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Copyright © 2010 EIG. Unauthorized access or electronic forwarding, even for internal use, is prohibited. Vol. XLIX, No. 42, October 18, 2010

• Iran Trumps Iraq With • Peak Oil Demand Issues • Delays, Export Issues
New Reserves Hike, p2 Cloud Beijing’s Horizon, p3 Still Haunt Kashagan, p5

• Wall Street Buys Into • Summer Brings Gas • Marketview:

Conoco’s Big Promises, p3 Shortages for Argentina, p4 Money Worries, p8

Ban Lifted, But The Obama administration last week lifted the deepwater drilling moratorium implemented
in the wake of BP’s Macondo well blowout in April, providing a much-needed boost for the
Gloom Persists beleaguered US offshore industry. But the outlook for the deepwater Gulf of Mexico remains
In US Gulf decidedly gloomy. In the near term, the concern is that a de facto moratorium will continue
as the Interior Department remains cautious about granting drilling permits (PIW Sep.6,p1).
The Interior Department lifted the deepwater drilling ban for operators that comply with new rules
enacted Sep. 30 and demonstrate the availability of adequate blowout containment resources. But
most companies expect any recovery in Gulf of Mexico drilling to be slow, given likely permitting
delays, confusion regarding new regulations and the time needed for rig inspections.
Longer-term, executives say the accident has severely scarred the US offshore industry, and
that activity in the deepwater Gulf — the primary engine for US oil production growth — may
never recover to pre-Macondo levels. Speaking last week at the annual Oil & Money conference in
London organized by Energy Intelligence and the International Herald Tribune, Weatherford boss
Bernard Duroc-Danner said the Gulf of Mexico, the second-largest deepwater market in the world
after Brazil, would likely shrink to around the same size as the Norwegian or West African mar-
kets. Before Macondo, the deepwater Gulf typically saw 35-45 rigs in operation, but that could ultimately
fall to around 15 as companies deal with increased liabilities, tighter operating standards and higher costs.
Onshore plays such as shale gas and heavy oil will become more attractive as a consequence. “What will
happen to deepwater in general is that it will take more time, it will be more expensive, but will yield on
(Please turn to p.4)

Opec Starts Opec is taking comfort from a sustained period of oil price stability, but ministers meeting last
week in Vienna — where they stuck with existing production targets — also spoke of the growing
Fretting About risk of price volatility in the first quarter of next year. Downward pressure on oil prices could
2011 Demand emerge in the form of slowing economic growth in China and elsewhere in Asia, threatening
demand in the very economies that have underpinned the recovery so far. While economic recovery
is under way, there is still considerable concern about its magnitude and pace, Opec noted in the official
communique from the Oct. 14 meeting. “Everybody is working hard to avoid an economic slowdown,”
Saudi Arabian Oil Minister Ali Naimi said. “I hope we do not have a double-dip recession.” Oil minis-
ters from Algeria and Kuwait told PIW that softness of demand in 2011 is one of the issues the 12-mem-
ber producer group discussed behind closed doors. The issue is made more worrying in the context of
rampant overproduction by many Opec members — compliance was a concern going into the meeting,
but there is little incentive to throttle back output with oil prices above $80 per barrel (PIW Oct.11,p1).
There are upside price concerns as well, with Opec and analysts fixated on the risk of a
further slide in the US dollar. There is optimism, however, that any speculative price rally
would be capped at around $90/bbl, which is thought to be the pain threshold for many still-
fragile economies (p8). Washington is determined to defend a weaker dollar to keep US exports
competitive, analysts say, while real questions linger about the relative speed of the US recovery.

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Even though price hawks Algeria, Libya, Iran and Venezuela said they would not mind
higher prices, Opec’s de facto leader, Saudi Arabia, is unlikely to let prices stray too far above
$80/bbl. And with some 4 million barrels per day of spare capacity, Riyadh has the ability to
turn on the taps to tame any protracted rally. The North African producers are not as happy with
the current prices as their Mideast Gulf counterparts, as most of their imports are from the eurozone.
“The terms of trade are going against Opec,” the head of Libya’s Opec delegation, Shokri Ghanem,
told PIW. But Opec’s moderates — led by Saudi Arabia — have little appetite for prices leaving the
$70-$80/bbl range, one Opec insider noted: “Many economies simply cannot afford $90 oil.”
Iraq remains outside Opec’s quota system for now, but said it was committed to market
stability and did not expect its new wave of production capacity to upset the global economy,
even if global growth falters next year. Longer-term, the country wants to maximize revenues
over production (p2). Oil Minister Hussein al-Shahristani said he expects a minimum average of
300,000 b/d to be added to Iraq’s production in 2011 — an amount insufficient to materially impact the
global economy, analysts say. Markets will have to be more attentive when — and if — Iraq starts
adding 500,000 b/d to 1 million b/d in a year or so, but al-Shahristani tried to allay worries that
Baghdad would flood the market. “Our contractual capacity is 12 million b/d,” he said. “Those who
say Iraq is not going to produce that much — maybe they are right. We have not decided how much
we are going to produce. We have to wait and see what the demand will be in six years’ time.”

