Commodity Corner: Oil Falls Amid Softer Demand Outlook

- Commodity Corner: Oil Falls Amid Softer Demand Outlook

Friday, September 02, 2011
Rigzone Staff
by Matthew V. Veazey

Light sweet crude oil for October delivery lost nearly three percent Friday after the U.S. Department of Labor announced that the U.S. economy added zero jobs last month.

The WTI settled at $86.45 a barrel, a $2.48 day-on-day decline, after the Labor Department reported that the loss of 17,000 government jobs in August offset the addition of the same number of private-sector jobs during the period. According to media outlet MSNBC, the government last reported zero job growth 66 years ago. The Labor Department also announced that the unemployment rate held steady at 9.1 percent.

The unimpressive employment figures support the view that the U.S. economy is experiencing a double-dip recession, lowering expectations for oil demand.

Brent futures also ended the day lower, losing 1.7 percent to settle at $112.33 a barrel. The benchmark traded within a range from $111.57 to $113.51. The WTI peaked at $88.99 and bottomed out at $85.42.

By noon Friday, one-third of Gulf of Mexico natural gas production had been shut-in as Tropical Storm Lee ambled toward the Louisiana coastline. That was not enough to counter the aforementioned dismal economic prospects, however; October natural gas lost more than four percent Friday to settle at $3.87 per thousand cubic feet.

Front-month natural gas fluctuated from $3.85 to $4.065 during floor trading. Reformulated gasoline for October delivery lost a nickel to end the day at $2.84 a gallon after trading within a range from $2.795 to $2.90.

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Seadrill 2Q Earnings Climb on Demand

- Seadrill 2Q Earnings Climb on Demand

Thursday, August 25, 2011
Seadrill Ltd.

Seadrill reports second quarter 2011 results:

Highlights

• Seadrill generates second quarter 2011 EBITDA) of US $579 million
• Seadrill reports second quarter 2011 net income of US $645 million and earnings per share of US $1.34
• Seadrill distributes quarterly cash dividend of US $0.75 per share
• Seadrill records a US $416 million gain on realization of the Pride International Inc. shareholding ("Pride")
• Seadrill exercised its right to call and retire the US $750 million 2012 convertible bond
• Seadrill ordered a new ultra-deepwater drillship for an all-in cost of US $600 million
• Seadrill ordered a new tender barge rig for a total consideration of US $115 million and a new semi-tender rig for an all-in cost of US $200 million
• Seadrill agreed to sell the jackup rig West Juno for a total consideration of US $248.5 million
• Seadrill agreed to sell the jackup rig West Janus for a total consideration of US $73 million

Subsequent events

• Seadrill acquired a 33.75 percent ownership stake in Asia Offshore Drilling Ltd through a private placement
• Seadrill's majority owned subsidiary, North Atlantic Drilling Ltd, takes delivery of the harsh environment jackup rig West Elara
• Seadrill completed the divestment of the jackup rig West Juno for US $248.5 million in early July
• Seadrill secures two three-year contracts for two jackups with a US $348 million revenue potential

Second quarter 2011 results

Seadrill reported consolidated revenues for the first quarter 2011 of US $995 million compared to US $1.11 billion for the first quarter 2011. The reduction is due to de-consolidation of Archer Limited from end of February.

Operating profit for the first quarter was US $430 million in line with the preceding quarter.

Operating profit from the Floaters was US $341 million as compared to an operating profit of US $312 million in the first quarter 2011 due to improved average economical utilization rate.

Operating profit from the Jackup Rigs amounted to US $49 million as compared to an operating profit of US $64 million in the first quarter 2011 as result of lower average economic utilization rate.

Operating profit from the Tender Rigs was US $40 million, down from US $49 million in the first quarter 2011 due to the retirement of the tender rig barge T8.

Net financial items for the quarter amounted to a gain of US $264 million compared to a gain of US $441 million in the previous quarter. The second quarter included a gain on realization of our Pride position of US $416 million whereas the first quarter benefited from a US $477 million gain in connection with the deconsolidation of Archer Limited formerly known as Seawell Limited. Loss on derivative financial instruments was US $90 million compared to a US $41 million gain in the first quarter.

Income taxes for the second quarter were US $50 million compared to US $48 million in the first quarter.

Net income for the quarter was US $645 million and basic earnings per share of US $1.35.

Chief Executive Officer in Seadrill Management AS Alf C Thorkildsen commented, "Our second quarter results reflect solid operation and performance for our offshore drilling rigs. We are in particular satisfied with the improved utilization rate for our floaters that was up from 94% to 97%. Based on a sound outlook for our industry and our solid contract portfolio we continue to be optimistic about our future earnings potential and have resolved to uphold a cash dividend of US $0.75 per share for the quarter."

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Risk Is A Four Letter Word

- Risk Is A Four Letter Word

Thursday, August 18, 2011
Rigzone Staff
by Trey Cowan

The average investor often overlooks the simple concept of how the market discounts risk. Risk and reward typically correlate strongly with one another. Currently, the risk premium that an investor demands in exchange for lending to broader markets is expanding. In broad terms, investors must be anticipating that future risk levels are increasing.

To better define the risk/reward relationship, we first point to the current situation surrounding the 10-Year Treasury Note. From July through the week ending August 12, 2011, the note's yield has declined 26 percent from 3.18 percent to a 2.34 percent. Today, the 10-Year dropped below 2 percent.

Previously, the lowest the yield on the 10-year was 2.12 percent, set in December 2008; when fears regarding the global credit freeze were near their highest levels. Yields for fixed income instruments respond inversely to price. Investors buy the 10-Year to reallocate their holdings away from risk and into this safe-haven, which has the effect of driving the price up. We note the key concept in finance: the yield on a 10-Year is often looked upon as the proxy for the risk-free rate of return.

