Schlumberger is pulling back as a collapse in petroleum prices led to a sharp drop in exploration spending by its customers.

Commodity prices have plummeted in recent months, as recessions in some of the world’s largest economies dampened demand. Like all oil producers, Schlumberger has been hurt by the plunge in the price of oil, which has fallen from $147 per barrel in July to about $42 per barrel now. The company has also seen its budget for exploration cut by 40%.

Schlumberger reported net profit of $1.15 billion, or 95 cents per share, down from $1.38 billion, or $1.12 per share, although revenue rose nearly 10% to $6.87 billion.

Schlumberger Chief Executive Officer Andrew Gould told investors on a conference call that the company was cutting 5,000 jobs out of 87,000 worldwide, and did not rule out more cuts in the first half of 2009, if necessary.

“It is a good sign that they’re coming front and center and acknowledging things have gotten a lot worse,” Mark Brown, an analyst at Pritchard Capital Partners in New York, told Bloomberg News. “We had to get this negative news out there.”

Schlumberger’s results echoed the sentiment of energy analysts who have forecast spending by oil and gas producers would drop by one-fifth or more in 2009 as companies move to conserve cash.

Spending by companies around the world on oil and natural gas exploration will fall to $400 billion in 2009, according to a Dec. 19 report by analysts James Crandell and James West of Barclays Capital Research.

The biggest decline in exploration spending is expected to come in North America, where U.S. spending will fall 26% to $79 billion and Canadian spending will slide 23% to $22 billion, Barclays said. By contrast, capital spending outside North America will fall only 6% to $300 billion.

“At current prices, most of the new categories of hydrocarbon resources are not economic to develop,” Gould said in the statement. “We expect 2009 activity to weaken across the board with the most significant declines occurring in North American gas drilling, Russian oil production enhancement and in mature offshore basins.”

Russia is part of Schlumberger’s largest regional market, which includes Europe and Africa.

In Canada, big producers like EnCana Corp. (ECA), Canadian Natural Resources and Husky Energy Inc. (PINK: HUSKF) have cut 25% to 30% from their capital budgets, according to Gary Leach, president of the Small Explorers and Producers Association of Canada.

“Right now it’s way cheaper to buy gas and oil on the market than to go drill for it,” Leach told the Calgary Herald.
But all those spending cuts may soon lead to a significant rebound in prices, Gould said.

Despite heavy spending by producers to develop new resources in recent years, the supply situation is still depressed and the cuts in investments hitting the industry now will “sow the seeds of strong rebound,” Gould said.

That seemed to be reflected in at least one of Schlumberger’s units.

Even though it posted a 68% drop in profit and a 25% drop in revenue in the quarter, Schlumberger’s WesternGeco seismic business – which measures prospective oil and gas reservoirs – is sitting on a record $1.77 billion order backlog.

And the gloomy earnings report from Schlumberger did nothing to dispel the notion among investors that oil prices will move higher.

“The fact that because this wasn’t the quarter that was prophesying the end of the world, it’s causing people to rethink their pessimism,” Bill Herbert an analyst at Simmons & Co. in Houstonsaid told Bloomberg. Indeed, oil services stocks rebounded in trading Friday.

Source: Schlumberger Sees End in Sight for Slumping Oil Prices

This from The Sovereign Society:

The oil industry is a tricky business.

I know. I was a well-site geologist for many years. Just like the stock market, sometimes the best-looking prospects are your worst duds and those you were not too sure about gush profits.

It’s a gamble, but one that can pay off big if you’re right. But what if you’re wrong? Well in the old days it was watch out below… but now, I know of a strategy that can insure against some of your losses.

I call it “PPS” and it has helped me out many times in the past. Let me explain…

Right now I’m looking again at the oil, gas and the service industry. They’ve been beaten up pretty badly. As the price of oil has dropped from $147 a barrel to below $40 last week, any company that is even remotely associated with the industry has seen it share price tumble.

The major oil companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) have seen their stock prices pull back as much as 50% from their 52-week highs. Schlumberger (NYSE:SLB), which traded as high as $111.95 this year, is now at $41.91. Baker Hughes (NYSE:BHI) down from $90 to $30 and Transocean (NYSE:RIG) has fallen from $163 all the way down to $55.

