Friday, May 30, 2008

Fossil Fuel Cultists In Their Native Habitat

Biogenic fossil fuel cultists in their native environment, i.e. nowhere near an oilwell.

The "Oil Window"

According to biogenic fossil fuel theory, oil can only be found in sedimentary rock and not below the mythological 15,000 foot "Oil Window." See so-called "Dr." Kenneth Deffeyes's Hubbert's Peak.

The next chapter of this book explains that there is an "oil window" that depends on subsurface temperatures. The rule of thumb says that temperatures 7,500 feet down are hot enough to "crack" organic-rich sediments into oil molecules. However, beyond 15,000 feet the rocks are so hot that the oil molecules are further cracked into natural gas. The range from 7,000 to 15,000 feet is called the "oil window." If you drill deeper than 15,000 feet, you can find natural gas but little oil.
Richard Heinberg's The Abiotic Oil "Controversy"

the temperatures at depths below about 15,000 feet are high enough (above 275 degrees F) to break hydrocarbon bonds. What remains after these molecular bonds are severed is methane, whose molecule contains only a single carbon atom. For petroleum geologists this is not just a matter of theory, but of repeated and sometimes costly experience: they speak of an oil “window” that exists from roughly 7,500 feet to 15,000 feet, within which temperatures are appropriate for oil formation; look far outside the window, and you will most likely come up with a dry hole or, at best, natural gas only.

Oil starts out as organic material, any kind of organic material, from algae to dead fish to organic material found in fish fecal pellets. This material must sink to an oxygen-free bottom where the absence of oxygen allows it to decay. Then it must be covered with other sediment and pushed into the "oil window" which starts at a depth of 7,500 feet deep and ends at 15,000 feet in depth. Above 7,500 feet, the temperature is not hot enough to "crack" the organic material into oil molecules and below 15,000 feet, everything is cracked all the way into natural gas. Inside that window, the temperature is at "coffee pot" levels and after a few million years, the organic material is cracked into oil.

Much of the book explains how heat "cracks" the complicated organic residues of dead plants to create oil. In general, the material must have, at some point, been trapped between 7,000 and 15,000 feet below the earth's surface. This is called the "oil window." Closer to the surface, temperatures are too low to make oil; deeper down, it is so hot that the material gets turned into natural gas.
The Oil Window.

The oil window refers to the depth at which the process of turning kerogen into oil can occur – from 6,000-7,000 ft. to 13,000-15,000 ft. At this point our "source rock" (the original rock) will be "cracked" into oil. ("Cracking," apparently, is the term of choice used by petroleum geologists.) At greater depths you would not get oil from the cracking, but gas.
And the Wikipedia entry for Petroleum

Geologists often refer to an "oil window"
They all say "geologists" plural but so far Deffeyes is the only so-called "geologist" I've found who has made such a claim (in other words the whole world is learning from this moron).

The reality is that oil rigs have been drilling below 15,000 feet true vertical depth looking for oil since 1938. And guess what else? They've found it!!!

InfoGulf.Com via Offshore Mag: Exploration and Development Below 15,000 feet TVD.

For exploration greater than 15,000 ft TVD on the shelf during the period 2003-2005, 115 wellbores (45 in 2003, 41 in 2004, and 29 in 2005) were drilled by 35 operators.

Those wells were drilled at least 3 years ago. We are finding oil much deeper now. According to Chris at Anadarko, the Grand Cayman well was drilled to 32,440 feet TVD. According to Guy at Transocean they've gone down to 35,000 feet TVD. And Transocean is building ships that will drill to 40,000 feet TVD.

Furthermore, 275 degree heat is no problem for oil: Brazil Oil Trapped by 500-Degree Heat

For more of Mr. Deffeyes's pseudoscience see here: The Many Wrong Predictions Of Ken Deffeyes.

Petrobras Finds Light Oil In Shallow Water

Petrobras makes new, "important" light oil find

RIO DE JANEIRO, May 29 (Reuters) - Brazilian state oil company Petrobras on Thursday announced a new "important" find of light oil 36 API grade in the shallow waters of the Santos basin off Sao Paulo state's coast.

Unlike a slew of recent discoveries in the subsalt cluster at great depths at sea, the find was made above the layer of salt about 6,560 feet (2,000 meters) under the ocean floor and and at a water depth of just 770 feet (235 meters), which should make future output easier.

Petrobras is the only company working the BMS-40 block, where it expects to start drilling a second well next month, it said in a statement. It provided no reserve estimates.

The find, located about 170 miles (275 km) south of the coastal city of Santos, was confirmed via a formation test, which showed a high flow rate for the type of reservoir and oil found and an estimated per-well production potential of more than 12,000 barrels per day, the company said.

