Drilling

With most of the attention on Secretary Kenneth Salazar’s attempt to stop offshore drilling in the Gulf, some of you may be unaware the same battle is being won a different front.

Shortly after President Obama took office, John Podesta, a key member in President Obama’s transition team brought into question 77 leases in Utah. Due to pressure from the environmental lobby these leases, which border national parks in the region, were recalled on the assertion that the sales were improper. The belief at the time was that these 77 leases were rushed through in the waning days of the Bush administration.

As a result, the leases were withdrawn from the bid round and have been sequestered from exploration since December 2008. According to Kathleen Sgamma, Western Energy Alliance’s Director of Government Affairs, this assumption was incorrect. “The withdrawn lease were offered based on the culmination of a seven year environmental management study,” Sgamma said.

The Western Energy Alliance (formerly Independent Petroleum Association of Mountain States or IPAMS) is currently calling on Secretary Salazar to reinstate the 77 leases based on an internal investigative report filed by the Dept. of Interior stating that the leases were carried out properly. The investigative report claims that the reasons for canceling these leases were unfounded. Although the report was completed in December 2009, it was only released this week.

According to Sgamma, the real issue is jobs. “This week the House Subcommittee on National Parks, Forests and Public Lands will hold a hearing on ‘Creating Rural Jobs with America’s Public Lands,’ and the US Chamber of Commerce is holding a Jobs for America Summit.” Sgamma added, “Secretary Salazar could take immediate steps to create energy jobs by reinstating the leases and taking other measures to enable western producers to develop the clean American energy on federal lands that our nations needs to survive,” Sgamma said.

The reinstatement process is ongoing. To view the full Investigative Report conducted internally by the Dept. of Interior visit http://westernenergyalliance.org/wp-content/uploads/2010/07/BLM-Lease-Report.pdf

The International Association of Drilling Contractor’s 2010 World Drilling Conference is now underway in Budapest, Hungary. The trip from Houston, Texas, only took 23 hours (NOTE TO SELF: Get a new travel agent!). So far, there’s been plenty to talk about from advances in drilling technology to improved risk management programs. However, the Gulf of Mexico is no small topic either.

A brief review of Monday’s June 14, 2010 issue of USA Today featured several pages of news concerning the current efforts to kill the oil leak just offshore Louisiana. Apparently, President Obama has paralleled the spill to an environmental 9/11, labeling the event an “assault” on the US coast. Rhetoric is in no short supply, unlike oil and natural gas.

A separate article expressed the UK’s reaction to tough talk by the US President against one of the country’s largest, most profitable companies. Nothing important there, just more rhetoric. Finally, someone is attempting to write about technology.

HEADLINE: “Relief wells aim at 7-inch pipe 18,000 feet below the surface”

The article is well written at least with viable sources to offer credibility to the account. However, the tone seems a bit dry. The article begs to be on the front page as the “latest failed attempt.” And even though the headline says it all, the author still isn’t convinced when he writes, “Instead of drilling for oil, workers are targeting the 7-inch-wide steel-casing pipe located just above the spot where the oil reservoir 18,000 feet deep.”

In reality, that is the story that needs to be told. However, Vergano accounts for his three obligatory sources and ends with the projected 100 days it will take to stop the leak. As an editor at E&P, the fact that a team of engineers can send a 5 1/2-in. pipe more than three miles down and accurately target another pipe with a diameter of 7-in. is without a doubt an amazing feat.

Despite the obvious problems with the spill, the technology (much of which is being highlighted in Budapest this week) speaks volumes for an industry that is only 63 years old. The problem, for most Americans is that we’re too close. We see the rigs on tv, we hear the bad press on the evening news, we listen to the government convince us that oil companies are robbing us at the pump (even though nearly half the price of a gallon is taken out in taxes). Combine all of these observations, and the average person thinks they know something about the oil and gas industry.

For weeks, the evening news has barraged the public conscious with derogatory images of the oil and gas industry. From ruined tourist destinations to fishermen unable to ply their trade. Now, the government has stepped in and put the industry at a complete standstill. Watching the “Anderson Coopers” of the world, you’d think that every person living on the Louisiana coast is as mad he is. We’re all frustrated, that goes without saying. However, the average American living in close proximity to the spill, either works in the oil and gas industry or at least has relatives and close friends in the business.