Another component in the valuation of assets is the risk premium. As the risk-free rate of return shrinks the average risk premium an investor demands must rise. In other words, if the 10-year yield is falling, then market risk is actually on the rise. Let's assume for a moment that an investor wants a 10 percent return on their investment. If the risk free rate has dropped from 3 percent to 2 percent, then the risk premium that investor is willing to take on has grown by a corresponding amount. Otherwise, the investor's required return falls to 9 percent (signifying their aversion to taking on additional risk). Therefore, when we see dramatic drops in the 10-year, like what just took place, all else equal, investment risks must be perceived to be on the rise. Such a move is justified to mathematically keep the overall return at equilibrium.

Using the earnings estimates we can prove that these financial concepts are factoring into current market valuations. For our example we are using the earning's yield of the the S&P 500 Index. We took the recent annual earnings for the S&P 500, $112.8, and divided it by the index value for the week ending August 12, 2011 (1178.81). What we found was that the earnings-to-price (E/P) yield was 9.5 percent. If you subtract the corresponding 10-year treasury yield (i.e. the risk-free rate) of 2.3 percent from the E/P, the remainder is the risk premium for the S&P 500 Index (i.e. 7.2 percent).

The risk premium for the S&P 500 is relevant for two issues. First, the S&P 500 includes only well-capitalized U.S. operated firms of a significant size. If the market expects a total earnings yield of 9.5 percent for blue-chip U.S. firms, then obviously the required return (and associated risk) for lesser quality investments is going to be higher. Second, the current risk premium at 7.3 percent for the S&P 500 is well outside the norm (3.85 percent average since 2005 and 5 percent YTD).

This growing level of inherent risk in the broader markets and the market's appetite for risk does have an impact on oil prices that is worth considering. Although the Fed's posture towards interest rates (and their vow to hold them low into 2013) would suggest that the dollar will remain weak, this is no time to get bullish on oil. Look no further than price variability to understand our reasoning. Since 2005, one standard deviation in the price of a barrel of oil represents 25 percent of the total price. Conversely, one standard deviation in the S&P 500 Index approximates 15 percent of the total. Therefore, at a time when the market is risk averse, an investment in crude oil bears with it 66 percent more risk than the total market.

Suppose that inherent in recent market sentiment is a fear that the U.S. economic growth profile for next year will slip by about 10 percent or approximately three-tenths of one percent of GDP. Ultimately, such a scenario would be accompanied by less demand for oil. We used regression analysis to compute the value of one barrel of oil based on a 10 percent decline in S&P 500 earnings using observations starting in 2005. Our calculations peg the implied value of WTI crude oil at $84/barrel based on if NTM earnings estimates drop $11 for the S&P 500 Index. Our calculations would be well below what the EIA and leading economist recently had considered a reasonable assumption for next year (+$100/bbl).

Also, consider how much the current risk premium exceeds its average 52-week value. Recent history suggests that a growing risk premium (that is well outside this 52-wk norm) spells trouble for oil prices. Back in 2008, risk premium exceeded its own norm by 2 percentage points. Oil prices in the subsequent 10 weeks fell 53 percent. Again in 2010, the S&P 500 risk premium broke 2 percent above its norm and oil prices fell 5 percent in the following ten weeks. With the markets now showing a risk premium that is again 2 percent above the norm, a repeat of this pattern does not seem far-fetched.

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Commodity Corner: Oil Declines on GDP Data

- Commodity Corner: Oil Declines on GDP Data

Tuesday, August 16, 2011
Rigzone Staff
by Matthew V. Veazey

The WTI and Brent contracts settled lower Tuesday after the release of a key European Union economic indicator supported a pessimistic outlook for global crude oil demand.

Light sweet crude oil for September delivery lost $1.23 to end the day at $86.65 a barrel while Brent slipped 44 cents to settle at $109.47 a barrel. Eurostat, the statistical arm of the EU, on Tuesday announced that gross domestic product throughout the bloc rose by only 0.2 percent in the second quarter. GDP growth during the first quarter was a more robust 0.8 percent; however, Eurostat pointed out that the latest second quarter figure beats that of the corresponding period in 2010 by 1.7 percent.

The WTI contract price fluctuated from $85.62 to $87.93 during Tuesday's session.

Front-month natural gas lost nine cents to settle at $3.93 per thousand cubic feet. Forecast models show milder temperatures from the Midwest to the Northeast through the remainder of this month, chilling cooling demand projections for the regions.

The September natural gas contract traded within a range from $3.90 to $4.04 Tuesday.

The price of a gallon of reformulated gasoline fell two cents to end the day at $2.85. September gasoline peaked at $2.87 and bottomed out at $2.83.

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OPEC Shaves Oil Demand Outlook, Sees 'Dark Clouds' over Econ

- OPEC Shaves Oil Demand Outlook, Sees 'Dark Clouds' over Econ

Tuesday, August 09, 2011
Dow Jones Newswires
LONDON
by Benoit Faucon

OPEC Tuesday trimmed its global oil demand growth forecast for 2011 and warned it could cut the outlook further, signaling that mounting economic woes are biting into the world's crude consumption.

In its monthly report, the Organization of Petroleum Exporting Countries reduced the global demand growth forecast for this year by 150,000 barrels of oil a day--the deepest such cut this year--on a downgrade in its U.S. economic growth outlook and weakening Chinese prospects.

"Dark clouds over the economy are already impacting the market's direction," OPEC said. "The potential for consequent deterioration in market stability requires higher vigilance and close monitoring of developments over the coming months."

Global oil demand will still rise by 1.2 million barrels a day, and the downgrade represents only a fraction of the 88.14 million barrels a day OPEC expects to be consumed this year worldwide.

OPEC warned that were higher oil prices to persist or the most industrialized economies to suffer further setbacks, it might trim the forecast by another 200,000 barrels a day. OPEC produces more than one in three barrels consumed worldwide each day.

Coming hard on the heels of a drop in oil prices by over 10% since early August, the downgrade could give ammunition to an Iran-led group that has fought higher oil output. A June OPEC meeting in Vienna ended in acrimony after a Saudi Arabia-led group failed to persuade OPEC that an anticipated surge in oil demand this year merited an output increase.

