Pursuit of oil requires caution - East Valley Tribune: Business

Pursuit of oil requires caution

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Posted: Sunday, April 30, 2006 6:49 am | Updated: 3:26 pm, Fri Oct 7, 2011.

The best example of how energy company profits ought to work in a free market can be seen in the price of natural gas.

“That’s the one energy source in which we’re nowhere near our old highs,” said Barton Smith, an economist at the University of Houston.

“Natural gas prices are about half of what they were at their peak this past winter. The high price of natural gas has got everybody out there, everybody and their cousin are looking for natural gas. There is a natural gas exploration boom going on all over, including places like Wyoming and Colorado, and we already see new supply coming online. That gives you an idea the market can respond.”

But it’s different with oil, he said.

The geopolitical problems prevent companies from going after new oil in places such as Saudi Arabia, where operations need major maintenance and improvements.

“The Saudis can produce significantly more than they’re capable of producing right now if their oil fields were only taken care of,” Smith said. “But nobody is willing to invest in Saudi Arabia because of the fear that al-Qaida is going to do them in sooner or later. You’ve got problems in Nigeria, got a crazy man in Venezuela. You’ve got a small player that had some potential and that’s Chad, and all of a sudden we’ve got civil unrest in Chad and a government that was almost overthrown. American oil companies are throwing up their hands and saying ‘I quit.’ ”

While consumers notice the record earnings, they don’t don’t stop to recognize it could easily cost Exxon $1 billion to pursue just one small oil segment in the Gulf of Mexico because deepwater drilling rigs are expensive, Smith said.

“The scientific side of the story is so greatly improved over just 25 years ago,” he said. “These guys have really become good at figuring out where oil is and not drilling dry holes. The problem is its hard to figure out where you’re politically safe and where you can pop in a $5 billion investment and not lose it instantaneously by some military coup. Americans have had their hand in the sand for too long in not recognizing the percent of our domestic energy needs that we’re having to import has been growing rapidly since the late 1980s.”

The American Petroleum Institute said oil companies will spend nearly $89 billion this year for U.S. exploration and development projects.

Another $17 billion will go for production and $6.5 billion to refining.

The numbers are 8 percent higher than last year and 24 percent over 2004.

The industry spends 12.4 percent of its capital as a share of gross output on petroleum refining and oil and natural gas mining. Only utilities and mining are higher.

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