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Yesterday's diary talked about proposed changes in the Securities and Exchange Commission's regulations on "proved" oil reserves when oil companies claim when they seek investors.  There are some good parts to these new regulations, and some scientifically valid arguments for others.

There is also the possibility that the new regs, combined with an elimination of the ban on offshore drilling, could mean a financial windfall for oil companies, whether or not they actually drill more oil.

Climb aboard and let's go exploring.

The Oil Business and the Oil-drilling Business

First, it's important to understand that the oil business is very different from the oil-drilling business.  The oil-drilling business is what the oil business used to be:  find a promising field, put down some exploration holes, start pumping if you get lucky.

The oil business is a five-ring circus.  In each ring, a giant multinational corporation juggles what President Bush calls "fancy financial instruments" and occasionally tames wild animals--those would be actual, independent, old-school oil companies, independent oil-drilling companies and the exploration divisions of the Big Five.

The point of the circus is not to make oil.  That is the job of oil-drilling business.  The job of the circus is to make money--for the circus.  Or, to use more acceptable language, to "maximize value to shareholders."

While the "Drill Here, Drill Now" advocates will remind you that those shareholders are individuals, mutual funds and large pension funds, often they are the oil companies themselves, and their executives.  


Don't Drill Here, Don't Drill Now

Many have asked why new fields should be opened to leasing when there are millions of acres already leased which the oil companies haven't yet explored.  House Democrats, responding to unrelenting pressure to open new offshore acreage, proposed legislation requiring companies move ahead on exploring the 68 million acres currently under lease or forfeit their leases.  The move, doomed to fail, had at least the merit of making Republicans admit that leasing acreage alone doesn't produce petroleum.

In fact, the Big Five oil companies are spending less and less of their increasing cash flow on exploring leased tracts for new oil fields, leaving smaller companies to do the mule work of actual oil drilling.  

This trend, monitored by Rice University's James Baker III Institute for Public Policy, doesn't show any signs of turning around, despite record company profits.

Before we delve into the question of just what the heck they're doing with all that dough, let's knock off this boring business stuff and go look for some oil.


Deep Waters Run Expensive

Oil exploration techniques are largely the same no matter how deep the waters you're exploring.  In seismic exploration, charges are exploded on the sea floor as boats tow hydrophones overhead, measuring echoes returned from the charges.  Data from the echoes are analyzed, giving a general idea of the stratigraphic landscape below.  Actually drilling for what lies beneath is a very different story.

Most people, thinking of offshore drilling, conjure up images of a standard drilling rig, its three or four feet sitting securely on the sea floor, the drill string snaking down through a few thousand feet of water to the seabed.  This drilling method has been in use since the beginning of the 20th century and is relatively mature, safe and inexpensive.  The Outer Continental Shelf leases the Bush administration is talking about opening up now are a very different kettle of oil.

Deep water drilling, whether for exploration or for producing, is a very specialized and expensive proposition.  There is currently a severe shortage  of drilling ships capable of drilling in the deep waters of the Gulf.  The dearth of deepwater rigs like the Enterprise-class Discover (pictured right) has driven the cost of drilling in deep water up from $150,000 a day just six years ago to over $600,000 a day now.

The explanation of the staggering price difference between shallow and deep water drilling can be found in the names.  The top picture is a standard drill "platform."  Once a proved reserve has been found, it can be towed into place, the legs extended to the sea floor and the drill string dropped to get working.

The Discover, by contrast, is a drill ship.  It has no legs or cables to hold it in place, and its fragile, 10,000 foot and more drill string must be preserved by a GPS-controlled dynamic positioning (DP) system, consisting of several motors and jets.  DP systems by themselves cost millions of dollars, one of the reasons why ultra-deep drillers cost $100 million last year.  Now, with increased demand, the price has jumped to half a billion.

Enterprise-class deep drillers aren't the sort of tool you can rent at a local home center, either.  Existing ships are booked solid for the next five years, a big reason why, no matter what Congress does or doesn't do this year, there will be no new oil flowing from OCS leases anytime soon.

So, why the rush to open those leases?


