• U.S. factory orders increased 1.1% in April, an unexpected gain that was boosted by the high cost of gas and other petroleum products, the Commerce Department announced yesterday (Tuesday). Economists had expected a smaller gain of just 0.1% after an upwardly revised 1.5% gain in March, MarketWatch reported.

• Borders Group Inc. (BGP) announced yesterday (Tuesday) it would reduce 20% of its corporate positions in an ongoing effort to cut costs. The No. 2 U.S. bookseller will eliminate 156 positions at its Ann Arbor, Mich. Headquarters and 118 corporate positions at other locations, Reuters reported. The reductions represent less than 1% of Borders total staff.

• In a bid to lure new customers to purchase reloadable cards, Starbucks Corp. (SBUX) will offer free AT&T Inc. (T) wi-fi service to patrons who buy a minimum $5 on a reusable Starbucks Card. “Customers have let us know they want to be recognized for choosing Starbucks,” Brad Stevens, vice president of customer relationships, told USA Today. Particularly, he says, at a time when “budgets are tight.”

• Annual inflation in Kenya soared 31.5% higher in May, Bloomberg reported, citing the country’s National Bureau of Statistics reported yesterday (Tuesday). May’s numbers are even steeper than April, when soaring food prices pushed inflation up 26.6%.

• Chevron Corp.’s (CVX) vice chairman told Bloomberg that the company will spend up to $5 billion in African oil projects – including nearly $5 billion for a gas-to-diesel conversion plant in the Niger Delta – to boost production and help accommodate global demand. “The world is saying it needs it,” said Peter Robertson.

• Staples Inc. (SPLS) yesterday (Tuesday) raised its hostile bid for Dutch office supplies distributor Corporate Express NV (ADR: CXP) to $2.6 billion. Rather than accepting two previous overtures from Staples, Corporate Express last month struck a surprise deal to buy a French competitor, Lyreco SAS, which would create an international competitor to Staples, the Associated Press reported. Lyreco may be entitled to a $46.8 million break-up fee if Corporate Express shareholders pursue the Staples deal.

• Lehman Brothers Holdings Inc. (LEH), set to report its first quarterly loss since going public, is considering raising billions of dollars in fresh capital to help shore up its balance sheet, the Wall Street Journal reported. The exact amount isn’t known, but analysts estimate it is likely to be between $3 billion and $4 billion. Lehman will probably reveal the details of the plan with its quarterly results, due the week of June 16.

• Oil prices fell sharply yesterday (Tuesday), at times slipping more than $3 a barrel on the New York Mercantile Exchange. The drop came after Federal Reserve Chairman Ben S. Bernanke indicated that more interest rate cuts are unlikely. His comments sent the dollar higher and raised questions about oil’s ability to reach new highs in the short term.

Source: Global Investing Roundups Wednesday, June 4th, 2008

To answer those questions we turn to a report published in late March by UBS energy analyst Jon Rigby and his team in London. Their incredibly useful report is called, “Will there be enough production capacity?” UBS has been battered by its huge sub-prime related losses. But their work on where future oil production will actually come from nearly redeems them. They have asked just the right question at the right time, and answered it in detail.

The report reaches a number of surprising conclusions about the global oil market. It also includes a useful database of oil projects scheduled to enter production in the next five years. These are projects which could add meaningful capacity (100kbpd or more) to global oil production. We’ll look at who stands to benefit in a moment. But first, some of the report’s findings [emphasis added is ours]:

• “Declining existing basins, rising costs, increased technical challenges, stretched supply chains, geopolitical blocks and tightening fiscal terms all seem impediments to growing global production capacity for oil and gas, despite the clear pricing signals.
• “There is no obvious wall of new production coming to the market in response to high prices.”
• New projects scheduled to come on-line from National Oil Companies (NOCs) belong mostly to three major firms: Aramco, Petrobras, and Gazprom.
• New project cost is rising and becoming more technologically challenging, especially deep-water.
• “Nominal growth rates tied to global GDP now look more unrealistic as potential upstream growth slows. This appears reasonably consistent with a growing view that oil production may actually not exceed 100Mbbl/d.”

The idea that global oil production may never exceed 100mbbl/d is worth a much closer look. I’ll get to that later. But before we look at the end, let us look at the beginning of the end and where new production might come from as the world’s oil producers try to bridge the gap between 87mbpd and 117mbpd.

The good news is that there IS new production capacity in the pipeline this year and next. Keep in mind that the final investment decision on the projects entering into production this year was made anywhere from 3-6 years ago. That shows you how far in advance you have to plan for new production (assuming you’ve even found oil in the first place).