Iran Trumps It was inevitable that Iraq’s decision to hike its official oil reserves estimate to above that of
historic rival Iran would produce a response from Tehran — but surprising that it happened
Iraq With New so quickly. Exactly a week after Baghdad announced its revised estimate of 143.1 billion bar-
Reserves Hike rels, Iran trumped it with a new figure of 150.31 billion bbl, retaking second place within
Opec behind Saudi Arabia’s reserves of 260 billion bbl (PIW Oct.11,p1). The new figure was
taken from a report compiled over the past six months and “based on production information and
new discoveries,” Iranian Oil Minister Massoud Mirkazemi said, adding that a further revision of
the country’s reserves was likely to be made before the end of the Iranian year in March 2011. Iran
last upgraded reserves in 2003, when it raised its estimate from 100 billion bbl to 130 billion bbl,
citing large new onshore finds and improved recovery rates from some of its mature fields.
The new Iranian reserves number has created the impression that the two Mideast Gulf
neighbors have gotten themselves into a faintly ridiculous tit-for-tat squabble, and was greeted
with even more industry skepticism than the Iraqi estimate a week earlier. But even if there is
little credible scientific basis for Iran’s upgrade, the country is still making an important political
point to Baghdad, Washington and the rest of the world — that despite the contrast in recent
political and economic fortunes between Iran and Iraq, Tehran is not going to cede second place
in Opec’s pecking order without a fight. Following a US-led invasion, Iraq’s oil sector is now open
for international business, and its oil ministry is talking up ambitious plans for hiking output to 12 mil-
lion b/d. Thanks to US-led sanctions, meanwhile, Iran’s oil sector is off-limits to most international
investors, oil production is stagnating and gasoline imports have dried up (PIW Oct.4,p1). By raising
its reserves estimate above Iraq’s, Tehran is saying that none of this matters — it still has more oil.
The fundamental skepticism that surrounds both reserves estimates and production
forecasts from these countries was further underlined at last week’s Oil & Money conference
in London, at which a panel of Iraqi experts poured cold water on the country’s plan to raise
output from 2.5 million barrels per day to 12 million b/d by 2017. In seven years’ time, Iraqi
output was more likely to be around 4 million-5 million b/d, they agreed. This would put it
roughly on par with Iran, and may mean Tehran has less to fear from its old rival than it
thinks. Former Iraqi Oil Minister Issam Chalabi said Baghdad’s official production targets were
not based on a reasonable assessment of the country’s export facilities. “I will cut my hands off if
Iraq can provide 12 million b/d in export facilities,” Chalabi said, citing the complexity of building
a pipeline through Syria and maritime border issues with Iran as barriers to export expansion.
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Page 3 www.energyintel.com PIW© October 18, 2010

Wall Street Buys One year ago, Chief Executive Jim Mulva unveiled the “new and improved” ConocoPhillips —
a ConocoPhillips that would simultaneously rectify every ill causing analysts to withhold their
Into Conoco’s support for the company. The new strategy would be one in which Mulva would swallow Wall
Big Promises Street’s condemnation of his years of costly and ill-considered acquisitions and instead adopt a
strategy aimed at delivering the best of all worlds — starving the company of capital in order
to relieve its debt-laden balance sheet, aggressively raising the dividend and reinstating buy-
backs to the benefit of shareholders, leveraging additional funds through asset and equity
divestments, and growing both reserves and production organically (PIW Oct.12’09,p6).
Conoco has an initial two-year plan in which $10 billion from asset sales and roughly $9 billion from
the sale of its 20% stake in Lukoil will cover debt repayment and share repurchases, while annual
capital spending will fall by around 14% to $12 billion. This all translates into a production loss,
excluding its Lukoil holding, of roughly 100,000 barrels of oil equivalent per day, leaving Conoco
with output near 1.7 million boe/d. All production growth through 2014 will take place only on a per-
share basis, with output holding flat but buybacks reducing the number of outstanding shares.
Between 2014 and 2019, however, actual production should grow by an annual 2%-3% as the com-
pany moves 1 billion boe per year of resources into the proved reserves category, led by its oil sands
operations in Canada and the Australia Pacific LNG (APLNG) joint venture with Origin Energy.
Mulva’s new strategy addresses all the complaints and concerns voiced by Wall Street in
recent years, but one problem remains: the current Conoco management does not have the track
record to suggest it can deliver. Specifically, the idea that Conoco can grow reserves and production
at any rate, let alone 2%-3% per year over the long term, flies in the face of recent stagnation. That
lack of growth took place, moreover, against a background of aggressive capital spending, a far cry
from the capital starvation envisaged under the new plan (PIW Mar.29,p1). Since 2003, there has
been only one meaningful increase in Conoco’s reserves and production, courtesy of the $35.6 billion
acquisition of Burlington Resources at the end of 2005. Beyond that, production and reserves have either
flat-lined or fallen. Changes to reserves booking rules mean the company can now add its Canadian oil
sands, but doubts remain about APLNG, with Australia’s new generation of coalbed-methane-backed
LNG schemes struggling to ink the long-term sales contracts needed to justify the next stage of funding.
Another sticking point is the continuation of Mulva at the helm for the “next several
years” to see this transformation through, even as the lieutenants who faithfully executed his
previous strategy are shown the door (PIW Oct.11,p6). At best, the 64-year-old Mulva might
stay on through 2014, but beyond that — when the real work needs to be done to deliver organic
growth — he will be gone. So while Conoco recently ushered in an operations-focused team to
replace the ousted former management, uncertainty over the company’s future remains high.
Wall Street, however, has bought into the new vision — ever since the initial details of Conoco’s
strategic reversal were announced last October, its shares have outperformed the company’s peer
group, with analysts and investors happy to accept the short-term benefits of aggressive buybacks
and the highest dividend yield among the US majors. Conoco’s stock was trading around $48 per share
before the new strategy was unveiled, but has recently been trading above $60/share. This 29% rise com-
pares with a 23% increase for Chevron and a 2% decline for Exxon Mobil over the same period.

