Offshore

The House of Representatives is expected vote on an energy and climate-change bill by Friday, June 26. One of the primary objectives of this bill (which has been the subject of several of my entries over the past few weeks) is to cut greenhouse gas emissions.

The interesting news today is that President Barack Obama and former Vice President Al Gore have apparently joined forces to drum up national support for the bill.

According to an article written by Kim Chipman at Bloomberg, Cabinet members were to begin traveling across the nation this week encouraging support. Chipman cites a statement issued by White House spokesman Ben LaBolt, explaining that this undertaking is part of an effort to raise public awareness and rally backing for the President’s plan to tackle climate change and remake the US energy economy.

This initiative, according to LaBolt, will be patterned on Obama’s successful effort earlier this year to pass the $787 billion economic recovery act.

Chipman’s article includes a comment from Gore touting the program. “We have to go to the grassroots,” Gore told supporters by e-mail.

Given the emphasis on green energy, it would really be great if the Cabinet members would consider greenhouse emissions as they undertake their travel. It might be a good idea to cycle or drive electric cars as they spread the word to the general public.

Frankly, regardless of the method of delivery, I’m not convinced the bill will get a very warm reception when Americans find out that the proposed law would cost $22 billion a year by 2020, or $175 for every household. These are the figures that were released last week by the Congressional Budget Office (CBO), and I have to think that with the global economy in the state it is in presently and with unemployment rates climbing, enthusiasm for additional household costs might not equal Democrats’ expectations.

The CBO says that in fact, there are plans to soften the cost to consumers by giving some industries free pollution permits and selling others at auction to raise money for tax relief.

Without those measures, the price tag could be much higher. In an analysis prepared for Representative Dave Camp, a Michigan lawmaker who leads the Republicans on the House Ways and Means Committee, the cost without these measures would be $110 billion a year, or $890 per household.

While the Democrats undertake their plan to travel the nation to reach the common man this week, the American Petroleum Institute (API) has taken a different tack. Earlier this month, the API sent 30 working people from the industry to Washington to give their views about what’s good about oil and gas to senators, representatives, and senior staff members.

According to an article in the Oil & Gas Journal, API spokesperson Karen Matusic explained the objective of this undertaking. “We wanted to show the human face of the industry, helping policymakers understand that actions that affect the oil and gas industry have consequences for real people all across the country, their families, and their communities.”

What a concept. Instead of taking the message to the people, Washington can actually hear what “the people” think.

API President and CEO Jack Gerard hopes to make the visit to Washington a regular event. “We want our policymakers to meet the hard-working employees of our industry and come away with a better understanding of who we are and what we do to bring Americans the energy they need, now and in the future.”

Undoubtedly, it would be good for legislators to get some facts and figures about the enormous number of people who are employed in the US energy business, a look at the industry’s advanced technology and how it is being applied to make oil and gas production “cleaner,” and a realistic comprehension of how “green” legislation could impact areas of the country where energy companies are the biggest employers.

One of the people quoted in the Oil & Gas Journal article makes a significant point: “I am a third-generation refinery employee, and I have seen how an industry like ours can create opportunities for people in our area. I want to tell policymakers that if they do not make the right decisions now, they could put an industry out of business. It would have a devastating effect on our community where 50% of the budget for the local school district comes from the oil industry.”

Sadly, it isn’t very likely that the Cabinet members fanning out across the nation to encourage grassroots support for this bill will talk with many of these kinds of people.

More is the pity.

The heated debate continues in Washington about how to achieve energy security while pursuing President Obama’s green agenda. The latest dispute is a continuation of the Republican assault on the climate bill (now in the House of Representatives) that addresses capping releases of carbon dioxide and other greenhouse gases.

An article by H. Josef Hebert of the Associated Press highlights some of the fray.