These are great companies in great industries. And no matter the environmentalists want you to believe, they won’t be going away for a long, long time.

They have war chests full of profits from the recent run-up in oil prices. They don’t need much outside financing and can wait out the economy. They’ll invest in themselves just as they’ve always done. They’ll push the limits of technology and invest in people.

And if President elect Obama has his way, and I believe he will, then we’re also going to see massive infrastructure construction projects begin next year. As we put people back to work, as money again begins to flow oil prices should begin to drift higher.

So if you want to profit as the industry turns up you should look at the iShares Dow Jones US Oil & Gas Index ETF (NYSE:IEO) and the HOLDRS Oil Services ETF (NYSE:OIH). These two ETFs will give you broad exposure across the industry.

Then to protect your downside I suggest you look at my “PPS” or Protective Put Strategy. Using this strategy, you’re going to buy one put for every 100 shares of these ETF’s. Now, to keep your cost down look to buy in the nearest month or two and look at the put options about 20% below your share purchase price.

As an example – if the HOLDRS Oil Services (OIH) were trading at about $70 per share like it was today and I was going to use this strategy I would buy 100 shares of OIH and then immediately buy an OIH protective put. I would buy the Jan OIH 55 symbol OIDMK for about $2.35.

This strategy cost a little more then just buying the long position but I’ll tell you, do it and you will sleep better at night. It’s the same as paying $72.35 for the shares and if they take off (like I think they might) the extra $2.35 becomes almost irrelevant…but if I’m wrong I’ve covered my assets.

Source: Striking it rich on Oil…without getting Burned

Irwin says oilfield service company Schlumberger Limited (NYSE:SLB) is a great energy play for investors still a bit skittish about going straight into emerging markets.

“It’s a big-board American company that should give you a good night’s sleep while letting you gain from the hottest markets anywhere…”

We’d been watching oil-services giant Schlumberger Limited for a while. When it announced Q2 earnings on July 18th, we knew it was time for our emerging-market investors to get in on the action.

The commodities boom in emerging markets is real. It’s making the rich even richer, but more importantly multitudes of poor people are getting a crack, often for the first time, at an upwardly mobile life that bubbles up through the entire economy. Once this starts to happen in developing countries, you want to get in on it.

Certainly, emerging markets are working quite well for Schlumberger.

The company’s Q2 growth was helped by increased drilling efficiency in the North Sea, improved performance and lower start-up costs on projects in Mexico, Russia, eastern Siberia and South East Asia. (Just as an aside, the long-dormant North Seas also delivered favorable results for the company.)

The company said that sequential revenue increases were recorded across all Areas most notably in the North Sea, US land West, Mexico/Central America, US land Central, Arabian, and Peru/Colombia/Ecuador. In addition, double-digit growth rates were recorded by the China/Japan/Korea, Thailand/Vietnam and Australia/Papua New Guinea.

In Latin America, oil-field service revenue of $1.06 billion increased 15% sequentially and 39% year-on-year. Pretax operating income of $243 million increased 31% sequentially and 36% year-on-year. While Venezuela and Argentina were particularly active with new wells, the company saw improved activity throughout the region.

The combined European, so-called CIS (the Commonwealth of Independent States – formerly the USSR) and African region is also bustling for Schlumberger.

Revenue of $2.07 billion increased 9% sequentially and 28% year-on-year. Europe’s gain was pegged on a North Sea resurgence. West and South Africa and East Russia all saw increases in exploration-related activities.

When it comes to Africa, Angola and Ghana proved a reliable source of revenue. In both cases, Schlumberger benefitted from new and deeper wells. CIS, meanwhile, produced leading-edge technology exploration as well as contracts for up to 10 new rigs north of the Arctic Circle.

On the other side of the planet, the Middle East and Asia saw revenue of $1.44 billion increased 9% sequentially and 19% year-on-year. China, Japan and South Korea rebounded after a winter slowdown. More importantly, though, is the growth in exploration in Australia and Papua New Guinea. Thailand and Vietnam contributed to growth through additional exploration.

