http://news.morningstar.com/news/DJ/M01/D17/- 200501170805DOWJONESDJONLINE000250.html
Big Oil Cos Slow New Exploration,OPEC To Dominate -Report
January 17, 2005 7:50 a.m.

LONDON -- Major oil companies are replacing dwindling reserves by
acquiring other oil companies instead of exploring for new fields, a
strategic shift with implications for global oil supplies,
investment bank Credit Suisse First Boston said in a report Monday.

Integrated oil companies are spending only 12% of their total
capital expenditures on finding new oil fields, down from nearly a
third in 1990, the report said. Integrated oil companies like U.S.
super-major ExxonMobil Corp (XOM) have upstream oil exploration and
pumping and downstream refining and marketing operations.

Instead, the sector has replaced more than half of its reserves in
the past five years through buying other companies or revising
estimates for how much oil it can squeeze out of its older fields
because of new drilling technology, the bank said. Fifteen years
ago, companies replenished nearly two-thirds of their reserves
through new finds.

In addition, with the world's biggest oil companies convinced
exploration is too costly and risky, the steady of growth of the
world's total oil reserves has fallen sharply, the bank said. Global
oil reserves are being replaced at a rate of 1.2% a year in the last
three years, compared to 2.3% over the last 20 years, even as oil
demand growth is hitting new records with China and India becoming
industrial powers, the bank said.

Outside OPEC, the picture is grimmer, with growth flat compared to
0.4% over the past 20 years.

New York Times
June 9, 2004
Got Oil? Now, Try to Find Tankers to Carry It
By HEATHER TIMMONS

LONDON, June 8 - Now that OPEC has agreed to raise its crude oil
production quotas in hopes of taming high and jittery oil prices,
industry experts are growing more concerned about both the capacity
and the security of oil tankers, the next link in the supply chain.

The world's tanker fleet is already stretched thin by robust demand
for oil, by looming deadlines for the phase-out of single-hull
tankers for safety and environmental reasons, and by lengthening
backlogs at the shipyards where new tankers are built. It is far from
clear, experts say, whether the existing fleet can handle the new
production that Saudi Arabia and others have promised in coming
months.
"There is just barely enough shipping capacity at these high
production levels," said Jeffrey Goetz, head of marine projects and
consulting at Poten & Partners, a New York-based energy and ocean
transport broker.

Charter rates for tankers, which can be even more volatile than oil
prices, have been driven up in recent weeks by the tight market.
Shipping costs may now add $3 a barrel to the price of oil delivered
to the United States from the Middle East, up from about $2 earlier
this year, analysts said.

http://www.nytimes.com

New York Times
April 26, 2005
Valero Makes Deal to Become Top Refiner
By JAD MOUAWAD

