Oil Patch Insider

Oklahoma’s not doin’ fine —OK? ANGDA pondering life after Harold? Yes, Isenberg’s optimistic and ExxonMobil is spending more money, not less

Harold Hamm has locked horns with Mexico, Venezuela, Saudi Arabia and Iraq.

Now he’s doing battle with Canada.

The U.S. producer is heading up a group of Oklahoma oilmen, operating under the name Domestic Energy Producers’ Alliance.

They have persuaded their state’s Attorney-General Drew Edmondson to investigate whether Canada is illegally dumping crude in the United States.

For Hamm, ranked 42nd on Forbes’ list of richest Americans last year, this is familiar territory, it comes 10 years after he led a handful of drillers in suing the Latin American and Middle Eastern quartet, accusing them of selling crude at prices below production costs.

His effort then fizzled, although it threatened to turn into an international trade dispute.

Hamm, whose efforts this time are aimed at oil sands production, said Oklahoma producers are getting less for their oil than it’s worth because of the alleged Canadian dumping.

He said that if Canada adds another 1.5 million barrels per day from the oil sands to the 2.2 million bpd it already ships into the U.S. that “would be a disaster.”

Hamm estimated that Oklahoma, whose output is about 200,000 bpd, received 300,000 bpd of synthetic crude from Canada at the Cushing supply hub.

He claims to have backing from producers in eight other states.

It’s a problem that could get worse once TransCanada’s Keystone pipeline, partly owned by ConocoPhillips, connects up with Cushing later this year, said Oklahoma driller Mickey Thompson.

He said the group is not trying to shut down Canadian crude, but the members are worried about their ability to survive in a marketplace.

Thompson figures the cost of turning Canadian oil sands crude into light oil is likely in the range of $60-$70 per barrel, although the Canadian Association of Petroleum Producers estimates that the most expensive synthetic crude costs about $30-$35 to prepare for export.

Because their crude is easily refined, the Oklahoma producers say it has been fetching $4-$6 per barrel below the U.S. crude futures price, or less than $40 per barrel, compared with recent months when they have gone from fetching a premium price to selling for a $10- to $12-a-barrel discount to Brent, a major world benchmark.

Thompson said the question is whether oil sands producers are delivering oil to the mid-continent below their cost and, if that is the case, “Is it legal?”

A spokesman for Edmondson said the state is looking to consult with someone who has petroleum marketing and pricing expertise.

Alec Avramenko, executive vice president of Calgary-based Global Petroleum Marketing, told the Globe and Mail the Oklahoma strategy is naked protectionism.

He accused the Oklahomans of saying “We’re fighting for survival and we just don’t want you Canadians around anymore.”

—Gary Park

Heinze tells ANGDA board to start looking

In 2003, the board of the newly formed public corporation hired the past president of ARCO Alaska and former Department of Natural Resources commissioner to be its first CEO. Heinze, 66, said it’s the longest he’s ever held a single position in his entire career.

Toward the end of a long meeting in Anchorage on March 9, Heinze reminded the Alaska Natural Gas Development Authority board of directors about a deal he struck with them at a meeting last July.

“I asked for more money, and you gave it to me, and in return I promised that I would stay for a year,” he said. “Okay. And we both kept our promise, as far as I’m concerned.”

Heinze continued, “And I am not serving notice in any way, shape or form, but I think it is appropriate for the board to be serious about thinking about the fact that there is a life after Harold Heinze. ANGDA has meaning far beyond just me.”

He said, “Beyond July, both of us have lived up to our deal,” but added that he was “not against” making a new deal, only that he wanted the board to consider his replacement.

For much of the past five years, ANGDA has been gathering permits, conducting studies and making plans for a variety of natural gas projects to serve Alaska markets with the goal of eventually handing over its work to a private sector company for construction.

Heinze suggested ANGDA should find a new boss before handing over its projects.

“The organization is going to face more and more financial type issues than project engineering type issues, and so I would suggest serious consideration of someone who has more of a financial background with pipelines,” Heinze said.

He continued: “Given the general state of the economy, this would also be a time to look more nationwide for such a person, and they might be readily available. There’s a lot of good financial people out there that are having a hard time finding a home right now.”

Vice Chair Don Benson took a more colloquial approach: “I hope some of those guys that are jumping out those ten-story windows, we can catch one of them and pull them in.”

Smiling, Chairman Scott Heyworth, who sponsored the 2002 ballot measure that created ANGDA, scribbled a name on a sheet of yellow legal paper and handed it to Heinze.

“I think I got the right guy,” Heyworth said.

Heinze read the name to himself, and began laughing. “NO!” he said.

—Eric Lidji

Nabors optimistic in challenging times

“The fourth quarter (of 2008) was not as bad as it could have been and the future is probably going to be better than the price of our stock seems to indicate,” Isenberg said. “Our North American land drilling markets are adjusting to a new paradigm in natural gas drilling with the commercialization of abundant shale deposits. Over time this will benefit Nabors since much of the investments we have made over the last few years were in assets that give us disproportionate exposure and distinct competitive advantages in these areas that are increasingly strategic to the U.S. energy supply.”

Isenberg also said that, despite a slowdown in international drilling markets, Nabors has “high-specification rigs” that make the company poised to grow.