"The discovery is of great importance because of its potential for light oil production and the reserve's location in shallow waters," it added.

Speaking in El Salvador earlier on Thursday, Brazilian President Luiz Inacio Lula da Silva said his country "has just discovered big oil blocks with a great potential to turn it into one of the three top countries by oil reserves."

Wednesday, May 28, 2008

Bounties Of The Deep

Bounties Of The Deep.

A multinational consortium has struck oil in ultra-deep waters in the Gulf of Mexico.

The companies said an exploration well called Stones #3 had hit reservoirs of natural gas and oil in 7,500 feet of water and at a total depth of 29,400 feet.

Tuesday, May 27, 2008

Bullish On Petrobras

Growing reserves at 6% annually. Peak oil?

Zacks: New Reserves for Petrobras

We keep our Buy recommendation on Petroleo Brasileiro SA (Petrobras) (NYSE: PBR) on the Brazilian state oil company's positive production-growth profile and the improving outlook for its downstream business. The recent discovery of the Tupi field opens up a new range of possibilities for the company in the long run.

Moreover, the continued high price of oil and the company's large inventory of development projects are also positive. Finally, Petrobras' first quarter results were better than expected, and the outlook for the following quarters remains encouraging.

Most of Petrobras' domestic operations are located in the offshore Campos Basin, which is Brazil's largest oil region and is one of the most prolific oil and gas areas in South America. Even without considering some important new discoveries, the company is expected to grow annual volumes by about 6 percent over the next few years. The company has laid out a realistic, but aggressive, plan to grow production volumes over the next few years by competitively developing its extensive, proved undeveloped reserve base in the Campos Basin and in select international markets, using its considerable expertise in deepwater oil exploration.

Until recent quarters, PBR used to trade at a discount due to the difficult political environment in Latin America. However, after the discovery of the new oil field at Tupi, with a reserve potential of over 60 billion BOE [barrels of oil equivalent], PBR trades at 19.7x our 2008 earnings estimate, at a considerable premium over the industry mean of 11.4x.

In the near term, the stock should benefit from the positive outlook for the domestic oil industry and the recent upgrade of Brazil to investment grade by S&P. We expect PBR's P/E multiple to expand to around 21.5x our 2008 earnings and set a target price of $79.50 on the stock.

Sunday, May 25, 2008

Transocean Sells Another Ultra-Shallow Asset

PetroGulf of Kuwait Buys Transocean Nordic Rig for $170 Million

May 25 (Bloomberg) -- Gulf Petroleum Investment S.A.K.C., or PetroGulf, the Kuwait-based provider of technical services to the oil and gas industry, agreed to buy an offshore oil-drilling rig for $170 million.

PetroGulf agreed to purchase a Nordic rig from U.S. offshore drilling contractor Transocean Inc., the Kuwaiti firm said in a filing to the Kuwait Stock Exchange today.

Friday, May 23, 2008

Halliburton Gets Ready To Head Deeper

David Lee Smith: Halliburton Gets Ready to Head Deeper

With crude prices headed for goodness knows where, and operators wading into progressively deeper water in search of new discoveries, Houston-based Halliburton (NYSE: HAL) jumped into the quest for Expro International Group, an oilfield services company based in Reading, U.K.

Halliburton, the second-largest factor in the services sector behind Schlumberger (NYSE: SLB), has apparently offered $3.4 billion for Expro, which produces equipment that permits the testing of wells drilled in waters exceeding 1,000 meters deep. It trumps an earlier offer by a unit of Goldman Sachs (NYSE: GS), along with private equity firm Candover Partners, and Dutch investor AlpInvest Partners.

At this point, it's impossible to know whether the trio will attempt to top Halliburton's offer. Either way, however, my betting is that, given the determination of Halliburton's CEO Dave Lesar to expand and diversify his company and its capabilities, Halliburton will ultimately emerge victorious in its quest for Expro.

While not long ago, offshore drilling to just a few hundred feet was the norm for exploration and production companies, new discoveries are occurring in depths to several thousand feet more and more frequently. Further, deepwater drillers Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO) have ridden the trend to relative stardom within the offshore drilling group.

Given these trends, the addition of Expro would be an important arrow in Halliburton's capabilities quiver. Lesar has made a number of other moves in the past couple of years that I believe have benefited the company materially. I suggest that you carefully watch Halliburton and its progress toward acquiring Expro. What better combination than a well-managed company that just happens to be operating in what is a front-and-center sector?

Transocean Drills World's Longest Well

40,320 feet: Transocean Drills World's Longest Well on Qatar Coast.

May 21 (Bloomberg) -- Transocean Inc., which owns one- fourth of the global supply of deepwater oil rigs, drilled the world's longest well off the coast of Qatar, surpassing the old record by almost a half mile (805 meters).