Drilling for Dollars

The Baker Institute study linked above showed that the Big Five don't spend their money exploring for oil.  One would expect, with world demand soaring, that they would increase the percentage of gross profits spent on exploration to increase supply--and revenues.  Instead, that percentage has remained in the mid-single digits for years.

What has increased, from 1 percent in 1993 to 30 percent in 2000, last year a whopping 55 percent of gross profits, is money paid out in dividends or spent repurchasing company stock.  As a result, the amount of oil reserves controlled by the large, investor-owned companies has declined drastically.

In the first three months of this year, Exxon Mobil Corp., the world's biggest publicly traded oil company, shelled out $8.8 billion on stock buybacks alone, compared with $5.5 billion on exploration and other capital projects.

ConocoPhillips has already told investors that its stock buybacks for April to June of this year will come to about $2.5 billion -- nine times what it spent on exploration.

Stock buybacks are common throughout corporate America, not just for Big Oil. They shrink the amount of stock on the open market, essentially increasing its value and giving individual shareholders a bigger stake in the company.

Limiting exploration limits supply, which is one way companies "maximize return to shareholders," the shareholders being, increasingly, themselves.  As ConocoPhillips spokesman Gary Russell said, "Could we spend $20 billion or $25 billion? Absolutely.Could we do it effectively, in a way that provides ultimate value to our shareholders? Probably not."


Sea of Green

With millions of acres leased and unexplored and exploration budgets flat, with deepwater drill ships booked solid, why in the name of Neptune are oil companies and their mouthpieces making new offshore drilling out to be the single most important issue facing the country?

Combined with the revised rules on classifying reserves discussed in yesterday's diary, those new leases offer opportunities to increase claimed reserves--and the bottom line for the companies and their shareholders--without expanding the oil supply at all.

The Democrats' response--that companies should first drill in the fields they currently hold--is overly simplistic, as it doesn't address the growing world demand.  Then again, neither does the Republican mantra of "Here, Now."

There's only one way to deal with our energy problem to the benefit of all Americans, not simply the oil companies and their shareholders, and that is to reduce demand.  Higher CAFE standards, better public transportation, more thoughtful use of our private autos, hybrid and all-electric vehicles.  T. Boone Pickens' ideas of shifting the electrical grid to renewables and using natural gas for fleet fuel is worth adopting, despite the downside of making T. Boone Pickens even richer.

These are the real solutions to our energy crisis.  "Drill Here, Drill Now," combined with "Trust us when we tell you what a proved reserve is" amount to little more than the Big Five getting their last, biggest Christmas present from an administration that's already been quite generous.


End notes:  I've added the "teaching" tag to these diaries so that they can be included in plf515's weekly roundup "DailyKos University."  I've certainly learned a lot in putting them together.

One aspect of the new regulations I didn't get to was the limitation of new technology in proving reserves without actual drilling in the deep Gulf.  One geologist I spoke with, a thirty-year veteran of both private industry and the Dept. of Interior, rejected the idea out of hand, citing the unpredictable variations in subsea strata.  The possibilities for false positives were too great to rely only on non-drilling methods.  Only one professional's opinion, but I found the arguments persuasive.


Just by coincidence, ExxonMobil posted its second-quarter profits about 15 minutes after I posted this diary.  $11.7 billion, a new record.  Who'da thunk it?

Originally posted to Crashing Vor on Thu Jul 31, 2008 at 05:15 AM PDT.

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Comment Preferences

  •  CV, thanks for keeping on top of this and (10+ / 0-)

    informing us.

    Where's your tip jar, dude?

    Never, never brave me, nor my fury tempt:
      Downy wings, but wroth they beat;
    Tempest even in reason's seat.

    by GreyHawk on Thu Jul 31, 2008 at 05:17:16 AM PDT

  •  Drop a tip in the ocean. (31+ / 0-)

    I've tried my best to figure out some way to relate pooties and oil and can't make it work.  Still, as requested, here's a picture of Biscuit.

  •  Great read, CV. Bookmarked. nt (3+ / 0-)

    SANKOFA(Akan) "One must return to the past in order to move forward."

    by MariaWr on Thu Jul 31, 2008 at 05:28:16 AM PDT

  •  Making Pickens richer not a downside... (4+ / 0-)

    Personally, I don't care how rich somebody is...