Peak Oil Demand China has done it again. New data released last week showed that crude imports jumped by
35% year-on-year last month to 5.69 million barrels per day, underlining the country’s contin-
Issues Cloud ued strong oil demand. The September import figure set a new monthly record and added
Beijing’s Horizon credibility to suggestions that demand in the world’s second-largest oil consumer could top 9
million b/d this year. But how high can Chinese oil demand go? Most analysts believe the coun-
try’s oil demand could reach 13 million-14 million b/d by 2020, and discussions have appar-
ently begun in Beijing on how to boost economic growth at a faster rate than energy demand
growth, and on how to cap oil consumption after 2020 (PIW Aug.30,p8). “China is resisting any
calls for a peak of absolute demand,” says Kang Wu of consultancy Facts Global Energy. “But inter-
nally they are searching for the possibility. They are searching where overall energy consumption
can peak.” By 2020, China will certainly account for a larger proportion of world oil demand — up
from 10% at present to almost 15%, according to estimates from Bernstein Research. But it is likely
to remain well behind developed countries in terms of energy intensity, and behind the global aver-
age in terms of per capita oil use — at a forecast per capita rate of just 3.6 bbl per year by 2020,
China would still be 25% below the projected global average. Per capita use in the US, by contrast, is
forecast to ease back to 20.7 bbl per year by 2020, suggesting China still has plenty of room to grow.
PIW© October 18, 2010 www.energyintel.com Page 4

Beijing has so far articulated no policy on oil demand, focusing instead on energy efficiency
and capping greenhouse gas emissions by cutting back on coal in power generation in favor of
natural gas, renewables and nuclear. But it seems highly unlikely China will sacrifice economic
growth for cleaner air. “If you reach 13 million b/d of oil consumption, will you cap supplies and pre-
vent economic growth? No, you will revisit policy,” says JP Morgan analyst Lawrence Eagles. Beijing
is struggling to reduce energy consumption per unit of GDP by 20% between 2005 and the end of
2010, and it’s still not clear that the country will meet that goal. China is also aiming to reduce carbon
dioxide emissions per unit of GDP by 40%-45% from 2005 levels by 2020.
Any effort to cap oil demand before 2020 seems unlikely. But Beijing could turn its attention
to oil between 2020 and 2030, driven not only by environmental imperatives, but also by concerns
about how runaway Chinese oil demand might put pressure on global oil supply, pushing up both
oil prices and the country’s import bill. If Chinese oil demand continues on its current trajectory, it
could hit as high as 18 million b/d, Facts’ Kang notes. “[But] it might be drastically lower — we see a lit-
tle over 14 million b/d as a practical forecast.” Official projections of future energy demand seem tied to
perceptions of future supply — the government has been increasingly bullish, for example, about future
gas demand following the progress made by state firms in securing LNG and pipeline gas imports.

(Continued from p.1)

Ban Lifted, But average less later,” Duroc-Danner told delegates. US Gulf wells should take 20%-25% longer to drill
due to new rules applying to blowout preventers and cementing. If such delays are repeated at a global
Gloom Persists level — a matter that lacks clarity for now — the impact on oil markets “could be huge,” International
In US Gulf Energy Agency Executive Director Nobuo Tanaka said (p6).
Risk perceptions will have an enormous impact on the Gulf of Mexico. The bosses of
independent producers with relatively weak balance sheets are unlikely to risk the com-
pany on the deepwater Gulf when a single incident of human error could wipe them out.
Independents account for 60% of US Gulf production, but over time they are likely to
sell out of the basin, executives say. David Williams, head of US driller Noble, said 15%-
20% of Gulf of Mexico operators would be wiped out by oil-spill response legislation passed
recently in the House of Representatives which would eliminate a liability cap on producers
for economic damages caused by spills (PIW Jul.12,p3).
The debate in Washington over oil-spill response legislation is far from over, however.
The so-called Clear Act has not yet passed the Senate, where members are taking a more
cautious approach, particularly in light of the weak US economy. Doom and gloom forecasts
about the bill’s impact on US Gulf oil output and energy security may help the industry’s
cause, which should be further assisted by the expected influx of pro-business Republicans after
Nov. 2 congressional elections. Executives cite a study by consultants PFC Energy that predicts
the loss of around 950 million barrels of oil equivalent of production over the next decade as an
indirect consequence of Macondo. Williams called for a “rational debate” in Washington, while
Duroc-Danner warned that it was impossible to “legislate human error out of the equation.”

Summer Brings Argentina’s gas shortages are becoming a year-round affair. Shortages during this year’s
Southern Hemisphere winter were particularly severe as freezing temperatures blanketed the
Gas Shortages country, but the problem is now spreading to the summer months as well. Argentina depends on
For Argentina natural gas for most of its electricity, and with the economy booming — official statistics indicate GDP
growth hit 11.9% in the second quarter — industrial demand is expected to be strong, while a typical
summer surge in demand is expected from power generators as air-conditioning use increases.
The shortfall means state energy firm Enarsa is looking at importing several LNG car-
goes during the summer, the first time it will have made anything other than sporadic spot
purchases outside the winter months. Argentina’s LNG imports this year are already out-
pacing government forecasts — at the start of the year, Enarsa said it had planned to take 12
cargoes in the year to March 2011, but by the start of winter in June, that forecast had risen to 14.
Now Enarsa says it plans to take about 20 deliveries by March, but that figure could still rise —
17 LNG shipments had already been unloaded at the country’s Bahia Blanca terminal as of the
end of September, with an 18th scheduled to dock on Oct. 9.
To date, Argentina has not entered into multiyear LNG supply contracts, sources say,
instead opting for spot purchases or ad hoc arrangements with suppliers such as Repsol
and Excelerate. Up until now, that has been a good strategy, since the country was only
Page 5 www.energyintel.com PIW© October 18, 2010