The well extends for 40,320 feet, including a 35,770-foot horizontal section, the Houston-based company said today in a statement. Transocean's offshore GSF Rig 127, which has retractable legs that extend to the seafloor, drilled the well in 36 days as part of a $6 billion A.P. Moeller-Maersk Group project.

The well exceeded the previous record length of 38,322 feet set earlier this year at Sakhalin Island off Russia's Pacific Coast, Transocean said. Maersk Oil & Gas, a unit of Copenhagen- based A.P. Moeller, plans to boost output from Qatar's Al Shaheen field to 525,000 barrels a day by the end of next year.

Oil and gas producers including Exxon Mobil Corp. and Royal Dutch Shell Plc are using more horizontal wells to tap reserves formerly regarded as uneconomical.

Thursday, May 22, 2008

Petrobras Strikes Oil (Again)

Petrobras, which recently passed GE in market cap to become the world's 5th largest company and plans to order 40 ultra-deepwater rigs at a cost of $30 billion, struck oil again the other day: Petrobras, Shell, Galp Find Oil in Pre-Salt Block.

May 21 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, said it struck oil in the BM-S-8 block of the coast of Sao Paulo state.

Petrobras, in a joint venture with Royal Dutch Shell Plc and Galp Energia SGPS SA, found reserves in well drilled through the seabed and a layer of salt beneath seas 2.1 kilometers (1.3 miles) deep, according to a statement posted on the Brazilian securities regulator's Web site.

``The potential for the area is great and this well helps to show the whole pre-salt region has a great future,'' said Lucas Brendler, analyst at Geracao Futuro Investimentos SA, a Porto Alegre, Brazil-based investment bank which manages 7.6 billion reais ($4.6 billion) of stocks, including about of 1.3 billion reais of Petrobras, its largest holding. ``Still, this is only incremental data, and we'll need more news, more facts, to have a better idea of the actual size of the deposit.''

Petrobras will need to drill a second well in the Santos basin area, about 250 kilometers south of Rio de Janeiro, before the company can get a full idea of the size of the field.

As of May 14, Petrobras's well had drilled through 6,975 meters of ocean floor, according to Brazil's petroleum regulator, known as ANP.

Iraq Could Have Largest Reserves In The World

Iraq could have largest oil reserves in the world

Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world.

The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”

BP Capital Positions

T. Boone Pickens Hedge Fund Holdings

Also see here.

Tuesday, May 20, 2008

Lehman Ups Transocean Target

Ahead of the Bell: Transocean shares rise

NEW YORK (AP) -- Shares of Transocean Inc. edged higher in premarket trading on Tuesday after a Lehman Brothers analyst raised his price targets on more than three dozen oil service and drilling companies.

James Crandell raised his price target to $192 from $180 and maintained his "Overweight" rating on Transocean, a Houston-based offshore driller.

The new target price implies a return of 19 percent on Monday's closing price of $161.39. On Tuesday, shares rose 61 cents to $162 in electronic trading.

Crandell said in a note to investors that he expects a strong recovery for North American natural-gas drilling in 2008 and through 2009. He also predicted substantial growth in overseas operations for oil service and drilling companies over the next several years.

Sunday, May 18, 2008

Qarn Qaymah 2

Here is the full press release from Calvalley Petroleum: Calvalley Petroleum Inc. - Qarn Qaymah 2 Encounters Hydrocarbon Shows in Kohlan Sandstone and Fractured Granite Basement

Calvalley spudded the Qarn Qaymah 2 appraisal well on December 6, 2007. The primary objectives of this well were to appraise the Qarn Qaymah 1 basal Kohlan sandstone gas/condensate discovery and to explore for hydrocarbons within the large, underlying granite basement closure. Secondary objectives existed in the Saar-Naifa carbonates. The well was drilled to a total measured depth of 3,975 metres.

As previously announced on January 14, 2008, oil and gas shows were encountered in Qarn Qaymah 2 within the lower portion of the Saar and Naifa formations, which represent secondary zones of interest in the Qarn Qaymah 2 well and for future wells in Qarn Qaymah area. The Kohlan sandstone, which was a primary objective and sits immediately above the granite basement, was penetrated at a measured depth of 3,178 metres. A good natural gas show was displayed over a twelve metre sandstone interval. Gas and significant condensate were previously recovered on a short term test of the Kohlan sandstone in the Qarn Qaymah 1 well. Qarn Qaymah 2 is located 2.1 kilometres to the east of Qarn Qaymah 1.