OPEC Tuesday cut its U.S. economic growth forecast to 1.8% in 2011 from 2.5% previously. U.S. oil consumption data for May showed the largest decline observed since January 2010 and demand contraction in industrialized countries was expected to continue.

OPEC also said demand in China--the engine of oil consumption growth in recent years-has been losing steam. The country's factory sector grew in June at its slowest pace in 28 months, OPEC said.

OPEC estimated demand for its own crude remained unchanged for 2011 and is still up 200,000 barrels compared to last year, as the global demand downgrade is offset by lower-than-expected non-OPEC supply. The OPEC oil demand outlook, however, was cut by 100,000 barrels a day for next year.

But the group's data also still points to a supply gap of 811,000 barrels a day in the second half of this year, according to a Dow Jones calculation of the difference between current oil output and OPEC's demand forecast for the coming period.

But the crystal ball will roll into the consumers' camp with the U.S. Energy Information Administration expected to release its own report later Tuesday, followed by the International Energy Agency Wednesday.

Copyright (c) 2011 Dow Jones & Company, Inc.

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Oil Demand to Increase; Supply Less Certain -Study

- Oil Demand to Increase; Supply Less Certain -Study

Thursday, August 04, 2011
Ernst & Young LLP

Oil demand and prices should continue to rise in the third quarter of 2011 according to indicators, even with ongoing uncertainty with respect to the economic recovery, deficit reduction initiatives in the US and the debt crisis in Europe.

In the first quarter of this year, with expectations for continued economic improvement and as a result of the supply disruptions from the Middle East, oil prices rose to over $100/barrel. But after peaking in the second quarter, crude prices fell back slightly, in spite of the announced stock release by the International Energy Agency (IEA), as the economic recovery lost some steam.

Oil

The bright spot in the oil outlook is the increasing activity in the Gulf of Mexico since the oil spill last year, with the first new production out of the Gulf coming in the second quarter. While overall production remains below pre-2010 levels, the application and permitting process is substantially improved, and increasing production will create jobs and increase domestic energy supplies at a time of expected strong demand growth. Oil production elsewhere in the Americas continued to increase as well, notably from the Bakken formation in the Upper Midwest, as well as from the Canadian oil sands and Brazil.

The big unknowns for oil producers are the short-term effects of the IEA's release of 60 million barrels from emergency supplies and OPEC members' disagreement over supply increases. The IEA's release announcement brought prices down temporarily and is expected to fill the void of Libyan supplies. However, as the market moves into the high-demand season, the IEA release will not meet that increased demand, and the market will need more supply from OPEC at a time when its spare capacity is at its lowest level in more than 20 years. Beyond the short-term, over the next three to five years, pressures on OPEC to increase capacity and production are expected to increase substantially.

"Oil prices are dictated by supply and demand, and all signs point to modest oil demand growth and uncertain supply," said Marcela Donadio, Americas Oil and Gas Leader, Ernst & Young LLP. "Barring a strong economic shock, continued strong oil prices seem to be in order over the next three to five years."

Gas

US natural gas production continues to grow, with the latest production figures reaching the highest point in almost 40 years. Shale gas is driving the growth and is now approaching about 30% of US total gas production, even as gas-directed drilling has slowed and issues surrounding the economic feasibility and potential environmental impacts of the resource are raised.

"We maintain that natural gas is a sound solution to the nation's need for domestic, cleaner-burning fuel," said Donadio. "We have the resource in abundance and we know how to produce it safely. We need to put any questions around that to rest and focus on creating more opportunities to increase natural gas demand."

Oilfield services

Oilfield service activity is dictated by upstream spending. Spending is expected to continue to grow by about 15 to 20% in 2011, returning close to the peak 2008 levels. Service capacity is being strained by the unconventionals boom. Cost increases and staffing shortages are appearing. This resurgence of the oilfield service segment is being driven by fit-for-purposes technology such as rotary steerable rigs and directional/horizontal drilling; strong oil prices; and the efficient application of shale gas technologies including multi-stage fracking and horizontal drilling.

Transactions

The second quarter was another fairly strong quarter for oil and gas transaction activity, marking seven consecutive quarters of deal growth. Deal activity in Americas continues to dominate the global transactions landscape.

Looking into the second half of year, transaction activity should stay fairly strong, boosted by the expected continued high oil prices and the ever-high geopolitical risk, tempered only by the still reasonably high levels of economic uncertainty, particularly in the US and Europe.

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Commodity Corner: Mfg. Data Stoke Oil Demand Fears

- Commodity Corner: Mfg. Data Stoke Oil Demand Fears

Monday, August 01, 2011
Rigzone Staff
by Matthew V. Veazey

The September contract price for light sweet crude oil settled at $94.89 a barrel Monday. The WTI traded within a range from $93.42 to $98.60.

The 81-cent day-on-day loss followed the release of disappointing July manufacturing figures by the Institute of Supply Management (ISM). ISM, which bases its findings on surveys of manufacturing supply managers, reported that the U.S. manufacturing sector expanded at a slower rate in July. The organization's closely monitored Purchasing Manager's Index (PMI) fell from 55.3 to 50.9 from June to July; a value above 50 generally means that the manufacturing sector is expanding.

"Production and employment also showed continued growth in July, but at slower rates than in June," ISM Manufacturing Business Survey Committee Chair Bradley J. Holcomb said in written statement. "The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent." Holcomb also pointed out that export sales were very strong and domestic sales were sluggish last month.

Brent futures edged upward Monday, gaining seven cents to settle at $116.81 a barrel. The Brent contract price peaked at $119.95 and bottomed out at $114.86.

Weather forecast models are projecting above-normal temperatures throughout the eastern half of the U.S. through the middle of next week, and cooling demand is expected to increase as a result. September natural gas gained 4.3 cents to end the day at $4.19 per thousand cubic feet.