In offshore Qatar, Schlumberger was part of a consortium that established several world records by drilling the world’s longest well in the Al Shaheen field. This pertains to peak-oil theorists, but right now we can’t figure out on which side of the table. Schlumberger is digging deeper because the oil is harder to find; on the other hand, technological advances are enabling deeper wells.

We don’t claim to be geologists, but it seems that this kind of deep drilling could simply keep on going – that eventually some new technology lets us go further into earth to find new oil.

Well, how does North America stack up against these emerging markets? Not too good, actually.

North American revenue of $1.44 billion increased only 1% sequentially and 7% year-on-year. That’s virtually no growth compared to the dynamic markets we’re seeing elsewhere in developing economies.

And thanks to these emerging economies, Schlumberger was able to post healthy Q2 numbers over all. Here’s the top line…

Schlumberger reported Q2 revenue of $6.75 billion versus $6.29 billion in the first quarter of 2008, and $5.64 billion in the second quarter of 2007.

Income from continuing operations was $1.42 billion-an increase of 9% sequentially and 13% year-on-year. Diluted earnings-per-share from continuing operations was $1.16 versus $1.06 in the previous quarter, and $1.02 in the second quarter of 2007.

Source: Schlumberger: Emerging-Market Oil is a Gusher

Among the earnings season headlines: Bank of America Corp. (BAC) will be issuing its final earnings report of the pre-Countrywide Financial Corp. (CFC) merger era and investors hope that Wachovia Corp. (WB) follows in the recent footsteps of Citigroup Inc. (C) and JP Morgan’s Chase & Co. (JPM), the latter two of which both provided better-than-expected (though certainly negative) results.

Yahoo! Inc. (YHOO) gives its shareholder a bit more ammunition for the never-ending Microsoft Corp. (MSFT) buyout controversy, as Yahoo execs are clearly hoping against hope some decent numbers can save their skin (musings known by the acronym “WWID” – for “What Would Icahn Do?).

Amazon.com Inc. (AMZN) will shed some light onto the U.S. consumer spending/retail sector pictures; however, investors should remember that those Internal Revenue Service rebate checks have likely all been spent by now. The U.S. Federal Reserve stays in the limelight as the Beige Book provides the country one more look at the mindset of U.S. policymakers.

The energy-supply data will be analyzed more closely as investors hope that prices are headed down to more manageable levels. And, of course, the Freddie Mac (FRE)/Fannie Mae (FNM) saga merits continued close scrutiny. Anyone interested in some newly issued stock of these financially strapped companies? [For a related Money Morning story containing the latest developments in the Fannie/Freddie saga, please click here.]

Last week provided investors with a nice reprieve from the daily surge in oil prices, as well as an apparent rebound in the Dow Jones Industrial Average Index – out of bear-market territory. But at least with the stock-price rebound, there’s a real question about whether this represents the first leg of a new bull-market uptrend, or is just a bear-market “head fake” that will separate many investors from their money. [For a special weekend market bulletin, in which Money Morning Investment Director Keith Fitz-Gerald argues that last week’s reversal in trading trends was such a "head fake," please click here. The report is free of charge.]

The backdrop for such a “bear trap” was just about perfect as the week ended, for the overall investor-market mindset had shed the dire outlook of recent weeks and months. Bad earnings somehow didn’t seem so bad. Negative forecasts somehow didn’t seem so negative. Cautionary comments by the central bank didn’t translate automatically and immediately into marketplace fears. Weak economic releases somehow didn’t seem so weak. Investors departed for the weekend with a newfound confidence (or, as we fear, overconfidence). Again, this begs the question: Is this the start of a new, bullish trend, or is it just an aberration that will soon yield to a resumption of downward stock prices and rising food-and-energy costs?

Stay tuned…

Coming up in the week ahead: Leading Economic Indicators (Today/Monday), Fed Beige Book (Wednesday), Existing Home Sales (Thursday), Durable Goods Orders (Friday), New Home Sales (Friday).