According to the article, Rep. Mike Pence, in the GOP said in a weekly radio and Internet address that Congress should open the way for more domestic oil and natural gas production and ease regulatory barriers for building new nuclear power plants instead of instituting cap and trade legislation. “During these difficult times, the American people don’t want a national energy tax out of Washington, DC,” he said.

The address further summarized what Republicans have been saying for weeks: The climate bill that is now in the House would lead to much higher energy costs and accomplish little to counter global warming if other nations do not act as well.

Supporters, of course, argue that the increased costs can be minimized.

According to Hebert’s article, Pence reiterated the Republican view that no mandatory limits should be placed on greenhouse gas emissions. For the Democrats, that premise is a non-starter, despite the GOP’s argument that generating nuclear energy is emission-free and that developing oil and gas resources is not necessarily a “dirty” business.

Pence also expressed support for “investments in renewable and alternative energy technologies and incentives to spur greater conservation among individuals and businesses.”

The Republicans’ plan is based on using revenue from increased oil and gas drilling to promote renewable energy such as wind and solar technologies. The plan also proposes ways to simplify the approval process for building more nuclear power plants and sets a goal of doubling the number of nuclear reactors over the next 20 years.

Unfortunately, the heart of the energy debate is characterized by an overweening proclivity on the part of Democrats to side with “clean” energy in any form over “dirty” energy like oil and gas irrespective of the nation’s need for affordable energy. The Democrats’ commentary on the GOP plan illustrates their reluctance to consider any proposal that includes promotion of any kind for oil and gas.

According to Hebert’s article, when Pence introduced the GOP measure, the office of House Speaker Nancy Pelosi (a Democrat from California) called it, “The same tired policies at a time when Americans are seeking new solutions to rebuild our economy and break our dependence on foreign energy sources.”

No matter that the “new solutions” will take decades to fully develop and even then do not have the capacity to replace hydrocarbons in energy provision. The fact is that in Washington today, green-mindedness is next to godliness, and logic and pragmatism haven’t got a leg to stand on.

The unfortunate truth is that no matter how logical or pragmatic the Republicans’ plan might be, the only people who seem to be listening are other Republicans. And it’s difficult to make headway in a debate when you’re talking to yourself.

According to an article written by Daniel Whitten for Bloomberg , Jack Gerard, president of the American Petroleum Institute, says a climate bill recently passed by the House of Representatives will raise gas prices at the pump by 77 cents/gal. Gerard has based this estimate on a Congressional Budget Office (CBO) study.

The CBO study, which was released June 5, says the bill would produce $845.6 billion in revenue and cost consumers $821.2 billion through 2019 in the form of free allowances for industry, tax breaks for low income households, and investment in cleaner forms of energy.

A quote attributed to US Representative Ed Markey, a Massachusetts Democrat who helped write the bill, sums up the democrats’ view that the bill will “get our planet out of the red, while helping to put our budget back in black.”

This view, according to Gerard, is more than optimistic. Gerard believes the measure puts too much of the burden on the oil and gas sector and that in addition to raising gasoline prices, it will raise the cost of a gallon of jet fuel by up to 83 cents/gal and diesel fuel by 88 cents/gal.

“The $846 billion price tag on emission allowances – borne disproportionately by oil consumers – will drive up costs of producing and refining gasoline, diesel, and other fuel products while doing nothing to protect fuel consumers,” Gerard said.

The republicans appear to agree with Gerard. A statement issued by the office of House Republican Leader John Boehner says this move creates “new national energy taxes that will affect every American” and “provides no relief for most of the middle class.”

If Gerard and the republicans are correct in their predictions, Americans will have to conserve at a level that far exceeds the conservation measures most are exercising at present. All the more reason, perhaps, to participate in an event scheduled for June 18 called “Dump the Pump Day,” which is being sponsored by The American Public Transportation Association. The objective of the day is to cut down on gasoline consumption.