The casing shoe was set 43 metres into the granite basement at a measured depth of 3,233 metres and drilling continued into the underlying granite basement. The well was deviated at an inclination of up to 72 degrees towards the south to enable Calvalley to drill towards seismic features that may represent potential fracture zones within the large potential basement closure. An additional 747 metres of granite was penetrated below the casing shoe, giving a lateral offset from the casing shoe of approximately 570 metres to the south. The total 785 metre granite basement intersection in Qarn Qaymah 2 equates to a true vertical basement section of 380 metres total vertical depth in the well bore. This demonstrates the presence of a structural closure with hydrocarbon shows in several fracture zones.

Six fracture zones, which are associated with faults or flexures within the granite basement, were encountered with associated hydrocarbon shows. Strong gas kicks were encountered soon after penetrating the granite basement and gas-condensate shows were associated with the first two fracture zones. As the well was deepened, oil was observed in good quantity over the shaker and mud pit from the four fractures. The mud weight indicates the reservoir pressure may be in excess of 5,000 psi.

Qarn Qaymah 2 has encountered excellent hydrocarbon indications while drilling and, depending on test results, may be the first hydrocarbon discovery within the granite basement zone of Block 9. The Qarn Qaymah granite basement is a large structural high and could have a significant volumetric hydrocarbon potential. Other discoveries have been made in the granite basement of the Masila basin which have achieved commercial productivity. The drilling rig will be demobilized following the completion of logging of the granite basement section and a service rig will be moved on site to commence extensive testing of various hydrocarbon horizons within the well.

The well has demonstrated the potential viability of the granite basement structure in Block 9 as another potential hydrocarbon reservoir and additional exploration is intended to be directed toward similar structures.

Saturday, May 17, 2008

Crude Oil Found In Basement (Bedrock) Again

Hat tip: Anaconda

Exploration discoveries

Asia. Calvalley Petroleum discovered oil in granitic basement while drilling its Qarn Qaymah-2 exploration/appraisal well in Yemen’s onshore Block 9. Appraisal objectives for the previously drilled Qarn Qaymah-1 were accomplished as shows of mostly natural gas were found in the basal Kohlan sandstone, above basement. The well drilled 2,451 ft into basement, where strong oil shows and high pressures were encountered in fracture zones. The well was drilled to a TD of 13,042 ft.
Calvalley Petroleum - 2008 First Quarter Results

Average daily production from the Block 9 for the three months ended March 31, 2008 was 4,602 gross barrels per day (Calvalley working interest 2,301 bopd), down from the previous quarter’s average of 5,218 bopd (2,609 bopd net) and 5,404 bopd (2,702 bopd net) for the first quarter of 2007. The reduction was due to pressure testing and maintenance activities and reservoir modeling at Hiswah that periodically took several wells off of production during the quarter.

A deep exploration well in the Qarn Qaymah region encountered hydrocarbons in the Kohlan sands and in the fractured granite basement. The Company is currently in the process of production testing the well.
Anaconda writes, "How many times does oil have to get discovered in bedrock before oil geologists accept that oil is abiotic?"

Friday, May 16, 2008

This Oil Move Is For Real

Jim Cramer: This Oil Move Is for Real

It doesn't stop. I hear about less gasoline use. I hear about big alternatives to energy. I hear about mass transit. They are meaningless to oil. Far more important to oil is the Petrobras decision to try to glom onto 80% of the world's rigs. That's a killer. No one else can drill deep if they do that. Plus, the cost of drilling is monumental now. Meanwhile, in the political landscape, we worry about the Strategic Petroleum Reserve, not drilling offshore where there is lots of oil and gas. We worry about taxing oil companies' windfalls, not encouraging them to drill year-round. And the result? Look at your screen. There is still, even at these prices, no marginal oil available. As an aside, why don't all the pundits ask the speculators to sell us some? They are sure to replace it with drilling.

Thursday, May 15, 2008

Petrobras Hires 80% Of Deepwater Rigs

Bloomberg: Petrobras Hires 80% of Deepwater Rigs, Inflates Rents

May 15 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, leased about 80 percent of the world's deepest-drilling offshore rigs to explore prospects including the Western Hemisphere's biggest discovery in decades.

Petrobras, as the Rio de Janeiro-based company is known, is hiring rigs that can drill in at least 3,000 meters (9,800 feet) of water, Chief Executive Officer Jose Sergio Gabrielli said in an interview last week. The world has 21 such vessels, according to, which tracks the offshore drilling industry.

The company's ``insatiable'' demand is forcing producers including Exxon Mobil Corp. and BP Plc to pay more as they compete for the remaining units, said Kjell Erik Eilertsen and Truls Olsen, analysts at Fearnley Fonds AS in Oslo. Explorers that don't have rigs under contract may delay projects or pay rents of more than $600,000 a day.