At a time when bottlenecks in the oil industry are helping to keep prices near record highs, Valero Energy, the largest independent refiner in the United States, agreed yesterday to buy its small rival Premcor in a cash-and-stock transaction valued at $6.9 billion that will create the nation's largest oil refiner.
The deal comes as refiners are straining to meet soaring demand for oil products like gasoline. Of late, higher prices have translated into record profits for an industry once dogged by overcapacity and low returns.
The acquisition is the latest in a string of takeovers by Valero, which is based in San Antonio, and illustrates the industry's challenges to grow under environmental regulations and state rules that make it difficult to build new refineries. No new refinery has been built in the United States since 1976.
According to the American Petroleum Institute, the number of refineries in the country has more than halved to 150, from a peak 25 years ago of more than 350. Simultaneously, capacity growth has failed to keep pace with demand. The shortfall of refined oil, close to four million barrels a day, has to be covered by imports.
For William E. Greehey, Valero's chief executive since 1979, the takeover is the biggest step so far in making Valero the most competitive refiner in the United States, pushing it beyond Exxon Mobil as the country's top refiner. Valero's stock has been the best performer in the Standard & Poor's 500 index this year. And yesterday, the shares got another push, though one rating agency downgraded the company's debt by one notch to the lowest investment grade.
Valero has been snapping up smaller rivals and expanding its capacity, spending about $8 billion buying 14 refineries since 1998. It has managed to outperform its peers, thanks to its ability to process cheaper, heavy oil into more lucrative higher-grade light products. With the acquisition of Premcor, Valero adds 4 refineries, bringing its total to 19, and bolsters its refining capacity by a third, to 3.3 million barrels a day.
Because refiners have been operating near full capacity recently, the difference between sour grades, as the industry calls heavy oil, and sweet, or light grades, has widened, generating higher returns for companies with heavy-oil capacity.
"This acquisition couldn't come at a better time," Mr. Greehey said. "Clearly, the refining industry has entered a new era. As a result, we believe that we will continue to see higher highs and higher lows for both sour crude oil discounts and product margins."
Premcor's refineries are in Port Arthur, Tex.; Memphis; Delaware City, Del.; and Lima, Ohio. Valero will be able to process about 1.8 million barrels a day of heavy oil. The companies will have assets worth $25 billion and yearly sales of $70 billion.
"This deal joins together the top two heavy-oil refiners in the United States," said Fadel Gheit, an energy analyst at Oppenheimer & Company.Valero is buying each barrel of capacity for $9,350 compared with a cost of $12,000 a barrel to build a new refinery, according to John Meloy, an analyst at Natexis Bleichroeder in New York.
"Today, you can buy refineries on the stock market far cheaper than you can build them," Mr. Meloy said. "They saw this coming, and made a bet on it and the bet has paid off. I would not say that we are in the last inning of this ballgame."
Analysts predicted more mergers could follow, with candidates including Frontier Oil and Tesoro Petroleum.
Valero will pay $3.5 billion in stock and $3.4 billion in cash for Premcor, which is based in Old Greenwich, Conn.. It will also assume $1.8 billion worth of Premcor debt and $800 million of cash.
Under the terms of the agreement, Premcor shareholders will get 0.99 Valero share, or $72.76 in cash, for each Premcor share, or a combination of both. The cash offer is 23 percent more than Premcor's closing price on Friday and a 20 percent premium on a recent 30-day trading average.
Share of both companies rose yesterday. Valero gained 1.1 percent, to $75.87 a share, and Premcor soared 18 percent, to $69.70 a share.
But rating agencies warned they might cut Valero's debt to junk status if the purchase went ahead. Yesterday, Standard & Poor's downgraded Valero by one rung to BBB-, one notch above junk, and put the company on negative watch; Fitch, which rates Valero BBB-, also put the company on credit watch with negative implications.
The acquisition is subject to approval by the Federal Trade Commission. It was endorsed by Premcor's board and still requires the approval of its shareholders.
Lehman Brothers advised Valero, whose name comes from the Mission San Antonio de Valero, better known as the Alamo. Morgan Stanley advised Premcor.

www.iht.com/articles/2005/10/27/business/rigs.php

International Herald Tribune, October 27, 2005

A global shortage of tools for the oil industry
By Jad Mouawad

Kim Bennetts, an executive at a Texas-based natural gas company, traveled over 7,000 miles this year to the heartland of China to look for the right rig to drill four wells in the Piceance Basin, a booming exploration area in western Colorado. That is how far he needed to go to get the basic tools of the trade. The shortfall in drilling rigs has become so acute that some executives blame it for slowing down new exploration projects.

"Sure, there's been some hue and cry," said Bennetts, the vice president for exploration and production at Presco. When the skeleton crew arrived, along with the rig, a local newspaper compared them to Chinese railroad laborers in the Rockies in the 19th century.

"But the Chinese are not displacing any Americans in terms of either technology or jobs, not when nearly every American rig and crew is spoken for," he said.

The oil and natural gas industry is awash in cash. Collectively, major oil companies are on track to earn more than $100 billion in profit this year. But even with all that money, energy executives cannot simply snap their fingers and bring on more supplies to meet strong demand. The bottleneck in drilling crews and rigs is only one piece in the giant jigsaw puzzle of infrastructure needed to produce energy.

Each piece that is needed to find, drill, pump, carry, refine and ship hydrocarbons has been stretched by years of underinvestment. Today, just about everything between the wellhead and the gas pump is in short supply.

