Friday, September 26, 2008

Hockey Stick Thinking

In the late 70’s, the oil industry used an optimistic oil price forecast when calculating the economics of a new oil development. They assumed the price of oil, then a little over $10 per barrel, would show a slight increase for several years, but after that, the price would increase dramatically, maybe 4 or 5 times. This pricing scenario was to become known as “The Hockey Stick” because the shape of the curve over time looked like that particular sporting implement. The hockey stick price projection, which everyone thought was the absolute truth, made even dog projects look good.

Of course, we now know that the price of oil did not increase dramatically in the 80’s. There was a period in the early 80’s where the price seemed to follow the prediction (there was that little problem with Iran), but by the mid 80’s, there was an oil glut and the price had fallen. The result was that oil companies became less and less profitable as their predictions of riches failed to come true. This resulted in a severe contraction of the industry. Lay offs and “early retirement packages” followed as companies downsized. Small service companies went out of business. Young people saw their parents out of work and did not follow them into the oil industry. Enrollments in reservoir engineering and geology curriculums dwindled to almost nothing at some universities.

Oil companies adjusted and revised their oil price predictions to be more of a flat line. In other words, they no longer assumed that the price of oil was predestined to increase every year. This made their economic evaluations much more conservative. The result was that only a worthy few projects made it through to the annual budget. But these projects made money and lived up to their economic predictions. Oil company profits increased. And it was a good thing because the industry was beginning to venture out into deeper water and the technology for that deeper water was not going to be cheap. The development costs were going to be much higher and mistakes made during project economic evaluation could have disastrous effects. Conservatism was the best way to proceed unless you wanted to break the company.

Even with today’s oil price over $100 per barrel, I doubt that you can find an oil company executive that would use those figures in his economic evaluation. He knows from past history that the price will not hold at those levels.

It looks as if the housing and mortgage industry got caught in their own version of Hockey Stick thinking. They assumed that housing would always increase in price. No one, it seems, took a step back and considered “What if?” Had they done so, or had they taken a lesson from the oil industry, we might not be in this situation today.

Tuesday, September 23, 2008

Ike Damage Report

The MMS reports the following:

Minerals Management Service (MMS) reports that as of September 17, 2008, 49 of the 3,800 offshore oil and gas production platforms in the Gulf of Mexico have been destroyed by Hurricane Ike. Currently, MMS has no information on whether any of the destroyed platforms will be rebuilt by any operator. Oil and gas operators are also reporting damage to offshore infrastructure other than destruction. These reports are being analyzed by MMS and damage statistics will be released next week.

Initial estimates are that the 49 destroyed production platforms produced a total of 13,000 barrels of oil per day and 84 million cubic feet of gas per day.

Additional damage reported includes three jack-up and one platform drilling rigs destroyed and one jack-up drilling rig with extensive damage.

On-going reports indicate that there are five gas transmission pipeline systems with damage. The full extent of damage will not be available until operators are able to test the systems. MMS is analyzing the impact that this may have on resuming production.

Production Statistics are here

The Old Ways

Like most people of my generation, my parents grew up during the Great Depression. Grandpa was a farmer up in Maine and NH until Grandma put her foot down. I have a picture of my father and his siblings on the old farm. They were dressed in burlap sack cloth - literally. Playtime for them was jumping on cow flops in the field. (If you don't know what those are, you've got to get more fresh air) Dad joined the Navy (before the war) and some of the money he sent home built an indoor flush toilet in my grandparents house. It was tucked away under the stairway. When I got older, I had to duck my head to take a pee. When we would visit my cousins in Maine for Thanksgiving, we had to walk out back to the privy. It was cold in Maine in November and you didn't linger over the morning paper. To say they hard a hard childhood followed by war is an understatement.

Dad never had a credit card. He paid cash for everything. If you wanted something, you saved your money until you had the purchase price. Or you developed some skills and built it yourself. He built three houses during his lifetime. Credit was something you just didn't do. He finally got a credit card in his old age when he found he needed one to get a hotel room or a rental car. The balance was always paid off immediately. He was a Yankee's Yankee. He had no patience for idiots. The best reliance was self-reliance. I suspect his experience during the Depression was the cause of this philosophy.

I wonder what he would think about the latest economic debacle. I can't imagine he'd be too pleased about having to bail out a bunch of people who mortgaged themselves to the hilt or granting a pass to the fat cats who got rich off the situation.

Monday, September 22, 2008

Comprehensive American Energy Security and Taxpayer Protection Act

It was overshadowed by the recent problems on Wall Street, but your congress critters passed the Comprehensive American Energy Security and Taxpayer Protection Act last week. It’s now on its way to the Senate. The Dims want you to believe that it provides a basis for an energy policy. Lets take a look.....

