Surging oil has petro companies drilling again

By CHRIS KAHN

posted: 36 DAYS 22 HOURS AGO

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NEW YORK -With oil prices surging, petroleum drillers have dusted off idled rigs and kick-started a global production network that thrives on high energy prices.

Some oil executives have declared the yearlong slump in petroleum over, pointing to an uptick in exploration and drilling operations around the world. At $82 per barrel and growing, oil prices are finally at a level that gets drillers excited.

"We are in an extraordinarily good position to prosper by the recovery," said Gene Isenberg, chairman and CEO of Nabors Industries. Nabors operates oil rigs in the U.S., among the hardest hit regions in the world as far as energy goes.

As the oil industry begins reporting third-quarter earnings, the rebound in oil may lead to more jobs in the oil patch as companies spread out in search of more petroleum, especially shale gas deposits around the world.

Whether a sudden rise is prices is good for the industry in the long run, however, is not clear. Consumers slashed spending on energy last year when prices spiked and the recession deepened.

Energy Secretary Steven Chu said this week the return to $80 oil was worrisome because it could slow a global economic recovery if people have to divert more money to energy costs, a concern that is shared by many energy experts.

"If I'm spending more on energy, that's less I'm going to commit on impulse spending," said Amy Jaffe, the Wallace Wilson Fellow at the James A. Baker III Institute for Public Policy at Rice University.

U.S. gas prices hopped above $2.50 per gallon last week and have risen every day since, to $2.596.

Even in the oil industry, the jump in prices is not universally welcome.

Refiners, who process oil into gasoline, have struggled to make money because pump prices have plunged. They have little choice but to charge more, said Bill Day, a spokesman for San Antonio-based Valero Energy Corp., but demand for fuel is nowhere near what it was before the recession.

That has led to closures and falling supplies of gasoline.

Valero already plans to idle two units at a Delaware refining plant, eliminating 150 jobs. It will also cut another 100 jobs from a New Jersey plant. Another refining company, Sunoco Inc., also plans to idle its Eagle Point refinery indefinitely, stranding 400 full-time workers.

"Clearly, there are more cuts coming across the industry," Day said.

Overall, the third quarter was a struggle for the petroleum industry. American oil giants, which feasted on record-breaking crude prices in 2008, wrestled with thinner profit margins from July to September and should post a series of woeful earnings reports in coming weeks.

Exxon Mobil, Chevron Corp., ConocoPhillips and Marathon Oil Corp. are expected to report that profits tumbled by 60 percent or more. Valero Energy Corp., the nation's largest independent refiner, is expected to post a loss for the second quarter in a row.

Quarterly results this year are being pitted against the same three months of 2008 — the most lucrative ever for oil and gas companies. Crude prices soared above $147 a barrel in the third quarter of 2008, helping Exxon Mobil and Chevron set earnings records.

Investors are focusing instead on how companies fare versus second-quarter results, when crude barrels fetched an average of $59.80.

Chevron said it boosted U.S. oil and gas production between the second quarter and the first two months of the third quarter. Oil and gas production fell internationally, in part because of civil unrest in Nigeria, where Chevron has operations.

In an interim report, the San Ramon, California-company said that third-quarter income from oil and gas drilling operations should increase "significantly" from the second quarter. Profits should be flat, however, for its refining operations.

Halliburton Co., which led off the season for energy companies last week, reported higher revenues. Halliburton chief Dave Lesar said the oil business may have bottomed out in the third quarter.

Shares of Chevron, Marathon, Occidental, ConocoPhillips and BP have hit six-month highs as oil prices climbed above $80 a barrel. But prices haven't increased because Americans are returning to work, and Wall Street will be looking for more signs that oil companies can continue to boost revenues in a troubled economy.

"Commodity prices have strengthened, but there's certainly some risk here as fundamentals begin to assert themselves again," Byrne said.

Last year, energy prices surged as oil producers neared their peak ability for pumping crude. This year, prices are rising for a different reason: the weak U.S. dollar.

Investors holding other major currencies, like the euro, yen or pound, can buy dollar-based crude contracts for cheaper when the U.S. currency falls.

As a result, the benchmark oil contract grew from $48.39 on April 1 to $70.61 on Sept. 30, even though American petroleum consumption remained well below average for that time of year.

The U.S. continues to sit on large surpluses of oil and gasoline, and underground storage caverns are crammed with the most natural gas on record.

How long the oil rally can go on without a substantial growth in demand remains to be seen. And the industry is still recovering from the price collapse over the last year.

Earlier this month, ConocoPhillips said it would cut $1.5 billion in capital spending this year and put $10 billion of company assets up for sale.

Occidental Petroleum Corp. reports third-quarter earnings Thursday.

2009-10-21 17:25:28