For a time, I thought it was just me. At least, until I traveled to Europe.

ZURICH, SWITZERLAND (Custom Agent): “You from Texas? You have oil rig in backyard?”

ME: “No. But I am in the oil and gas industry.”

CUSTOM AGENT: “Why don’t they fix leak?”

ME: “They’re trying. It’s very deep. It’s never happened before at this depth?”

CUSTOM AGENT: “AH, why not just put thing on the thing and wah lah (wiping hands clean)?”

ME: “I’ll let them know when I get back to Houston [?]”

OK, so not everyone.

[ARRIVE IN BUDAPEST]

My point is this. A reporter from the BBC was broadcasting live from the Louisiana coast on Tueday evening. She said the following: “There is a lot of ambivalence toward the oil industry here in Louisiana. While many of these residents make the living fishing in these waters, many and possibly more work in the oil and gas industry. They’re really not happy about the moratorium. One resident said he feels like they’ve been punished twice.”

Truth is, sometimes you have to step away from things to see a bigger picture. With the situation in the Gulf of Mexico we are damned if we do, and we are certainly damned if we don’t.

On Tuesday, May 11, 2010, the US Senate met with the heads of operator BP, rig owner Transocean, and service company Halliburton in Washington to inquire as to why the Deepwater Horizon suffered a catastrophic failure in the GoM.

Inevitably, with the blowout still flowing, no real answers could be provided. While intervention is ongoing, the exact series of malfunctions will not be apparent until the leak is stopped and equipment is brought to the surface. For those us who want to understand exactly what failed and why, patience is in order.

On the other hand, it seems as if every local newshound and nationally broadcast pundit has earned honorary degrees in petroleum engineering. The blogosphere is rife with false claims and obfuscated links between segments of current drilling operations. The bottom line: if you don’t have real answers, just make something up that sounds good.

Now, the real issue is the tug-of-war ensuing between those who believe the US should “get off oil” and those who understand the complexity of this off-the-cuff proposal. In the long term, getting off oil may become a possibility contingent on new technology that currently does not exist (in a scalable form). As for hard statistics, oil will remain as a major part of the world’s economy for at least the next 30 years.

Here are some numbers that show why getting off oil is not such a great plan for the US. According to the US Energy Information Administration (EIA), the US consumed 18.7 million bbl per day of oil in 2009. Out of this number, the country produced 9 million bbl per day domestically, both on land and offshore. More than half of the oil consumed was imported, namely from our neighbors, Canada and Mexico, with the difference being made up from the Middle East. The Material Management Services (MMS) reports that GoM oil production for 2009 totaled 565.8 million bbl (more than 1.5 million bbl per day).

The current motive of the environmental sector is to end offshore drilling to prevent another catastrophic spill. Given the hypothetical deficit in domestic oil production if drilling ceased offshore, the US’s mobility would be hampered. While it did not report data for 2009, the EIA accounts for a daily production of 656 bbl of biofuels in the US for 2008. If this number remained static for 2009, a severe lapse in offshore production would lead to additional transport vessels bringing oil into the country. While a drilling moratorium for all offshore operations would decrease the risk of a blowout, the risks of a spill could actually increase due to a higher number of transport vessels sailing through US waters. Avoiding another Deepwater Horizon could invite the next Exxon Valdez.

The real question is appetite. Because the US remains as one of the most highly developed nations in the world, it uses a vast amount of energy. While pundits would claim that wind and solar can alleviate our “addiction” to oil, it remains only partially true. It’s true that wind and solar do generate a certain amount of power. However, this passive generation is most effect for heating and cooling in residential and commercial environments, running other types of electrical equipment, and it provides only a fraction of the needed power for minor manufacturing. While these sources do offset overall coal consumption, wind and solar cannot accomplish much in the way of moving our trains, trucks, heavy equipment, shipping, and heavy industrial manufacturing. For these operations you need a dense, high-energy resource: oil.

Others argue that dependence on foreign oil leads to long-term warfare. While this is also partly true, domestic oil production is the best answer to reducing dependence. By banning exploration in the Gulf, the deficit would most likely come from the Middle East who, according to the EIA, produced 24.4 million bbl per day in 2009. While our appetite for oil remains part of the problem, our infrastructure will not easily lend itself to an oil-free society in the near term.

