Barclays: 2012 E&P Spending to Approach $600B; Early Estimates Conservative

Barclays Capital estimates that global exploration and production (E&P) spending in 2012 will reach $598 billion, up 10 percent from the previous record of $544 billion in 2011.

Increased E&P spending during 2012 will largely be led by international markets with $438.8 billion, an 11 percent increase, while North America E&P spending in 2012 will rise 8 percent to estimated $159.7 billion.

Forecast spending increases are down from international spending growth of 20 percent and 31 percent in North America in 2011, but Barclays sees "considerable upside" to its current spending forecasts.

"The figures are somewhat misleading because companies are being conservative with their forecasts," said James C. West, Barclays' analyst for U.S. oil services & drilling and author of the study. "Internationally, we believe higher spending could arise from the resolution of the economic crisis in Europe, a resumption of activity in certain North African countries and oilfield service cost inflation," said West.

Domestic U.S. spending also could be revised higher dependent on the pace of the acceleration of drilling activity in the Gulf of Mexico and as companies gain confident in the oil price.

Oil prices continue to drive the capital spending increase, with oil and gas companies in aggregate basing 2012 capital spending budgets on an average oil price of $87 WTI and $98 Brent, lower than current WTI and Brent prices of $101 and $110, indicating that "oil and gas companies are likely taking a conservative view on oil prices, given the uncertain economic environment," West noted.

"Recent exploration successes in various regions of the world confirm our view that exploration is likely to be at the forefront of spending growth in 2012," said West. "In 2010, 32 percent of respondents planned on increasing the percentage of the budget dedicated to exploration. This percentage grew to 38 percent in 2011 and [is expected to grow to] 42 percent in 2012."

Supermajors will increase spending by 10 percent internationally and by 25 percent in North America. ExxonMobil will remain the largest capital spender in 2012, but Petrochina is gaining ground. Brazilian state energy company Petrobras could close the gap in the next several years, Barclays said, adding that Chevron is also aggressively increasing its spending.

Latin American Companies to Lead International Spending Again in 2012

Latin American companies are expected to lead spending again in 2012, with regional capital spending increasing by 21 percent versus 26 percent growth in 2011. Aggressive capital spending by Mexico's state energy monopoly PEMEX, which is seeking to reverse decline rates from major oil fields, will help boost Latin American E&P spending, along with spending plans by Petrobras, which is pursuing a multi-year development plan for its pre-salt reserves, and increased spending by Colombia's Ecopetrol.

African E&P spending will increase 14 percent in 2012 as civil unrest and political disruptions in North Africa and other areas abate and the supermajors begin work on large projects and new discoveries in emerging basins in East and West Africa.

Record spending in Norway, where Statoil and Lundin Petroleum have announced recent major discoveries have resulted in an increased appetite for exploratory work, will lead higher European E&P expenditures in 2012 with a 13 percent increase forecast.

Middle East E&P spending is expected to rise 12 percent next year due to a pickup in activity in Iraq, Saudi Arabia and Kuwait.

"We see Iraq as the most exciting from the oil fields services view, with a $2 billion market that could become a $8 billion market in four to five years," said West.

Saudi Arabia is expected to continue moving forward with plans to boost drilling activity as the country is expected to have an increasingly difficult time boosting exports due to escalating domestic demand, tightening service capacity and dwindling spare capacity. Kuwait also is expected to boost spending as part of its five-year $25 billion budget set at year-end 2010.

One surprise in the survey was plans by Russia-based Lukoil to invest $48 billion through 2014 to boost production, including $14 billion earmarked for 2012.

"During election years in Russia, we've typically seen spending a little bit up and down," said West.

Spending also is expected to rise by 7 percent in India, Asia and Australia in 2012, but the results are skewed somewhat by lower spending for select large companies due to the completion of several large projects, including Woodside and PTT Exploration and Production. Asian companies also are investing heavily in the North American market, shifting funds that might have been invested in Asia overseas.

North American Spending to Remain in High Single Digits through 2015

Fifty-four percent of the companies surveyed said oil prices were the biggest factor influencing their North America E&P spending plans in 2012; 47 percent of those surveyed said natural gas prices were the main driver behind spending plans, while 46 percent said cash flow was the most important factor behind spending.