    I care how they got that way.

    If bringing renewable energy online and reducing our dependence on oil makes people richer -- even people who are already rich -- then bless their little hides.

    That's supposed to be the American Way as portrayed in dime novels of old.

    The best way to get off of oil is for people to see a buck (made or saved) in the alternatives.  

    Without that, the government's got to get us there, and we things like Boston's Big Dig, Chicago's Deep Tunnel, Denver International Airport, etc,etc, etc do not inspire confidence.

    Even one of the greatest success stories, the Apollo moon landings, was achieved only by turning the money spigot on full, and managed to kill a crew of astronauts along the way.

    Fortunately, there are scads of entrepeurs all over the country perfecting approaches to renewable energy.
    Petroleum is a rough patch we've got to get through.  The future, however, is looking mighty sunny.  A bit windy, too.

    Free speech? Yeah, I've heard of that. Have you?

    by dinotrac on Thu Jul 31, 2008 at 05:31:04 AM PDT

  •  Two possible scenarios NO ADDITIONAL OIL (2+ / 0-)
    Recommended by:
    Crashing Vor, gildareed

    Legislation prepared that enables the companies to reclassify and restate their actual holdings (and improve their worth/stock prices) is at the core of the present flurry of updating the oil law and statements on reserves.

    As you pointed out, the vast majority of oil profits have been dumped back into buybacks and dividends (making lots of money) rather than any serious effort of increasing the fosssil fuel supply or preparing the next generation of alternatives.

    Since (even before)1993 the trend has been hold prices firm and extract the maximum, even if that means reduced finds and avoiding investing in rigs, other ways of producing oil hydrocarbons except drilling.

     The oil business has been a mature,monopoly driven cartel business since 1929 and the division of US and world markets into sectors controlled by the largest companies at that time  (Achevarry, Scotland agreement).

    BP the "beyond petroluem company" that admits it is necessary to plan for the next big thing in energy spent 8 billion on alternatives and it was the biggest  presence.  None of the others cares a fig about denting their profit engines by putting competition to oil out there. Their response is minimal and PR fluff. That 8 billion is a "drop in the bucket" of the trillion dollar a year business.

    Until they are forced to. By politics or an uprising.

    The additional windfall in leasesthe oil lobbyists thru their Republican shills/bribed politicians are screaming for will enable the VALUE of the companies to go up, and possibly,if there is a find or two of some size, for them to withdraw and shut in wells that are producing now in favor of cheaper to produce (their costs) in the new areas. No added supply to the markets.

    Net result is no affecting (downward) the price for consumers, the royalty/investment  costs of production go down and they make more money.

    John McCain: a survivor, not a hero. Just ask his first wife. He had his chance to be a hero and blew it.

    by Pete Rock on Thu Jul 31, 2008 at 05:50:09 AM PDT

  •  Change the lease arrangements (3+ / 0-)
    Recommended by:
    enough already, Crashing Vor, red 83

    If the oil companies want to lease new areas - allow it to happen IF they accept new terms on the new leases as well as the old leases.

    New terms =
    1- all oil must be used for USA comsumption
    2- 35% of oil must be given to the US oil reservers at NO COST
    3- Lease must be used within 5 years or they expire
    4- All jobs must be to US citizens
    5- All companies involved must be US companies that pay taxes

    Any other suggestions???

    •  Opportunity for the Democrats to defang issue (2+ / 0-)
      Recommended by:
      enough already, Crashing Vor

      The Republican Bushmob mantra is the chant drilldrilldrill we are running out! regardless, a position of begging the oil companies to do something wonderful,like keep prices high while they nobly and heroically stick a few extra rigs here and there.

      There is no shortage of gasoline, in fact the US oil distribution networks are now because of dropping sales EXPORTING a million and a half barrels a day including refined crude items like gasoline in search of customers.

      Making this expanded drilling fight and $11 and half billion  this quarter in ExxonMobil profits a policy
      challenge:

       1) to reserve US resources for American citizens thru a better agreement,
       2) oppose the giveaway like Bush wants should be a fight we are making and must make.