Despite the outcome of the current spill in the GoM, some observations should not be overlooked. While most media outlets have posed an “us” against “them” scenario between the oil industry and the fishing industry, the fact remains that successful drilling operations provide the very means by which these individuals ply their trade. From the manufacturing of their boats and engines to the equipment and the fuel used to venture out into the Gulf, we are all reliant on oil. Connecting the matrix of petroleum and its numerous roles in our everyday lives will prove that the benefits associated with offshore drilling far outweigh the risks.

French President Nicolas Sarkozy may appoint renowned geophysicist Dr. Claude Allegre – France’s most outspoken global warming skeptic — as the new super-ministry of industry and innovation.

According to a story filed by Climate Depot, Sarkozy appears ready to appoint the scientist who mocked former US vice president Al Gore’s Nobel Prize as a “political gimmick” to the high ranking scientific post.

The report states that Allegre’s appointment would send “political earthquakes” through Europe and the rest of the world.

The Financial Times reported that the possible appointment has “drawn strong protests” from environmentalists including Nicolas Hulot, France’s best-known environmental activist who said, “Putting him in charge of scientific research would be tantamount to ‘giving the finger to scientists,’” The Financial Times reported.

Allegre has not always been anti-global warming. He was among the first scientists to sound global warming fears 20 years ago. Only in recent years has Allegre reversed his views to become one of the most vocal dissenters of “man-made” global warming. As a member of both the French and US Academies of Science, Allegre has authored more than 100 scientific articles, written 11 books, and received numerous scientific awards including the Goldschmidt Medal from the Geochemical Society of the United States.

Allegre now asserts that the cause of climate change is unknown. He has labeled Gore’s “An Inconvenient Truth” as “nonsense,” saying on Oct. 14, 2007, “The amount of nonsense in Al Gore’s film! It’s all politics; it’s designed to intervene in American politics. It’s scandalous.” Allegre has not taken criticism lying down, accusing his environmental critics of spreading “lies and distortions” about his record and beliefs.
“As a scientist and citizen, I, unlike others, do not want environmentalism to accentuate the crisis or make the least well-off suffer more,” Allegre said in a recent Financial Times article.

Although Allegre was one of 1,500 scientists who signed the 1992 letter titled “World Scientists’ Warning to Humanity” warning that global warming’s “potential risks are very great,” he now believes the global warming hysteria is motivated by money. “The ecology of helpless protesting has become a very lucrative business for some people!” he explained.

In October 2007, US Senator James Inhofe from Oklahoma highlighted Allegre’s recent conversion to a dissenter of global warming. “I find it ironic that a free market conservative capitalist in the US Senate and a French Socialist scientist both apparently agree that sound science is not what is driving this debate, but greed by those who would use this issue to line their own pockets,” Inhofe said.

In 2009, rhetoric has swelled around the topics of environmental stewardship, global warming, and greening the economy. With Allegre’s possible appointment in the wings, the global discourse on climate change may finally see a balance due to rational opposition.

A new descriptive enters the lexicon of words used to describe the energy business. Who cares how we got to the modern age? All we know is that we don’t want to stay.

According to PowerShift ’09, a non-profit youth organization supporting drastic climate legislation, “Students and youth across the country will be following closely as the House Energy and Commerce Committee holds the first hearings on the American Clean Energy and Security (ACES) Act this week.”

The press release quotes Jessy Tolkan, Executive Director of the Energy Action Coalition, as saying, “Young people understand the US response to climate change will determine our future.” If climate were an isolated entity, this would be true.

The fact is no amount of US legislation will affect the overall rate of carbon emissions. Growing economies, like those of China and India, will continue to use what many environmental groups are now referring to as “dirty” energy. While this primarily refers to coal, oil and natural gas (including CBM) are inferred. The juxtaposition of “clean” versus “dirty” is a semantic form of brainwashing. More importantly, do young people really understand what kind of effect an irrational response to climate change will have on our future?

The plethora of activists and environmental groups would have us believe that most oil and gas executives’ cheer every time a baby seal is clubbed or a village is plowed over by bright yellow dozers making way for the next crime scene where Mother Earth is raped against her will. This simply isn’t true, but you know this.