There is no such thing as just-in-time oil production. But let’s take a look at projects that will come on line between now and 2010. We’ve selected only those projects that will produce more than 200kbp or more:

If you include LNG and the barrels of oil equivalent produced from it, your list expands a little more to include the following projects:

Beyond 2010, the future is murkier. But the UBS team has identified projects for which the final investment decision has been made. Assuming cost blowouts can be avoided and the projects aren’t cancelled, here are some of the bigger projects that could come on-stream between 2011 and 2015:

There are some massive LNG and natural gas projects coming on-stream between 2011 and 2015. Gazprom, Shell, BP, and ExxonMobil all look like big winners, should oil prices stay high and pass through to higher LNG prices.

The new oil finds off-shore in Brazil’s Santos Basin are not included in the UBS report because they are not likely to enter into production during the next five years. They will be difficult to produce in any event. Petrobras says the Tupi find may contain as many as 8 million barrels, while the Carioca field may have 33 billion barrels of reserves, of which about 10 billion could be recoverable, according to Citigroup.

Current Production Trumps Reserves

One UBS claim which may surprise older oil hands is that, “the capacity to produce—not reserves—is critical to energy markets.” UBS does not conclude that current producers should be valued differently that companies with large reserves but current production challenges. But it’s worth thinking about.

Does the fact that oil touched US$127 in futures trading contribute to BHP Billiton’s earnings and its war chest for its pursuit of Rio Tinto (ASX: RIO)? BHP thinks the answer is yes.

BHP Billitons’s oil projects showed up in a research report we reviewed yesterday. The report tried to answer the question of where future global oil production would come from. There is a 32 million barrel per day gap between what the world produces today (about 87mbdp) and where the International Energy Agency reckons the world will be in 2030 (117mbpd).

In other words, the world needs another OPEC if oil supply is going to keep up with demand. OPEC currently produces 32mbpd. The IEA says OPEC can double that figure if it invests about US$2.4 trillion in exploration and production. OPEC is not as sure. As you can see, the gab between global production capacity and global consumption is, ahem, pretty tiny right now.

Source: BHP Billiton, IEA

According to BHP’s oil man Mike Yeager, BHP’s cost of production for a barrel of oil is between $6 and $12 a barrel. For the last three years, production at BHP’s various oil fields has hovered around 300k bpd. That makes it the world’s 25th largest oil producer, according to the company, which is not bad if your main business is mining.

It’s an axiom that the mining business and the oil business don’t mix. Energy exploration and production sucks up the capital, while project life is uncertain and cash flows variable. There are lot of known unknowns, and on the exploration side, some unknown unknowns.

But BHP Billiton does know that oil production increased to 378k per day last month, and 415k per day last week. It knows that the fifth LNG train from the North West Shelf is scheduled to begin production this year. It knows that its Neptune field in the Gulf of Mexico, though delayed this week, should begin cranking out 50kbpd in June of this year.

It also knows that by this time next year the Shenzi field in the Gulf of Mexico should begin producing about 100kbpd and that by 2010 the Pyrenees field in Western Australia should produce about 96kbpd. And there are more projects in LNG on the way, too.

That is a lot of good news for an oil company that’s not an oil company. By market value alone, BHP Billiton is bigger than BP (NYSE: BP) and not far behind Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A). If the company is valued as an energy company and not just a miner, then yet another reconsideration of its value may take place. Rio Tinto should be worried about that. All that energy translate into cash for a bid sweetener.

BHP Billitons’s cost of production is going to rise. There is huge cost inflation across the entire oil industry as projects move further off-shore and deeper underwater. But this is an example of Australia’s exposure to straight-forward bull markets in energy and resources. The businesses aren’t easy, but they are not conceptually complicated.

What’s so astonishing about Australia’s resource economy right now is how it’s filtering down from gold and oil to base metals, bulk commodities, and even lead. “The great minerals land grab by China Inc continues with Hunan Nonferrous Metals Corp looking to buy one of Australia’s best untapped lead deposits,” reports Kevin Andrusiak in today’s Australian.

Lead?

“Yesterday Hunan launched a takeover bid for Perth-based Abra Mining, saying it is prepared to spend just $67.3 million to control one of the nation’s best untapped lead deposits. Hunan, which has received the backing of the Abra board for the takeover play, has offered 83c for 70 per cent of the remaining Abra scrip it does not already own.”

Hunan’s offer puts a 44% premium on Abra shares. A 44% premium on lead. If lead gets that kind of premium, what would BHP’s oil and energy reserves (1.3boe) and its resource base (3.5boe) command? The resource grab is well and truly on, and it’s moving at the speed of lead.

Dan Denning
The Daily Reckoning Australia

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Source: The Oil Company That is Not an Oil Company