``The oil majors have their backs against the wall as Petrobras has aggressively locked up significant rig capacity,'' said Omar Nokta, head of maritime research at Dahlman Rose & Co. in New York.

Petrobras is negotiating for as many as 17 more vessels to probe the Tupi discovery and neighboring fields, said Bill Herbert, an analyst at Simmons & Co. International in Houston. The company already controls almost seven times as much capacity as the next biggest user of rigs that can drill in 7,500 feet of water, according to research by Dahlman Rose. ...

Petrobras is in talks with Transocean Inc., the world's biggest offshore driller, to extend leases as much as three years ahead of expiration, Robert Long, chief executive officer for the Houston-based contractor, said last week.
See video here.

UBS Bullish On Offshore Drillers

Transocean should do well today.

UBS bullish on US offshore drilling sector

May 15 (Reuters) - UBS started coverage of the U.S. offshore drilling sector with a positive stance based on a healthy longer-term macroeconomic outlook, strong commodity prices, and increasing demand for offshore rigs over the next several years.

The brokerage, which added the world's largest oil and gas drilling contractor Transocean Inc (RIG) to its strategic stock selections list, said high oil prices will drive increased exploration spending.

"We prefer offshore drillers with deepwater exposure and higher specification jackup rigs to take advantage of rising dayrates in these classes of rigs," analyst David Anderson said in a note to clients.

Investors should favor companies with fewer deepwater contracted rig days and more jackup contracted rig days as dayrates for deepwater rigs are likely to continue to rise through 2011, while average jackup dayrates are likely to fall in 2009, Anderson said.

The analyst said offshore drillers are highly correlated to oil prices, which he believes will remain at very high levels over the next several years.
UBS eyes oil's surge, Chevron, drillers.

Transocean (RIG) drew the distinction as top pick at UBS as it waded into several oil-services firms that specialize in drilling and other technologies for extracting precious fossil fuel [LOL].

After purchasing GlobalSanteFe in recent months, Transocean has emerged as "not only bigger but better," according to the bank.

With the largest fleet of deepwater rigs, Transocean ranks as the largest offshore driller in the world, UBS noted.

"As we are more bullish on deepwater-activity levels well into the next decade, we view Transocean as a core holding in the offshore-drilling sector," it said. "Although near-term integration issues are to be expected, Transocean is one of the best operators in the business and will be one of, if not the primary beneficiary of rising deepwater day rates."

Tuesday, May 13, 2008

Zack's Bullish On Halliburton

Zacks: Keep Halliburton a Core Holding

Halliburton Company's (HAL) first-quarter 2008 results were on the weaker side, reflecting continued pricing pressure in the U.S. market. However, the company's income rose nearly 6%, driven by growing business in the Middle East, Asia and Latin America.

The company's overseas revenues were up 24% year-over-year and look set to achieve the targeted growth rate of 20% for the full year. Our Buy recommendation remains unchanged as we continue to view Halliburton as a core oilfield service holding.

We believe that the company will continue to reap the rewards of several strategic moves during the past year, resulting in further margin gains and a strengthened competitive position in its space. Despite some recent gains, Halliburton shares continue to trade at a significant valuation discount to its peer group. While the company no doubt has substantial exposure to North American natural gas through its market leading pressure-pumping business, its international leverage and presence appears to be under-appreciated.

The award of a major multi-year Saudi Aramco project highlights the strength of its international relationships, which we believe will get greater attention. With the KBR separation issue behind it, the new-look Halliburton is now a pure-play energy services provider; well positioned to capitalize on growth opportunities in its global energy services business.

Management is targeting industry leading revenue, earnings and returns performance metrics over the next few years, highlighting the breadth and depth of the company's oilfield franchise. Our new $55 price objective, raised from $44 before, is based on 2008 P/E and EV/EBITDA multiples of 14.8x and 19.2x, still below most of its large-cap peers.

Monday, May 12, 2008

Barron's: National Oilwell Varco Ranked 3rd

In the latest Barron's 500 National Oilwell Varco (#3, NOV) ranks only behind Blackrock (#1, BLK) and Research In Motion (#2, RIMM).

In the California gold rush, suppliers of picks and shovels fared far better than prospectors. The same might be said of the oil patch; just ask National Oilwell Varco, a supplier of oil and gas drilling-rig equipment, whose revenue more than tripled in the past four years, to $9.8 billion. The Houston company's earnings rose more than 500%, to $3.76 a share, and its backlog of business grew to $9.9 billion in the first quarter, up from $2.3 billion in 2005.

Some of that growth was due to acquisitions. In March 2005 National Oilwell purchased Varco for $2.59 billion in stock. The combined company bulked up even more this past April, when it completed the $7 billion takeover of Grant Prideco, adding drill bits and drill pipe to its product line-up.