A new weather system in the Caribbean could also have an effect on natural gas prices over the next several days. The National Hurricane Center in Miami reported Monday afternoon that a "vigorous" tropical wave has formed near the Lesser Antilles and will likely to develop into a tropical cyclone by the middle of the week. The system, which was moving west-northwestward at 15 to 20 miles per hour at 2 p.m. EDT Monday, would be named Emily if it strengthens into a tropical storm.

September natural gas traded within a range from $4.13 to $4.20 Monday.

Gasoline for September delivery lost a penny Monday to settle at $3.05 a gallon after fluctuating from just under $3.01 to $3.145. The August contract, which expired Friday, settled at $3.11.

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Despite Criticism, Canadian Oil Key to U.S. Demand

- Despite Criticism, Canadian Oil Key to U.S. Demand

Monday, July 25, 2011
Rigzone Staff
by Karen Boman

Despite criticism by environmental groups, U.S. imports of Canadian oil will continue to play a critical role in meeting U.S. energy needs, according to a recent report by the Calgary-based Fraser Institute, In America's National Interest-Canadian Oil.

In recent years, environmental groups have campaigned against the extraction of oil from Canada's tar sands. In advance of planned protests next month near the White House, U.S. actor Danny Glover and Canadian environmentalist David Suzuki are arguing that tar sands development has wrecked large sections of Alberta and disrupted the way of life of indigenous communities in the province.

In 2009, Greenpeace USA launched its "Stop the Tar Sands" campaign, which claimed that northern extraction of oil from Alberta's oil sands has "created a literal hell on earth" because land is visibly scarred by oil sands development, which takes place above ground. Amnesty International also has campaigned against oil sands development, wanting it to end until "no more development without human rights".

Environmental activists attempts to restrict U.S. imports of Canadian oil "ignore the reality of U.S. dependence on foreign oil and could force America to buy oil from repressive governments that restrict civil, political, and economic freedoms," according to the study by the public policy think-tank.

Canada now provides more oil to the U.S. than all the Persian Gulf countries combined, even though America imports 5.5 million more barrels of oil daily than it did in 1973. "Thus, the question is not whether or not the U.S. will import oil, but which country will supply that oil to American consumers, businesses and government," said study author and Fraser Institute director of Alberta policy Mark Milke.

Canada ranks sixth among the world's top oil producers at 3.3 million b/d. Unlike other countries that produce more oil such as Russia, Saudi Arabia, Iran and China, Canada scores well on measurements of civil, political and economic rights, as well as on proxy measures indicating quality of life, such as literacy rates, post-secondary education, and misogynist practices. With the exception of Norway, Canada is the only major oil-exporting country that scores highly on all measurements of civil, political and economic freedom.

Fraser cites the recent forecast by the International Energy Agency (IEA) that oil will remain "the dominant fuel in the primary energy mix to 2035," with global demand for crude oil reaching 99 million barrels daily by that time. IEA also forecasts that unconventional oil, such as oil extracted from Canada's oil sands, will play an increasingly important role in world oil supply through at least 2035, regardless of what government's do to curb demand.

Given that oil will remain a chief component of the global energy mix for the next several decades, America can either continue to embrace oil imports from Canada or resort to importing increasing amounts of oil from governments "that regularly violate human rights as a matter of policy, and in some cases, are state sponsors of terrorism," said Milke.

Milke noted that the perfectionism exhibited by Greenpeace and other environmental groups ignores the reality of actual energy needs and capabilities. "Long-lasting positive reforms are necessarily based upon how human beings actually live, behave, and work, and within the physical limitations they themselves face."

Canadian gas also provides an alternative supply as geo-political events, such as the Iranian Revolution of 1979 and the invasion of Kuwait by Iraq sharply curtailed oil imports on the world market, as well as insurance against disruption in OPEC supply. The study found that claims that oil sands crude does not lower prices because non-conventional oil is more expensive are mistaken, noting that the "final price of oil is determined not only by the initial cost of production but also by demand.

"Reduced supply on the international market from any source creates upward pressure on prices; in reverse, more oil on the market from any source acts to dampen upward pressure on prices. This is straightforward supply and demand."

The study does not recommend that governments restrict oil imports from jurisdictions based upon their relatively poor record for civil, political and economic freedoms. However, just as it is ill-advised for governments to restrict trade for matters unrelated to national security, "it is also ill-advised to allow misleading assertions from lobbyists about Canadian oil to go unchallenged," Milke said.

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Growing Population, Economies Fuel Asian LNG Demand

- Growing Population, Economies Fuel Asian LNG Demand

Tuesday, July 19, 2011
Rigzone Staff
by Karen Boman

Southeast Asian demand for liquefied natural gas (LNG) will play a significant role in the global LNG trade as forecasts call for growing populations and economies in the region and demand for cleaner-burning natural gas.

According to the U.S. Energy Information Administration, Asia is expected to account for 48 percent of the world's population growth, 52 percent of global gross domestic product growth, and 64 percent of growth in primary energy consumption. Demand for LNG is expected to grow in China, India, Malaysia and Indonesia in the coming years, and Japan, which was devastated by an earthquake and tsunami in March, has boosted its LNG imports as nuclear power plants in the country remain offline.

Southeast Asian gas markets are often overlooked, but Thailand, Singapore, Indonesia, Malaysia, Vietnam and Bangladesh are expected to become LNG importers by 2017, Flex LNG reported in June. Regasification terminals are under construction in Indonesia, Malaysia, Singapore and Thailand, which previously did not have regasification capacity.

Thailand's first LNG receiving terminal is expected to begin operations this year.

Flex LNG is developing a floating LNG project in Papua New Guinea (PNG) with a proposed operations start-up date in 2014, which the company said is "perfect timing" for the anticipated wave of Asian LNG demand. Northeast Asia remains the dominant LNG market and is still experiencing solid growth, and the Fukushima disaster is greatly enhancing this growth, Flex LNG noted. "China and India are the new 'growth engines' in Asian LNG demand and strong growth is expected going forward," Flex LNG said.

According to a report by the International Gas Union, 60 percent, or 135.1 million tones/annum, of the world's LNG was consumed by the Asia-Pacific region in 2010. Sixty percent of that LNG was sourced from within the region; the remaining 40 percent was imported from other regions.

