Replies to post #933 on The Rising Influence of Rising Affluence

[DewDiligence]

Fallout from the deepwater “moratorium” affected CLB shares today—down almost 3%. This is probably an overreaction; the deepwater GoM comprises only a small portion of CLB’s contracts, and I would expect CLB to be able to be able to substitute business elsewhere if activity in the GoM does not return to baseline. Comments?

[DewDiligence]

A Wrong Turn on Natural Resources

[This is an op-ed piece in Monday’s WSJ.]

http://online.wsj.com/article/SB20001424052748704596504575272790583630252.html

›JUNE 1, 2010
By JOSEPH STERNBERG

For all that talk about a new knowledge economy, things still matter a great deal in this world. And whether it's the steel beam holding up the floor of your office, the gasoline you put in your car or the circuitry in your new iPad, "things" mean natural resources. So it's worrying that one of the major policy trends emerging in recent days is that the capitalist West is cutting itself out of the resource game.

Witness President Obama's extension of a moratorium on offshore drilling in the wake of the Gulf oil spill. His move blocks 33 exploration projects in the Gulf of Mexico, as well as progress on drilling off the Virginia coast and in the Arctic.

Meanwhile, Australia—a key supplier of minerals such as iron ore and uranium—is debating a confiscatory 40% tax on "excess" mining profits. This already is hampering investment in the country's mining industry. India, Brazil and Chile also are contemplating various forms of windfall profits taxes.

Domestic political concerns explain these policy blunders. Oil drilling of any sort has been contentious with environmentalists and coastal NIMBYs in the U.S. for decades—and those folks tend to vote Democratic. While the tragic and destructive Gulf spill is being cited as the main reason for the latest ban, in truth it is simply providing cover for policies the left has wanted to implement for years, and a convenient excuse for President Obama to backtrack from earlier promises to drill offshore. As for all the windfall-profits taxes, blame governments grasping for new revenue to make up budget shortfalls.

It all adds up to a global problem. One common thread running through these cases is that all the countries involved are democracies. The danger is that if these countries won't supply minerals to the world on market principles, others—like China—will step into the gap with other ideas.

China's alternative is to expand its own non-transparent resource grabs around the world. If capitalism can't provide, Chinese companies will make their own deals in places like Africa, Mongolia and Russia. Expect to see more stories about new Chinese-funded mining or drilling projects in the third world. Expect also to see a lot of hand-wringing about whether this means the authoritarians in Beijing are extending their political influence in smaller, weaker developing countries.

Meanwhile, America's policies to keep its own oil reserves untapped mainly benefit Russia, the Middle East and Venezuela, which are left to fill the unmet demand—and profit handsomely as a result. Especially when combined with weak-dollar policies from the U.S. Federal Reserve, these regimes enjoy enormous windfalls the less Western competition they face.

Sometimes capitalist countries themselves may benefit from this, since state-owned companies can invest in resource extraction with less regard for profitability than Western listed companies. Such has been the case in Canada, which in 2006 announced that as of next year it will increase taxes on the corporate "income trust" structure that is popular in the resource industry. The corporate profits tax rate on such enterprises will rise to above 30% from zero today. That has crushed valuations in the oil industry, which is capital intensive since Canada's petroleum reserves are mainly in the form of hard-to-extract oil sands.

Smelling a buying opportunity, Chinese state-owned companies, which aren't controlled by private shareholders and can accept a lower return, have been willing to move in, investing at least $4.6 billion in Canadian oil companies since the tax increase was unveiled. Abu Dhabi has also become a bigger investor.

But this means the West will have to become more receptive to that kind of investment. Canada has, but Australia and the U.S. in particular are still hesitant. Remember the controversy over an attempted Chinese purchase of Unocal in 2005? One point of this story is that Western governments will have to either get out of the way of Western companies that want to extract resources or prepare for the Chinese and others to try.

Without giving too much credence to China alarmists, it is still possible to say the world is better off if resources are in the hands of transparent companies that will trade on market principles free of the risk of excessive government interference. The third and worst alternative is to stay on the current track of crippling Western resource reserves while also blocking capital from the willing investors that remain.

Yes, companies will continue to extract resources in the West even under the taxes (though the outright drilling ban is another story). But those bad policies will make a major difference at the all-important margins of the market, which drive pricing decisions. The choice for Western policy makers now is simple: They can clamp down on their resource industries for domestic political reasons and hand pricing and supply power to non-market and non-democratic governments. Or they can allow their own companies to run a truly global resource market capable of meeting the world's need for things.‹

[DewDiligence]

Chevron Tells Feds, “We’re Not BP”

http://online.wsj.com/article/SB10001424052748704067504575304883167477548.html

›By BEN CASSELMAN
JUNE 14, 2010

Chevron Corp. has come out swinging in its fight to continue drilling in the deep waters of the Gulf of Mexico, arguing that not all oil firms should be tarred with the brush of BP PLC's Deepwater Horizon disaster.