Market Matters

Freddie Mac and Fannie Mae stayed in the headlines last week as U.S. Treasury Secretary Henry Paulson announced plans for a “non-bailout” government bailout, complete with improved borrowing terms and an expanded line of credit (and which required congressional approval, easier said than done). By week’s end, Freddie toyed with the idea of “going at it alone” (like any good private enterprise should) and opened discussions about raising capital by offering up to $10 billion in new stock. Given the company’s current “dire” financial position, any new shares must offer great incentives to potential investors. Currently, Freddie’s outstanding preferred stock yields in the neighborhood of 14%.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) emerged from hibernation and offered a few regulatory ideas of its own. With “short interest” at all-time record levels, the SEC initiated actions aimed at limiting investors’ abilities to engage in short-selling strategies (which many observers have labeled as the “speculative excesses” that are responsible for everything from soaring energy prices to plummeting stock prices). Not be upstaged, the Federal Deposit Insurance Corp. (FDIC) took possession of IndyMac Bancorp Inc. (OTC: IDMC), another troubled institution engaged in “risky” mortgage lending, which opened again as a federally-owned institution. (So who’s next and just what will that cost the taxpayers?)

Bailouts and new regulations aside, the financial crisis still has a way to go – and possibly a very long way [To read my two-part report from last week about a Japan-style "Lost Decade" for the U.S. economy, including the investments you can make to sidestep this long malaise, please click here. Both reports are free of charge.]

In terms of earnings season, while Wells Fargo & Co. (WFC), JP Morgan Chase, and Citigroup announced weaker earnings (or losses) for the last quarter, their results actually beat Wall Street’s expectations. Merrill Lynch & Co. Inc. (MER) helped shore up its capital position by selling its 20% interest in Bloomberg LP for roughly $5 billion. The world’s largest brokerage firm also reported its fourth-straight quarterly loss and was downgraded by Moody’s Corp. (MCO) immediately after the release. Outside of financial-services companies, airlines – Continental Airlines Inc. (CAL), Delta Air Lines Inc. (DAL) and American Airlines Inc. parent AMR Corp. (AMR) – did as expected in this earnings season, and reported massive losses.

Google Inc. (GOOG) and Microsoft were among the earnings-season headlines, issuing disappointing forecasts, despite reporting quarters that saw earnings jump by more than 35%. Oil-services giant Schlumberger Ltd. (SLB) reaped the benefits of higher energy prices and manufacturer Honeywell International Inc. (HON) raised its forecast for the rest of the year.

Investors enthusiastically received the positive (yet negative) earnings news from the (depressed) financials and also reacted to a pullback in oil prices. Early in the week, the dollar dropped to a record low against the euro and oil continued its endless climb. After that, however, in four consecutive trading sessions, crude plunged by more than $15 a barrel to a market price of less than $130 – its lowest-such close in more than a month.

Excellent supply reports showed that oil-and-gas inventories actually rose last week as demand slowed, given the higher prices. Mid-week, investors took the opportunity to seek out some bargains as the Dow soared close to 500 points and experienced its best two-day percentage gain since October 2002. The other indexes lagged (thanks Google), though still ended the week in positive territory. Bonds tumbled as investors unwound previous flight-to-quality trades. The week came to a close with plenty of uncertainty, but also with the slightest glimmer of hope out in the market that the financial (and oil) madness may one day come to an end (although we here at Money Morning still believe that “end” is well down the road).

Economically Speaking

News from the economic front was not quite so positive last week as those inflationary fears we’ve been warning about for more than a year appear to finally be coming to fruition.

The June Producer Price Index (PPI) rose at its fastest pace in 27 years and wholesale prices now stand more than 9% higher than they were at this time last year. Likewise, the Consumer Price Index (CPI) jumped by 1.1% in June as energy prices skyrocketed by more than 6.5% during the month.

For those economists who choose to discount the energy statistics, core CPI experienced its worst showing since January and reflected escalating prices in airline tickets, among other areas. (Since ticket prices are directly tied to the price of jet fuel – a form of “energy price” – shouldn’t those optimistic economists factor travel out of the “core” equation as well?)

