grid we have in the U.S., we have very little problem getting natural gas to wherever we want it. This brings me to the question of using natural gas as a transportation fuel. The distribution of ethanol to gas stations is difficult and costly. Ethanol must be transported by rail car or tanker and then blended with gasoline. It is not available in many parts of the U.S. However, natural gas is available and abundant. Using our pipeline network we should easily be able to provide natural gas to your local retail gas station. The retail outlets need facilities to provide compressed natural gas (CNG) and we need automakers to provide the U.S. consumer with a dependable and affordable CNG vehicle. Auto dealerships could provide the means for converting existing vehicles to CNG. Government subsidies or tax credits may be needed to spur the development of CNG for transportation.

U.S. Outer Continental Shelf Leasing Ban Lifted

According to the Oil and Gas Journal, the lifting of the moratorium on drilling in the Outer Continental Shelf went largely unnoticed. Nick Snow, OGJ’s Washington editor says this is good news for Americans, but it is only the first step. The American Petroleum Institute said Congress should avoid reinstating the ban or any other obstacles to the development of U.S. oil and natural gas resources. Sources indicate that opponents to OCS leasing are still firmly against opening new U.S. offshore areas. Senator Robert Menendez (D-NJ) said “Expanded OCS drilling is bad energy policy, bad environmental policy and it will do nothing to lower the prices at the pump, now or ever”. Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM) sent a clear signal on Sept. 25th when he told reporters: “We’ll revisit this issue next spring”. Even Republican Presidential candidate John McCain is against drilling in ANWR and wants to leave the decision to drilling offshore up to the states.

With the expiration of the US Outer Continental Shelf and oil shale leasing moratoriums, it was reported that US House Republicans asked Interior Secretary Dirk Kempthorne to identify steps Congress should take to ensure potential resources in reopened areas are developed soon. Minority Leader John Boehner (R-Ohio) and other Republicans said “We are concerned by media reports that radical anti-energy groups may, with the tacit support of the Democratic Party leadership, file a barrage of lawsuits to continue to deny the American people access to these vital sources of American-made energy”. The asked Kempthorne to promptly identify such barriers and potential litigation as well as responsible actions which Congress might take to ensure that resources in the reopened areas are unlocked in an expeditious manner.

Commentary -  I don’t understand how developing our own natural resources to reduce imports from foreign suppliers is bad energy policy. I don’t how the investment of $160 billion of capital spending in exploration and production in the U.S. for 2008 is bad for the nation. I don’t understand why Democrats do not want to develop 420 trillion cubic feet of natural gas resources in offshore areas (20 years of reserves at current production levels). Even Speaker of the House Nancy Pelosi (D-Calif.) said that we need to use more natural gas because it is the cleanest burning fuel. How is this bad environmental policy. Of course, Pelosi also said that natural gas is not a fossil fuel, so I guess she doesn’t understand we need to drill below the surface of the earth to find more natural gas.

Major Oil Company Interest In Shale Gas Plays

According to Petroleum News, most of the shale gas plays in the United States have been dominated by independent producers such as Devon Energy, Chesapeake Energy, Anadarko Petroleum and XTO Energy. They reported the recent purchases of acreage in some of the newer gas shale plays like Fayetteville shale in Arkansas by major oil companies. The most recent deal was British Petroleum’s (BP) purchase of $1.9 billion for a 25 % interest in Chesapeake’s Fayetteville shale assets. The assets cover 540,000 net acres, which the companies believe could support the drilling of as many as 6,700 future horizontal wells. BP will own 135,000 net acres. The transaction was structured not only as an asset purchase ($1.1 billion), but also as a financing commitment for drilling in the Fayetteville shale. BP agreed to pay $800 million of the cost to drill and complete wells in the field. A month earlier it was reported that Chesapeake closed the sale of its Arkoma Basin Woodford shale assets in Oklahoma to BP for $1.7 billion.