The recent political push to mandate the move away from fossil fuels is the irrational result of mass hysteria. Making believe that life as we know it will completely disappear within one or two decades if we don’t “alter our self-destructive course” is not a viable solution. What it breeds is misinformation and the progressive delusion that the world will be great if “they just do what we say.”

Renewable energy is a viable concept, but it can’t take place overnight. In the US, we have optimized our use of resources within the last 150 to garnish the highest levels of energy from the various elements we extract. Newer economies want a chance to do the same. To legislate limitations on what can be produced is to tether one of last bastions of heavy industry we have. While this appeases our sense of well being in the short-term, it will put us behind the technology leaders of tomorrow.

For a “greener” future to have optimum benefit, it will need to be conducted through a long process of transition. Renewable energy is not juxtaposed from that produced with fossil fuels. The oil companies of today will be the energy companies of tomorrow, adopting those technologies that become more profitable as markets change with time – not with legislation. Besides, doesn’t StatoilHydro own wind farms?

A new study published by the University Of Illinois College Of Law sheds light on the myths and the reality surrounding the recent proposal by many policy makers, activists, and politicians to “green the economy” and provide struggling countries – particularly the US – with “millions of green jobs.”

“Green Jobs Myths” is jointly written by Andrew P. Morriss, University of Illinois; William T. Bogart, York College of Pennsylvania; Andrew Dorchak, Case Western Reserve University; and Roger E. Meiners, University of Texas – Arlington. Its abstract points out that “a rapidly growing literature promises that a massive program of government mandates, subsidies, and forced technological interventions will reward the nation with an economy brimming with ‘green jobs.’ Not only will these jobs improve the environment, but they will be high-paying, interesting, and provide collective rights.”

The authors go on to say that this literature is constructed on mythologies about economics, forecasting, and technology.

The study focuses its analysis on the recent efforts to provide a full description of green jobs by the United Nations Environment Programme (UNEP) report, the U.S. Conference of Mayors (Mayors) report, the American Solar Energy Society (ASES) report and the Center for American Progress (CAP) report. “All these reports attempt comprehensive analyses, providing greater detail than the anecdotal claims elsewhere,” according to the new study.

The authors of Green Jobs Myths determine three key factors from the literature. First, the authors examine the problems with each report’s attempt to define when a job qualifies as “green” and to calculate how many supposed green jobs exist. Second, the study examines how the green jobs literature treats key economic concepts and finds that it makes fundamental economic errors in its analysis. Third, the study examines specific areas of technology where the authors believe the green jobs literature makes errors that typify it as a whole. The authors conclude by suggesting, “Deep skepticism is the most appropriate response to the hyperbolic claims of the green jobs literature.”

According to the authors, the most comprehensive piece of green jobs literature is the UNEP report. In its summary, the study shows the scope of the transformation that would be required of the American economy, the world economy, and society to implement green jobs proposals. The suggestions put forth by the UNEP report are fundamentally geared toward a complete restructuring of modern society and the world economy. Green jobs are described as a means of achieving its programmatic goals. However, unlike most green jobs reports, UNEP states that existing jobs will be destroyed as disfavored methods of production are forced to cease and replaced by new, preferred methods of production.

While many of the domestic reports viewed in this study propose that green jobs programs are a “win-win,” the UNEP report does not pretend that this policy implementation is a simple matter nor does it sugarcoat the massive structural changes that would be needed. In addition, the UNEP report does not pretend to know exactly how many jobs will be created decades from now, or that the costs can be known. The authors point out in their analysis that the UNEP report makes clear the broad scope of the social change it proposes, which is a change to virtually every aspect of daily life: from where people live, where their food comes from, how they commute to work, and even to what they do at work. If implemented, all of these would be dramatically altered from their current existence.

Overall, the authors observe that the green jobs literature focuses on phasing out virtually all of the country’s current energy sources, roughly 93%. Currently, only about 7% of our energy comes from what are called “renewable” sources. Green jobs promoters assert that 93% of our energy should be eliminated – energy used for heating and cooling homes, schools, and offices; powering cars and transport vehicles; and providing power for industry and agriculture, creating every good most people enjoy.