buying during the Northern Hemisphere summer, when prices are usually lower. But now
that Argentina needs LNG all year round, it will have to compete with richer Northern
Hemisphere buyers and can expect to pay higher prices. Now, at the start of the Northern
Hemisphere winter, LNG shippers are charging a $5 per million Btu premium over US benchmark
Henry Hub prices for October deliveries, compared with $2.50/MMBtu in recent months, says
Buenos Aires-based energy consultant Daniel Gerold.
Despite the country’s difficulties with gas supply, Buenos Aires is continuing to build
thermoelectric power plants designed to run on gas. This policy suggests that lack of strate-
gic vision remains the principal problem bedeviling the Argentinean energy sector — many
analysts blame the current gas crisis on the government’s 2003 decision to introduce price
controls, a move which discouraged upstream investment and has seen domestic gas pro-
duction dwindle (PIW Aug.16,p4). Enarsa plans to complete two new facilities by 2012, the 280
megawatt Brigadier Lopez plant and a 560 MW plant in Ensenada, without a guaranteed source
for gas. Many of the country’s thermoelectric plants already have to run on costlier diesel feed-
stock for at least part of the year, and Gerold estimates that Argentina will burn 1.6 million cubic
meters of diesel for power generation this year, a 64% year-on-year rise.
There are some indications that the government is waking up to the need to improve
its energy planning. The energy ministry now intends to sign long-term LNG supply deals, one
source says, and is increasing the number of staff working on strategic planning. Yet other
sources who know the ministry say the resources devoted to long-term planning remain insuffi-
cient, and argue that Enarsa cannot feasibly enter into long-term LNG contracts because it lacks
professionals capable of making multiyear demand forecasts.