"We believe the shift in key determinants to oil prices is linked, in part, to the change in the North American market," said West. "While oil prices may fluctuate, we believe companies will continue to drill as long as it is economic and they have the cash flow to support drilling."

North America has been a short-cycle market characterized by volatile swings in activity, but the shift towards oil-directed and liquids rich activity is reducing the cyclicality in the region and will result in more consistent and growing spending levels.

"Long-term and across cycles, we expect spending growth in North America to remain in the high single digits through 2015," West noted.

North American natural gas drilling will continue to decline in 2012 due to low gas prices and high supply, but major oil companies will continue to take large positions in unconventional gas plays.

"While natural gas prices are expected to remain weak in the intermediate term, oil majors are taking the 15-20 year view and expect gas prices will come back," especially as the U.S. becomes an LNG exporter and domestic use of gas to fuel cars becomes more prevalent, said Paul Horsell, head of commodities research and Barclays.

The majority of companies surveyed plan to increase spending in the Permian Basin in West Texas, which is mainly an oil play, by 20 percent, and will increase expenditures in the Midcontinent, Bakken and Marcellus plays.

The uptick in North American unconventional oil activity means that oil service equipment capacity will likely remain tight in 2012. Barclays believes that both the U.S. and Canadian stimulation markets remain currently undersupplied by as much as 20 percent, and despite a significant amount of capacity expected to enter the market throughout the year, market activity is likely to continue to outstrip supply.

BP: Halliburton Destroyed Test Results On Deepwater Horizon Cement

HOUSTON (Dow Jones Newswires), Dec. 5, 2011

BP on Monday accused oilfield-services giant Halliburton of destroying unfavorable results from tests on cement used to plug the leaking well in the Deepwater Horizon disaster.

Halliburton prepared the cement mix that BP had used to plug the deep-water well that blew out in April 2010, killing 11 and unleashing a huge oil spill. In a motion filed with a U.S. court in Louisiana, BP said that Halliburton's own tests after the incident showed the cement slurry was unstable and claimed the company destroyed the results of the test and misplaced key data.

Halliburton destroyed the evidence "in part because it wanted to eliminate any risk that this evidence could be used against it at trial," BP said in the filing. The U.K. oil company says it bases its motion on deposition testimony by Halliburton witnesses and internal documents. Halliburton didn't immediately respond to requests for comment.

BP's salvo is the latest in a multipronged legal fight pitting one of the world's largest oil companies against its contractors over their share of responsibility for the U.S. Gulf of Mexico oil spill. BP has said its contractors, including Halliburton, share part of the blame; Halliburton has said that BP directed all operations and is at fault. In September, Halliburton sued BP for defamation, and for providing inaccurate information before the cementing job in the Deepwater Horizon well.

According to BP's filing, Halliburton told its employees in late April or early May 2010 to test a batch of the cement at a facility in Duncan, Okla. The testing showed that the solids in the cement mixture were separating from the liquids, a sign of instability, according to BP.

BP says that a Halliburton employee said under oath that "he destroyed test results in order to keep the information from being 'misinterpreted' in ways adverse to Halliburton in litigation."

Copyright (c) 2011 Dow Jones & Company, Inc.

Cyber Security Poses Threat to O&G Bottom Line

Financial loss and intellectual property theft are two of the impacts businesses are feeling from breaches in cyber security, a threat that the U.S. government and industries are beginning to address.

A number of industries, including the military and health care, have been targeted through cyberattacks, and the Stuxnet virus, which was used to take control of nuclear power plants in Iran, highlights the potential threat to energy assets.

Concerns over breaches in cyber security, which have grown in numbers and level of sophistication in recent years, have prompted the U.S. government to begin addressing the issue, including the National Security Council's Perfect Citizen program, a program announced in July 2010 which would set up surveillance of domestic computer networks, including private utilities, to monitor for viruses.

Oil and gas companies also are beginning to examine how security breaches can impact their businesses. Energy companies can be vulnerable to security breaches that target data on exploration and production drilling. In one case, data was being stolen from the unsecured email server on a computer workstation aboard a rig.

While some PwC's clients are taking a wait and see approach to cyber security risks, this approach may not be enough to ward off an advanced persistent threat, in which attacks are more sophisticated and targeted, cannot be detected through traditional security monitoring.