As part of the promotion for the big day, The American Public Transportation Association is guiding people to a Web site that will help assist in conserving energy and will help consumers find the most frugal gasoline prices in their area. The site BillShrink.com provides the free online cost savings service, including a free gas tool that shows where to find the cheapest stations along your commute.

According to The American Public Transportation Association, the price of gas can vary as much as 50 cents/gal in one neighborhood. And the price is always changing. BillShrink can save commuters an average of $130/year by continuously finding the cheapest gas stations close to people’s home, work, and other routes. Since prices change from week to week, users of this service can receive updates on the best stations along a specified route.

Promoters of Dump the Pump give some interesting suggestions for cutting costs.
•    Take public transport or car pool to go to work and walk to neighborhood shops for your errands;
•    Drive at a reasonable speed. As a rule of thumb, you can assume that each 5 mph you drive over 60 mph is like paying an additional 20 cents/gal for gas;
•    Use cruise control on the highway for better fuel management. A car engine is more fuel efficient when it runs at a consistent speed;
•    Avoid letting your car become your closet. Take everything out of the car that you don’t need so your engine doesn’t have to work as hard. When packing for a road trip, try to keep luggage inside the vehicle rather than strapping it to the roof, where it creates wind resistance and more drag; and
•    Keep up with regular maintenance. Simple things such as changing the engine air filter as needed can improve gas mileage as much by 10%.

According to Robert Ryan, vice president of global exploration at Chevron, the world has plenty of energy resources. The challenge will be to figure out how to capitalize on these assets so that they deliver the best results for consumers.

Ryan made his comments to more than 700 academicians, industry representatives, and researchers at the plenary session at the 28th international conference on Ocean, Offshore, and Arctic Engineering in Honolulu, Hawaii, on June 1, 2009. “The world is awash in resources,” he said.

Ryan presented numbers – now quite familiar to most of the industry – that show a significant gap between supply and demand for oil and gas by 2030 and talked about the many challenges that stand in the way of bringing those resources to market. These challenges include:
• Limited access to resources;
• Remote locations;
• Harsh environments;
• Ultra-deep water;
• Deeper wells;
• Unconventional reservoirs;
• Technical challenges;
• Cost management (an issue regardless of the world
economy); and
• New energy sources.

John Murray, director of technology development at FloaTEC, followed Ryan with his own take on the industry’s challenges, focusing primarily on the technology issues in the offshore oil and gas sector, particularly in deep water.

Murray pointed out that most of the significant additions to global production will come from deepwater fields where high-pressure/high-temperature (HP/HT) challenges are an issue.

“If the US wants to maintain its contribution to domestic production from the Gulf of Mexico (GoM), the industry is going to have to develop new technologies, particularly for HP/HT conditions,” Murray said. “Deepwater floating production systems will also have to undergo modifications if they are going to be deployable, not only in deepwater applications in the GoM, but in more challenging environments like the arctic.”

In Murray’s opinion, some of the recent floating systems developed for open water conditions can be adapted for application in arctic regions, where up to one-third of the world’s remaining oil and gas resources remain, most of them in a marine environment.

The primary message from both speakers was one we have been hearing for some time: If the oil and gas industry is going to be able to exploit challenging areas, more creativity, more innovation, and more integration are needed.

According to Ryan, more efforts have to go toward developing renewable resources as well. “All energy resources need to contribute, or we’re in a bit of a bind as an industry moving forward,” he said.

Representative Cynthia Thielen, Assistant Republican Leader in the Hawaii House of Representatives, heartily agreed, devoting her segment of the plenary session to presenting the need for more research in wave energy.
“Wave energy has to be part of the renewable portfolio,”
she said.

According to Thielen, “Hawaii’s wave climate is the second best in the world,” and recently-awarded federal grants will be invested to define and develop the potential for this resource. Her goal is for Hawaii to become what she called, “a renewable energy laboratory for the nation.”

