OGFJ.com Most Read 2010

Ah, January – the start of a new year and new beginnings. While I’m not one to make resolutions, I do like to reflect on the past year.

For those of you who are regular print subscribers, you may be familiar with my Charities and Champions: year in review column that appears each December. I reflect back on various industry execs and companies that donated their time, money, and talents to help others in the community.

It may be three weeks into January, but I thought I would take this opportunity to reflect back on 2010 in another way.

2010 was a tremendous year of growth for OGFJ.com. The introduction of both our Deal Monitor and Unconventional Resources pages were a great boost in our continued effort to bring up-to-date oil and gas industry information to our online readers. What generated the most interest?

This year, a tragic event held top billing for most read articles on OGFJ.com.

While many updates and articles were written about the Deepwater Horizon incident, three made it into the top tier in 2010:

Who will be held responsible for Deepwater Horizon?

New Orleans lawyer details scrutiny sure to follow Deepwater Horizon accident

BP begins second relief well, places containment system in leaking riser

With “Financial Journal” as part of our title, it wasn’t a surprise that articles with a financial twist were also part of the most read articles of the year.

Tudor Pickering Holt develops into key energy finance player

Renewed interest in royalty trusts

One shale article made it into the top ten:

Oil shale deal flow heating up in Bakken, Niobrara

Also not surprisingly, articles and news briefs about shale activity, especially those pertaining to Eagle Ford shale activity, fleshed out much of the remaining “most read” articles for the year.

Again, it isn’t my nature to make resolutions, but I do start every year with a renewed sense of optimism and hope. To 2011, I say: Show me economic recovery, open capital markets, and a greater utilization of shale assets. They’d make a nice Top Five list for next year.

Howard Dean, Ed Gillespie agree: Energy policy needed

According to the Ernst & Young Business Risk Report 2010, the country's uncertain energy policy is the No. 1 risk to the oil and gas industry. Actually, the move wasn't a monumental one as this risk ranked No. 2 in the same survey last year, topped only by "access to reserves: political constraints and competition for proven reserves."

I see a theme here.

Ernst & Young points to the "vague outcome" of the Copenhagen climate conference in December 2009 as one factor. Yet another: the energy policy decisions further complicated by the tragic Gulf of Mexico oil spill.

Political factors that might limit or prevent access to reserves and an uncertain energy policy that hinders the ability of oil and gas companies to plan, invest, and respond to the laws of supply and demand have a tight grip around the industry that provides the country with its energy needs.

At Ernst & Young's Energy Executive Insight Session recently, I had the opportunity to hear a debate between Howard Dean, Former Chairman of the Democratic National Committee, and Ed Gillespie, Former Chairman of the Republican National Committee.

As politicians do, each stated their case for victory in the coming elections. However, both agreed on one thing: the need for a cohesive and comprehensive energy policy.

Governor Dean believes the country hasn't had an effective energy policy in 20 years, partly because the topic isn't well understood in Washington, partly because the industry itself isn't unified.

Different constituencies – wildcatters, super majors, enhanced recovery companies – are working against each other instead of together. Dean noted the coal industry as one example. "The biggest opposition of the oil and gas industry outside of the government is the coal industry," said Dean, referring specifically to shale development in the unconventional resources space.

Will natural gas be a bridge fuel because of its clean-burning properties and plentiful supply? Gillespie, who does work with the Natural Gas Alliance, thinks so. "Natural gas is looming in a big way in the energy debate," he said. "It's inevitable we'll see more reliance on natural gas – maybe in our autos," he continued.

While Dean disagrees about natural gas in the automobile industry – he feels electricity has leapfrogged the fuel in that regard – broadly speaking, he sees the US as having the ability to use all forms of energy. The question is in what order and how do we do it? The technology is there, but the marketplace is distorted. This is where an energy policy is needed.

"No matter what happens with the election, the parties will have to decide they WANT to pass something," commented Dean.

Can the energy industry to come together and write an energy plan?

Chesapeake due for 'Major' upgrade

The face of the energy industry is changing. It is cyclical. It has happened before, and it will happen again. Certain independent exploration and production companies didn't survive the credit crisis.

Those names are gone from the radar; that's one change. Another might be the way we think about some of the large independents.

"Never stop thinking," offered Kenneth A. Hersh, CEO of NGP Energy Capital Management, at IPAA’s Private Capital Conference in Houston on Thursday.

Hersh reminded the crowd that the oil and gas industry is not immune to the conditions and phases that other industries have gone through, and that now is a time to maintain discipline, push forward, and perhaps change the way we perceive the industry.

The best example of the changing times, he said, is the changing of the 'majors,' and perhaps even, the 'super-majors.' ExxonMobil is a non-disputed supermajor. Ten years ago the company had an enterprise value of roughly $50 billion spread throughout the world.

Today, while companies like Chesapeake, Devon, and Apache are all, in fact, independents, they really should be considered majors, he said. Each carries an enterprise value of over $40 billion, and inflation and other generational considerations aside, the companies are certainly in the league as the Exxon of a decade ago -- bigger when you consider the scope of the companies in North America alone.

What do you think? Is it time for the industry to lump these companies in with the Exxons and Chevrons of the world?

Exploration spending on the rise?