Former Vice President Al Gore has stated that our current sources of electricity (40% of all energy in the US) should be eliminated within a decade. However, the authors point out the 10% of electricity in the US comes from renewable sources. With wind, solar, geothermal, and biomass representing about 3% of the nation’s electricity generation capacity, even with rising capacity these technologies will continue to represent a mere fraction within 10 years.

Some of the myths surrounding green jobs proposals defined by the authors of the new study include the notion that everyone understands what a “green job” is. The reality: no standard definition of “green job” exists. Advocates report that creating green jobs will boost productive employment; however, the reality is that many green job estimates include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.

The authors report that many proponents of green jobs feel that current forecasts are reliable. According to this study, much of the green jobs literature has based estimates on poor economic models using dubious assumptions. In addition, it is believed that green jobs promote employment growth. The fact is that by promoting more jobs instead of more productivity, the green jobs described in the literature will be low-paying and in less than desirable working conditions. The United Nations and Congress cannot simply mandate economic growth. The study also says that government interference such as restricting successful technologies in favor of speculative technologies favored by special interests will inevitably generate stagnation.

Perhaps the most astounding myth put forth by the green jobs mentality is that government mandates are a substitute for free markets. The truth is that companies react more swiftly and efficiently to the demands of their customers and markets than to cumbersome government mandates.

The “Green Jobs Myths” paper concludes that literature supporting green jobs claims is rife with internal contradictions, vague terminology, dubious science, and ignorance of basic economic principles. “Indeed, the green jobs literature claims resemble the promises of long-term financial prosperity offered by Ponzi schemes. New taxes, increased public borrowing , and government subsidies will be needed to support green jobs programs. We find no evidence that these ‘investments’ in green jobs can support the promised results,” the authors add.

The real purpose of the green jobs initiative is not to create jobs, but to remake society. This analysis purports that sweeping changes advocated in these reports under the premise of “greening our economy” are intended to shift the American and world economies away from decentralized decision making. The authors state that its real intent is to move in favor of centralized planning. Instead of allowing individuals to voluntarily trade in free markets, green jobs advocates would instead discourage trade and give central planners and politicians the reigns to choose which technologies could move forward as well as determine the choices faced by consumers and workers. Cloaking these policy shifts within the topic of green jobs, advocates of drastic economic policy shifts hope to avoid heated debates over the massive and costly changes they want to impose.

In an interview, Andrew R. Morriss, lead author for “Green Jobs Myths,” stated the dangers of diametrically opposing so-called “green jobs” against what many proponents classify as “less desirable forms of production” – jobs in the oil and gas industry.

Morriss said, “I think it is wrong to position green jobs as opposed to a fossil-fuel based economy. Jobs in refining - making it more efficient - are just as green as jobs in solar power.” Morriss and his coauthors emphasize, “The US economy has been steadily getting greener through market forces for at least 100 years, as cost pressures drive firms to innovate to be more efficient to cut costs.

“The current debate is an obfuscation of the real issues – what most of the people demanding the government spend billions on green jobs are trying to get is a substantial shift in the nature of our economy. If you read the UN Environment Programme report, for example, you can see this pretty clearly – they want less trade, more expensive energy, less fossil fuel use, etc.”

The debate, contrary to what most green jobs proponents currently believe, is far from over. The shining medallion being put forth as the green-engineered future is a pipe dream to say the least. Fossil fuels provide the infrastructure, the income, and ingenuity for most economies to thrive. To supplant this massive, proven network with technologies that are promising – but hardly scalable – is a vision that is not based in reality.

“Green Job Myths” contains 97 pages and is replete with graphs and statistics on the subject of green jobs and energy production. This paper should be required reading for anyone with a stake in the energy industry.  To download a free full version of the above paper visit http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1358423#

So here it is, the 2009 SPE/IADC Drilling Conference in Amsterdam, Holland. On first appearances I would have to say that the crowd doesn’t look expansive. Not that I mind, elbow room is always nice. But, given travel expense its discretionary nature in the world’s current economic state, I assume that many of us who planned to attend perhaps were outvoted by the gatekeepers.

However, the show goes on. Conference Chairperson, Walter Simpson, said this morning that approximately 1,450 people were registered to attend the Amsterdam Conference, which also has 93 exhibitors on the show floor. Maybe it’s not as bad as it seems? I can only report what I see.