At the end of 2010, China and traditional LNG importers Japan, Taiwan and Korea had 280 million tones/annum, or 51 percent, of the world's regasification capacity. East Asia had accounted for between 75 percent and 80 percent through of the 1990s and early 2000s of the world's regasification capacity, but that share has declined since the mid-2000s due to new capacity in North America, Europe, and the emergence of LNG importing markets in South Asia, South America, and the Middle East.

Asian LNG markets represent three distinct demand groups, said Peter Cleary, VP of Corporate Strategy and Development of Santos Ltd., at the Asian Oil and Gas Conference on June 7. The first group, comprised of established LNG markets of Japan, South Korea, and Taiwan, are countries seeking supply security and diversification by fuel type. These countries have effectively locked in LNG demand, growing at steady incremental rates of between one percent and three percent of year.

The second group represents the growing mega-markets of China and India, which started to develop less than a decade ago but is expected to grow at 10 percent per year, and could be as significant as established markets.

Last month, Black & Veatch and Chemtex unveiled plans to design and build two new LNG facilities in Shaanxi Province, China. The facilities, located in Jingbian City and Yulin City, will be used to liquefy gas for vehicle fuel in the region, offsetting the use of diesel and gasoline. The Black & Veatch-Chemtex team has won five LNG projects in China since the beginning of 2011, and 13 since 2006.

The third group represents the emerging markets of Southeast Asia, including Singapore, Thailand, Malaysia, Indonesia, Vietnam and the Philippines. This group of emerging buyers includes some of Asia's "bedrock" producers who are now becoming importers, as is the case with Petronas purchasing 3.5 mtpa from the Gladstone LNG project in which Santos, Petronas, Total and Kogas are partners.

While future U.S. LNG exports will impact trade flows, Cleary said he believes Asia's demand for securing supplies from neighboring sources will preserve oil-linked prices for the foreseeable future. "Oil-linked pricing of LNG has been the commercial driver required to build real scale and tackle challenging gas developments. Oil-linked pricing has worked in Asia because buyers are comfortable that oil is an established, well understood and globally traded commodity," Cleary said.

With limited conventional gas resource, industrialized Asia and the emerging economies in that region are almost totally dependent on imported LNG from Southeast Asia, Australia and the Middle East. "This dependence places a high premium on security of supply, which is reflected in the region's dependence on long-term relatively high-priced contracts indexed to oil," according to a study by the Massachusetts Institute of Technology, The Future of Natural Gas.

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Halliburton CEO: Demand for Services Outpacing Capacity Growth

- Halliburton CEO: Demand for Services Outpacing Capacity Growth

Monday, July 18, 2011
Dow Jones Newswires
by Ryan Dezember

Halliburton Co. (HAL) Chief Executive Dave Lesar said Monday that demand for oil field services in North America, such as hydraulic fracturing, continues to grow faster than companies like his can add equipment as producers rush to drill unconventional oil basins.

"Overall, growth in the demand for our service has outpaced capacity additions and we expect this imbalance to continue going forward," Lesar said on a conference call to discuss second-quarter results.

Halliburton reported a profit of $739 million, or 80 cents a share, up from $480 million, or 53 cents a share, a year earlier. The latest period included a penny in restructuring-related costs. Revenue climbed 35% to $5.94 billion, which set a new company record.

Analysts polled by Thomson Reuters most recently forecast earnings of 74 cents a share on revenue of $5.71 billion.

Much of the quarter's success is attributed to activity in North America, where high crude prices, producers' healthy balance sheets and easy capital have fueled a rush to unlock unconventional onshore oil reserves, including shale formations.

Natural gas drilling in North America, though down 2% in the quarter, remained "relatively resilient, spurred by the increase demand for power generation due to the substitution of natural gas for coal and harsh summer temperatures in various regions," Lesar said. Though Halliburton remains "a bit cautious" on natural gas drilling, the company's move to reduce prices in order to keep customers drilling has been fruitful, he said.

Halliburton also cited an uptick in work in the U.S. Gulf, winning service contracts for eight of the 18 deepwater wells that have been permitted since U.S. regulators lifted a ban on such drilling in February. The ban was enacted in response to last year's Deepwater Horizon explosion, which killed 11 workers and touched off the worst offshore oil spill in U.S. history. Halliburton provided cementing services for the well the Deepwater Horizon was drilling for BP PLC (BP, BP.LN).

Lesar cautioned, however, that the pace of new drilling permits has slowed and once the current backlog of work is complete, the Gulf of Mexico recovery could stall in the second half of the year.

Internationally, where recovery from recession has come more slowly for service companies than in North America, margins improved slightly.

"We are now seeing evidence that the international pricing is stabilizing," Lesar said. "We believe that steady volume increases should be a precursor for overall international pricing to improve toward the end of the year."

Delays in Iraq weighed on results, though Lesar said he expects profitability in the Middle Eastern country by the fourth quarter.

"We believe that Iraq will be one of the fastest-growing countries internationally in the coming years and that we will benefit significantly as a result of a first-mover strategy," he said.

Lesar also said that while Halliburton is spending heavily in sub-Saharan Africa to establish operations in countries including Mozambique, Tanzania and Uganda, the efforts should "position us for many years of profitable operations going forward," Lesar said.

(Tess Stynes contributed to this article.)
Copyright (c) 2011 Dow Jones & Company, Inc.

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Commodity Corner: Crude Up on Demand Promise

- Commodity Corner: Crude Up on Demand Promise

Tuesday, July 05, 2011
Rigzone Staff
by Saaniya Bangee

Oil futures soared more than 2 percent Tuesday on demand expectations. Light, sweet crude settled up $1.95 at $96.89 a barrel on the New York Mercantile Exchange (NYMEX). Prices for crude oil peaked at $97.48 a barrel.

Barclays Capital raised its 2012 forecasts for Nymex and Brent crude. It forecasts 2012 Nymex crude at $110 a barrel and Brent crude at $115. Barclays claims China, India, Saudi Arabia and Brazil will be the main sources of demand growth in 2012.

