A Record Dry Hole

Well, that was the worst return on $6 billion of capital we’ve ever seen. Worse than a dry hole offshore Alaska. Lot of hot air, lot of gas! After two years of much ado, we got nothing. Same president in the Oval Office, same party control of the House and Senate, and no doubt, more gridlock. Perhaps the best we can hope for is that, as is common in second administrations, certain cabinet members will depart, such as Interior’s Ken Salazar and Energy’s Stephen Chu. Rumors say as much. Then again, you might prefer the devil you know to the one you don’t.

In President Obama’s second term, pundits say, intense pressure on tax reform threatens the energy industry as much as ever, maybe more. There is a deficit to whittle down, and tax breaks for energy are a big target. After all, the debt ceiling will be reached this month and it’s a whopper—$16.39 trillion.

The effective tax rate on corporations is 35%, a number that Obama has said he will lower to 28%. But a report from Bracewell Guiliani’s Policy Resolution Group in Washington, D.C., calculated that the effective rate on petroleum producing firms is actually 11.27% and on oil-field services, 22.05%. The integrateds pay 33%. This compares to electric utilities paying 33.77% and banks paying 17.5%. Drug companies pay only 5.62% and aerospace/defense pays 20.05%. There will be a lot of juggling and gnashing of teeth during negotiations on this issue.

Hart Energy’s government policy guru John Kneiss says there will be a dramatic increase in efforts to devise a national policy on fracing, not only on federal lands, but possibly nationwide. This is something the industry will fight with bare knuckles.

But, the oil and gas industry has more to worry about than post-election jitters on tax reform and increased regulatory burden from the EPA or others; for instance, when an industry stalwart like Devon Energy Corp. announces it is writing down some $1 billion in natural gas properties, and dealmaker extraordinaire Chesapeake Energy Corp. indicates it is getting more difficult to ink a deal and attract Asian money.

Low gas prices have tripped up companies big and small, and their transition to more oily plays has sometimes been painful to watch. If the Asians are backing off at all, it only means they are savvy and careful. We hope it doesn’t mean they are disappointed in what they’ve seen so far.

In the New Year, we will know more about the fiscal cliff, the European debt crisis and softening oil demand. Indeed, OPEC recently lowered its projection for world oil demand, citing fast-rising North American production (not to mention, longer term, Brazil), greater fuel efficiencies and the fact that we just aren’t using as much oil as we once did.

On the other hand, the International Energy Agency said recently that world demand would increase steadily to 2035. As usual, you can pick the projection you like best.

Oilfield service firms are watching events unfold with some nervousness as demand for their products slows and prices fall. Pundits call for a lower rig count in 2013. With so many companies moving to pad drilling, fewer rigs can do the same job—or better. Now, talk is sweeping the patch about doing more fracs in shorter distances between stages. It’s exciting to see these improvements take place.

But does this all mean lower oil prices for longer, just when so many companies are transitioning to oily plays? Does it mean margins are squeezed for all the service companies?

More questions will soon be answers. On Obama’s New Year’s Docket: The Keystone XL Pipeline. It will be approved, maybe by the time you read this.

Also on the docket: liquefied natural gas exports. In December a consulting firm was supposed to release a study on whether exports of U.S. LNG will boost domestic gas prices or not. It follows a federal study released earlier this year that concluded there will be varying increases in natural gas prices if exports are allowed. Manufacturers are watching this one.

Further on the docket: Export of U.S. crude oil, always a hot potato. Raymond James says the Gulf Coast could be saturated sometime in 2013 with light sweet crude, making exports a necessity, but “...as we all know, politics and reality can be very different things.”

We’d like to take this opportunity to thank our readers and conference attendees for making 2012 a good year for the magazine and for Hart Energy. We believe your support validates what we are doing and tells the editors and researchers here that we are on track. We do appreciate your business and do not take it for granted. Let us know by phone or e-mail what you think, what issues concern you, what intriguing news you have, what interesting companies or people you’ve come across in your travels. Happy holidays from all of us.