Though Thielen’s goals are a bit off the beaten path, they are based on a very real need. Hawaii is extremely dependent on imported energy, drawing 92% of what it uses from abroad. According to Thielen, Hawaiians pay the highest utility rates in the nation and are totally vulnerable to supply disruptions. The state’s clean energy goal is to achieve 70% of the energy used on the islands from renewable sources by 2030 and to cut usage by 30% by improving efficiency.

There is an interesting article written by William La Jeunesse on the Fox news Web site. The title of the article is “Offshore Oil Suffers From Obama Restrictions on New Drilling.” The focus is the need for increased oil and gas production in the US and the obstacles that stand in the way.

The article is built around interviews with Marathon Oil Co. and Cathy Landry, a spokeswoman for the American Petroleum Institute.

The author notes the “generous tax subsidies to wind and solar” granted by the Obama administration, which overtly favors green energy. La Jeunesse follows this comment with the observation that at the same time alternative energy is getting subsidies, taxes on oil companies were hiked by $70 billion over five years, “including  $122 million on leases the administration considers non-producing.”

Not surprisingly, Oil companies like Marathon are concerned. Not only could the taxes decrease the amount of money going to exploration, Cathy Landry said, the increased burdens on the industry could cost jobs as companies cut back on domestic production

“We all have hope for green energy, but it is going to take time – and in the meantime, oil and natural gas will have to be the bridge to the energy future,” Landry said.

The problem, of course, is that oil and gas are costly to find and produce, and the government is putting road blocks in the way instead of finding ways to help solve this problem.

L Jeunesse writes, “Congress lifted its 27-year moratorium on drilling off Florida and the East and West Coast last year, but billions of barrels of that oil remains untouched and off-limits because the Obama administration has postponed development there.”

This doesn’t exactly bode well for the “bridge.”

Meanwhile, an article published in the “Wall Street Journal” takes a look at some of the problems with big oil. Writer Liam Denning opens his story with an interesting statement: “Thunder Horse turns 10 next month. BP’s billion-barrel oil field, discovered in 1999 in the Gulf of Mexico, is a source of pride. It also is a reminder of what ails the oil majors.”

The ailment Denning diagnoses is the inability to replace reserves with big oil finds. He examines a number of international operating companies and finds them lacking, observing that adding reserves through mergers and acquisitions was a short-term fix and that the real solution is to find more oil

Denning cites calculations by Neil McMahon of Sanford C. Bernstein that show less than half of BP’s additions to reserves over the past five years have come through its exploration efforts.

After presenting analyses of a number of operating companies (the vast majority of which are shown in a rather bad light), Denning concludes: “The majors need to reassure investors that the regular distributions of cash are sustainable. That means, when it comes to replacing barrels, proving they can go out and find, not buy, more Thunder Horses.”

This is a nice conclusion, but the fact is that it doesn’t tell us anything we don’t already know. Finding oil and gas in significant quantities is the goal of every operating company.

The problem is that with more restrictions on drilling and higher taxes, it is going to be much more difficult for operators to find oil and gas, and that means they will not be able to assure regular distributions of cash.

The government initiatives for green energy undercut the US investor by making it much harder for oil companies to pay out dividends. And if Landry’s prediction is accurate, the initiatives also have the potential to cost jobs.

According to a story written by Eric Reguly and published in Toronto newspaper “The Globe and Mail,” Total has publicized its opinion that in 10 years global production will plateau at 95 MMb/d, about 10 MMb/d more then current production.

The interesting point of the article is that the company believes conventional oil production will soon reach its maximum practical limit and that diversification will be key to success.

Long-term diversification, the article says, will include nuclear energy and other sources outside the realm of hydrocarbons. In the short term, though, the focus will be on oil sands in Canada and heavy oil in Venezuela.

Reguly quotes Yves-Louis Darricarrère, Total exploration and development president, as saying, “We believe that, because of plateau oil, the oil sands are necessary to supply demand growth.”

According to the article, Total intends to spend US $20 billion developing its Alberta portfolio over the next decade.