National Oilwell's growth stems in part from improved manufacturing efficiencies. A factory that turned out 95 to 100 top drives (the part that turns the drilling pipe) three years ago now manufactures 365, with only a modest capital investment of $1 million to $1.5 million, says Merrill (Pete) Miller, chairman and CEO. The company espouses "quick response manufacturing," an approach to enhancing efficiency developed at the University of Wisconsin.

National Oilwell's stock has climbed 67% in the past 12 months, as oil has breached new highs above $120 a barrel. Yet the shares trade at only 13.5 times Wall Street's 2009 earning estimates. The concern, apparent in most oil-industry multiples, is that crude prices will peak, in which case the total number of industry drilling-rig orders -- which stood at 158 in January, up from 29 in April '05 -- will fall.

Oil's seemingly inexorable rise has sparked fierce debate, however. "Hundred-dollar-plus oil is a clear indication that worldwide demand for oil is continuing unabated," says Gary Russell, a senior equity analyst for the AIM Energy fund. "The industry is going to need many, many, many more rigs to find oil supply, to keep up with demand."

One sign of the company's confidence: National Oilwell has ignored pressure to buy back shares and instead has used its cash to expand its business. "The world needs more oil and gas," says Miller. "The worldwide rig count will climb in the next 10 years."

And this blurb from Schlumberger's (#4, SLB) Andrew Gould:

An increase in exploration, spurred by the need to find new sources of oil and gas in the next three to five years, will benefit the company. "The market is going to be surprised by the extent to which drilling is going to have to increase," Gould predicts.

Dahlman Analyst Sees Higher Rig Rates

Sector Snap: Drillers down, but analyst bullish

National oil companies have been locking in drilling contracts in recent months while most publicly traded oil majors "have been waiting on the sidelines," analyst Omar Nokta wrote in a client note."Now, with limited availability and record high leading edge rates, they must combat declining reserves and production to satisfy stakeholder demands."

Nokta and colleagues boosted their forecasts for average drilling rates by $50,000 per day, meaning that they now expect the priciest ships, which can operate in very deep water under harsh conditions, will fetch an average of $600,000 per day over the next three years.

"We believe Transocean (RIG) stands to benefit the most from the tight deepwater market as it controls seven of the 16 ultra deepwater rigs available to market through the end 2010," Nokta wrote. "We expect the company to negotiate attractive contract terms that allow for substantial visibility deep into the next decade."
And here: Energy Sector Roundup: Oil Backs Off a Record

Major oil companies "have their backs against the wall" when it comes to getting offshore drilling contracts, according to Dahlman Rose & Co. managing director Omar Nokta.

Nokta says Brazil's national oil company, Petrobras, has aggressively locked up a significant amount of rig capacity. As a result, dayrates have been pushed to record levels.

"We expect the few deepwater rigs available during the next three years will see significant enquiry and lead to higher dayrates and contract durations," said Nokta. "We are raising our dayrate assumptions for ultra deepwater floaters (7,500-feet drilling capability or more) to $570,000/day, harsh environment ultra deepwater floaters to $600,000/day and standard 5,000-feet deepwater floaters to $475,000/day. These dayrates are $50,000/day higher than our prior forecasts."

Nokta thinks Transocean Inc. could benefit most from the tight deepwater market since it controls seven of 16 rigs available through the end of 2010.

Friday, May 9, 2008

Socratic Solitaire 2008

Fist off: long live Charlie! I'm going to weep like a little girl when he's gone. And second: thank God for Peter Boodell. He is the Plato of our time.

Peter Boodell: 2008 Wesco Shareholder Meeting: Detailed Notes.

CM: Testing, can you hear in back? Mr Denham has an announcement.

Denham: We ask you not to use your video recorders, thanks. ...

There will be a long Q&A preceded by Socratic solitaire conducted by the Chairman. Meeting is adjourned.

We now begin Q&A, starting with a long game of Socratic solitaire. During questions, do not ask what we are buying or selling. Any other question is fair game, but we don’t agree to answer them.

Thursday, May 8, 2008

Jefferies Source Of Petrobras Rumors

A Bit of Upside for Deepwater Rigs

Companies Featured in This Article: Petrobras, FMC Technologies, Cameron International, Dril-Quip, Oceaneering International, Hornbeck Offshore Services, GulfMark Offshore, Tidewater, National Oilwell Varco, Repsol YPF, Hess, Transocean, Diamond Offshore

Jefferies & Co.

UNDERSCORING OUR POSITIVE ultra-deepwater thesis, a huge series of ultra-deepwater-rig awards is likely forthcoming from Petrobras, Brazil's National Oil Company (NOC), which will have positive ramifications for the deepwater-rig segment but more directly impact deepwater-service companies.

