Oil Industry

Saudi Arabia is the world's most important oil producer. Given its relatively high production levels, accounting for nearly 13 percent of world output and 35 percent of total OPEC output in 1991, and, more significantly, its small domestic needs, the kingdom's dominance of international crude oil markets is unchallenged. Although reluctant to play the role, Saudi Arabia has become the "swing producer," balancing international oil demand and supply. Therefore, within limits, Saudi oil production policies can have a profound impact on international prices. Since the early 1970s, the kingdom has occasionally used this dominance to influence oil prices, usually to further its objectives of sustaining long-term oil consumption and ensuring economic stability in the industrialized world.

OPEC to Maintain Production Levels in Today’s Meeting

The Organization of Petroleum Exporting Countries (OPEC) will likely maintain its crude oil production quotas at its meeting in Vienna, Austria today, Thursday.

Saudi Arabia’s oil minister, Ali Naimi, has indicated that while demand is beginning to pick up, inventories remain dangerously high. Therefore, it would be best for the cartel to “stay its course” by continuing to adhere to previous production cuts until demand stabilizes.

After soaring above $147 a barrel last summer the price of oil tumbled more than 80% to a four-year low of $32.70 a barrel in February. To combat the sharp decline in prices, OPEC has lowered its production quotas by 4.2 million barrels per day (bpd) - about 5% of global demand - since September.

Since February, oil prices have recovered, climbing to their current level above $60 a barrel. But both Naimi and industry analysts have warned that the rally has more to do with market sentiment and the potential for a recovery than it does fundamentals.

“The price rise is a function of optimism that better things are coming in the future,” Naimi told reporters earlier this week.

The International Energy Agency (IEA) estimates global oil consumption will fall by 2.6 million bpd this year. That would be the biggest drop since 1981.

Naimi says that world crude inventories - at current levels - would be sufficient enough to meet about 62 days of global demand. OPEC members would like to see them fall to about 52 to 54 days worth of demand.

An increase in OPEC production “will not happen until we are sure that global inventories return to their normal levels,” Naimi told the Arab daily Al-Hayat.

U.S. crude oil inventories rose to the highest level in two decades earlier this month. However, Naimi did note that demand in Asia, particularly China, seems to be accelerating and crude prices could reach $75 a barrel by the end of the year.

Still, analysts are urging caution, as production quota compliance among OPEC nations is beginning to wane. Production compliance among OPEC nations reached 85% in March - an impressive level by historical standards. Members only delivered on 78% of the promised cuts in April as prices recovered.

Saudi Arabia, OPEC’s largest and most influential producer, actually pumped below its target level in April, but other members have been cheating. Iran, OPEC’s second-biggest producer, accounted for 410,000 bpd of the overproduction last month, while Angola exceeded its target by 170,000 bpd and Venezuela overproduced 130,000 bpd the IEA reported.

“Lagging quota compliance by the non-Gulf Arab states - hovering around 50% - has hamstrung any real discussion of a potential cut to accelerate the drawdown of the glut,” PFC Energy analyst David Kirsch said in a report today. “Purported requests by Angola to revise or suspend its quota, as well as moves by Venezuela to certify a higher production figure leave any proposal for further output restraint effectively stillborn.”

OPEC president says goal is still for $75 oil

VIENNA (Reuters) - OPEC president Angola said the group's goal was still to achieve $75 a barrel by the end of the year, echoing earlier comment by leading exporter Saudi Arabia that the level was achievable without damaging a fragile world economy.

"It's the goal to achieve this price," Jose Botelho de Vasconcelos, who is also Angolan oil minister, told reporters on his arrival in Vienna on Monday ahead of talks on Tuesday between the European Union and the Organization of the Petroleum Exporting Countries.

Asked whether the aim was to hit $75 before the end of the year, he said "yes".

Saudi Oil Minister Ali al-Naimi established that level as a goal at OPEC's most recent meeting in May.

U.S. crude earlier this month hit a high above $73 a barrel, but on Tuesday fell back to around $67.

OPEC Secretary-General Abdullah al-Badri, who greeted the OPEC president on his arrival in Vienna, said it was too soon to say whether OPEC might consider changing its output ceiling when it next meets in September.

He said compliance with existing production targets was 75 percent, lower than levels of around 80 percent hit earlier this year, but he said he understood discipline was becoming more strict.

Oil drops below $69 as traders eye US dollar

AP - Oil prices fell below $69 a barrel Wednesday, but were up from earlier lows, as investors continued to focus on the value of the U.S. dollar, which typically trades inversely to commodities, and awaited a policy statement from the Federal Reserve.

There will be no new refineries

Oil companies won't be building more refineries, because there won't be enough oil left to refine by the time new refineries could pay for themselves.
There hasn't been a new refinery built in the US since 1976. In 1982, there were 301 operable refineries in the U.S and they produced about 17.9 million barrels of oil per day. Today there are only 149 refineries, and they're producing 17.4 million barrels. This increase in efficiency is impressive but not a miracle. As with everything these outputs are carefully calculated to optimize profitability. Let me explain.
Truth be told, new refineries require tremendous financial commitments which take anywhere from 15 to 25 years to amortize. With record oil prices it would make perfect sense to invest in a few refineries today, except... for the lack of oil to be refined 20 years from now.
Trends have predicted that peak oil production, where the production of oil starts to decline, will be reached around 2007-2010. After that, there will be less and less oil to refine no matter where drillers look. In this context, building expensive new refineries does not make a lot of sense as existing ones will be sufficient to process whatever little oil is left. So forget about new refineries, except for a few in the northern midwest to process the heavy oil from Canada.