In August of this year, it was reported that Exxon Mobil Corp. wants a bigger piece of the emerging unconventional natural gas business, but plans to grow its business from acquired plays such as Horn River in northeastern British Columbia. Driven by an 8% dive in oil and gas production, it is the latest oil major to shift gears into unconventional gas, hard-to-reach resources from tight sands, coalbed methane and gas shale formations. In the Horn River gas shale play, Exxon Mobil and its Canadian affiliate, Imperial Oil ltd. purchased the right to explore on 115,00 acres. Some sources indicate that Horn River’s resource potential is estimated to be in excess of 35 trillion cubic feet.

Commentary -  It is surprising to see Exxon Mobil moving into these areas. Their strategy in the past has been to pursue only the so-called elephant fields or those oil and gas fields with at least 1 billion barrels of reserves. The company ignored much of the Gulf of Mexico for this reason and sold the majority of their properties in the Permian Basin in Texas. The joint-venture of BP and Chesapeake in the Fayetteville shale is very interesting. Drilling 6,700 horizontal wells is enormous.

Slower Development of Marcellus Shale Expected

The Marcellus shale is a Middle Devonian-age black (organic rich) shale that occurs in the subsurface beneath much of Ohio, West Virginia, Pennsylvania and New York. About 10%  of U.S. natural gas currently comes from unconventional shale gas plays such as the Marcellus shale. Natural gas from shales is expected to increase to 20% of U.S. gas production over the next three years according to some sources. Oil operators in the Marcellus shale are rushing to add acreage, expand leaseholds and submit applications to drill. However, Chesapeake Energy CEO Aubrey McClendon said in August that there are way too many regulatory, topographic, water and infrastructure issues with the Marcellus shale that we should not expect a Barnett shale style ramp up of production. He also indicates that the Marcellus shale will not make a meaningful contribution to our country’s gas production until at least 2013-15.

New York and Pennsylvania governmental bodies are concerned about the environment. New York laws are 16 years out-of-date and laws need to be passed to expand statewide spacing rules to address horizontal drilling. New York State Assembly and Senate had to amend the state’s Environmental Conservation Law. Also, citizen’s watchdog organizations have formed task groups to raise awareness of potential environmental effects. The New York Department of Environmental Conservation (NYSDEC) will hold a series of public hearings to discuss drilling for oil and natural gas in New York. Governor Paterson stipulated a review of horizontal natural gas drilling activities. In the other states, oil operators were notified in June by the Delaware River Basin Commission and the Susquehanna River Basin that advance approval was required for any amount of water withdrawn or consumed to develop wells in the Marcellus, Utica and other shale formations.

Commentary -  The Chesapeake CEO might be right if the states impose roadblocks to development of the Marcellus shale. The regulatory and environmental concerns might be resolved but all the permits and advance approvals required will certainly slow down the process. The water issue could be a real problem since large quantities of water are needed for hydraulic fracturing of the wells.

San Antonio Utility Makes A Big Bet On Coal

Using abundant coal from the Western States such as Wyoming is seen by many as a solution to America’s growing need for energy. In San Antonio, CPS Energy made a decision five years ago to build a large new coal-fired power plant. The plant will be their fourth and is located at Calaveras Lake in San Antonio. The coal will come from the Eagle Butte coal mine from the Powder River Basin in Gillette Wyoming. The San Antonio utility relies on coal more than any other fuel for their electrical generation. The new plant is expected to start-up in 2010.  CPS Energy sees coal as a vital part of its energy mix. The coal is abundant, cheap and reliable. Today, coal makes up nearly 40% of CPS Energy’s electrical generation and that will increase when the new plant comes on-line.. As part of an agreement to get the plant approved, CPS Energy is spending $700 million to reduce emissions of nitrogen oxide, mercury and sulfur dioxide from coal, making its coal plants the cleanest in the nation. The utility has no plans to reduce carbon dioxide emissions from its coal plants.