The more interesting element of Reguly’s article is the second component of Total’s program, which calls for developing heavy oil from Venezuela.

Though it is true that Venezuela has considerable heavy oil reserves, it seems a bit optimistic to think that partnering with President Hugo Chavez is a good plan.

A Dow Jones article published May 15, 2009, said Chavez announced that his government will continue to seize oil-company assets as part of its plan to expand the state’s control over a key industry.

The article quotes Chavez, who declared in a televised press conference in Buenos Aires, “You ask me if we have our eye on other [oil] companies. Yes. Yes. Next Wednesday (May 20), we will continue to seize companies in eastern Venezuela…I don’t know how many, let’s say all of them.”

This statement was made about a week after the Venezuelan congress passed a law that allows national oil company PdVSA to seize the assets of oil service firms.

Unfortunately, this isn’t a surprising turn of events in Venezuela. It will be interesting to see how Total positions itself to make a success there.

In its enormity, OTC is able to offer a technical session, industry breakfast, topical luncheon, or panel discussion on a broad range of topics.

At the 2009 conference last week, there were interesting sessions on drilling and completion, seismic visualization, subsea systems, pre-salt, unconventional oil and gas, risers, flow assurance, and a host of other technologies. Additional sessions focused on risk analysis and its application in different facets of the industry.

And as is always the case these days, there were several sessions addressing the challenges of working in the arctic, including one on the Sakhalin 1 project and another on arctic exploration, production, and transportation. There was also an industry breakfast on the subject of arctic challenges and a topical lunch titled, “Arctic, the next frontier.”

DNV chose the occasion to publicize its latest joint industry project (JIP), which aims to develop best practices for arctic offshore structures. This JIP is one of many the company in involved with on the subject of arctic operations.

According to a press release the company put out at the show, DNV is kicking off this JIP to improve existing industry guidelines for the safe design of both fixed and floating structures in arctic offshore regions. Several of the major oil and gas players have committed themselves to the endeavor, which will result in the development of recommended practice for ice effects on offshore structures.

Today, DNV said, the most important standard for arctic offshore structures is ISO 19906. The problem the industry is faced with, according to Gus Cammaert, DNV’s director for arctic technology, is the standard is not definitive. “ISO 19906 is ‘open-ended’ in a number of its recommended design practices, and it does not contain specific requirements for mobile drilling units or FPSOs for cold regions.”

The DNV-led JIP will produce a recommend practice (RP) for ice effects on arctic offshore structures and will identify and discuss issues that should preferably be addressed during the concept screening or FEED stage.

The main scope of the JIP is to provide practical guidance on key issues related to:
•    Design methodology, particularly relating to safety philosophy and probabilistic design;
•    The characteristics, properties and conditions of sea ice and icebergs in selected areas;
•    Ice action scenarios and load prediction algorithms for fixed and floating structures;
•    A discussion of structure response for key design issues;
•    Case studies for fixed and floating structures.

The plan is for the resulting RP to be a companion document to the ISO19906 standard.
Some of the major participants in the JIP are StatoilHydro, Shell, Transocean, Daewoo Shipbuilding, Hyundai Heavy Industries, Aker Arctic, and Olav Olsen.  In addition to four business units within DNV, 15 organizations from eight countries (including the US, Russia, and China) are represented. Participation from additional sponsors is welcome, the company said.

Interested companies should contact Dr. Gus Cammaert, DNV project manager for the JIP at gus.cammaert@dnv.com.

Cammaert, an expert on ice, specializes in ice interaction with platforms and ships. He is the author of a reference text on ice interaction with offshore structure and currently heads a research group at DNV that is developing new tools, services, and standards addressing arctic challenges.

Cammaert is one of three industry experts who will take part in a Web broadcast that I will moderate at the end of May. He will be joined by Dr. John Murray of FloaTEC and Dr. Roger Basu of ABS. Look for an announcement for the time and date of this Web event, “Taking on the Arctic – Tools & technologies to open the frozen frontier” on the home page of the E&P Web site.