Crude oil is a finite resource more and more depleted. As such, an increasing demand put on this finite supply necessitates careful management in order to stretch its lifespan and profitability.

"Peak Oil" and directions in the oil industry

We are reaching closer to ‘peak oil’ with each passing day. Analysts predict the inevitable to come with this century. Present measures taken, the future consumption of petroleum in America may drop and possibly even decrease, but are biofuels really the key to the solution?

European countries have already made a switch to biofuels and are beginning to feel the effects and complications. While it hasn’t resulted in direct food shortages, biodiesel is already causing shortages of vegetable oils.

Will countries like China and India follow this trend in energy conversion? It is difficult to imagine any country with enormous population would make such a move. This conversion could result in massive world food shortages as never experienced. Both countries realize this and are pursuing aggressive oil exploration.
Some American environmentalists believe that it is possible to make a complete switch from crude oil to alternatives by 2050. This is very unrealistic as crude oil provides us with more than just a form of energy. It is a raw source of chemicals for manufacturing drugs, plastics, chemicals, and fabrics.

So what is the realistic solution with the arrival of peak oil? Canada, USA, and Venezuela sit on more unconventional oil than all historical conventional crude and present reserves that are available. Peak oil does not mean an abrupt end to oil. It does mean that demand of conventional oil will exceed supplies of conventional crude. This spells the end to cheap crude.

Extracting oil out of America’s huge oil shale deposits is once again drawing attention. It will be successful as new technology comes on stream. With higher crude prices there will be decent returns in revenue. It will inspire more interest and new ideas. Oil companies’ attention will once again be drawn to this area.

This is the era for non-conventional oils. Needs, economics and unrealistic alternatives will make us realize that the world can adapt to and meet these challenges. Non-conventional supplies of crude oil will play an important role in the generations to come.

Profitability and $100 oil

$100 per barrel: the line was finally crossed on January 2nd 2008. What does this imply for profits of oil producing nations? In order to run some numbers we have to consider a key measure called the break-even price which is the amount of money it takes to extract 1 barrel of oil.

The break-even price is the first thing oil companies establish in order to determine if drilling a new well makes financial sense. From the break even price, profitability can easily be determined with the following formula:

Profitability = (Price of Oil - Break Even Price) / Break Even Price

For example with oil at $100 and a break even price of $50, profitability is 100%. But with oil at $60 and the same break even price, profitability drops to 20%
By dialing their target profitability first, oil companies then determine if a new drilling project is feasible. Needless to say, with oil retailing now at $100, more wells will be drilled in deeper, harder to reach places than were previously profitable.

The following table provided by the Bank of Kuwait gathers current reported break-even prices of major oil producing nations:

This level of profitability explains the recent $7.5 billion placement in troubled Citibank from the Abu Dhabi Investment Authority, the $1.8 billion investment in UBS by a strategic Middle East investor and the 20 percent acquisition of the London Stock Exchange by the tiny nation of Qatar.
High oil prices have allowed Gulf Cooperation Council (GCC) countries to boost their foreign assets to more than one trillion dollars during the 2002-2006 period. With a looming recession (read "western assets on sale") and high oil prices we can expect this trend to increase.

Companies in the Oil Business For the Long Haul

Companies that anticipate a long presence in the energy market are those involved with oilfield services. It's now January of 2008, and it's an understatement to say that the stock market is uncertain. To add to the general anxiety caused by the collapse of the housing market, oil prices keep going up. Since demand continues to rise, and production is falling off, high prices aren't going to end soon.

With all this uncertainty, even healthy and profitable businesses are experiencing a temporary loss in stock value, which include the oilfield services companies. These companies provide a wide range of technology and project management, contracting with international oil companies, independent oil and gas companies, and national oil companies for building new oil rigs, both on and off-shore, as well as finding new prospects and providing reservoir management. Within recent years, they have become the companies developing new technologies, rather than Big Oil. These technologies include reservoir imaging, monitoring, and development, with seismic crews and data processing centers using seismic libraries. Imaging services range from 3D and time-lapse (4D) seismic surveys to cutting-edge surveys for finding new oil prospects. There's been speculation that the Big Oil companies have stopped spending money looking for new oil, since there's not much left, and they wouldn't be able to control it as in the good old days. Rather, they're spending huge amounts of money buying up the shares of their own companies, in order to have future control of the oil reserves they still own.

Also unlike the Big Oil companies, oilfield services companies don't insist on owning a big share of the oil reservoirs they find, but only on getting paid for the work that they do. Because of this, they are the go-to companies for countries who want to control their own oil and economies. Companies like Schlumberger Ltd. have become popular with third world countries, because part of their contract is to train future executives and workers within the local population, which they are doing successfully throughout the world.

There's a variety of viable oilfield services companies for investors to concentrate on, and it would be worth their while to investigate them.