Meanwhile, Saudi Arabia's move to reduce the price of August Arab Light oil for its Asian buyers also pressured oil prices Tuesday.

The U.S. Commerce Department reported a 0.8 percent increase in factory orders. According to reports, U.S. businesses ordered more airplanes, automobiles and oil-drilling equipment for the month of May.

Brent crude for August also traded up Tuesday, settling at $113.61 a barrel. The intraday range for Brent crude was $111.23 to $114.34 a barrel.

Front-month natural gas gained nearly 4 cents, ending the trading sessions at $4.36 per thousand cubic feet. Futures rose on warmer weather forecasts. Higher temperatures increase the usage of air conditioning, which in turn increases the demand for natural gas. Natural gas traded between $4.25 and $4.41 Tuesday.

After fluctuating between $2.945 and $3.02, gas prices for the August contract settled at $2.98 per gallon.

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Maersk Extends Rig Fleet with $1.3B Drillship Order

- Maersk Extends Rig Fleet with $1.3B Drillship Order

Tuesday, July 05, 2011
A.P Moller - Maersk Group

Maersk Drilling, a business unit within the A.P. Moller- Maersk group, has declared its option to build two ultra deepwater drillships at Samsung Heavy Industries in South Korea.

The drillships are scheduled for delivery in the second and third quarters of 2014, respectively. The total project cost for the two drillships is approximately USD 1.3 billion, which includes a turnkey contract with the yard, owner furnished equipment, project management, commissioning, start-up costs and capitalized interest. Simultaneously, Maersk Drilling has obtained a new option for the construction of two additional drillships.

"We have an ambition of becoming one of the leading drilling contractors in the ultra deepwater segment and this order is another important step in taking a bigger share of this attractive market segment," said Claus V. Hemmingsen, CEO of Maersk Drilling and member of the Executive Board of the A.P. Moller – Maersk Group. "The order reflects our commitment to grow our rig fleet enabling us to serve our customers in the ultra deepwater segment on a more regular basis," Claus V. Hemmingsen continued.

Year to date, Maersk Drilling has invested USD 3.8 billion in two new jack-up rigs and four drillships.

Maersk Drilling had a revenue of USD 1.6 billion and a profit of USD 399 million after tax in 2010.

Hemmingsen sees a strong market for deepwater drilling rigs as the global demand for oil is increasing while at the same time production from mature fields is declining.

"This means that about six times the current Saudi production must be brought on stream over the next 20-25 years which will drive a solid growth in the demand for drilling services. The main part of this growth will take place in frontier areas such as deepwater," he said.

The two drillships will be of similar design to the two drillships Maersk Drilling ordered from Samsung in April 2011. The 228 meter long drill ships will be able to operate at water depths up to 12,000 ft (3,650 m) and will be capable of drilling wells of more than 40,000 ft (12,200 m).

Similar to the design philosophy on Maersk Drilling's ultra deepwater semi-submersibles the drillship design includes features for high efficiency operation including a dual derrick, which allows for parallel and offline activities. The extensive storage areas and tank capacities provide an advantage when operating in areas with less developed infrastructure and limited presence of suppliers. Together with the higher transit speed the increased capacity will reduce the overall logistics costs for the oil companies. The drillships will have accommodation capacity for 230 people.

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Platts: China's Oil Demand Up 8% YOY

- Platts: China's Oil Demand Up 8% YOY

Wednesday, June 22, 2011
Platts

China's apparent oil demand in May reached 39.4 million metric tons (mt) or an average of 9.31 million barrels per day (b/d), which was 8% higher year on year, as state-owned enterprises continued to increase output to meet local market supply needs, according to a Platts analysis based on recent statistics released by the Chinese government.

Still, May's apparent oil demand was lower than April's oil demand at 9.37 million b/d. It was also the second consecutive month of single-digit demand growth following the October 2010 to March 2011 period of monthly demand growth in excess of 10%.

"China's crude oil imports and refinery throughput continued to grow last month, albeit at a slower pace," said Calvin Lee, Platts senior writer, China. "More importantly, demand appears to have dropped another notch last month, contributing to rising inventories."

Chinese refiners processed a combined 38.47 million mt of crude oil in May, or an average of 9.1 million b/d, equating to a 7.5% increase year over year.

Tasked by the central government to maintain adequate supplies of refined products in the local markets, domestic refineries continued to run at a rapid pace last month in a bid to prevent any oil shortages in the country. Yet, May's throughput was only marginally higher than April's crude runs at 9.09 million b/d.

With China refineries experiencing very low or negative margins, the Chinese companies are not well motivated to process more crude to meet the potential diesel demand surge, industry consultancy FACTS Global Energy said in a brief earlier this month.

In the meantime, net product imports last month were only 930,000 mt, or an average of 0.21 million b/d. Thus, net imports in May were the lowest this year, reflecting the fact that Chinese companies' appetite for imports has ebbed due to high prices in the global markets.

According to an estimate released earlier this month by the National Development and Reform Commission (NDRC), China's consumption of refined products in May grew 5.2% year on year to 20.19 million mt. But consumption was down 28,000 mt from April.

Coupled with increased production, the May drop in consumption helped to boost inventories and oil product stocks at month’s close were one million mt greater than a year ago, the country's top economic planning agency said in its monthly industry report.

A month ago, NDRC reported that consumption of oil products in April grew at a faster pace of 8.3% year over year to 20.4 million mt. Oil product inventories at the end of April were 450,000 mt more than a year earlier.

In a separate report earlier this month, the NDRC said China's state-owned oil majors Sinopec and PetroChina held in storage by late May more than 13 million mt of refined products, a level which the NDRC termed as a "reasonable level."

"A recent supply crunch appears to have dissipated for now. But it could be a different story if power shortages worsen, forcing industrial users to fall back on diesel power generators, and peak summer demand for transportation fuels cause another tightening in supply," Lee said.