Delays, Export Kazakhstan’s long-term aim of more than doubling oil output to 3.5 million barrels per day is being
jeopardized by chronic delays at the giant offshore Kashagan field, which, with estimated peak pro-
Issues Still duction of 1.5 million b/d, will provide the lion’s share of future growth. It is still not entirely clear
Haunt Kashagan when first oil from Kashagan will materialize — while the Eni-led consortium in charge of Phase 1
of the Caspian Sea project is sticking to an end-2012 target date, sources involved in the project tell
PIW production is unlikely to start before mid-2013, some eight years later than the original 2005
start-up date (PIW Oct.11,p8). Under the first phase, production will ramp up to 370,000 b/d, or possibly
450,000 b/d, while the second phase would see output creep up toward the 1 million b/d mark. But the
timing for Phase 2, which will be carried out by the North Caspian Operating Co. (NCOC), jointly led by
Royal Dutch Shell, state Kazmunaigas, Total, Exxon Mobil and Eni, is also out of kilter. Phase 2 had been
scheduled for start-up in 2015-16, but has been pushed back to 2018-19, according to Kazmunaigas.
NCOC, which is in the process of awarding initial contracts for Phase 2, says it is far too early to talk about
a third phase that would see production reach the targeted 1.5 million b/d plateau.
Kashagan, which with proven reserves of 7 billion-9 billion bbl is the world’s largest single
discovery of the past 40 years, is also one of the most challenging projects around. A multitude
of obstacles, including severe weather conditions and the presence in the field’s reservoirs of
deadly hydrogen sulfide, has contributed to a massive rise in capital costs, which for the first
phase alone are likely to exceed $40 billion. Higher costs mean that Kazmunaigas will need to raise
up to $1.7 billion per year over the next five years to meet its Kashagan cash calls. But as much as the
Kazakhs might complain about the consortium’s performance, there is little they can do to improve
matters other than urge NCOC to reduce costs, which it has partially done by slashing salaries and
other overheads. Kazmunaigas, which in 2008 doubled its stake in Kashagan to 18.5%, now has much
greater say in overseeing the project and also has the final word on the award of contracts.
The Kashagan partners also need to work out how production will be exported. The
Caspian is landlocked, so a variety of overland routes will be needed to transport Kazakh
crude. These include using existing pipelines running north to Russia and east to China, and also
using rail connections running to ports on the Black Sea. Another option is for the partners to
ship their volumes across the Caspian to Azerbaijan and feed them into the BP-operated Baku-
Tbilisi-Ceyhan pipeline — provided there is sufficient spare capacity.
Existing routes can handle Phase 1 production, but Phase 2 is likely to require the building of a
costly new transportation system. The likeliest option is that the consortium will build and finance a
pipeline linking Kashagan to a new Caspian Sea terminal at Kuryk. But much to the partners’ irritation,
Astana wants the pipeline to be owned 100% by Kazmunaigas, and also wants the 600,000 b/d Chevron-
led Tengizchevroil joint venture — still the country’s largest producer — to join the party.
PIW © October 18, 2010
What’s New Around the World
GENERAL
CORPORATE — Despite its current woes,
BP is likely to deliver the strongest production
growth of any of the leading international
majors from 2012, once it has completed its
$30 billion asset divestment program, accord-
ing to Martin Lovegrove, vice chairman of oil
and gas at investment bank Standard Chartered.
Lovegrove, a veteran mergers and acquisitions
advisor whose team is working with BP on its
asset sales, said all the majors should ideally be
undertaking similar “shrink to grow” strategies
by clearing out lower-return assets, but that man-
agement anxiety over falling production figures
was preventing this from happening (PIW
Aug.2,p2). As a result, only a few companies
forced to sell — such as BP — would actually
demonstrate the advantage of this approach.
Lovegrove told last week’s Oil & Money confer-
ence in London that the asset market was still
generally seeing “huge” spending by national oil
companies from Asia, particularly China, who
run the associated risk of overpaying. “Prices in
some deals are extraordinarily high, and there is
no doubt at all some of these players will look
back and say, ‘What were we doing?’” he said.
CORPORATE — Oil-field services and
equipment costs have almost returned to the
crippling levels seen in 2008 at the height of
the oil price spike, according to a senior exec-
utive with Italy’s Eni. “Prices fell for only a
very small period” after the economic crisis hit,
Claudio Descalzi, chief operating officer of the
company’s exploration and production division,
told PIW on the sidelines of last week’s Oil &
Money conference in London. “We reached
$37/bbl during the economic crisis [in December
2008], and during that period everybody forecast
a 15%-20% reduction in costs. But after a few
months, during July 2009, the oil price again
reached $65-$70/bbl and costs started increasing
again.” The upshot was that costs did not fall as
much as expected. “We think there has been a
reduction in costs of a few percent,” Descalzi
said, but costs were now “not far” from where
they were in 2007 and 2008 (PIW Jan.18,p2).
EUROPEAN UNION — Brussels has pro-
posed tougher Europe-wide rules on offshore
drilling in the wake of BP’s Macondo blowout
and oil spill in the US Gulf of Mexico. The pro-
posed legislation aims to plug gaps in existing
laws, which are largely determined by national
regulators in the 27-member bloc, and ensure
that existing best practices in individual countries
become the standard across the EU. Covering
areas such as drilling permits, offshore safety and
spill prevention and response, the new rules
would essentially enshrine the “polluter pays”
principle — ensuring oil companies have the
financial wherewithal to pay for any spill cleanup
— and extend EU oversight farther offshore. The
www.energyintel.com
European Commission said it plans to present
the proposals by summer 2011, after various
investigations into the Macondo disaster have
been completed. It is as yet unclear how the pro-
posals might affect non-EU Norway, which is
also looking to tighten its own already tough
drilling standards (PIW Jul.12,p7).
IEA — The International Energy Agency
(IEA) has shaken off its previous concerns
about the global economy and substantially
increased its projections for world oil
