Friday, May 10, 2013

Shell is doing what BP did in 2009/2010 - a deep water massive oil spill to keep their heavy deepwater investment projects afloat.

"Shell plans to drill more than two miles underwater in the Gulf of Mexico in pursuit of new sources of oil and gas. If successful, the Guardian reports, the project will rank as the world’s deepest offshore facility."

Wait a minute, is this profitable?

Assuming minimum capex of $5 billion dollars in installation costs alone (based on BP Thunderhorse), a 50,000 bbl/day extraction and a "unreasonable" sustainable oil price of $95/bbl (based on current price), it will take 1053 days (2.88 years) of deepwater production to earn back the capex. That is without considering the high cost of production at between $80-90/bbl.

At a net profit of $20/bbl at 50,000 bbl/day production it would take 13.7 years just to break even. But at 50,000 bbl/day production, it would also take 13.7 years to deplete the 250 million recoverable reserves.

That's not all.

Consider the total recoverable reserve at  just 250 million bbls. At $20/bbl net profit, it would bring in only $5 billion max. What? Just to break even at the best scenario.

What if with the failing economies around the world, the price of oil drops below $70/bbl? This is not an unrealistic scenario.

In 2008, the oil prices were inflated to above $140/bbl in July only to crash to $30/bbl by Nov 2008.

For Shell to break even in 2.88 years, the oil prices need to hold at ($95 + $80) or $175/bbl for at least 2.88 years plus the present 5 years (exploration, construction & installation), to bring the oil online.  Do you see this happening?  Very unlikely if the present world's daily consumption of 85 million bbls/day drops as well.

Now consider why BP rushed to drill the Macondo exploration well in Jan 2009 when oil prices were still well below $40/bbl?  Especially when the recoverable reserve of the Macondo prospect was just 70% of the 50 million bbls or  35 million bbls.

Now you see why BP's Macondo well was the Sacrificial Lamb to keep BP's mega trillion investment in the deep water Gulf projects afloat.

Shell Is Drilling the World’s Deepest Offshore Oil Well in the Gulf of Mexico
May 9, 2013 2:30 pm

The Petronius Rig in the Gulf of Mexico, operated by Chevron and Marathon Oil. Photo: Extra Zebra

Shell plans to drill more than two miles underwater in the Gulf of Mexico in pursuit of new sources of oil and gas. If successful, the Guardian reports, the project will rank as the world’s deepest offshore facility.

The move is being viewed in the oil industry as a demonstration of Shell’s confidence that its technology can deliver returns on expensive and risky offshore projects, despite a recent downturn in oil prices.

Although BP recently put its Gulf of Mexico project—called “Mad Dog Phase 2″—on hold, Shell is not alone in its endeavors in the Gulf. ExxonMobil is planning a $4 billion project in the region, as well.

Shell’s executive vice president, John Hollowell, told the Guardian that the new project demonstrates the company’s ongoing commitment to meet U.S. energy demands. “We will continue our leadership in safe, innovative deepwater operations,” he said. The Guardian:

The move comes despite ongoing controversy over offshore exploration – especially in the Gulf of Mexico, where in April 2010 a fire and explosion on the BP Deepwater Horizon rig killed 11 workers and started a leak that took three months to cap. Last month BP said it had paid $25bn (£16bn) of the $42bn it has set aside to cover the damage caused by the spill.

Shell expects its new well to produce 50,000 barrels of oil per day once it reaches peak production. It estimates that the well, located in an oil field discovered eight years ago about 200 miles southwest of New Orleans, contains around 250 million barrels of recoverable oil total—just over three percent of the 6.9 billion barrels of oil the U.S. currently burns through each year.

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WTI Crude Falls a Second Day on Dollar Rally
By Mark Shenk - May 11, 2013 3:12 AM GMT+0800

West Texas Intermediate crude fell for a second day as the dollar climbed, reducing the appeal of raw materials priced in the U.S. currency.

Futures declined 0.4 percent as the Dollar Index advanced above 83 for the first time in more than two weeks. Gold dropped 2.2 percent. The 12 members of the Organization of Petroleum Exporting Countries bolstered oil output last month, a report from the group’s Vienna-based secretariat showed. OPEC’s demand forecast was little changed. Crude rebounded sharply in the last 30 minutes of floor trading.