It purports to open more offshore areas to drilling. The gotcha is that these areas must be 100 miles or more offshore. There is still no drilling allowed within 50 miles of the shore and permission from the coastal State is required to drill between 50 and 100 miles offshore. And the Eastern Gulf of Mexico, which has the best potential, is still entirely off limits (thank you, Florida). The areas opened up will be in deep water and will be expensive to develop. They won’t be attractive to oil companies. And the states have no incentive to allow drilling off their coast because they will not get a share of any oil revenues.

It eliminates a royalty relief provision that was enacted several years ago to provide incentive to develop deep water and drilling for deep gas. It means the government is reneging on an agreement they made with industry several years ago. If there is one thing oil companies do not like, it’s a country that changes their agreements on a whim. It puts the USA on the same level as a third world dictatorship. Eliminating royalty relief will stifle high-risk, high cost developments in the Gulf of Mexico.

It mandates that 15% of electricity must be generated by renewable means by 2020. This sounds like a good idea, but who is going to pay if the electricity you get from wind farms costs more. Ummmmm, you!

It requires selling oil from the Strategic Petroleum Reserve to reduce the price of gasoline. Those of us who sat in gas lines in the 70’s remember that the SPR was built to provide a reserve of oil that could be used in times of national emergency (say, a war, for example) when certain foreign producers may not want to sell oil to us. It was not to be used to manipulate the price at the pump. The word “Strategic” should be a clue.

Oil companies have a choice where they explore for oil. They can easily shift their money to overseas opportunities where they will be welcomed. If you like the idea of more jobs going overseas, increasing our dependence on foreign oil and higher cost electricity, then urge your Senator to vote for this bill. If you want energy independence from foreign imports, tell them to vote against this bill.

Wednesday, September 17, 2008

Ike Damage Report

Early overflights after Ike indicate that 28 platforms in the GOM have been totally destroyed. (That's 28 out of 3,800,folks). These platforms account for about 11,000 BOPD and 82 MMSCFD of natural gas.

More information will be forthcoming as platform inspections take place.

Tuesday, September 16, 2008


Hurricane Ike shuts in production in the Gulf of Mexico and refineries across Texas and Louisiana. Nigerian rebels attack Shell facilities. Major business failures on Wall Street.

The price of oil is $93.

Go figure.

Thursday, September 11, 2008

GOM Production Statistics

Ike evacuation is underway and the GOM is shutting in.

Where I Was Then

I was working in the 50 story building owned by a major oil company in New Orleans. I had dropped my wife off at the airport that morning. She was going to Connecticut via Atlanta for a meeting. I first heard about the towers when I went downstairs to the coffee shop. I came back to my office but was unable to get into CNN to get the news. I had to go through BBC to find out what had happened. Shortly after that, the major oil company decided to evacuate the building feeling they may be a target as well so I left the office and walked to my car. While I was walking, my wife called me. She had finally gotten to a phone and was stuck at the Atlanta airport. I told her I was on my way and would find her - somehow. As I left NOLa, I saw that the Superdome was surrounded by State Police. I wasn't sure what I would find on the highway, whether it would be roadblocks or crazy people, but I headed for Atlanta some 8 hours away with the clothes on my back and no side arm.

It turned out that all the police were on duty guarding buildings so I had a free run on the interstate. I put the hammer down, set the cruise control on 80, and went to get my wife. She eventually called me and told me she was in a Holiday Inn. It seems the mayor had asked local hotels with empty rooms to send vans to pick up people at the airport and take people out. My wife got a ride and a room. Thank you Mayor of Atlanta and Holiday Inn.

My wife told me that the airline had told them very little - only that they had to land as a problem in the northeast had grounded all air traffic. The passengers soon learned what happened when they started making phone calls about their changed plans. She sat on the runway for a few hours before getting to a gate. Then all passengers were told to get out of the gate area and go to the main lobby of the Atlanta airport.

We spent the night at the hotel and then drove home the next day.

Monday, September 8, 2008

GOM Production Stats

Here are the production stats as of Sunday.

Production is recovering but bet on Ike to cause another shut in, even if it doesn't hit New Orleans.

Sunday, September 7, 2008

Back Home

Arrved back home Frday evening. Did some grocery shopping in Alabama. Stuck in Sldell for over an hour because of some idiot causing an accident on the twin span bridge. House damage is slight and power was not out long enough to defrost the fridge. Almost back to normal but we are not unpacking the bug out bag until we see what Ike is going to do.

Friday, September 5, 2008

Production Statistics

Here is a link to the Gulf of Mexico oil and gas production statistics on the MMS web site. Damage assessments will occur soon and I'll post that as soon as it becomes available. Note that "rigs" means drilling rigs and MMCF/D means Million cubic feet per day. The districts are named for the location of the MMS office that handles that area of the Gulf.

I will be returning home today. Reports are that the local grocery and gas stores are open along with some of the fast food emporiums.

Thursday, September 4, 2008

The NOLa Evacuees Return - The Real Story

I mentioned the rumor the other day about the return policy for evacuees. Here is a link for the full story.