According to a press release from Calyon Securities Inc. in late April, not all of the drilling contractors are in hot water.

Diamond Offshore (DO), which invests heavily in deepwater assets, will buck the trend.

The company reported 1Q 2009 earnings per share of $2.51, well above Calyon’s estimate of $2.22. According to Calyon, cost savings complemented in-line revenues and resulted in the earnings surprise. In its press release, Calyon said, “We remain bullish on deepwater drillers such as DO, which have good earnings visibility.”

Floater activity is moderating, Calyon said, and bidding activity in the US Gulf of Mexico (GoM) market remains weak even in the mid-water segment. Internationally, though, the duration of the term contracts remains stable. Deepwater demand persists in West Africa, Brazil, and Mexico, so opportunities outside the US GoM remain.

Of course, it comes as no surprise that the jackup market is weak, particularly in the GoM, but since DO has no newbuilds under construction, the company expects $470 million in capex in 2009 to be spent primarily on maintenance.

Diamond is cash rich, a situation, Calyon said, that should help DO upgrade its older rigs if opportunities arise.

Pride International Inc. also had a good first quarter, exceeding by nearly $9 million the same period last year. Revenues for 1Q 2009 totaled $549.3 million compared to $540.1 million during 1Q 2008.

According to Louis A. Raspino, president and CEO, “Although we faced a more challenging business environment, we recorded good financial results in the initial quarter of 2009.” The difficult environment that developed in late 2008 has continued in 2009, he said, with further signs of weakness, evidenced by declines in worldwide fleet utilization, especially among jackups and mid-water rigs, lower day rates and subleasing of floating rig capacity.

As with DO, the good news for Pride comes from the company’s deepwater assets, which consist of two drillships and six semisubmersibles.

Deepwater revenues were down somewhat, totaling $218.5 million in 1Q 2009 compared to $238 million in 4Q 2008. Pride attributed the reduction in segment financial performance to a decline in utilization to 91% in 1Q 2009 compared to 98% in 4Q 2008, which reflects 45 days of out-of-service time on the semisubmersible Pride Brazil to complete a planned upgrade, and 10 days on the Pride North America for repairs and maintenance. Both rigs returned to service during the first quarter. Segment average daily revenues improved to $334,900 in the first quarter of 2009 compared to $331,300 in 4Q 2008.

Though the business climate continues to be challenging, Raspino said, the long-term outlook for the deepwater segment remains positive.

So even though day rates have tumbled and a lot of jackups have been stacked, deepwater continues to sustain contractors that have invested in that segment of the industry.

The University of California, Davis, has been awarded $3 million by the California Energy Commission to speed the transfer of renewable-energy advances from research laboratories to homes and industries.

According to a press release that came out April 15, “The new California Renewable Energy Collaborative will become the administrative center for three existing programs focused on biomass, geothermal, and wind energy, as well as a new fourth program that will focus on solar energy. Other renewable energy sources, such as hydropower and ocean energy, may be addressed in the future.”

Bryan Jenkins, UC Davis engineering professor and director of the UC Davis Energy Institute, will lead the new California Renewable Energy Collaborative.

“This new center for collaboration will help energy researchers and specialists from many different sectors work more effectively with the end users of their products – the state’s consumers and energy providers.”

According to Jenkins, the efforts of the previously established biomass, geothermal and wind collaboratives have been instrumental in shaping policy and guiding research to help the state meet its goals for reducing greenhouse gas emissions, decreasing reliance on petroleum, and continuing growth in renewable energy.

“Establishing a central collaborative home will help coordinate critical research and policy missions among the state’s agencies, industries, and the public for meeting the challenges facing California in the transition to a more secure and sustainable energy sector,” Jenkins said.