Retail sales rose by a slower-than-expected 0.1% in June, as weakness in auto sales overshadowed the consumers’ desires to spend those government rebate checks. In fact, many naysayers previously warned not to put too much stock in recent retail statistics as they are more reflective of that (temporary) economic stimulus than they are of any real motivation for consumers to shop.

U.S. Federal Reserve Chief Ben S. Bernanke was in the spotlight again last week (as he seems to be every week, these days), as he delivered his mid-year testimony to Congress and discussed the Fed’s ongoing challenges of stimulating a weak economy without prompting additional inflationary pressures. The central bank chair continued to walk a fine line between these two crises and the minutes from last month’s policymaking Federal Open Market Committee (FOMC) meeting revealed the difficult balance.

While many Fed-watchers expected the next move in rates to be higher, the continued economic weakness makes a rate escalation potentially deadly to the weak economy. For now, the central bank pretty clearly believes that the best move may just be no move at all. The Fed also announced some new rules aimed at protecting residential homebuyers against the “predatory” practices of those (now defunct) mortgage originators.

These days, lenders actually may be required to verify a potential borrower’s income to determine if he or she qualifies for a loan. (What a shame IndyMac never thought of that before.)

Weekly Economic Calendar

Source: New Bull Market or Bear-Market Trap? Investors Look to Earnings Season for Clues

This piece is taken from The Growth Stock Wire. It’s in the form of a questions and answers session. But it’s well worth the read if you’re interested in the ins and outs of shale oil.

The Commodity Investor

Matt Badiali

Q: I’ve read some articles on shale gas. What is the big deal with this stuff? – H.B.A: Shale is the world’s most common rock, formed from mud and clay deposited at the bottoms of lakes and ocean basins. Shale looks like the slate you see in chalkboards or on roofs, (slate is actually shale that was “cooked” in the earth).

Clay and mud are tiny -– much smaller than sand. So it’s hard to tap shale deposits. (See the next question, about the Bakken Shale, for more details.)

Some shale is full of old plants and animals. These shales become the source rocks for oil and natural gas. In the past, it didn’t make sense to drill shale for either oil or gas. Shale presented technical challenges that were beyond most of the industry. However, that began to change in 1990, when oil-service giant Schlumberger began focusing its attention on the natural gas in shale.

The company estimates that shale contains 500 billion to 780 billion thousand cubic feet (MCF). We consume about 23 billion MCF per year, so that’s about 20 to 34 years worth of natural gas. Today, one MCF sells for more than $13. So the reward is in the trillions of dollars.

The Barnett Shale became the proving ground for shale technologies. Barnett is in the Fort Worth Basin of Texas, which underlies the entire region west of the city of Fort Worth. The Barnett Shale holds between 25 billion and 250 billion MCF.

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I’m not targeting companies that are just Barnett players for investment. However, I am interested in companies that learned how to drill the Barnett and are now leasing land in the many new shale regions.

Investors can take a look at companies operating in the Huron Shale in southern Ohio, the Fayetteville Shale in Arkansas, and the Ootla in Canada.

Q: Why can’t we pump all the oil out of the Bakken Shale? – D.S.

A: The Bakken Shale, the granddaddy of the shale oil fields, underlies northeastern Montana and western North Dakota. A recent government report put the amount of oil in the Bakken Shale between 200 billion and 400 billion barrels: enough to eliminate our oil imports for at least 45 years.

However, the report also says we can only recover about 3 billion to 4 billion barrels of that oil with current technology. That’s a terrible recovery rate… around 1% or 2%.

The problem with the Bakken Shale – and with many of the shale deposits around the world – is “permeability.”

Some reservoirs are like a glass of grape juice and ice cubes. You stick in a straw and suck up the juice around the ice cubes. That’s a permeable reservoir.

However, some reservoirs are like clusters of grapes. You know there’s a lot of juice in there, you just can’t get it out. You have to stick the straw in each grape, suck a little, and then move to the next one. That’s an impermeable reservoir.

Impermeability is one of the problems facing by companies working in the Bakken Shale and other “unconventional” oil fields. You need a way to put the straw through as many grapes as possible.