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Commodity Corner: Oil Settles Lower on Demand Concerns

- Commodity Corner: Oil Settles Lower on Demand Concerns

Monday, June 06, 2011
Rigzone Staff
by Matthew V. Veazey

Crude oil for July delivery ended the day at $99.01 a barrel Monday.

Monday's $1.21 day-on-day decline stems from pessimism about the prospects for crude oil demand, thanks in part to recent unimpressive economic data showing higher unemployment in the U.S. In addition, some analysts expect OPEC to raise its production ceiling when the cartel meets later this week.

Oil peaked at $100.68 and bottomed out at $98.64 Monday.

The futures price for natural gas moved in the opposite direction Monday, gaining 12 cents to settle at $4.83 per thousand cubic feet. Providing some of the momentum for gas was an International Energy Agency (IEA) report that projects a "golden age" for the fossil fuel. According to the IEA, natural gas use worldwide could exceed 2010 levels by more than 50 percent by the year 2035.

In the nearer term, more summerlike temperatures are expected to prevail in the Northeast and Midwest through this week. As a result, demand for cooling—and natural gas—is expected to increase in these key electricity markets.

July natural gas traded within a range from $4.74 to $4.855 Monday.

July gasoline slipped four cents to end the day at $2.95 a gallon. It fluctuated from $2.94 to $3.02.

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Today's Trends: Chinese Oil Demand Reaches Third Highest Level Since 2005

- Today's Trends: Chinese Oil Demand Reaches Third Highest Level Since 2005

Monday, May 23, 2011
Rigzone Staff

China's apparent oil demand in April reached 38.36 million metric ton (mt) or an average of 9.37 million b/d, marking an 8.3% increase from April 2010 due to increased demand during the spring sowing season, according to Platts' recent analysis.

Apparent oil demand by the world's second largest oil consumer in April was the third highest monthly demand rate since Platts began tracking the data in 2005, behind 9.62 million b/d in December 2010 and 9.58 million b/d in February 2011.

"Beijing has in recent weeks directed state oil majors to ensure adequate domestic supply of products by cutting back on exports and running refineries flat out to meet increased demand from the transportation sector and agriculture sector, with the onset of the spring planting season," said Calvin Lee, Platts senior writer, China.

Earlier this month, the National Development and Reform Commission said Chinese oil majors would temporarily suspend diesel exports, except to Hong Kong and Macau, in a bid to boost domestic supplies.

Still, Platts noted that the 8.3% increase in demand in April showed that overall oil demand growth has moderated from the blistering pace set in the first quarter of well over 10% growth each month. "Some analysts are forecasting that Chinese oil demand growth will moderate for the rest of the year because of a decelerating economy and high oil prices further denting end-user demand,” Lee said.

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Shale Boom, Gas Demand to Make North America LNG Exports Reality

Shale Boom, Gas Demand to Make North America LNG Exports Reality

Friday, April 29, 2011
Rigzone Staff
by Karen Boman

The increase in North American natural gas due to the shale gas boom and a projected increase in global gas demand mean that North America will become a liquefied natural gas (LNG) exporter within the next few years.

The recovery in global LNG consumption in 2010, combined with anticipated gas demand growth in emerging economies of China and India presents opportunities for LNG exports, as does growing demand in Europe, where gas production is expected to decline and demand for gas-fired power generation is expected to grow. Near-term LNG demand also will be impacted by Japan, where the earthquake and tsunami damaged nuclear power facilities, resulting in strong demand for natural gas to fire electric power plants. However, it is too early to tell how this will impact Japan's long-term plans.

North American LNG exports should be sustained as long as North American shale gas production remains at existing levels, said Zach Allen, publisher of PanEurasian Enterprises NATS report, which tracks global LNG markets. Cheniere Energy's Sabine Pass in Louisiana and Freeport LNG in Texas are two existing LNG regasification facilities that will have liquefaction capacity added to allow for LNG exports.

Sabine Pass's liquefaction facilities are scheduled to begin operations in 2015, drawing from onshore Gulf Coast conventional gas plays as well as the Barnett, Haynesville, Bossier, and Eagle Ford shale gas plays. Freeport LNG's liquefaction facility also is expected to be in service in 2015, and will draw its supply from the Eagle Ford, Barnett and Haynesville shale plays as well.

Cheniere noted that adding liquefaction infrastructure to Sabine Pass will allow the company arbitrage opportunities for Henry Hub versus oil prices. Worldwide LNG prices are predominately based on oil prices, or between $10-$25/MMBtu, while Cheniere estimates the cost of delivering gas from Sabine Pass to Europe and Asia at between $7 - $12/MMbtu. The project also has the advantage of having significant infrastructure already in place, including storage, marine and pipeline interconnection facilities, which means lower capital costs.

The Cove Point LNG regasification facility near Baltimore, Maryland could potentially serve as an export facility for Marcellus shale gas, Allen noted. He sees Marcellus gas as a stranded asset, as it's difficult to move gas south from the Marcellus region. "Through displacement, you can move a certain amount of it to the north and east, but that precipitates a price war," said Allen, who also speculates that Sempra Energy's Cameron LNG facility in Louisiana might also be another possible LNG liquefaction facility.

Allen sees Gulf Coast liquefaction facilities as primarily serving the European market, while the Kitimat LNG plant in British Columbia has a competitive advantage in serving northeast Asian markets due to its proximity to Asia. The terminal would also provide a market for Canadian gas, as incremental demand in northern Washington, Oregon and northern California does not provide enough market for gas supply in the region.

Last month, Kitimat partners Apache Canada Ltd., and EOG Resources Canada said Encana Corporation would acquire a 30 percent working interest in the planned facility. The three companies have a significant presence in the Horn River Basin. According to a report by Scotiabank Group, demand for Kitimat LNG is expected to be boosted in the medium-term outlook as shifting to gas-fired power generation occurs in the U.S and parts of Europe and Japan shifts from nuclear energy to imported LNG.