So far, the technical sessions have been the “bell of the ball.” Simpson also announced that this year’s submissions for papers were a new record for the conference. Although, attending a conference in Amsterdam is rather sexy. I wonder what the turnout would’ve been for “2009 SPE/IADC Drilling Conference Beaumont, Texas?” Not that there’s anything wrong with Beaumont, but location can take an event a long way.

Calgary, Alberta, Canada-based Xtreme Coil Drilling Corp. has expanded its operations in Mexico. The venture began as with the execution of a new drilling contract with a Weatherford International subsidiary.

The company is now preparing to deploy two additional Coil Over Top Drive (COTDTM) drilling rigs under a new long-term contract. between Weatherford de Mexico S.A. de C.V. and Xtreme Coil’s wholly owned subsidiary, Xtreme Coil Drilling Mexico, S.A. de C.V.

The two XTC 400 drilling rigs will operate in the Chicontepec oilfield near Poza Rica. The XTC 400 is Xtreme Coil’s largest rig capable of drilling 10,000 ft with 3 ½-in. coiled tubing. Set up as a “triple,” the rig is also capable of drilling to 14,000 ft with conventional jointed drill pipe. It is built with a 400,000 lb. AC drawworks, a large 200,000 lb. injector and an integral multi-well pad self skidding system. Both rigs recently completed operations in the United States’ Rocky Mountain region.
Xteme Coil initiated its first international project in mid-2008 with six newbuilt COTDTM drilling rigs. It now has a fully staffed Mexico office acting as an operational base near Poza Rica. Current success in the region includes a 95% rate of productive rig time.

In Q4 2008, Xtreme Coil reported approximately 950 operating days in total. By the year end, Xtreme Coil had nine rigs under long-term contract. Including the two rigs moving to Mexico, its drilling rigs under contract have now increased to 11 out of its current COTDTM rig fleet of 16. The company is pursuing a number of new opportunities in several international regions. Its operating information shows its rigs to viable equipment for responding to conventional and re-entry drilling projects both in North America and beyond.

A recent report by investment firm Bain & Company Inc. announces a hard look at the year to come. In what it calls “The Davos Energy Brief” it outlines some possibilities for 2009, most importantly average crude price of $40 per barrel.

Industry spending is expected to decline by 20%; activity and employment is predicted to drop by 10%; and overall production will be reduced by 5 MMbbl/d. It’s not news to say that the oil and gas industry is now experiencing a painful contraction. The report adds that 30 key energy companies (10% of the top 300) will be acquired or consolidated during 2009. This could be a good thing or bad depending on the motivations of the move.

How fast things have grounded after July’s record high crude price? The good news is resilient companies will survive and may even improve their standing. Those who have overspent during last year’s boom or failed to secure their investment standings will most likely perish. The key to surviving this downturn will be decisive action coupled with the ability to be patient.

According to Bain & Co., timely action will help companies to set a strategic direction through turbulence, steer major projects forward, manage costs, and sustain dialogue with stakeholders. On the other hand, patience will be necessary to ride out price volatility, survive capital market, and overcome supply uncertainty.

In spite of the economic problems facing the industry today, oil and gas will remain an attractive sector for investors in 2009, the report said.

The major unknowns for 2009 include oil prices, production capacity, and sector consolidation. Bain & Co. asserts that companies have drastically changed their short term strategies as a result of recalibrating their investment plans with $30 to $50 per barrel estimates. For oil producers this means new portfolio priorities. For consumers it presents new supply and storage needs.

The long-term prospects are also challenging, but a dramatic contraction in the oil and gas industry seems inevitable at this point. Reductions in demand and capacity are currently visible. This will continue to have a definite effect on the unconventional resource boom. Planned expansion projects for new infrastructure will be delayed by rebids. Other areas under threat in current economic situation include new exploration, new market and technology developments.

In light of everything that will come to pass in 2009, this downturn is only a test. CEOs, Chairmen, and board members will find ways to win during these turbulent times. As for the rest of us – the consumers – we have to assume that no matter how bad things get they’ll always get better over time. When the oil price has normalized we’ll start complaining about the price of gas again.