The weekly crude oil inventory decline was more than four times greater than what was expected by a Dow Jones Newswires survey of analysts. A major factor in the surprise: imports fell by 676,000 barrels per day. Last fall OPEC agreed to take 4.2 million barrels per day out of the market, to shore up demand brought on by the recession. Compliance by the 12-member cartel — which supplies 40 percent of the world’s oil was at 77 percent in April, according to Bloomberg.

Gasoline stockpiles also declined, by 1.6 million barrels. The same Dow Jones survey had expected gasoline stockpiles to grow by 80,000 barrels. Refiners are producing less. Refinery capacity fell by 0.4 percent to 85.9 percent. The Dow Jones survey had anticipated a 0.5 percentage gain. In its own monthly report released Friday, as reported by the Financial Times, OPEC said: “As the world economy stabilizes, the world oil demand appears to be settling down. Industrial production  activities are steadying and in some parts of the world have even improved slightly…There are no significant downward revisions to our previous oil demand forecasts. Still, U.S. oil demand is the wild card and any further downward adjustment in the country’s oil demand would have an impact on total world oil demand.”

Yet during May 2009, the price of a barrel of crude rose $15, topping $66 per barrel, registering a six-month high. In the final week of May, natural gas futures rose the most in 10 weeks — more than $0.25 — settling at $3.87 per MMBTU. Conventional wisdom says the price increases may be temporary, that is, unless, the economy picks up at a rate faster than was previously expected.

As paraphrased on Bloomberg,  OPEC Secretary General Abdalla el-Badri said that the rally in oil prices is being driven by improving sentiment about the global economy, and isn’t supported by demand. Speaking to reporters from the OPEC meeting in Vienna, El-Badri said that global crude stocks remain very high, though prices may reach $70 to $75 per barrel by year end, in part because investors are returning to the commodity markets. Saudi Arabian Oil Minister Ali al-Naimi said OPEC opted not to alter its output targets because “prices are good, the market is in good shape.”

One thousand feet is considered “deepwater,” and 5000 feet is considered “ultra-deepwater.” One third of deepwater petroleum discoveries in 2008 were in ultra-deepwater with the deepest find at almost 10,000 feet. Deepwater drilling began in the Gulf of Mexico in 1979, but projects were relatively rare before taking off in the 1990s.

President of Shell Oil, Marvin Odum, says deepwater development is based on the quickly shrinking areas to explore for petroleum development, and just as importantly new oil and gas technology makes it easier to find potential fields in the deeper water.

The Minerals Management Service cut its forecast for the oil and gas output of the Gulf of Mexico for the next ten years by 300,000 barrels per day to between 1.6 million and 1.9 million barrels. The service also sees natural gas trending down after a rise to over 7 billion cubic feet per day this year.

Part of the forecast cutback is tied to the increase in deepwater projects. Although technology is allowing for deeper exploration and development, deepwater projects have increased technical and geological challenges than offshore in more shallow waters. These challenges lead to longer lead times for the projects.

The Minerals Management Service added the recession could still affect oil and gas investment and development. Gulf region director Lars Herbst said, “We could start seeing deepwater exploration and development affected if it’s a long downturn.”

The Gulf of Mexico has accounted for as much as 25 percent of U.S. domestic oil production and 15 percent of domestic gas production.

Sources for this post include Google News and Reuters UK.

These proposals are seen as more of a political “wish list” that will likely not come to fruition, but the message is clear to the oil and gas sector.

Here are some of Obama’s proposals affecting the oil and gas industry:

• The major change is a proposal to repeal the ability to write off drilling and development expenses. This deduction goes back over 90 years and taking it away would cost the industry around $3 billion according to the Independent Petroleum Association of America.
• Repealing the ability to depreciate wells over time to reflect reduced production.
• Ending “enhanced oil-recovery credit” that encourages continued working of depleted wells for additional energy.
• Repealing a manufacturing tax deduction.

On top of the possibility of losing these tax deductions, the oil and gas industry could also be looking at a new excise tax on production in the Gulf of Mexico. American oil and gas producers own 90 percent of the leases in the Outer Continental Shelf and the new tax would put a $5 billion burden on oil and gas investment and development.

The proposed repealed tax deductions would take $31.5 billion in deductions currently available to oil and gas companies. 

Sources for this post include 2theadvocate.com and Financial Times.

Sameh Fahmy, in concerns echoed loudly by oil executives at a gas conference in the Egyptian capital, said that global investments and contract signings had fallen sharply over the second half of 2008 as crude collapsed from a record high of almost $150 per barrel and banks, struggling to remain solvent, sharply reigned in lending. But oil and gas production costs had only dropped by 5 to 10 percent. “We are in a period of extreme slowness” on the global level, Fahmy said, adding that fears about last year’s price spike in crude would be quickly eclipsed if investments — key to generating new supply sources — are not sustained. Crude could go to “over $200 (per barrel) in a period of two or three years if we don’t all act quickly now,” Fahmy said. Oil officials and executives have repeatedly warned about another price spike as falling investments hamper efforts to tap new supply to meet a rebound in demand once the world economy picks up again. As companies are forced to go deeper offshore, or explore in difficult terrain to secure new resource reservoirs, production costs are also expected to remain high. Industry executives, while echoing Fahmy’s concerns, were also eager to show how they are stepping up to meet future energy needs even as the slide in oil prices challenges the economic viability of a number of major oil projects worldwide.