One challenge facing North American LNG exporters is the lack of liquidity and transparency in the European LNG market. Since LNG traded on power exchanges in Europe can be done privately, with no price information disclosed, "we have no idea what LNG prices really are," Allen noted. The market is at best opaque, said Allen, but market forces will eventually push for more transparency.

North American exports of LNG have the potential to compete in cost terms in the global LNG market, Barclays Capital noted in an April 19 report. However, the successful development of liquefaction terminals will depend not only on economics, but ability of project sponsors to secure long term off-take agreements, access to capital and regulatory permits. The higher oil price environment anticipated by Barclays will help make North American LNG exports competitive; however, they are likely to come at the higher end of the LNG supply cost curve.

Solid credit is key for a company developing a North American liquefaction project due to the fact that U.S. and Canadian gas not stranded, as it usually is with liquefaction projects. In a traditional stranded gas project, the project developer would have to ensure that the sale price, with a known floor price, covered the break-even cost of the integrated facility and secured a certain return on the investment.

Both the U.S. and Canada have deep and liquid domestic gas markets that offer an alternative for feed gas; these alternatives make the all-in cost of LNG production a moving target. "It would take an enormous balance sheet to shoulder the risk of buying gas at Henry Hub and selling it at oil equivalents in Europe or Asia over a 20-year time-frame," Barclays noted.

Shale gas development around the world also could dampen LNG consumption, including China. However, Barclays estimated in a March 22 report that the effect of shale gas on Chinese LNG imports would be limited to about 1 Bcf/d over the next decade, given the constraints China faces in developing its shale gas. Shale gas exploration and development in other countries is still in the early stages, but worldwide success of shale gas development "could pose a significant downside risk to LNG import needs."

Today's Trends: Natural Gas Funnelling

Tuesday, March 22, 2011

Rigzone Staff

by  Trey Cowan

The cylinder sections in the graph above represent a range of, plus-to-minus one, standard deviation surrounding the average annual natural gas prices for the corresponding years. Trading patterns over the last three years indicate that the price volatility of natural gas has diminished significantly. Specifically, the range has narrowed from $4.28 in 2008 to just $0.58 at present.

If the cylinders were to be placed concentrically side by side, the resulting effect would be a funnel. Proceeding from the wide-end of the funnel to present day prices, it appears that natural gas has reached a period of price stability.

While much has been written about oversupply issues, the normal corrective mechanisms (i.e. participants leaving) appear to be taking root in the natural gas markets. Specifically, since October 2010, the US land gas rig count has fallen from 950 to 856 rigs, a 10% decline. Taking the conservative assumption that each rig could drill 10 wells per year implies that 940 (10 wells x 94 rigs) fewer natural gas wells will be drilled over the next twelve months.

Given the dramatic decline curves associated with shale gas, such as the depleting 70% during the first year in the Marcellus; the downward trend in rig count implies that future reserve replacement will not likely keep pace with existing production. Such a scenario points to a rebalancing of supply and demand in the U.S.
The discipline we are seeing with regards to a lower natural gas rig count is not occurring in a vacuum. These rigs that were drilling for natural gas are now drilling for oil. In fact, the US land oil rig count has increased by 153 rigs over the same time frame (i.e. from last October until now). E&P firms have made it clear that the incremental return per unit of $11, favoring oil, is a strong incentive to continue shifting resources. Thus, additional drilling to reinvigorate gas production will not resume quickly once prices begin to improve because the equipment will likely not be available.

With prices stabilizing and production normalizing, we can now envision a point in the future months where price improvement rather than price destruction can be seen as the ensuing trend. Other factors that are starting to play to the natural gas market's hand are strengthening industrial demand and a trend towards more electricity generation using natural gas as the fuel. Given the recent nuclear crisis in Japan, the backlash on nuclear energy will only make burning natural gas even more desirable.

So, even with the +7% recent surge in natural gas prices last week, we still see reasons to get more bullish on the commodity in the near future.

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[Oil and Gas Post] - Japan’s Coal, Gas Demand to Rise After Quake, New Hope Says

Japan’s Coal, Gas Demand to Rise After Quake, New Hope Says

March 22, 2011, 2:07 AM EDT
By Elisabeth Behrmann

(Updates to add closing share price in fourth paragraph.)

March 22 (Bloomberg) -- Japan’s coal and natural gas demand is likely to rise after the nation’s biggest earthquake this month knocked out nuclear-powered generators, said New Hope Corp., an Australian coal producer.

“I would expect increased requirements to burn coal and gas over the next few years,” Robert Neale, chief executive officer of the Ispwich, Queensland-based company, said today in a phone interview. Coking coal, in particular, would be needed “because you’ll have at least five or more years of reconstruction, which is going to require steel,” he said.

Japan, which depends on imported fuel for most of its needs, is seeking alternatives to nuclear power after the March 11 quake forced the shutdown of 11 reactors. Five years may be needed to rebuild after the disaster, the World Bank said.

New Hope fell 0.2 percent to A$4.89 at the 4:10 p.m. close in Sydney trading. Shares in the company have risen 0.8 percent this year, compared with the benchmark S&P/ASX 200 Index’s 2.2 percent fall.

New Hope reported first-half profit of A$407 million ($409 million), a rise of more than fourfold following the sale of the company’s stake in Arrow Energy Ltd. The company has a cash balance of about A$1.6 billion following the A$238 million acquisition of Northern Energy Ltd., Neale said.

Demand for coal will rise to make up for the lost nuclear capacity because it’s cheaper than oil and gas, and also due to negative public sentiment toward nuclear power, Andrew Harrington, an analyst Patersons Securities Ltd., said in a report. “We believe that the negativity surrounding nuclear energy will see increased demand for fossil fuels including and especially coal.”

Coal producers likely to benefit from increased demand include Gloucester Coal Ltd., New Hope, Whitehaven Coal Ltd. as well as developers Aston Resources Ltd., Cockatoo Coal Ltd. and Riversdale Mining Ltd., said Harrington.

--Editors: Keith Gosman, Andrew Hobbs
To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net
To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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