Our industry sources indicate that Petrobras is likely to announce letters of intent (LOI) to award long-term contracts for as many as 17 new-build ultra-deepwater rigs by the end of the week.

In what would be an unprecedented contract award for size, we understand that Petrobas could award LOIs (with underlying contracts of six ...
This explains why NOV was up 9% today.

Since I'm last to know and it was too late to buy NOV, I saw PBR down on the split and bought at $62.75 for a point.

It's better to be lucky than good =)

UPDATE: U.S. March Trade Deficit Narrowed More Than Forecast

Brazil is preparing to tap the biggest crude-oil discovery in the Western Hemisphere in three decades, which lies just off its Atlantic coast. Petroleo Brasileiro SA, Brazil's state oil company, is in talks with Houston-based Transocean Inc. to extend offshore drilling contracts.

Wednesday, May 7, 2008

Even Charlie Munger Makes Mistakes

Berkshire's Munger says investors should lower expectations.

"There will be a hell of a mess in these derivative books eventually," he said.

Munger said better accounting standards are needed and banks should not be allowed to put money into risky and complicated investments.

"These people wouldn't get away with this horrible behavior if the accountants didn't bless it," he said.

Munger said the testosterone-driven, competitive executives heading most investment banks are partly to blame for the current financial problems.

"I do not think we'd have this mess if women were running all the financial institutions," he said.
Perhaps someone should remind Mr. Munger that a woman, namely JP Morgan's Blythe Masters, invented the Credit Default Swap.

Credit default swaps were invented with collateralised debt obligations in 1995 by Blythe Masters, a 34-year Cambridge graduate who was then the head of JP Morgan’s Global Credit Derivatives group.
Ms. Masters, formerly CFO, is still on JP Morgan's executive committee and is now global head of commodities. Good timing.

I might also remind Mr. Munger of the crisis caused by a certain Helen of Troy.

Transocean: Best Company In The World

After hearing Charlie Munger trash diversification over the weekend (see here, here, and here) I increased my already overweight (14%) position in Transocean (RIG) to well over 20%. Yes she's the prettiest girl in school but with a p/e of 9 it's not clear to me that everyone knows it. Does anyone know of another company that has profit margins and return on equity in excess of 30%? Q1 Transcript.

Transocean Is Coastin'

The margin picture, however, brightened meaningfully. Field operating income margins lifted from the upper 50% range into the lower 60s. Note that this includes all revenue sources, some of which are lower-margin than drilling, so the figure is understated compared to the contract drilling margins I tend to talk about when I praise Noble's (NYSE: NE) dynasty or ENSCO International's (NYSE: ESV) excellence.

I've talked about the tax rates of some of these drillers, which vary widely due to geographic factors. Diamond Offshore (NYSE: DO) reports about the highest rate that I've seen, while the two aforementioned aces fall in the high teens. Transocean did them one better, with an effective tax rate of 15.5% -- and that included some unfavorable items. This light tax treatment helped Transocean turn out a solid 38% net income margin.

Transocean's been scoring some big contract wins in India, an exciting basin that has been overshadowed by the exploration exhilaration in places like Angola and particularly Brazil. Reliance Industries, a bit like a Petrobras (NYSE: PBR) of India (granted, Reliance has more competition vis a vis ONGC), is exploring aggressively in what's known as the KG basin, offshore India. Yesterday's announcement of a new drillship order takes Reliance's deepwater vessel commitments with Transocean up to six, with three active rigs and both vessels from Transocean's joint venture with Pacific Drilling under construction. If Reliance hits anything like Petrobras' Tupi, Jupiter, or Carioca finds, then expect the fireworks to really fly.
With 80% of deepwater drilling records, Transocean has a wide economic moat. The latest enhanced Enterprise-class drillship ordered from Daewoo costs $730 million. They already have 4 of these bad boys under construction (Discoverer Clear Leader, Discoverer Americas, Discoverer Inspiration, and the yet unnamed GSF Newbuild), each capable of drilling in 12,000 feet of water and to 40,000 feet total depth. The earliest a competitor can get one is 2011 and they would still have to pay Transocean for the patent on dual activity. This is a $50 billion company earning $4 billion a year and growing. Right behind Google (GOOG) in terms of estimated long term earnings growth.

Thursday's Options Report.