Gustav Thursday

Still in Alabama. My son made the run back yesterday. Traffic wasn't as bad as expected. However, he reports that the grocery stores and gas stations are still closed. Not enough employees have returned to allow them to open. He spent the night at my house as I had power and he didn't. Life could still be a little on the basic side so we are going to hang here until tomorrow.

The government did a good job on the evacuation plans but leave the return up to chance.

Oldest grandson baked a cake yesterday afternoon in honor of our 30th anniversary. Yeah, it was a mix but its the thought that counts. He has discovered an interest in the culinary arts at the age of 11. His sense of taste is amazing. He can dissect the ingredients in a dish by smelling and tasting. When we went to Boston, he was able to tell the difference between Cod and Haddock after it was all mixed up together in Fish and Chips. All in all, pretty amazing for a kid who only ate chicken nuggets as a young'un.

Wednesday, September 3, 2008

In Temporary Exile

We finally heard last night that Plaquemines Parish would open the north end on Wednesday at 0600. BUT, many homes had no power, there was no gas and no groceries. Be prepared to camp out for a few days. Feeder bands from Gustav were still causing tornados on Tuesday.

PE heard through a reliable source that the politicos wanted to keep the parishes (Orleans, Jeffeson and Plaquemines) closed for a few more days but public pressure was building to allow residents to return. The State Police were turning people back but many of those people had run out of money and had no place to go. They were forming Hoovervilles along the interstate. St Charles Parish was the first to open and the others followed suit soon after.

My son is heading back today and will camp out at his office if necessary. PE will stay put with the rest of the group until the weekend. We do not want to be in the middle of the return traffic. They evacuated using contraflow but they will only have the normal side of the intestate when they return.

Tuesday, September 2, 2008

Cabin Fever Sets In

It's Tuesday and we await word on when we will be allowed to return home. Based upon the reported damage, we should be able to return soon but the politicos seem to be holding off for some reason. My son is anxious to get his staff for his advertising agency back to work and finishing outstanding contracts. My wife has decided to re-open her employment office on Monday and I am waiting to hear what the Great Yellow Pectin wants to do. If they don't open up for returns tomorrow, there will be 2 million pissed off people. I know I have power at my house (Call the answering machine. If it picks up, you have power.) Reports from Bro-in-law is that damage is very slight and NO FLOODING! For comparison, we were allowed to return to Plaquemines Parish on September 11 after Katrina. Damage was much worse then. I don't know why they haven't given the word already.

The boys are getting antsy and the Rents have taken them out to the outlet mall. If we don't get back soon, There Will be Blood.

Monday, September 1, 2008

Thoughts on Gustav and Hurricane Evacuations

We're now waiting for the all clear so we can return and put our house back in order. Ground truth report says no flooding but they will keep us out in order to let Entergy fix the power and to clean up any downed trees. Traffic on the way back will be a bitch. Bobby Jindal said 2,000,000 people evacuated in the face of Gustav - the largest evac in Louisiana history.

Bobby was impressive. He would reel of facts and figures giving the general impression that he had a plan, they were following the plan and that he had a handle on everything that was going on. Great inter-state cooperation with medical needs people being evacuated by C 130 to neighbor states. Hundreds of buses were standing by along with Amtrack trains to evacuate those with no transportation. Homeland Security and FEMA were there next to him lending pro-active support but following his lead. Mayor Nagin stood by with a look that he was relieved not to have to worry about the details. Bobby will make a great President one day.

The one political glitch is Jefferson Parish President Aaron Broussard ranting that Mississippi wouldn't allow evacuees to travel east on I-10 because it would have caused an inconvenience to the Biloxi casinos. Of course, his family was in the traffic jam forced to go north so he probably had a personal dog in the fight.

Personally, I left about 24 hours before my mental deadline (when the hurricane crosses an imaginary line between the Yucatan and Cuba) but I had to in order to avoid the rush. Going to the FloraBama area was the next best option to going north since we had no hotel reservations. I was glad to see the thing stay to the west. The bottom line is the homestead seems to have survived and the family is safe. That's the best result. Other aggravations are minor in comparison.

30th Anniversary and Max

Today is the 30th anniversary of my marriage to the wonderful woman who became my mate. It is the second time we have spent it on a hurricane evacuation. Katrina was the first. Not very romantic but I hope the recent trip to France made up for it.

We often suspected that Max the Shih Tsu was abandoned during Katrina. His behavior last night confirmed it. We had tropical storm conditions in Alabama with wind and rain. Max was not happy and wouldn't stay in one place. He was upstairs and downstairs. He was scratching on all the bedroom doors. If you let him into the room, after a few minutes, he wanted to get out. When he laid down, he did it in a corner. It was like he needed to verify that he was not alone and didn't want his back exposed. It's daylight now and calmer. He will get to sleep. His humans won't.