For the last six years, UC Davis has been administrative home for the biomass and wind collaboratives. According to the press release, the campus leads the nation in many aspects of environmental research and education – particularly renewable energy, climate change, sustainable agriculture, energy efficiency and conservation, and advanced transportation technology and policy. The university’s renewable-energy projects include new sources of bioenergy, advanced photovoltaic materials, solar thermal systems, and enhanced wind turbine design and efficiency.

No doubt research dollars need to be invested in renewable energy, and this is a good step in the direction of converting new concepts into commercially viable products.

The primary objective of the collaborative is to help California move forward the most promising and cost-effective renewable-energy initiatives by assessing resources and technologies and by identifying barriers and opportunities that affect commercial success as well as regulatory, economic, and financial constraints that stand in the way of commercialization. The collaborative will advise the California Energy Commission on strategic planning for renewable energy development; and will disseminate best practices and research findings.

The plan is for each collaborative to be governed by a board with representatives from commercial trade associations, including utilities, private industry, and investors as well as noncommercial representatives from universities, state and federal agencies, local government, public interest associations, and environmental groups.

Ken Krich, assistant director of the California Institute for Energy and Environment said, “This pioneering agreement will establish a new level of coordination and integration among the renewable-energy technologies and will accelerate the state’s pivotally important renewable energy initiatives.”

Meanwhile, California, which has an enormous energy demand, is still resistant to developing its oil and gas resources offshore, and there is little indication that this will change. A small concession can be found in the statement made by Farrokh Najmabadi, director of the UC San Diego Center for Energy Research, who said, “Energy security and economic prosperity requires deployment of an array of energy technologies that are economical and have minimum environmental impact. Collaboratives like this one play an important role of bringing together academic researchers, commercial end-users, and state regulatory agencies.”

It’s hard to tell if the “array” includes oil in gas, but I’m an optimist.

To find out more about the collaboratives, click here.

Dan Pickering of Tudor, Pickering, Holt & Co., an energy investment and merchant banking firm, told attendees at the RMI Oilfield Breakfast in Houston on April 8 that the industry should not expect a “normal environment” for the next six to 12 months. “We’re about a year and change into this process,” Pickering said, noting that the slowdown is expected to last three years.

Pickering prefaced his observations with the comment that he would touch on a number of subjects, but not delve deeply into any of them because of time constraints. Because of attention constraints, I’ve selected only a few of his remarks to share.

On the subject of natural gas prices, Pickering said that although weather has helped, the economy continues to hurt the gas industry. LNG imports will be up over the next few years, he said, and LNG imports are hurting the US gas market. “We expect gas prices to stay low and get worse,” he said, estimating a 2009 average price of $5 and a 2010 price of $5.50. “It’s going to be rough getting to that better patch.”

Pickering took a look at dropping US drilling rig activity and commented that the count will probably continue to go down. And when it recovers, it will not rise to previous heights. “The US recovery will not look the same,” he said.

Pickering expects 1/3 utilization of the rig fleet through 2009 and 50% to 60% utilization at the point that he considers a recovery.

There wasn’t a lot of good news on the service side either. On the brighter side, although business is not going to be fantastic for the next 18 months, the balance sheets for the five big service companies (BJ, Baker, Schlumberger, Halliburton, and Weatherford) are very strong. “This is not the 1980s,” he said.

The “good” news is that Pickering believes we will see $50 oil this year, $60 oil in 2010, and $80 oil in 2011. So there is a light at the end of the tunnel, and the prediction is that things will begin to pick up later this year, albeit slowly.

Given the cyclical nature of the industry, the sad fact is that fluctuating highs and lows are “normal.” And although our recent highs and precipitous lows were extreme, none of us was surprised to see oil and gas prices spike and plummet. The only surprise was the magnitude.

The world needs energy, and much of that energy will come from hydrocarbons for the next 30 to 40 years.

“The bright spot is that the industry has staying power,” Pickering said.

And although Pickering didn’t close on this note, I will. I like a happy ending.