demand both this year and next (PIW
Sep.20,p6). Global oil demand is expected to
average 86.9 million b/d in 2010 and 88.2 mil-
lion b/d in 2011, the agency said in its latest
monthly oil market report, representing a
300,000 b/d upward revision for each year. The
revised numbers suggest a 2.2 million b/d
increase this year and 1.2 million b/d next. Over
this period, non-OECD countries are expected to
provide virtually all the growth, with demand
rising by 1.8 million b/d in 2010 and 1.5 million
b/d in 2011. In contrast, OECD demand is pro-
jected to grow by 310,000 b/d this year before
contracting by 290,000 b/d in 2011. The agency
also increased its third-quarter estimate for
world oil demand by 800,000 b/d, almost
600,000 b/d of it in the OECD, due to surpris-
ingly strong demand data for July and August.
(million b/d) 2009 2010 % Chg. 2011 % Chg.
World Demand 84.79 86.94 2.5% 88.16 1.4%
OECD 45.45 45.76 0.7 45.47 -0.6
North America 23.30 23.76 2.0 23.71 -0.2
Europe 14.49 14.33 -1.1 14.23 -0.7
Asia-Pacific 7.66 7.67 0.2 7.54 -1.7
Rest of World 39.35 41.18 4.7 42.68 3.7
World Supply* 85.06 86.94 2.2% 88.16 1.4%
Non-Opec† 51.69 52.60 1.8 53.10 1.0
Opec NGLs 4.65 5.16 11.0 5.79 12.2
Opec Call§ 28.45 29.18 2.6 29.27 0.3
* PIW calculates future world supply from non-Opec plus Opec
NGLs plus Opec Call and Stock Change. IEA does not project
future Opec supply. †Angola joined Opec as of Jan. 1, 2007,
and Ecuador rejoined Dec. 5, 2007. Non-Opec supply for 2008
has been adjusted to exclude Angola and Ecuador for compari-
son purposes and includes Indonesia, which left Opec Jan. 1,
2009. §Call on Opec is global demand minus non-Opec supply
and Opec NGLs, not an IEA Opec supply projection. Source:
International Energy Agency.
PEOPLE — Ray Irani is to step down as
chief executive of US major Occidental at the
company’s May 2011 shareholder meeting,
and will be replaced by current President
and Chief Operating Officer Stephen
Chazen. The move follows increasing share-
holder irritation with Irani’s sector-leading com-
pensation package and, given that he turned 75
at the start of this year, the company’s apparent
lack of any succession planning (PIW Oct.4,p3).
Reflecting this, Occidental also announced sig-
nificant changes in its long-term executive com-
pensation program that would substantially
reduce overall compensation levels to put the
company “more in line with its peers.” Irani will
Page 6
retain the role of chairman, where he will focus
on the company’s Mideast operations and inter-
national business development.
COUNTRIES
GABON — The government has once again
postponed its long-awaited licensing round,
this time blaming the Macondo disaster in the
US, environmental concerns and rising indus-
try costs. The round, the first since 1999, was
expected to inject new life into the country’s
upstream sector with the offer of subsalt and
deepwater acreage. Mines Minister Julien
Nkoghe Bekale said the delay was necessary to
minimize risks and ensure compliance with inter-
national environmental standards given that
exploration costs and environmental concerns
had changed since the Macondo blowout and oil
spill in the Gulf of Mexico. The auction was
originally due to kick off in May, but was post-
poned until October. No new date has been set.
INDONESIA — Japan’s Inpex and France’s
Total have signed a heads of agreement to
supply LNG from Indonesia’s Bontang pro-
ject to a regasification terminal in West Java.
As operator of the Mahakam production sharing
contract that supplies Bontang, Inpex said the
firms had agreed to sell 11.75 million tons of
LNG to Nusantara Regas, which will operate the
receiving terminal on the island. Deliveries will
start in 2012 for 10 years and a binding sales
agreement is expected to be signed next year.
The announcement came just a day after Golar
Energy said it had been awarded a contract by
Nusantara, a joint venture between Pertamina
and the country’s state distributor, Perusahaan
Gas Negara, to supply the floating, storage and
regasification unit for the project.
LIBYA — State-owned National Oil Corp.
(NOC) is now targeting production capacity of
some 2.2 million-2.3 million b/d by 2015, against
an earlier target of 3 million b/d. NOC head
Shokri Ghanem explained that Libya’s ambitions
have been dampened by the drop in global oil
demand, Opec output policy and domestic bud-
getary constraints. Industry sources earlier told
PIW, however, that decline rates at the country’s
older state-run fields were also putting the squeeze
on output (PIW Jul.5,p3). High contracting costs
have meanwhile prompted NOC to rethink plans
to revamp its old Marsa el-Brega LNG plant,
Ghanem said. The venture, run by state Sirte Oil
Co. with partner Royal Dutch Shell, has failed to
gain traction since its launch in 2005, in part also
because of the absence of gas discoveries by Shell,
now testing its fourth onshore Sirte Basin well after
striking out at the first three. More broadly, a gen-
eral lack of exploration success has seen a number
of companies exit Epsa-4 acreage awarded in
2005, among them Chevron, Occidental,
Australia’s Woodside and the UK’s BG.
Page 7 www.energyintel.com PIW © October 18, 2010
MALAYSIA — State-owned Petronas is RUSSIA — In a sign that Novatek is win- (PIW Jul.25’05,p1). Sino-US ties have
expected to raise more than $4 billion when it ning more government support for its improved under President Barack Obama,
floats its Petronas Chemicals arm on the LNG project than even state giant paving the way for more bilateral invest-
Kuala Lumpur stock exchange in November, Gazprom, Prime Minister Vladimir Putin ment. But with a highly charged political
in what is set to be the country’s biggest-ever has backed the independent gas produc- environment in Washington, where lawmak-
initial public offering (IPO). The IPO is er’s request for a favorable tax regime on ers recently took measures to address
expected to be launched on Nov. 12, following the gas-rich Yamal Peninsula. Putin asked China’s controversial currency policies, the
the release of a draft Petronas Chemicals federal and local authorities to cooperate on chances for a backlash can’t be entirely dis-
prospectus last month. A major player in implementing the plan for Yamal LNG, counted — especially with US congressional
Southeast Asia, the company churned out 9.7 which backs calls for a zero mineral extrac- elections slated for Nov. 2. Under the deal,
million tons of petrochemical products in the tion tax on fields producing LNG for 12 CNOOC will pay $1.08 billion in cash for
year to March, accounting for 6% of its parent years, or until a certain cumulative output is the stake in Chesapeake’s 600,000 acres in