In an interview with The Wall Street Journal, Chevron chairman and CEO John Watson said he accepts the need for tighter drilling regulations in the wake of the spill, which since April has fouled the waters and coastline of the Gulf. But Mr. Watson, 52, called unnecessary the six-month moratorium on deep-water drilling imposed by the Obama administration.

The second-biggest U.S. oil firm by market capitalization after Exxon Mobil Corp., San Ramon, Calif.-based Chevron owns more Gulf of Mexico drilling leases than any other company and is the third-biggest oil producer there, after BP and Royal Dutch Shell PLC. It was considered a growth area for Chevron.

Now, access to deep water may be in jeopardy. In addition to the six-month moratorium on drilling in more than 500 feet of water in the Gulf, President Obama has put on hold plans to expand drilling off the coast of Alaska. Norway, too, has put a temporary halt to new deep-water exploration.

While Mr. Watson wouldn't directly criticize BP, he said that even before the current disaster, Chevron had in place policies and procedures that might have avoided the oil-well blowout that caused the spill [“might” is intended to be a polite synonym for “would”].

"This incident was preventable," Mr. Watson said.

In the early days of the Gulf disaster, the oil industry mostly presented a united front. But as the crisis has dragged on, companies have begun to distance themselves from BP.

Mr. Watson and the CEOs of several other big oil companies are almost certain to try to draw distinctions when they face questions from a congressional panel on Tuesday.

Chevron shares have fallen nearly 10% since the Deepwater Horizon drilling rig caught fire April 20; though that drop is small compared with the drop in BP's market valuation has declined 46%. [HES has (undeservedly, IMO) fallen about 20%, despite its having minimal activity in the deepwater GoM.]

Mr. Watson said he understood the decision to halt drilling in the immediate aftermath of the disaster, which he called a "humbling experience for the industry." But he said the industry's overall safety record is strong, and that both industry and government panels have drawn up new safety recommendations in light of the spill.

"We favor rapid adoption of those recommendations," Mr. Watson said.

Environmental groups, however, oppose a quick return to drilling.

David Goldston, director of government affairs for the Natural Resources Defense Council, said drilling shouldn't resume until a presidential commission appointed to investigate the disaster completes its work.

"We don't really understand a lot about what happened here," Mr. Goldston said. "We don't really understand how endemic the problems are, and that all needs to be sorted out before drilling is resumed."

BP has been criticized by some industry experts for using a risky well design that could have made it easier for natural gas to get into the well and eventually cause the explosion.

Chevron uses a safer well design, said Gary Luquette, who heads North American exploration and production for Chevron. "I think that if we'd have had best practices employed on this well, we wouldn't have this situation that we have today," Mr. Luquette said.

BP has said its well design wasn't unusual and that its engineers evaluate many different factors in deciding how to drill. BP spokesman David Nicholas said, "there are detailed investigations ongoing and these will determine the causes of the tragic Deepwater Horizon disaster." [“No comment” might have been a shrewder thing to say, IMO.]

Many Gulf coast residents and politicians have also accused BP of being unprepared for the spill. Chevron has a "robust" system in place to deal with major spills, Mr. Watson and Mr. Luquette said, but they acknowledged that it, too, would have had difficulty dealing with a disaster of this magnitude.

Congress and President Obama have criticized BP for seeking to shift blame for the Deepwater Horizon disaster onto contractors. Mr. Watson pledged that Chevron wouldn't do the same in a similar situation.

"These are our wells," he said.

The Deepwater Horizon disaster has brought attention to industry's safety record onshore, too. In recent weeks, there have been several accidents at oil and gas sites on shore, including natural-gas wells that blew out in Pennsylvania and West Virginia and two deadly pipeline explosions in Texas.

A recent incident involved a Chevron pipeline in Utah that leaked what officials estimated was hundreds of barrels of crude oil into a Salt Lake City creek and threatened to contaminate the Great Salt Lake.

Chevron said Sunday that the leak from a pipeline that ruptured two nights earlier has stopped, but clean-up operations continue. "The leak has been stopped," Chevron spokesman Sean Comey said in an email." We're planning to excavate the area of the pipeline were we believe the leak began." The company said it "takes full responsibility for the incident."‹

[DewDiligence]

‘Crude’ Politics

[This editorial in Thursday’s WSJ echoes some of the points about safety made by the contributors to this message board.]

http://online.wsj.com/article/SB10001424052748704198004575311033371466938.html

›JUNE 17, 2010

Before the Obama Administration sweeps under the carpet the controversy over the drilling experts it falsely used to justify its moratorium, the incident bears another look. Not least because it underlines the purely political nature of a drilling ban that now threatens the Gulf Coast economy and drilling safety.