Two 2008 startup rigs and a new combined coiled tubing and stem drilling rig will boost 2009 results in Alaska, Isenberg said. However, other factors have lowered Nabors expectations in Alaska: Some drilling projects have been postponed, while the sinking of the only ice-reinforced workboat in the Cook Inlet has resulted in a temporary suspension of platform drilling in the inlet, he said.

Nabors Alaska drilling operations created $53 million in operating income in 2008, a 40 percent increase from the previous year. That compares with 2008 income of $629 million from the company’s Lower 48 land operations, and $408 million from international operations.

But the economic crisis is taking its toll and Isenberg said that Nabors expects a precipitous decline in activity and pricing as customers abruptly adjust spending. The brunt of this decline will likely occur in the first quarter of 2009, he said.

“Our U.S. Lower 48 land drilling business improved during the (last) quarter although the outlook is for substantially lower operating income over the next two quarters,” Isenberg said. “The number of rigs working has fallen rapidly from a high of 273 in October and, after averaging 260 for the quarter, stands at 181 today. Day rates are less relevant now as customers are more focused on reducing total costs to be in line with cash flow.”

—Alan Bailey

ExxonMobil bucking trend, sticks to investment plan despite recession, lower prices

Oil prices have dropped by more than $100 a barrel since their peak last summer, but at the company’s annual presentation at the New York Stock Exchange on March 5, Exxon’s Chairman and Chief Executive Rex Tillerson said Exxon had not planned for $100-per-barrel oil prices in the five-year investment plan it released in 2008.

“We told our people to ignore all this noise about $100 oil,” he said. “We were not planning for a world of $100 oil, or $200 oil. …We really are making no adjustments to our business strategy. … It feels pretty much business as usual.”

Exxon plans to increase capex spending by 11 percent in 2009, an increase of $3 billion over 2008 to $29 billion, and plans to invest about $150 billion over the next five years.

Two things could reduce that number:

• Cutbacks by some partners on shared projects;

• Cost reductions on materials and services.

A large portion of the planned spending is tied up in projects already under way, so the increase between 2008 and 2009 was largely due to cost increases that skyrocketed as oil and gas prices rose. But those prices are coming down and Exxon, like most oil companies, is negotiating with its suppliers and contractors for lower rates.

Tillerson said Exxon is limited in its ability to cut costs where contracts are already in place, and it’s not looking to take unfair advantage of the current market environment.

“We are in active discussions with all of our suppliers and contractors,” he said. “Our objective is to work collaboratively with them. It’s not in our long-term interest to drive a lot of these folks out of business by hitting them over the head with a hammer because of the environment we’re in.”

What next for Exxon?

According to Bloomberg reporter Joe Carroll, using its treasury shares Exxon “could make a deal for more than the combined value of its two biggest U.S. rivals, Chevron Corp. and ConocoPhillips, without borrowing money, issuing stock or tapping its cash.”

Tillerson sees the dramatic rise and fall of crude prices, and the meltdown of global credit markets that pushed the world into a recession, as a “supreme test of a company’s business model.”

So besides sticking to its spending plan, how does Exxon plan to flex its financial muscle in the years ahead?

As analysts have predicted, Tillerson said Exxon is looking at purchasing competitors, but not companies with a declining resource or production base.

He also said the mergers and acquisitions market was “very much in a state of change,” and “has not settled in my view.”

What he seemed most interested in was partnering with some of the world’s state-run oil companies that are resource-rich but cash-poor.

“There are any number of resource companies and oil companies around globe where we would think we have the ability to bring ... success,” Tillerson said.

He would like to replicate the success Exxon has had working with Qatar’s state-run oil entity. Exxon has nine major projects scheduled to start this year, many centered on the development of large natural gas fields in Qatar.

According to Brian Youngberg, an analyst at Edward Jones & Co. in Des Peres, Mo., who Carroll quoted, nations with state-owned oil companies “are looking for partners with deep pockets as well as the expertise to reach very deep and remote reserves.”

At their peak, the 2009 startups are projected to add the equivalent of 485,000 barrels a day to Exxon’s production.

By 2015, the company expects its capital and exploration investments to add about 1.5 million barrels a day of new production to its 2007 level of production, which was 4 million barrels per day, bringing its total daily production to 5.5 billion barrels of oil by 2015.

Exxon’s 2008 production actually fell below 4 million barrels per day — for the first time since its acquisition of Mobil in 1999. It dropped by 6.2 percent, prompting even louder criticism of the buyback program from analysts, who said Exxon should be investing more in future production, given the growing difficulties of finding oil and gas.

In response, Exxon insisted the buyback program had not cut into its investment plan, reminding critics that its net exploration acreage had increased by 40 percent since 2003.

Not interested in alternative energy

No, Tillerson said, Exxon remains committed to developing fossil fuels, which government forecasters say are needed to meet at least 60 percent of world demand through 2030.

Exxon will continue to focus on improving energy efficiencies and inventing new technologies to reduce emissions.

He also said the company plans to continue to invest only in research on alternatives and renewables, until they can be profitable without government subsidies.

“If I wanted to kill (tax subsidies), the thing to do is for ExxonMobil to go and invest heavily in them and then Congress would immediately cancel the tax subsidy. Actually what they would do is they would just cancel it for us.”

—Kay Cashman