If the Congress passes climate control legislation to reduce carbon dioxide emissions in response to global warming, CPS Energy may be subject to some imposed fees. Most experts expect Congress to pass the legislation next year and both Presidential candidates support it. The most likely system imposed is a so-called “cap and trade” system that will place a national limit on carbon dioxide emissions and require companies to buy and sell pollution credits. However, CPS energy has no plans to close any coal-fired plants, arguing that coal is still the most cost-effective way to supply energy to its customers. CPS Energy’s Vice-President of Energy Development Mike Kotara says the only legitimate alternative to replace power is not wind or solar, but to increase the use of natural gas which would increase electric rates to their consumers.

Commentary -  I agree with Mike Kotara that there is no legitimate alternative to coal, other than natural gas. I have discussed this in my post “The Case for Higher Natural Gas Prices”. The climate change legislation that Congress is proposing is just a covert way of applying a “carbon tax” on the consumer. Did you read the news item about Al Gore’s speech last week in which he urged “civil disobedience” to stop the construction of coal-fired plants to meet the nation’s growing need for more electrical power?  I normally wouldn’t express my political views on issues such as global warming, but it is just too important. I do not concur with the premise that human activity is contributing to Global Warming and I am not in favor of any climate change legislation. I concur with the 400 or more prominent scientists that have recently voiced their objections to the “so-called” consensus on man-made global warming. Please see the following article http://epw.senate.gov/public/index.cfm?FuseAction=Minority.SenateReport. Most of the earth’s existence thus far has been without humans. I read somewhere that if the planet’s history would be compared to a 24 hour clock the presence of humans would be the last 2 seconds of the day. If you are a history buff you might be interested in the following article that appeared in Newsweek in 1975 http://denisdutton.com/newsweek_coolingworld.pdf,

Russia’s Oil and Natural Gas Exports Declining

Based on information from the Energy information Administration (EIA), Russia holds the world’s largest natural gas reserves and is the world’s largest exporter of natural gas. They are also the second largest exporter of oil behind Saudi Arabia. The economy of Russia is heavily dependent on their oil and natural gas exports. In 2007, Russia’s real gross domestic product (GDP) grew approximately 8 %, marking the country’s seventh consecutive year of economic expansion. According to EIA’s report, this expansion was driven primarily by energy exports, given the increase in Russian production and high oil prices. The oil and gas sector generated more than 60% of Russia’s export revenues.

Kremlin policy makers continue to advance the state’s influence in the energy sector. Taxes on oil exports and oil extraction are high and Russia’s state-influenced oil and gas companies are obtaining controlling interest in previously foreign-led projects. Production is down 0.8% in the first half of 2008 compared to 2007 and exports experienced a decline of 5.2%. Some experts claim that if a country’s oil production is declining and its domestic oil consumption is growing (which is the case for many of the oil exporting countries) exports will decline at a rate faster than the rate production is falling.  Early in the year, Petroleum News reported that Russian Natural Resource Minister Yuri Trutnev has said that Russian production and exports will fall this year for the first time in a decade. Some sources indicate that Russia is using more of its own production for internal consumption and when combined with their production declining have reduced their exports accordingly. Petroleum News forecasts that oil exports from OPEC, Russia and Mexico will actually decline by 2.5 million barrels per day between now and 2012.

Commentary -  Some say that Saudi Arabia will restrict output by not expanding oil field development or at least delaying development in order to save oil for future generations. This would result in lower exports. From what I have read, there is a growing awareness of the challenges of increasing capacity in a conventional resource that is becoming very mature. Some have referred to it as “resource nationalism”. If their cash coffers are filled as a result of the high prices, perhaps they can reduce exports to save some of their oil for future generations. In the case of the Russians, the reduction in exports may be only a temporary decline. In the U.S. we need to be focused on two things: increasing our domestic oil production and developing plans that take into account the real possibility of a rapid decline in world net oil exports.