Commodity Corner: Oil Jumps on Fear of Don

- Commodity Corner: Oil Jumps on Fear of Don

Thursday, July 28, 2011
Rigzone Staff
by Saaniya Bangee

Oil futures edged higher Thursday as Tropical Storm Don brewed in the Gulf of Mexico.

Oil trading remained choppy throughout the day Thursday with prices as high as $98.01 and as low as $96.51 a barrel. Front-month crude gained 4 cents to end the session at $97.44 a barrel.

The U.S. Labor Department said the number of claims for unemployment benefits fell to its lowest level in almost four months last week. According to the report, 398,000 people filed for unemployment benefits; this represents an increase in employment.

In its latest bulletin, the National Hurricane Center reported that Tropical Storm Don has strengthened and is headed toward the Texas coast. Oil majors ExxonMobil, Shell, BP and Anadarko have scaled back production and evacuated non-essential from several platforms in the Gulf of Mexico. Analysts predict output levels should return to normal by Saturday morning.

Traders played it safe Thursday over lingering uncertainty caused by the U.S. debt-ceiling dispute. With an Aug. 2 deadline looming, lawmakers remain deadlocked over a proposal to raise the debt limit.

The Brent benchmark fluctuated between $117.07 and $118.64 Thursday, before settling at $117.36 a barrel.

Natural gas for September delivery fell by 1.7 percent to $4.24 per thousand cubic feet Thursday, thanks to larger-than-expected stockpiles as reported by the Energy Information Administration. The EIA stated that natural gas supplies grew by 43 billion cubic feet for the week ended July 22. As of July 22, inventories were at 2.714 trillion cubic feet, down 2.3 percent from the five-year average.

The intraday range for natural gas was $4.20 to $4.34 per thousand cubic feet.

Reformulated gasoline lost 0.8 percent to settle at $3.12 a gallon. It peaked at $3.17 and bottomed out at $3.09 during Thursday's trading.

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O&G Companies Fear Higher Royalty Payments under Obama Effort

- O&G Companies Fear Higher Royalty Payments under Obama Effort

Thursday, June 09, 2011
Dow Jones Newswires
WASHINGTON (Dow Jones Newswires)
by Tennille Tracy

Energy companies are concerned they could be forced to pay higher oil and gas royalties under a new Obama administration effort to revamp royalty calculations for energy extracted from federal lands and waters.

The Interior Department, which launched the effort last month, insists the proposed changes will simplify how oil and gas is valued and should not increase or decrease the royalty payments themselves.

Oil and gas companies are not so sure. They say changes could create an unfair calculation that leads to higher royalty payments, which would dampen the industry's profits and hurt smaller producers particularly hard.

"It makes us nervous when we hear of the government trying to simplify things," said Kathleen Sgamma, director of government affairs for the Western Energy Alliance, a group representing oil and gas producers in western U.S. states.

This debate comes as the energy industry has battled the Obama administration on other matters, such as a bid to eliminate billions of dollars of tax incentives for oil and gas companies.

The new royalty formula also comes as the Obama administration looks for ways to trim the widening deficit. Generating nearly $9 billion in reported revenue last year, oil and gas royalties represent one of the largest sources of non-tax revenue for the federal government.

The Interior Department is also considering, through a separate effort, an increase to onshore production royalty rates, now at 12.5%. The royalty rate for offshore production is 18.75%.

Government watchdogs have said the Interior Department's royalty program fails to collect the government's fair share of revenue from the industry. Earlier this year, the Government Accountability Office identified the program as being at a "high risk" of fraud, waste, abuse or mismanagement.

When calculating royalty rates, the Interior Department can often rely on the sale price between the buyer and seller to determine the value of the oil or gas. But in many cases--such as when affiliated companies sell to each another--the Interior Department questions whether this sale price reflects the true market value and conducts its own review. This creates a burden for government officials and leads to disputes with the industry.

Hoping to simplify the process, the Interior Department is considering a process where it relies on standardized prices to calculate royalty payments. These could be published prices from trade publications or prices at which the products are traded on exchanges.

But the industry is concerned standardized prices could lead the Interior Department to assign a higher value to oil and gas than what producers receive from a sale. And that would lead to bigger payments to the federal government.

Such a system could hurt smaller producers particularly hard because they often receive less money for their production than large multinational companies, said L. Poe Leggette, partner-in-charge at Fulbright & Jaworski's Denver office.

Interior Department spokesman Patrick Etchart said they welcome the industry's comments. Interior wants a system "that provides fair certainty to us that we get paid the proper amount," he said.

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

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