Friday, February 27, 2009

The OCS, Chevron and an API Conference

Every so often the American Petroleum Institute (API) hosts a conference call for interested bloggers to talk to folk in the industry. Today they had Gary Luquette who has been President of Chevron North America Exploration and Production Company since 2006. He was in Washington to testify before the House Committee on Natural Resources, and copies of his opening statement were available. This was my first visit to one of these events, and I am grateful to Jane Van Ryan for the invitation. The transcript won’t be out until next week, and I did not catch the names of other participants that well, so I will put that information up when I get it. The questions were focused largely on the testimony, which dealt with access to the outer continental shelf (OCS) of the United States, to allow drilling and production of oil and gas. (API has also just released a primer on the topic.) It is a region where access is currently not available, and so in a sense this was perhaps a move towards the “drill, baby, drill” rhetoric of the last election. The current areas that are off limits are shown on this map that I borrowed from the API primer.

Source API
UPDATE I will add links to the posts of the others that were in the call as I get them, and at the bottom of the post.

Some of the most productive recent discoveries have occurred in the deep waters of the OCS in the Gulf of Mexico, (for example Thunder Horse at 250,000 bd, and the Chevron Tahiti project. The region falls under the Minerals Management Service of Interior, and they recently published their 2008 review of the region. Currently their purview includes the gridded bit of the map below, and the report contains detailed information on wells and production in that region. For example the following figure shows how, over time, companies have had to go to deeper and deeper waters to find new reserves, but that in doing so that they are finding larger fields.
Source MMS
Average field size in the GOM showing discovery date and depth of water (Source MMS ).

It is this trend in discoveries that were an underlying part of the message that Chevron (and the other companies) were trying to convey. As Gary pointed out in his response to a question from “The Bear”, the assumption in the 1960’s, based on MMS surveys, was that the deepwater Gulf would hold 6 – 8 billion barrels of oil, and to date more than 45 billion barrels have been found. Thus estimates, such as an overall yield of only 200,000 bd from new discoveries, are likely to be considerably too low, and his estimate is that production could ramp up to over 1 mbd. New technologies are continually being evolved to deal with the challenges of producing oil from the increasingly more complex reservoirs that are being found, and thus current estimates of ultimate production are likely to be considerable underestimates when oil finally starts to flow. Staying on message relative to current Administration (and national) priorities, he pointed to the increase of over 160,000 jobs that just granting access could bring as this development moved forward. (Though it takes a long time to bring this all to pass, bear in mind that Tahiti was found in 2002, and is expected to come on line at 125,000 bd this year). The ultimate revenue to the government was projected at over $1.7 trillion.

Geoff Styles of Energy Outlook asked about the impact of the current estimate of tax changes (Pick Points 44) which Gary responded to by pointing out that the tax changes were still just a proposal, and while he felt that they were in the wrong direction and more of a challenge in the current climate (Geoff thinks the timing is wrong for cap and trade, he was optimistic for the future.)

Someone from Copious Dissent asked about the impact of climate change, obviously a current hot topic, and Gary responded that you have to accept that there is a perception in the minds of the people, and these for a time create a reality you have to live with. And that, at the moment, is where the climate change situation lies.

He went on to answer another question on AGW and corporate profits by noting that the scale of investments that the company must make each year (around $22 billion) requires that they generate large amounts of capital, and even as profits fall with the price drop for oil, they must continue to invest that amount if they were to have a future. (Tahiti, for example, cost $6 billion and they have yet to earn a penny on the investment).

Steve Rhodes of the Republican Temple asked about possible gas taxes, and the possibility of taxing folk per mile driven. The API position on this has been that taxes are not opposed, as long as they go for the support of infrastructure, but that this would be a very regressive tax, and since it will include a GPS element also carries elements of Big Brother. (My own sense on this is that it is already a dead issue).

Gail (the Actuary at TOD) has already a post up today on the impact of taxes on the industry and was curious as to the impact of proposed legislation on the smaller producers, particularly for the natural gas industry. She then went on to ask as to how $40 oil, and $4 (per mcf) gas prices would impact production. Gary pointed out that it wasn’t too long ago that those would have been very good numbers, and that, were it not for production costs which have recently gone up dramatically, the industry would be happy to work in that environment. Since prices are up it has brought a number of projects closer to the margin of profitability. But with open access to the OCS (which was the underlying message of the call) the industry could live and profit with those prices. He was less definitive in regard to gas production, admitting that while $4 might work in some rich shales, others would need $8 to be viable.

In regard to a small question I had on biofuels (since it was included in his opening statement) he felt that these were already making an impact, mentioned the food vs fuel dilemma, and that they were working with Weyerhauser on generating fuel from wood products.

On a more general note Gary closed by noting that last year the gap between possible supply and demand dropped from 4 mbd to 2 mbd. While current demand in the US is down because of the recession, and will likely continue so, in the rest of the world demand is likely to continue to grow, so that overall production needs to keep up. When the recession ends, then growth, particularly in countries like China and India will return to double digits, with the equivalent increases in demand, and we must be ready to meet that.

Well those are my notes from the conference call. Again my thanks to Jane and API for the invite.
UPDATE: Others who posted on the call are:
Bob McCarty

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