“We’re on track to have a model of the contract ready by the end of June and then we will start having consultations” with industry, Pemex exploration and production chief Carlos Morales told the Reuters Latin American Investment Summit. International oil companies have been quietly watching developments in Mexico due the widely held belief that unexplored areas, such as the deeper waters of the Gulf of Mexico, hold billions of barrels of oil. Private oil companies have been locked out of Mexico since 1938 when the country nationalized the industry. Many Mexicans still oppose allowing foreign firms back in, even under limited terms permitted by reforms enacted last year. Changes to energy legislation put in place in 2008 allow Pemex to offer incentive-based contracts to private companies. The companies will work as Pemex contractors and will not have any ownership over oil production or reserves. Critics of the reform call it back-door privatization. Supporters say the changes are needed to bring in capital and expertise.

The China National Offshore Oil Corporation

CNOOC’s proposed natural gas base is expected to cover 1.5 square kilometers with a deepwater coastline up to 1500 meters and will produce equipment and facilities for offshore oil and gas exploration and development to a depth of up to 3000 meters. The initial investment will be nearly a quarter million dollars.

The China National Offshore Oil Corporation has also announced plans to speed up the exploration and development of oil and natural gas in the South China Sea along with additional business related to its oil and gas efforts in the region, such as power generation and chemical products.

There have been reports that CNOOC and Husky Energy, based in Canada, have discovered a natural gas field in the South China Sea with potential reserves of more than 150 billion cubic meters. The China National Offshore Oil Corporation is currently the dominant player in the Pearl River Delta liquefied natural gas market. The oil and gas company has liquefied natural gas deals in place with a number of nations including Indonesia, Malaysia and Australia.

With the announcements of the oil and gas investment and accelerated South China Sea development, CNOOC has promised to continue pushing the offshore natural gas and Zhuhai liquefied natural gas projects forward.

The China National Offshore Oil Corporation is China’s largest offshore oil and gas company.

Sources for this post include TradingMarkets.com and ChinaNewswires.

The 2009 Offshore Technology Conference was held May 4-7 at Reliant Park in Houston. Surprisingly 66,000 attendees from over 120 countries participated in the midst of a global economic recession and in spite of concerns about the swine flu. The conference was the second largest in the OTC’s 40-year history and was slightly smaller than last year’s record-setting attendance. The 2009 OTC filled over 557,000 square feet of exhibition area to capacity with 2500 companies from 38 countries.

“This year’s attendance levels underscore that in a downturn, energy professionals come to OTC to learn about technologies and innovative approaches to reduce their costs and improve performance. OTC is known for presenting new and proven technologies that will help companies find and produce more oil and gas in deeper waters, and for sharing lessons learned on global projects that advance the offshore industry,” said Don Vardeman, 2009 OTC chairman.

Part of the conference was spent discussing the need for the petroleum industry to stay ahead of government policy issues that affect the energy sector, and the need for a new “engagement model” to increase communication and collaboration with opposing groups in order to change the overall tone of the energy debate.

John Hofmeister, former president of Shell Oil and current head of the non-profit Citizens for Affordable Energy, said, “I’m convinced that American people are smart and pragmatic, and if they hear the whole story about oil and gas, coal, nuclear, which is our base line energy, and not the myths, then they will be far more supportive of what the nation needs in the future.”

The 2009 OTC keynote speaker, Thierry Pilenko, chairman and CEO of Technip, said the oil and gas industry faces challenges in the current lower price environment and must reduce costs while retaining human capital, and avoid a “stop-and-go attitude” that is detrimental to the image of the petroleum industry.

The 2010 Offshore Technology Conference is scheduled for May 3-6 back at Reliant Park in Houston.

Sources for this post include OTC.09, Subsea World and the Houston Chronicle.

The root of this continued investment can observed in the last oil and gas bust and the dramatic reduction in investment that led to a tightened market and the fluctuating high oil and gas prices. The lingering memory of that mistake has renewed the commitment of big oil to investing in long-term oil and gas projects.

In an analysts’ conference call Chevron’s vice president and CFO, Patricia Yarrington, said, “We do have a strong capital program, that’s where our priority really is.” Chevron is backing up this position with a 2009 capital program of $23 billion, the same as 2008’s investment budget. This investment comes at the expense of shareholders in the short term, but will align the company for long-term success.

Phil Weiss, analyst with Argus Research, describes the current state of oil and gas supermajors, “If you look at spending they are certainly no counting on prices staying where they were at all. That is one of the reasons they build strong balance sheets – because when times get weak, you have more cash and borrowing capacity if need it to keep things intact until the environment gets better.”

Exxon Mobil was setting corporate earnings records last year, yet, for the first quarter of this year it reported being down to $4.6 billion compared to $10.9 billion the same period last year. Even with these reduced earnings the company said it increased capital investment in the first quarter by five percent and might even increase its planned $29 billion spending program for this year if the supermajor comes across a good investment project.

Sources for this post include the Wall Street Journal and journalgazette.net.