company’s revenues. Up to 31% of Petronas reached. Novatek is preparing to start devel- the Eagle Ford shale, and will also fund 75%
Chemicals — which embraces 22 entities, not all oping its 46 Tcf South Tambei field on of the US independent’s share of drilling and
wholly owned — will be floated in line with the Yamal as the main source of feedstock for a completion costs up to another $1.08 billion,
government’s plans for boosting liquidity on the planned 16 million ton/yr LNG plant. which should last until the end of 2012.
stock market. More Asian energy IPOs are in the Novatek boss Leonid Mikhelson said inter-
works, with Australian junior Peak Oil and Gas national companies may be brought in for a
last week launching the biggest offering this year second stage of the project (PIW Jul.19,p7). UNITED STATES — Biofuels are poised
by an Australian energy company as it seeks to Gazprom failed to receive similar tax breaks to displace more of the country’s gasoline
raise A$55 million (US$54.83 million) to finance on production of pipeline gas from its own consumption after the federal
its Philippines Cadlao redevelopment project. Yamal developments. Environmental Protection Agency cleared
Karoon Gas Australia could also list its South the way for gasoline to be blended with up
American business on the Brazilian stock market to 50% more ethanol for vehicles made
by the end of the month. UNITED STATES — Five years after since the 2007 model year. The EPA
political pressure from Washington approved a request from a coalition of
prompted China National Offshore Oil ethanol producers to boost the amount of
RUSSIA — Crude exports via the Transneft Corp. (CNOOC) to abandon its bid for ethanol in a gallon of gasoline to up to 15%
pipeline system to destinations outside the Unocal, the Chinese state oil giant is test- from the current 10% (PIW Jan.4,p5). The
former Soviet Union dropped by 5% to ing American waters again, this time with agency is expected to decide in December on
3.703 million b/d in September from 3.898 a planned $2.16 billion purchase of a 33% whether the fuel, known as E15, can be used
million b/d in August due to maintenance stake in gas producer Chesapeake’s Eagle in cars built from 2001 to 2006. Federal law
and higher export duties (PIW Sep.13,p7). Ford shale acreage in southern Texas. requires downstream oil companies to blend
The total was also 2.2% less than the 3.788 This deal is decidedly less ambitious than the 15 billion gallons of corn-based ethanol a
million b/d exported in September 2009 and $18.5 billion Unocal bid, and most analysts year into the gasoline supply by 2015, up
resulted from lower shipments via the coun- do not foresee similar regulatory problems from 12 billion gallons this year.
try’s flagship Baltic port of Primorsk, where
Transneft had moved maintenance to
September from August. Kazakh producers Iraq in Bilateral Talks on Bai Hassan Oil Deal
also stopped using Primorsk last month, possi-
bly because Kazakh exports resumed via The Iraqi oil ministry is in advanced talks Tuba, Nasiriyah and the northern fields
Ukraine, although shipments out of the with an international oil company (IOC) for of Kirkuk and Bai Hassan, he noted.
Ukrainian Black Sea port of Yuzhny also a deal to develop the northern Bai Hassan oil The 11 service contracts lined up with
slipped as producers abandoned the outlet field, with interest also shown in the giant IOCs under the oil licensing rounds would
because of poor economics. Shipments via the East Baghdad field, the country’s oil minis- provide a minimum average of 300,000 b/d
Druzhba pipeline to Europe increased last ter, Hussein al-Shahristani, has told PIW. of extra capacity during 2011, which would
month on the back of higher volumes to Poland Five oil fields that went unawarded in allow for exports of 2.2 million-2.3 million
and Hungary, but transshipments from Iraq’s two licensing rounds last year — Bai b/d, al-Shahristani said. By the end of next
Kazakhstan and Azerbaijan fell to 393,000 b/d Hassan, East Baghdad, Kirkuk, Middle year, output capacity is expected to rise by
from 469,000 b/d in August. Furat and Eastern — are all up for grabs, al- about 500,000 b/d to 3 million b/d, he said.
Shahristani said, and Iraq is prepared to With regard to Iraq’s new 143.1 billion
Port/Region Sep.’10 Aug.’10 Sep.’09
Black Sea Total† 647 849 957
negotiate with any firms that prequalified bbl official reserves estimate, the minister
Novorossiysk 545 646 736 for the tenders, provided they are willing to said the new number partly reflected the
Tuapse 98 108 85 accept Baghdad’s maximum payment terms. official production target of 12 million b/d
Baltic Sea‡ 1,343 1,396 1,490 “They’ve come for the Bai Hassan field, to be reached by 2017 (PIW Oct.11,p1).
Kozmino 319 306 0 but they have not made a formal offer,” he The overall recovery rate for the new
Total Seaborne 2,309 2,551 2,447 said, but added that the firm had agreed, in reserves was an average 34%, he added.
Druzhba Pipeline 1,126 1,084 998
discussions, to accept Baghdad’s fee pay- Industry sources said Iraq previously used a
Eastern Germany 354 344 320
Poland 378 384 362
ment of $4/bbl to develop the 2.4 billion bbl conservative estimate of 25%-30%.
Czech Republic 102 95 113 field. He declined to identify the company. Final agreement on Baghdad’s multi-
Slovakia 123 113 56 Baghdad was not planning any fur- billion dollar gas deal with Royal Dutch
Hungary 151 140 148 ther licensing rounds for oil, the minister Shell was “very near,” al-Shahristani said,
Bosnia & Herz. 17 9 0 said. The 12 million b/d of production adding that the Iraqi cabinet was expected
Total Crude Exports§* 3,703 3,898 3,788 capacity secured during last year’s ten- to give its seal of approval shortly (PIW
In ‘000 b/d. † Includes volumes loaded at Yuzhny (Pivdenny). ‡ ders was more than enough to cover Oct.11,p6). But the scope of the project had
Includes volumes from Primorsk, Butinge, and Gdansk but does Iraq’s needs “for some years to come,” been narrowed again, he said, with “techni-
not include rail shipments to Ventspils or Scandinavia. §
Including exports by rail (183,000 b/d in Sep. ‘10; 174,000 b/d he said. Under its own steam, Iraq was cal problems” prompting state South Gas
in Aug. ‘10; 193,000 b/d in Sep. ‘09) * Including oil transferred moving ahead on the expansion of the Co. to remove the Majnoon oil field from
from the Transneft system to the CPC pipeline (85,000 b/d in
Sep. ‘10; 89,000 b/d in Aug. ‘10; 88,000 b/d in Sep. ‘09)
southern oil fields of Subba-Luhais, the draft contract.
PIW © October 18, 2010 www.energyintel.com Page 8