“Commodities are taking a hit because the dollar is ripping,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “The Dollar Index crossed 83, which is hurting all these markets.”

WTI crude for June delivery slid 35 cents to settle at $96.04 a barrel on the New York Mercantile Exchange. Prices dropped as much as 3.1 percent during the session. The volume of all contracts traded was 55 percent above the 100-day average at 3:11 p.m. Futures rose 0.5 percent this week, the third consecutive advance.

Brent oil for June settlement decreased 56 cents, or 0.5 percent, to end the session at $103.91 a barrel on the London-based ICE Futures Europe exchange. Volume for all contracts was 21 percent above the 100-day average.

WTI gave up more than $1.50 of its loss and Brent rebounded more than $1 at the end of the session.

“This was a day when we started with a significant move, which lost its momentum,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “This afternoon was frustrating because there was no headline to point to.”

Narrowing Spread

The European benchmark’s premium to WTI was $7.87 a barrel, down from yesterday’s settlement of $8.08. The spread shrank to $7.48 yesterday, the narrowest level on an intraday basis since Jan. 3, 2012.

The spread may contract to as little as $5 in the third quarter as transportation bottlenecks in the central U.S. are cleared, according to a report by Jeffrey Currie and Stefan Wieler, analysts at Goldman Sachs Group Inc. in New York.

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, rose as much as 0.8 percent. The Standard & Poor’s GSCI Index of 24 commodities was down 1 percent.
Currency Moves

“This is all about currency moves,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The inverse correlation between the dollar and commodities is alive and well.”

Gold for June delivery settled at $1,436.60 an ounce on the Comex in New York after the biggest drop since April 15, when prices capped the biggest two-day loss in three decades. Silver for July delivery declined 1.1 percent, to close at $23.658 an ounce in New York.

OPEC produced 30.46 million barrels a day last month, up from 30.18 million in March, the group’s Monthly Oil Market Report showed. That’s the most since November, according to the estimates based on secondary sources. Global oil use is forecast to rise 800,000 barrels a day to 89.66 million barrels a day this year, down from April’s forecast of 89.67 million barrels.

“Fundamentally, we should be below $90,” said Tariq Zahir, a commodity fund manager at Tyche Capital Advisors in New York. “Fundamentals are starting to take over the market now.”
U.S. Production

U.S. crude output rose 57,000 barrels a day to 7.37 million last week, the highest level since February 1992, a May 8 Energy Information Administration report showed. Stockpiles increased 230,000 barrels to 395.5 million, the most since weekly data started in 1982. Based on monthly data, they were last at this level in 1931.

“OPEC production is going to weigh on the market,” said Rich Ilczyszyn, chief market strategist and founder of commodities trading firm in Chicago. “We have a supply problem as there is plenty of oil. U.S. supplies are at an 82-year high.”

Saudi Arabia, OPEC’s biggest crude producer, welcomes additional supplies from other producers that may help to stabilize prices, Oil Minister Ali Al-Naimi said.

“New supplies are welcome,” Al-Naimi said today in a speech in Istanbul, where he traveled to meet Turkish energy minister Taner Yildiz. “They will add depth and, I hope, greater stability to world markets.”

Al-Naimi has described $100 as a “reasonable” price for both oil consumers and producers.
Technical Resistance

The drop in prices occurred after the oil market failed to breach key technical resistance, Yawger said.

“We touched technical resistance in the $97 to $98 area for the third time since late January,” Yawger said. “We were in the area in late January, early April and at the beginning of this week and failed to break through on each occasion. Oil touched $97.17 May 6 and has been under pressure ever since.”

Implied volatility for at-the-money WTI options expiring in July was 20.1 percent, little changed from 20.1 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 741,240 contracts as of 3:12 p.m. It totaled 701,619 contracts yesterday, 20 percent above the three-month average. Open interest was 1.76 million contracts.

To contact the reporters on this story: Mark Shenk in New York at

To contact the editor responsible for this story: Dan Stets at

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