      John McCain: a survivor, not a hero. Just ask his first wife. He had his chance to be a hero and blew it.

      by Pete Rock on Thu Jul 31, 2008 at 06:36:35 AM PDT

      [ Parent ]

  •  Listening to Obama yesterday in MO (3+ / 0-)
    Recommended by:
    marina, Crashing Vor, gildareed

    I was encouraged by his clear dismantling of the Drill America myth. Another excellent diary, CV.

    Injustice anywhere is a threat to justice everywhere. - Martin Luther King, Jr.

    by DWG on Thu Jul 31, 2008 at 06:07:18 AM PDT

  •  When you are able to profit on the .... (4+ / 0-)

    misery of others, something is not quite right.  To be able to charge present customers more because of projected lower profit margins in the future--how sweet it is.  
    Instead of buying back so much of their own stock, I think oil conglomerates should be required to channel 15% of profits into renewable, alternative energy.  Use or lose.  Let's see how fast they discover lucrative ways to cash in on energy from solar, wind, water, geothermal, biofuels (other than corn) when they stand to lose this part of profits unless they use them.  
    And just why are these conglomerates allowed to enjoy insane profits without fixing things they break along the way--like wetlands?

    Push for Voter-Owned Clean Elections: Be A Citizen Co-Sponsor

    by gildareed on Thu Jul 31, 2008 at 06:38:27 AM PDT

  •  Best diaries in some time (1+ / 0-)
    Recommended by:
    Crashing Vor

    Thanks for the 2 great diaries CV. These are two of the best I have read in a long time.

    You're an asshole - my wife

    by A Man Called Gloom on Thu Jul 31, 2008 at 07:19:31 AM PDT

    •  Now, that's a bit much. (2+ / 0-)

      It's been a heck of a learning curve for me.  

      Started with nothing more than the feeling that the hellbent push to open offshore waters had little to do with energy supply and a lot to do with maximizing profit potential while the petrophiles were still in power.

      Learning about the pending changes in SEC regs regarding reserves classification got the spidey sense tingling, too.

  •  Exxon's reserve replenishment is suffering... (1+ / 0-)
    Recommended by:
    Crashing Vor

    ...because of oil nationalization.

    Although many drilling ships are indeed booked solid, we're looking at doubling the number of drill ships in the next couple of years.

    A fair amount of the current restricted offshore area is also shallow water.

  •  What happens to the space where they drill? (1+ / 0-)
    Recommended by:
    Crashing Vor

    Is it closed off to navigation?

    I see the rush to drill taking up millions of acres of previously open land, and now ocean as well.

  •  ok, i'm slow...can you explain how the new (1+ / 0-)
    Recommended by:
    Crashing Vor

    definition is related to not drilling on presently leased lands?

    •  Same as with new leases. (1+ / 0-)

      Drilling exploration wells, even shallow-water fields, is more expensive than "proving" by non-drilling methods.   The new regs will give companies the chance to bump up their claimed proved reserves, making their stock more valuable.

      •  ok, i get how the new regs will make more money (1+ / 0-)
        Recommended by:
        Crashing Vor

        for them by expanding the pool of proved reserves.

        but right now there is maybe 2/3 of leased lands not active and so they should use those lands before even considering more off-shore drilling.

        so, this law would also increase the value of the inactive leased lands?

        i guess my question is would the new law somehow give them an argument to say that they can not drill the nonactive leased lands? some reason why we can not demand that those 2/3 lands be used before even thinking of off shore?

        The fact that they have so many lands not active is one of the best arguments to defeat this current craze to drill off shore. so, i am wondering if this new law would somehow wipe out our argument and help them?

        •  The "drill on lands already leased" (2+ / 0-)

          is good politics, but does little to expand energy supply, either.

          I liked it as a political response.  "You want to drill for oil.  Fine, here's a bunch of fields you've already got.  If you don't want 'em, I'll give 'em to your brother."

          It's my hope that the next administration makes bold moves to address the demand side of the equation.  Unless that changes, all the drilling in the world won't help (except help oil co. shareholders, of course).