Marketview PIW Market Indicators

($/barrel) Oct. 11- Oct. 4- Sep. 13-

Money Worries itself felt in oil markets through two main

mechanisms, exerting contradictory forces.
Spot Crude
Opec Basket
Oct. 13 Oct. 8 Sep. 17
$80.04 $80.52 $75.28
UK Brent (Dtd.) 83.43 84.09 78.57
On the fundamentals front, competitive cur- US WTI (Cushing) 82.31 82.37 75.51
NEW YORK — Brazilian Finance Minister rency devaluations and rising trade barriers Louisiana Lt. Swt. 85.84 85.97 80.54
Guido Mantega made headlines late last month would lead to slower growth in international Nigeria Bonny Lt. 84.88 85.61 80.24
when he declared that the world was in the trade, if not outright contraction, which in Dubai Fateh 80.72 80.63 75.96
US Mars 81.14 81.55 75.82
“midst of an international currency war,” a turn would undermine global economic
Russia Urals (NWE) 82.43 83.15 78.43
conflict which finance ministers and central growth. This would contribute to slower oil Oman 80.97 80.44 76.24
bankers conspicuously failed to Prompt Crude Oil Prices demand growth and down- Indonesia Minas 83.85 83.88 78.67
resolve when they gathered for ($/bbl)
90
ward pressure on crude prices. Crude Futures
the International Monetary 90 Nymex
Nymex WTI WTI From a financial perspec- Brent 1st (ICE) $83.95 $84.13 $78.76
ICE
ICE Brent
Brent
Fund’s annual meeting in DME
DME OmanOman tive, however, if quantitative Brent 2nd (ICE) 84.30 84.38 79.01
85
Washington a week or so later. 85 easing by the Fed leads to a B-wave (ICE) 83.88 84.07 78.78
The key protagonists in the substantial depreciation in the WTI 1st (Nymex) 82.30 82.37 75.65
WTI 2nd (Nymex) 83.07 83.11 76.73
emerging currency clash are 8080 US dollar relative to other
Oman 1st (DME) 81.15 81.17 76.42
China and the US. The US major currencies, this should Oman 2nd (DME) 81.70 81.83 76.86
Federal Reserve has resorted to 7575 result in upward pressure on
Forward Spreads
quantitative easing — the injec- crude prices given the well-
Brent (1st-Dtd.) +$0.52 +$0.04 +$0.19
tion of new money into the 7070 established inverse relationship Brent (2nd-1st) +0.35 +0.25 +0.25
banking system through pur- between the two. Put simply, WTI (2nd-1st) +0.77 +0.74 +1.08
chases of government bonds by 6565 because oil is priced in dollars, WTI (3rd-2nd) +0.83 +0.74 +1.26
Mar Apr May Jun Jul. Jul Aug Sep.Sep Oct
the central bank — in an Mar. May when the US currency falls in Oman (2nd-1st) +0.55 +0.66 +0.44
attempt to increase inflationary expectations, value, the rest of the world has to spend less of Oman (3rd-2nd) +0.50 +0.51 +0.52
bolster domestic demand and push down the their currency to buy the same amount of oil, Grade Differentials
value of the dollar. The Fed is currently consid- which encourages demand. WTI-Brent (1st) -$1.65 -$1.76 -$3.11
WTI-LLS -3.53 -3.60 -5.03
ering a second, so-called “QE2,” round of Quantitative easing should also lead to
WTI-Mars +1.17 +0.82 -0.31
quantitative easing (PIW Oct.4,p8). increased demand for paper barrels, since Brent-Urals NWE +1.00 +0.94 +0.14
At the same time, China Nymex WTI crude has become more of a Brent (Dtd.)-Bonny Lt. -1.45 -1.52 -1.67
has been working to keep its ($/bbl) Forward Curves financial asset over the past
Term Crude Formulas
currency, the renminbi, 9595 decade, with commodity index Arab Lt.-US (cif) $83.31 $83.37 $76.41
weak — and its exports funds and exchange-traded Arab Lt.-Europe (Med) 82.88 83.07 76.33
cheap and imports expensive 9090 funds marketed as a hedge Arab Lt.-Far East (fob) 80.35 80.04 75.45
— by buying US dollars and against inflation. Nigeria Bonny Lt. 85.03 85.69 80.42
other currencies. China’s 8585 In the short term, financial Arab Light Gross Product Worth
foreign exchange reserves factors are likely to continue to Rotterdam $84.98 $84.23 $78.73
reached a staggering $2.45 8080 dominate oil markets. Since US Gulf Coast 83.75 83.71 77.67
Singapore 82.73 81.84 76.72
trillion at the end of June, of Oct.
Oct. 13 13
Fed Chairman Ben Bernanke
which about 60%-65% was 7575 Last
Last MonthMonth first suggested the possibility of Gross Product Worth & Margins
YearAgo Ago
thought to be in dollars. Year
QE2, front-month Nymex Rotterdam
UK Brent GPW $87.26 $86.20 $81.05
The US House of 70Nov.’10 70
Nov.'10 Nov.'11
Nov.’11 Nov.'
Nov.’12 1 2 Nov.'13 crude futures have climbed
UK Brent Margin +3.34 +1.65 +2.02
Representatives responded in Contract Delivery Month from the low $70s per barrel to US Gulf Coast
late September by passing legislation that break through the top end of their recent $70- Mars GPW 82.18 82.16 76.23
would allow Washington to level the play- $80/bbl trading range, despite OECD commer- Mars Margin +0.94 +0.51 +0.30
ing field with countries such as China that cial oil inventories being near record levels. Singapore
undervalue their currencies, by imposing But fundamental factors could regain con- Oman GPW 82.77 82.01 76.99
Oman Margin +1.14 +0.91 +0.07
countervailing duties on imports. The bipar- trol in the longer term if world economies stag- US Nymex
tisan bill passed by a wide margin, but a ger under the pressure of a currency war, WTI 3-2-1 Crack +$9.88 +$9.24 +$8.62
Senate version will have to wait until after putting downward pressure on oil prices — as
Refined Products
midterm elections in November. occurred in the second half of 2008, when the Rotterdam ($/ton)
A full-fledged currency war would make global financial crisis took hold in earnest. Eurobob Gasoline $766.83 $748.20 $715.40
Gas Oil (0.1%) 723.17 726.05 677.30
Fuel Oil (1%) 470.50 472.80 457.10
US Gulf Coast (¢/gal)
RBOB Gasoline 213.13¢ 212.17¢ 198.07¢
Welcome to SMARTER - FASTER Distillate Fuel (0.2%) 222.49 223.54 206.81
Smarter, Faster Access to Powerful Thinking =
new.energyintel.com Smarter, Faster Decision-Making
Fuel Oil (0.7%, $/bbl) $76.43 $77.06 $71.16
Singapore ($/bbl)
Naphtha $83.55 $81.06 $74.43
Gas Oil (0.5%) 93.37 93.12 87.38
CUSTOMIZABLE Fuel Oil (3.5%, $/ton) 476.04 477.15 447.13
What you want. Where you want it.
When you want it. Latest week’s data are preliminary. For GPW and mar-
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