When President Obama last month announced his six-month deepwater moratorium, he pointed to an Interior Department report of new "safety" recommendations. That report prominently noted that the recommendations it contained—including the six-month drilling ban—had been "peer-reviewed" by "experts identified by the National Academy of Engineering." It also boasted that Interior "consulted with a wide range" of other experts. The clear implication was that the nation's drilling brain trust agreed a moratorium was necessary.

As these columns reported last week, the opposite is true. In a scathing document, eight of the "experts" the Administration listed in its report said their names had been "used" to "justify" a "political decision." The draft they reviewed had not included a six-month drilling moratorium. The Administration added that provision only after it had secured sign-off. In their document, the eight forcefully rejected a moratorium, which they argued could prove more economically devastating than the oil spill itself and "counterproductive" to "safety."

The Administration insisted this was much ado about nothing. An Interior spokesman claimed the experts clearly had been called to review the report on a "technical basis," whereas the moratorium was a "comprehensive" question. Obama environment czar Carol Browner declared: "No one's been deceived or misrepresented." Really? We can only imagine the uproar if a group of climate scientists had claimed the Bush Administration misappropriated their views.

We decided to call some of these experts ourselves. Their information, and concerns, are revealing.

The experts were certainly under the impression they were reviewing a comprehensive document, as some of the recommendations would take six months or even a year to implement. And the report they agreed to did address moratoria: It recommended a six-month ban on new deepwater permits. Yet Benton Baugh, president of Radoil, said that in at least two separate hour-and-a-half phone calls among Interior and the experts, there was no discussion of a moratorium on existing drilling. "Because if anybody had [made that suggestion], we'd have said 'that's craziness.'"

Ken Arnold, an engineer and consultant, said the changes went beyond just the drilling moratorium. The Interior draft he looked at included timelines for each safety recommendation. The "bulk" of those recommendations, he explained, were all ones that could be done within 30 days. And most of the longer-term provisions would result in only "marginal increases in safety."

Yet when the final report came out, the timelines he saw had been removed, no doubt because they argued against the necessity of a six-month moratorium. Mr. Arnold adds that the Administration's decision to allow industry to continue drilling "gas injection wells"—which, he says, are no more risky than production wells—only shows the moratorium makes "no sense."

"This was a political call; this was not a technical call," says Mr. Arnold. Interior Secretary Ken Salazar has since testified that the call was his. But Robert Bea, from the University of California at Berkeley, who also reviewed the report, told us Interior had sent him a letter that "stated clearly that [the moratorium] had been inserted at the request of the White House." Mr. Bea pointed out that the Department of Interior is more than equipped to target and shut down specific Gulf operations that might offer safety concerns. There was no call for a moratorium "for industry as a whole."

Ford Brett, managing director of Petroskills and also a reviewer, notes that the experts first went to the Interior Department with their concerns. "All they had to do was put out another press release—one sentence long—clarifying that we hadn't reviewed the drilling moratorium. . . .That didn't happen." Only then did the experts go public.

As for Ms. Browner's claim that no one was "misrepresented," Mr. Brett disputes that. Several reviewers said they had, in fact, received "apology" notes from the Interior Department acknowledging the misrepresentation. "We did not mean to imply that you also agreed with the decision to impose a moratorium on all new deepwater drilling," read one.

All of this matters because it offers proof the moratorium was driven by politics, not safety. The drilling ban was not reviewed by experts, and was not necessary to satisfy most of the safety recommendations in Mr. Salazar's report. It was authored by political actors so Mr. Obama could look tough. A cynic might argue the ban was only added after review precisely because the Administration knew experts would refuse to endorse it.

A big reason why those experts would have balked is because they recognize that the moratorium is indeed a threat to safety. Mr. Arnold offers at least four reasons why.

The ban requires oil companies to abandon uncompleted wells. The process of discontinuing a well, and then later re-entering it, introduces unnecessary risk. He notes BP was in the process of abandoning its well when the blowout happened.

The ban is going to push drilling rigs to take jobs in other countries. "The ones that go first will be the newest, biggest, safest rigs, because they are most in demand. The ones that go last and come back first are the ones that aren't as modern," says Mr. Arnold.

The indeterminate nature of this ban will encourage experienced crew members to seek other lines of work—perhaps permanently. Restarting after a ban will bring with it a "greater mix of new people who will need to be trained." The BP event is already pointing, in part, to human error, and the risk of that will increase with a less experienced crew base.

Finally, a ban will result in more oil being imported on tankers, which are "more likely" to spill oil than local production.

All this is even before raising ban's economic consequences, which already threaten tens of thousands of jobs. This is why Louisiana politicians are now pleading with the Administration to back off a ban that is sending the Gulf's biggest industry to its grave.

"Mr. President, you were looking for someone's butt to kick," said Lafourche Parish President Charlotte Randolph, recently. "You're kicking ours." The sooner the Administration climbs down from this pointless exercise, the better for a Gulf that needs real help.‹