Even before hurricanes sent energy supplies into a tailspin this year, the oil industry had been hard pressed to find drilling rigs and crews, petroleum engineers and geologists, contractors and suppliers, tankers, pipelines, storage tanks, refineries and import terminals.

"The supply side is stretched from an industry perspective," David O'Reilly, Chevron's chief executive officer, recently said. "It's a little reminiscent of the squeeze we had 25 years ago."

Today's shortages can for the most part be traced to the boom-and-bust cycle that has shaped the industry. Even with record prices now, industry executives still are haunted by the collapses of 1998 and 1986, when oil prices tumbled to $10 a barrel in a matter of weeks.

These oil crashes sent many smaller companies into bankruptcy and left a profound impression in the minds of today's managers. In response, they went on a massive diet, cutting costs, reducing research budgets, freezing investments, and ultimately seeking savings that led to the mega-mergers of the late 1990s. The trouble is that by the time oil prices recovered, a more nimble industry was struggling to keep up with high growth. By that time, the industry in the United States had a much smaller work force, the result of years of consolidation and big layoffs.

Meanwhile, the number of oil companies has shrunk sharply. For example, BP is what was created after various mergers of at least 10 separate companies since the 1950s, including British Petroleum, Amoco, Atlantic, Richfield, and Sinclair. Today's top 10 oil companies were formed by mergers of over 45 separate entities.

"The industry has gone through such a contraction that getting it to expand again is proving difficult," said Paul Horsnell, an analyst with Barclays Capital in London. "These companies are not equal to the sum of their parts. "

One problem common to most companies is finding new engineers and geologists to fill the shoes of an aging work force that is mostly expected to retire over the next decade.

In the United States, half of workers in the oil and gas industry are between the ages of 50 and 60 and will retire over the coming decade; only 15 percent are in their early 20s to mid-30s; the average age in the industry is 48.

"The industry is going to have a lot of challenges replacing all the graying people leaving in the next few years," said Mark Rubin, the executive director of the Society of Petroleum Engineers. The average age for oil engineers is 51.

Students have been scared away from petroleum engineering and geology studies by the oil industry's brutal layoffs and negative image, analysts said.

After reaching a peak of 11,000 in 1983, the number of students enrolled in petroleum engineering in the United States has dropped to 1,700, while the number of universities offering these programs halved to 17 over the same period, according to figures compiled by Lloyd Heinze, a professor at Texas Tech. Enrollment hit a low of 1,300 students in 1997.

According to the American Petroleum Institute, oil companies will need to hire more than 5,000 engineers and 1,300 geoscientists to meet their needs. Getting them will be challenging.

"The availability of talent across the globe is shrinking," said Navjot Singh, the global marketing manager for recruitment at Royal Dutch Shell, whose company said this year that it plans to recruit 1,000 petroleum engineers.

According to a recent study by Wood Mackenzie, an oil consultancy based in Edinburgh, oil companies have been finding much less oil in recent years than they are pumping out. Their reserve replacement level, which peaked in 2000, has slumped over the past three years as the world's top oil companies found only half the oil they produced, according to the study.

"The reserves exist," said Andrew Latham, vice president for upstream consulting at Wood Mackenzie, "but it's almost inconceivable that we will get full reserve replacement. There are simply not enough rigs available, not enough geologists."

One reason, he said, is that oil companies have simply not been investing enough in exploration. These budgets, he said, have shrunk by a third since 1998.

One thing that's not in short supply is cash. With oil prices averaging $41 a barrel in 2004 and $56 this year, oil companies have been enjoying record profits. But much of these gains have been going back to shareholders, either in terms of record high dividends or as share buybacks.

This year, the six largest oil companies are expected to buy back shares worth $40 billion, a 60 percent jump from last year, according to John S. Herold, a research firm. They will also pay out some $31 billion in dividends. Only 34 percent of their cash flow, or $54 billion, will be invested in their so-called upstream businesses - drilling wells, building pipelines, and bringing new supplies to the market.

"The concern now is that there will be a backlash against big oil companies who do not seem to be doing enough to bring new supplies and push oil prices down," said Arthur Smith, Herold's chief executive. "The industry basically downsized itself into trouble."

Dave Kimble

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