"We believe our clients should not be ignoring these threats," said Brad Bauch, principal with PwC, who would like to see the level of monitoring for oil and gas information breaches reach a level seen with credit card companies, who closely monitor transactions and will call customers quickly after seeing suspicious activity.

Security breaches into corporate data have grown over the past decade due to growing number of corporate systems connected with the internet and the need for workers throughout companies to have access to proprietary information to make decisions.

At the same time, the introduction of so-called "silver bullet" security systems such as firewalls, gave companies a false sense of security, to the point where many companies reduced their IT staffs and the number of workers monitoring for viruses and other cyber attacks.

Monitoring technologies also become misconfigured, and alerts from monitoring technology to voluminous for companies to track. If alerts are seen, they are often not interpreted correctly by staff. Many times, companies do not know they've been hacked until someone such as the FBI alerts them.

The abundance of personal data available through social media outlets such as Facebook also is enabling cyber criminals to gather in-depth information on potential victims, and make specific, targeted attacks such as spearfishing. One example is an email sent to an intended target, saying they had met someone at a luncheon where an article was discussed. What looks like a link to the article is included, but when the email recipient clicks on the link, a virus is downloaded.

Once a vulnerability in a company's system in is exploited, custom-developed malicious software can be installed, including sniffers, backdoors, password crackers, counter-forensic file deletion, and stealth data egress techniques. Target data and domain controllers can be identified and data collected. Customized malware can be difficult to clear out of a company's operating systems.

Cyber threats come in several forms, including espionage by foreign intelligence services to gain military, political or economic advantage. This can include disruption of critical infrastructure.

Transnational criminals, who are usually seeking identify and credit card information which they can sell, pose threats to cyber security, as do corporate competitors who are seeking an economic advantage over a rival. In the case of corporate competitors, the risk of information security breaches may grow as more oil and gas companies form joint ventures.

Insiders also can pose threats to a company. In 2010, 43 percent of security incidents were perpetrated by insiders. While unintentional breaches can occur, a user, employee or contractor also can deliberately infiltrate a system and steal data to sell or disrupt IT services.

The average loss from a single incident of security breach was $875,146, according to the 2011 Global Information Security Survey by CIO Magazine and PwC. Forty-two percent of respondents surveyed reported financial loss as the biggest impact of security breaches, and 32 percent reported intellectual property theft as the second biggest impact.

Thirty percent of respondents said their business' reputation had been compromised by a security breach, while 17 percent of respondents had experienced fraud due to security breaches and 14 percent reported loss of shareholder value due to cyber security issues.

The ultimate cost of a breach goes beyond the initial loss or disruption of service, including cost of legal support, security remediation, forensic investigative support and the cost of making customers whole on financial losses.

In addition to traditional security skills, companies also must acquire cyber security response capabilities such as log aggregation, network and system baselining, network traffic monitoring and live memory monitoring.

"There should be less reliance on signature based technologies," said Bauch. "These are still valuable, but don't protect against the threat" of a cyber attack.

If a breach occurs, oil and gas companies should define and understand where valuable information is stored on the network and within systems. They should also identify breach indicators, analyze results to determine breach impact, identify remediation activities and evaluate susceptibility to future attacks.

API Blasts New EPA Fracking Proposal

The U.S. Environmental Protection Administration (EPA) should not try to rush to finalize by this coming April a newly proposed rule on air emissions from hydraulic fracturing (fracking) and other production operations, the American Petroleum Institute (API) said during a conference call Tuesday.

Among other objections, API said that EPA did not allow sufficient time for comments on the proposed rule and is not allowing enough time to review those comments and finalize the rule. API recommended that EPA allow one year from April 2012 to publish a final rule.

While API said that it will work with the agency to modify the rule, "let's just say that it is not unprecedented for the industry to litigate an EPA rule," commented Howard Feldman, API's director of regulatory and scientific affairs. "We are concerned about the one-size-fits-all approach" for required control technologies under the proposal, Feldman added.