It took a long time for oil companies to realize that drilling straight down wasn’t the best way to do that. The solution is directional drilling. In directional drilling, the well is drilled at an angle using a computer to help guide the drill bit.

I visited a well in south Texas where the bit went down deeper than a mile, then turned west and drilled horizontally for more than a mile. I was amazed… Here was this thick steel drill casing, steered by an engineer in a truck miles away. Now nearly all the big drilling and service companies, like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), offer steerable drilling in three dimensions.

In 1990, only about 40 rigs, or 6% of all the rigs in the U.S., were drilling horizontally. As of last month (according to the Department of Energy), 519 rigs, or 28% of the total, were drilling horizontally.

That makes it much easier for oil companies to get more out of their shale deposits. And as this technology advances, I think more of Bakken’s “grapes” will yield oil.

Some excellent companies are drilling in Bakken, including XTO Energy (XTO). But while XTO is adding reserves, you’re going to have to pay up for the growth these days. I told readers of the S&A Oil Report about the company last July, and we’re up 41% so far.

Good investing,

Matt

Source: The Commodity Investor Q&A

The counter bid – announced mid-afternoon today (Friday) – was made necessary after Halliburton trumped Candover’s bid earlier today. The Candover-led consortium’s original $3.2 billion bid had been launched on April 17.

The Halliburton bid represented a 6.2% premium over that original offer. Analysts said they expected Candover would respond with a higher bid – a correct assumption, as it turns out – but noted that they ultimately expected Halliburton to be the winner.

“I expect then Halliburton to top Candover’s bid and become the winner, unless there’s another industrial player,” Jane Coffey, head of equities at Royal London Asset Management, said earlier today in a telephone interview with Bloomberg News.

What analysts such as Coffey hadn’t counted upon, however, was the speed with which Candover came back with a new bid. That quick response is now leading some analysts to predict that Expro will take the slightly higher offer without waiting for a possible counteroffer from Halliburton.

“If I’m Expro, I’m like, ‘No, you had four weeks doing due diligence,’” James Wicklund, of Carlson Capital LLC in Dallas, told Bloomberg. “‘If you want to raise your bid, raise your bid. How many times do you need to go through the underwear drawer to know what you have?’”

Surging demand for oil from developing economies such as China and India have pushed oil to record levels over the past year. Just this week, West Texas intermediate crude crossed the $135-a-barrel threshold.

With oil commanding such a high price, Halliburton and its larger rival Schlumberger Ltd. (ADR: SLB), have profited as oil-rich nations have turned to the oil-services firms for help with excavation and exploration, forgoing the assistance of international oil majors, in hopes of keeping a larger chunk of revenue for state coffers.

At the same time oil demand is skyrocketing, some of the easy-to-reach oil deposits are starting to dry up, forcing the oil majors to experiment with more-challenging and – and much-more costly – deep-sea drilling expeditions. Oil at $135 a barrel can cover the cost of hard-to-reach sites that were previously considered financially unfeasible, making a company with Expro’s technology and experience a valuable asset.

Such heavy-hitters as Exxon Mobil Corp. (XOM), BP PLC (BP), Total SA (TOT), Chevron Corp. (CVX), ConocoPhillips (COP), and Royal Dutch Shell PLC (RDS.A, RDS.B), will spend a record $98.7 billion this year on exploration and production, according to Lehman Bros. Holdings Inc. (LEH).

And some of that almost $100 billion in exploration and production fees is bound to end up in the pockets of Expro, given that it’s among the leaders in deep-sea oil exploration. The firm’s experience with underwater wells at levels deeper than 1,000 meters (3,281 feet) would be a nice complement to Halliburton’s existing services.

Many analysts feel the deal makes too much sense for Halliburton to pass up.

“The consortium is private equity, with returns that need to be made – the higher their bid, the lower their returns,” Phillip Lindsay, an analyst with ABN Amro Holding NV (OTC: ABNYY), told Forbes. “I would say Halliburton is in a stronger financial position. I certainly think Halliburton could bid higher.”

Source: Halliburton Offer Sets Off Bidding War for Deep Sea Oil Expert

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.