          •  Stop imminent oil lease giveaway! info inside. . (1+ / 0-)
            Recommended by:
            Crashing Vor

            I should write a diary on this.  Imminent (2nd week in August) oil/gas drilling lease sale on BLM lands in NW Colorado (Glenwood Springs/Rifle area).

            Save the Roan Plateau website

            the 10 second bite is that BushCo/BLM wants to drill in an area proposed for wilderness designation (should be off-limits) that is currently surrounded by drilling points, we have the technology to drill diagonally and access the resources without trashing any more wildlands.

            go to the link above, there's a citizen petition with 17,000 signatures going in this week. that should tie them up for a bit. . .

            Rock the Earth and a few local groups have filed suit in district court to stop BLM from this egregious abuse of public lands:

            Rock the Earth lawsuit

  •  Glad this got rescued. (2+ / 0-)
    Recommended by:
    Crashing Vor, AshesAllFallDown

    I read part one, but wasn't around when you posted this one.  A genuinely valuable short short series, here.  Should be required reading.

  •  thanks for sharing your insight (1+ / 0-)
    Recommended by:
    Crashing Vor

    Very informative and well-written diaries.  Keep up the good work!

  •  a case of not drilling..... (0+ / 0-)

    I've been trying to understand the business of oil leases and royalties, but one case I stumbled on that seems instructive is the Point Thomson leases held by Exxon for three decades, on which Exxon drilled seven exploratory wells, on which Exxon got the go ahead on producing oil from six of these exploratory wells before 1982, six wells that Exxon then shut in 1982, and the leases on which Exxon has failed to drill a single additional well since.  Oh, yeah, Exxon filed two dozen development plans for Point Thomson, and then abandoned each one.  Then in 2006 when the State of Alaska revoked its leases for failing to meet its obligations to develop its Point Thomson leases, Exxon sued the State of Alaska for $800M in damages and is fighting to recover its leases.

    One reason so much is known about this case is that the history of these Exxon leases are detailed in the public record of Alaska DOI hearings, and then legal challenges to the findings of the Alaska agencies.

    One interesting thing about Point Thomson is that it abuts ANWR, and exploration of other parts of Point Thomson have hit oil that is believed based on geology to be primarily under ANWR.  Some want the Feds to lease that oil in ANWR in order to prevent the ANWR oil from being developed under Point Thomson leases.

    I think the issue is that Point Thomson is Alaska territory and not Federal so the leases are under Alaska lease terms which I think demand higher royalties than the typical Federal lease.  I'm wondering if Exxon is hoping to develop in ANWR and get the oil from its Point Thomson leases from ANWR under Federal royalty terms.  Note the principle is that you own whatever is under you land, and if the water flows to your land from your neighbor's land, the water is now yours to do whatever you want.  In most cases the entire region is placed under a single unified regime that divides the royalties among all land owners regardless of where the wells are located.

    But in any case, Point Thomson is all you need to google to find information on a clear case of Exxon failing to develop a sizable oil field in a span of three decades, during periods when the price was low, but also while the price of oil was very high.  This a case where the excuse "just because Exxon leases the tract doesn't mean that there is oil present" because Exxon discovered oil in six of seven exploratory wells and then shut in the wells in order to avoid being required to produce oil from those wells.

    The current governor of Alaska has the right attitude, paraphrasing "the oil under Alaskan state land belongs to the people of Alaska and not to the oil companies, and the oil companies produce the oil for the benefit of the people of Alaska."

    The oil and gas under Federal lands and waters be longs to We the People, is it OUR oil and not the oil of Exxon or BP or any other corporation, and the production of that oil and gas should be done to benefit We the People, not to the benefit of Exxon executives or stockholders.

    btw, I ran into this on a quest for information on how much oil and gas Exxon has produced from Federal lands and waters, and then the amount that Exxon paid We the People, and so I can estimate the economic profit Exxon took from We the People: how much Exxon charged We the People for OUR oil and gas over and above the price Exxon paid We the People for OUR oil.  We know for certain that Exxon's cost of production were well below $25 a barrel because Exxon produced oil from Federal lands when the market price of oil was below $15 a barrel circa 1999.

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