week 1: current events

Recent events have prompted me to change topics. Thus, this is somewhat thrown together and I'll probably leave some things out that I'll try to come back to later in the week. The good news is that my piece for next week is largely written.

One of the recent events I speak of is the natural gas situation between Russia and Ukraine and how that is impacting the rest of Europe. The Russia and Ukraine situation is played out in several articles, but how the situation is affecting Germany is a good example of the impact the disagreement is having. The other event to catch my eye is Venezuela's change in how foreign companies may participate in the way the country operates its fields. Venezuela made changes to its laws to ensure "the recovery" of several fields in its country. The country also made some tax changes to account for what they call "tax irregularities."

Russia's leveraging of Ukraine reveals the inherent vulnerability that oil and gas importing nations suffer from. Oil and gas are commodities. They will go to the highest bidder, but ideological differences will sometimes cause countries to refuse to sell, even to those who have money. The United States has money. It also has many ideological differences with some of the nations that it imports oil and gas from. In a way, the United States hedges (original article) where its imports come from, but that may be due to how much oil and gas it consumes. As domestic productions continues to decline, those imports obviously become more important which also increases the exposure of the United States to the decisions of others. While the United States receives no more than a sixth of its import from any single country, that would be a hard loss to stomach if a country stopped sending us oil. Additionally, countries like Canada that are reasonably favorable to us already send us 99% of their exports. There's only so much slack that they could pick up.

The point? Obvious enough. The United States must continue to hedge its import sources, but it needs to enhance domestic production in meaningful ways. (The fields in the ANWR are not all that meaningful in the greater scheme of things.) Enhanced domestic production will be driven by technology more than any political maneuvering. It also must, absolutely must, make a more concerted effort to develop alternative energy sources. Due to the high energy density of oil, it will remain the energy source of choice for transportation for a long time. Oil companies can project to be in business for at least another 50 years, probably much longer. However, it will become necessary to wean energy consuming devices that are stationary to other sources of power. If you don't need to haul your fuel source around, then there is far less cost involved in settling for something that is a bit bulkier, but still gets the job done.

The play that Venezuela is making is something that oil and gas companies are keenly aware of. When oil and gas prices are low, private enterprise is invited to help build infrastructure and develop fields. But when the prices rise and the profits become fat, countries do anything from impose windfall taxes to nationalize the operations or something in between. There's nothing quite like having the rules changed in the middle of the game. That's part of the exposure of being an operator.

Service companies like Schlumberger are much better protected from changes like that. Service companies do not have a direct stake in acquiring reserves and extracting, refining, and selling oil and gas. No matter who operates the field, they will still need service companies to do most of the upstream work.