Transocean (RIG) – Sky-high earnings from the world’s largest offshore oil driller failed to patch through to any great effect to Transocean’s share price, which is .27% lower at $157.42 – about $3 off the 52-week high. While some analysts have noted that the company’s share price has already exceeded some targets, perhaps adding to the lackluster action, option traders responded in two fashions – first by appearing to sell May 145 puts and 160 calls in what could indicate an expectation of very rangebound share price activity in the coming month; then by deferring new price bets to the August contract, where we noted heavy volume in out-of-the-money calls at the August 170, 200 and 210 strikes, and selling action in 120 puts.
I'm also a fan of National Oilwell Varco (NOV). Q1 Transcript.

Monday, May 5, 2008

Warren Buffett On Peak Oil

Warren Buffett and Charlie Munger On Peak Oil.

Q29: Doug Hicks, Akron Ohio. Oil will run out this century. Considering US policy is to do nothing until last second, will we face World War III? Will oil companies go to zero?

WB: Oil won’t run out - it doesn’t work this way. At some point the daily productive capacity will level off and then start declining gradually. There is the depletion aspect and the decline curves. We are producing 86m barrels per day or so, more than ever produced. We are closer, by my calculations, to almost our productive capacity, than we have ever been. I think our surplus capacity is less, and quite a bit less, than in past. Whatever that peak is, whether 5 or 10 yrs, the world will adjust, and we will think about it. Adjustments will cause demand to taper off. I don’t know how much oil is there, but there are lots of barrels of oil in place. We never recover total potential. We may have better engineering recovery in future. It is nothing like an on and off switch. You may still have enormous political considerations to get access to avail oil since it so important. There is nothing you can do over short period of time to wean world off oil.

CM: If we get another 200 yrs of growth dispersed over the world while population goes up, all oil coal and uranium will run out so you will have to use the sun. I think there will be some pain in this process. I think it is stupid to use up hydrocarbons of world so quickly. Stupid when there are few and limited alternatives. What should we have done? We should have brought all the oil over from Middle East and put it in our ground. Are we doing it now? No. Government policy is behind in rationality. If we have prosperous civilization, we must use the sun.

WB: Charlie, what is your over/under for oil production in 25 yrs?

CM: Oil in twenty five years, down.

WB: If this is true, that is big number. China is doing 10m cars this year, so down in 25ys is significant.
Also see here, here, and here.

Saturday, May 3, 2008

Technological Barriers To Carioca Field

Brazil Oil Trapped by 500-Degree Heat, Salt Barrier

Brazil's oil will be harder to develop than the Gulf of Mexico, where the deepest wells are now in production, Cline said. Exxon Mobil Corp. and Chevron Corp., the two biggest U.S. oil companies, saw diamond-crusted drill bits disintegrate and steel pipes crumple when they attempted to tap deposits beneath the Gulf's seafloor two years ago.

Uncharted Depth

Pumping oil from the Brazilian finds, parts of which are 32,000 feet (10,000 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest producing offshore well.

The obstacles will discourage development unless crude prices stay high, said Tina Vital, an analyst at Standard & Poor's in New York. U.S. oil futures, which reached a record at $119.93 a barrel in after-hours electronic trading yesterday, have jumped 81 percent in the past year.

Engineers will have to overcome temperatures that range from near freezing above the ocean floor to temperatures that can melt bismuth, used for transporting uranium rods and for shotgun shells. Layers of salt will also increase the challenge because the crystals absorb seismic waves used to pinpoint oil deposits.

Seismic Issue

``The seismic issue is important because if you don't identify the location of the oil properly, you're going to waste a lot of money when you drill the hole in the wrong spot,'' said Vital, a former Exxon engineer.

Brazil pumped 2.13 million barrels of oil a day in the last three months of 2007, more than OPEC members Angola, Libya and Algeria.

Tupi, 155 miles (250 kilometers) off Brazil's coast, may begin production by 2012, according to consulting firm Strategic Forecasting in Austin, Texas. The field may have 8 billion barrels of recoverable oil.

No start date has been set for Carioca, which Petroleo Brasileiro said will take at least three months to evaluate. A Brazilian regulator said this month the reservoir may have 33 billion barrels.

If confirmed by further drilling, the reserves will be triple the size of Alaska's Prudhoe Bay, the largest U.S. field.

Record Depth

The ocean-depth record for production was set last year by Anadarko Petroleum Corp. The company is extracting natural gas from beneath 8,960 feet of water in the Gulf of Mexico, where pressure measures 3,069 pounds per square inch, squeezing joints and tearing at seals.

``What we do at that water depth in the ocean is similar to NASA's space program, but they get to do it without any pressure trying to attack them,'' Kevin Renfro, production engineering manager at Woodlands, Texas-based Anadarko, said in a November interview.

Petrobras hasn't said how much it spent to sink wells at Tupi and Carioca. Similar drilling by Exxon and Chevron Corp. in the Gulf of Mexico cost $180 million to $200 million for each well.