In a letter to EPA, API listed the following other "critical concerns" with the proposed rule:

• The proposal expands listed categories and applies New Source Performance Standards (NSPS) to new affected facilities in "unprecedented ways that are outside the Agency's authority." Specifically, API said that there are NSPS sources included in the proposal "that emit little to no regulated pollutant or are construction-related emissions sources that are temporary … neither of which should be included in the rule."
• The equipment prescribed to conduct reduced emission completions "will simply not be available in time to comply with the current final rule schedule." API believes that "it will take years to manufacture sufficient specialized equipment and adequately train operators how to safely conduct these operations."
• EPA's cost analyses were based on "average model facilities" that do not represent all equipment and compliance costs and, without proper variability analysis to represent the wide variety of operations in the O&G industry, failed to identify when the controls are no longer economic.
• The system of notifications, monitoring, recordkeeping, performance testing and reporting requirements for compliance assurance are overly burdensome for the small and/or temporary affected facilities that EPA is regulating. "This is a waste of time and resources for both industry and the EPA," API said.

Among other recommendations, API said that EPA should "allow sufficient compliance time (varying from 60 days to at least two years) to comply with the equipment-specific NSPS requirements following promulgation of the final rule. API also recommended that the agency should "revise the economic analyses to include all compliance cost and operational variables."

"These revised analyses should be used to limit the emission controls applicability to operations where they are economically justifiable," API said.

A Crude Awakening

Source: Alasdair Macleod, Resource Investor  (11/30/11)

"The combination of the most rapid global monetary expansion in peace-time history and soaring oil prices is an inflationary disaster in the making."

One of the joys of interviewing some of the best brains in the world of finance and economics is that they alert you to important factors that perhaps you haven't fully considered. This was my experience with Chris Martenson in Madrid last week (the interview will be posted on the GoldMoney website in the coming weeks). He reminds us that the availability and price of oil are central to our economic future.

The basic argument is this: Very little can happen in our lives without oil. It is required for mining, agriculture, manufacturing, transport and distribution. Global consumption is rising, and extraction has leveled off. Oil-exporting nations are consuming more, leaving smaller balances for those with oil deficits. The cost of extraction is rising sharply: Whereas 50 years ago it cost one barrel of energy to extract a hundred, we are moving towards new fields where the rule is one barrel for three. We face a train wreck between the increasing rates of global consumption and the declining rates of net exportable production.

We are familiar with this story, but most of us underestimate its importance, so it is worth repeating. The chart below (which is based on statistics from BP's Statistical Review of World Energy 2011) sums up the problem.

The black line is the five-year moving average of the balance between annual production and consumption, represented by the black columns. The last year of production surplus was 1981, 30 years ago, and since then the world has drawn down on strategic stockpiles and inventory to meet consumption demand, at a trend rate that is now accelerating. The blue columns represent the European balance, which has benefited from North Sea oil and which is now running out. The red columns represent North America and Mexico, whose production has been deteriorating since 1984. But most frightening is the Asia/Pacific deficit (the yellow columns), which has soared over the last 20 years.

The chart clearly shows a picture of an imbalance between production and consumption that cannot continue much longer. The world is now caught between inflexible demand—because oil is vital to our very existence—and declining net production. This explains the oil price, which is the blue line in the second chart (I shall comment on gold in a moment).

There have been three phases: The first, when OPEC jacked up the price of oil; the second when more expensive non-OPEC fields came on stream putting a cap on prices, and finally the third, where prices have increased seven times so far. It is this third trend from which there is no apparent escape. The chart is on a logarithmic scale, which means that prices have been rising at an exponential rate since 1998.

With the production/consumption imbalance set to deteriorate further, there can be only one result, and that is considerably higher prices. Based on BP's statistics, which show that the world's most vital commodity has been in a supply deficit for the last 30 years, the logical outcome is a price explosion. And with quantitative easing in the markets there will be extra money to pay higher prices, the consequences for global price inflation do not bear thinking about. On this evidence we can therefore confirm Chris Martenson's analysis.

Living with an energy supply crisis will require a radical change in our lifestyles—downwards. The best financial protection from this event appears to be physical gold, which has tracked the price of oil reasonably well over the years as shown in the second chart, and can be expected to continue to do so. After all, the combination of the most rapid global monetary expansion in peace-time history and soaring oil prices is an inflationary disaster in the making.

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. He has a background as a stockbroker, banker and economist.

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