The drop from a $100 oil environment and a $10 gas environment to a $50 or $60 oil environment and a $3 or $4 gas environment forced most E&P companies into a hibernation of sorts. Cash flows were cut in half, if not more, and companies hunkered down in hopes of making it through the winter.

Spring came and went and things looked no better, in fact, in many cases, things got worse. Now, the summer has passed and 3Q09 numbers are starting to peek out from under the leaves. While earnings are still wobbly, it appears conditions may be right for an increase in exploration spending.

As recently reported in the November issue of Oil & Gas Financial Journal, capital spending among the Top 20 publicly-traded US companies in 2Q09 jumped more than 47.5%, nearly doubling the $28.1 billion spent in 1Q09.

On the international front, SMH Capital recently raised its 2009/2010 earnings per share estimates for oil service giant Schlumberger to $2.74/$2.85 from $2.71/$2.70, as the firm expects “a shallower downturn internationally given 3Q09 results and a higher forecasted international activity given rising oil prices.”

Oil prices are holding steady and many operators, both domestic and international, have “under-spent” first half ‘09 budgets after operating in survival mode for most of the year. With the much talked about boom in M&A activity upon us, perhaps too, is an uptick in exploration spending.

Limits on commodities trading will challenge E&P companies looking to manage risk

Both the Treasury Department and the CTFC believe greater oversight of financial trading activities is needed to prevent future market turmoil. Position limits on finite commodities pose challenges for companies managing energy commodity risk exposure.

If enacted, one challenge would be the resulting effect on the availability of hedging counterparties. Simply put, increased margin requirements of exchange-based trading would decrease the number of counterparties.

Forcing transactions to clear on a more transparent exchange would mean companies would be forced to rely less on credit to support deals. Could that actually be a good thing for the industry in that it would reduce counterparty risk?

More factors facing companies are an increase in regulatory disclosure requirements, and expanded internal and external compliance oversight and reporting requirements.

If enacted, companies could end up spending millions increasing and enhancing reporting and risk infrastructure and activities.

There are still some major questions about how, if enacted, the new rules will evolve. Who would set the limits? The CTFC? Individual exchanges? Who, if anyone, should be exempt? At what level should the limits be set? How would the appropriate level be determined?

Do the benefits of a more transparent system in hopes of thwarting another market disaster outweigh the potential challenges faced by companies to adapt to the new rules?

I suspect that if the new rules were to be enacted in the current economic state, companies would take their transactions overseas and hedge risks elsewhere. Depending on the volume of companies looking for alternatives, would that then make the efforts of the Treasury Department and The CTFC moot? And what impact would that then have on the US market?

Will an over-extended government agenda save the industry from prohibitive legislation?

While producers of oil and natural gas continue to be a target of the Obama administration's agenda, the IPAA is ready to fight the battle, said Joel Noyes, IPAA's Director of Government Relations & Industry Affairs. Noyes was one of numerous panelists at Wednesday's Summer NAPE E&P Forum in Houston.

Some of the outstanding issues facing the industry are cap and trade, hydraulic fracturing, energy taxes, and hedging and commodities markets. Fighting to ensure the voices of the industry are heard in Washington is the main objective of the IPAA. How will the association effectively lobby against so many potentially negative bills simultaneously?

It may not have to, at least not this year.

Noyes recollected a public official exclaiming that the last six months in Washington have been the busiest he's seen since perhaps the Carter administration.

The following list from the official White House website is a sampling of the issues President Obama and his administration would like to address:

• Civil Rights
• Fiscal Responsibility
• Defense
• Foreign Policy
• Taxes
• Disabilities
• Health Care
• Technology
• Economy
• Homeland Security
• Urban Policy
• Education
• Immigration
• Veterans
• Seniors and Social Security
  

…and the list goes on.

The Obama administration will continue to set its sights on the oil and gas industry over the course of its reign in Washington. Currently, one particular issue has come to the forefront, and it isn't related to oil and gas. Healthcare is priority number one.

Perhaps the industry can breathe a little easier, at least for awhile. As our lives remind us everyday, there are only so many balls you can juggle at any given time.

New oil sands emissions studies not enough to dissuade opposition

Two independent studies have found direct emissions from producing, transporting and refining oil sands crude are in the same range as those of the other crudes refined in the US.

The Life-Cycle Analysis of North American and Imported Crude Oils is based on two independent studies that comprise the first robust comparison of domestic, imported and oil sands crude processes in US refineries. The research, conducted over the past year by US-based consulting companies Jacobs Consultancy and TIAX LLC, was funded by the Alberta Energy Research Institute (AERI).

The studies found that direct greenhouse gas (GHG) emissions from the oil sands are generally about 10% higher than direct emissions from other crudes in the US, but if cogeneration is taken into consideration, oil sands crudes would be similar to conventional crudes in terms of GHG emissions.

This is a positive step in providing a more scientifically-based comparison between oil-sands-derived fuels and conventional crude oil-derived fuels, especially in an era where legislation is targeting greenhouse gas emissions; however, oil sands mining is questioned not only on the basis of greenhouse gases, but its effects on the landscape.

Land use and water consumption need to be analyzed and compared as well. Perhaps then more effort can be put into tapping the oil sands' full potential.