Hamm, producers try to combat a new concern in oil industry
By Robert Barron, Staff Writer
May 03, 2009
The United States has been concerned for many years about the influx of foreign oil, mostly from the Middle East into the United States. But now, a new concern from Canada is beginning to worry some oil producers, and, led by Enid’s Harold Hamm, they are taking steps to fight it.
The Domestic Energy Partnership Alliance is an organization created three months ago as a vehicle for oil and gas companies to combat the arrival of millions of barrels of foreign oil through pipelines into Cushing, which has the largest storage capacity in the world.
“We felt one overriding need is addressing the crude oil values in our part of the country and perhaps throughout the country in the last six-to-eight months,” said Mickey Thompson, a spokesman for DEPA.
Last fall, in context with falling oil prices, the price of oil in middle America fell more sharply as compared to oil in other markets. Historically, Oklahoma Sweet crude is sold on the world market at the same price as West Texas Intermediate, which is the benchmark for purposes of trading oil on the commodities market. Oil producers began to see a differential in the crude oil market, when North Sea crude was valued with significant savings over Okla-homa oil stored in Cushing.
“The storage problem worldwide, particularly in the United States and especially at Cushing, has become severe,” Thompson said. “When storage reaches near maximum capacity, it devalues someones oil, in this case ours.”
Thompson said it seems counterintuitive the best quality oil, closest to the pricing point, is marginalized by the storage and market factors. The issue was first noticed by Enid’s Harold Hamm, CEO of Continental Resources who has large production in Montana and Wyoming. A letter from Hamm states there is a challenge brought about by record amounts of crude oil in storage and the flip-slop of New York Stock Ex-change oil prices compared to other pricing points in the U.S. and around the world. That has left crude oil producers with negative price differential from $6 to $20.
Hamm and others started looking for reasons other than storage capacity, and they discovered what is filling capacity in pipelines from the north, one in particular, that is bringing 150,000 to 200,000 barrels a day of Canadian oil into Cushing.
That in itself is a problem, but Thompson said it is coupled with the reality a company called TransCanada and their partners, Conoco-Phillips, already have received approval to build a pipeline from Alberta, Canada, to Cushing that will carry another half million barrels of oil a day into this market. The U.S. and Canadian governments already have approved the project called Keystone Pipeline, and the right-of-way is being secured with construction planned for late 2009 or early 2010. The same company now is asking for a second pipeline called Keystone XL to bring almost a million barrels a day from Canada through Cushing to Houston.
Meanwhile, a consortium between Enbridge and British Petroleum is in the process of constructing and expanding existing and new pipeline from Canada through Chicago to Cushing.
Those pipelines will bring as much as 2 million barrels a day of Canadian Tar Sands oil to Cushing. The Tar Sands project is a mining, rather than drilling, project. It began 20 years ago when it was discovered mine sludge could be run through a refining process, which is called an upgrader, to get it in a form that will go through a pipeline.
“That was not an economical process when oil was $15 a barrel, however, in the past five years, there has been a ‘gold rush’ to Tar Sands because of the price,” Thompson said.
Thompson said the tar sands are a “hugely inferior” grade of oil, but there are 1.5 trillion barrels of oil equivalent in the ground in the Alberta, Canada, area, north of Calgary. The area is in a remote and usually very cold part of Canada, but two decades of work force barriers, plus a big spike in oil prices, makes it profitable.
“Now they must find a market. They could ship it west to the pacific coast and sell it to Japan or China, or ship it through the middle part of the county and sell it there, and that’s what they are doing,” he said.
The economic and political forces aligned to make it happen and Thompson admits it is a delicate and sensitive international political issue.
“It’s safe to say most Americans would rather be dependent on Canadian oil than Middle Eastern oil and that’s the way they sold it,” he said. “We can back out of our Middle Eastern oil with the Canadian oil bonanza, but that’s really not what happened,” Thompson said.
The environmental community in Canada is alarmed about the Tar Sands problem but have been rolled over, he said. The quality of oil is a large factor, according to Thompson. The biggest factor is the Canadian companies propose pipelines and sell the space, filling capacity before the pipelines are even built. All of the space goes to Canadian oil, but access is the central issue.
“They are building across the middle part of the country destroying local crude oil markets, and all that does to the local economy and tax base without any government intervention,” he said.
The U.S. government could force building of bigger pipelines and opening them up to American oil companies, however, politically there is very little interest in what happens to small oil producers.
“No one speaks for small oil. What does that mean to the economy from North Dakota to Texas? Even in Oklahoma we spend a lot of time talking about the benefits of natural gas, which is all true,” he said. However, crude oil is used in a variety of products from cosmetics to plastics to military jet fuel.
“The defense of our country rests on having oil,” he said.
Speaking for the small producers is what DEPA has in mind. An allied movement to represent their problems on a national basis. Thompson said Hamm began to notice the Tar Sands problem three years ago when North Dakota and Wyoming markets slashed prices for local production because of the pipeline. He started to talk about it in Oklahoma because it also was happening here, but high prices prevented his getting the attention he needed, Thompson said.
Hamm’s letter to potential investors said there is a challenge about by record amounts of crude oil in storage and the flip-flop of New York Stock Exchange oil prices compared to most other pricing points. He said that has left crude oil producers facing a negative price differential of between $6 to $20. The group was by Hamm and Mike Conrad, an oil producer from Ada, and Thompson, also of Ada.
“The impact in Oklahoma specifically ... if we lose $6 a barrel of the price of oil because of so-called market conditions, that’s $150 million less in gross production tax at a time when state government is already in a hole. This is a producer and royalty owner issue, but it also is important to the economy all through the midwestern states and throughout the country. We truly believe Canadian Tar Sands oil could drown all local markets in the U.S.,” Thompson said.
Thompson knows it is not an easy answer and they are concerned small U.S. oil producers could go out of business, and that is not a good answer, he said.
“If the market price of crude oil stays less than $50 a barrel, small producers can’t afford the discount of $15-$20 barrel,” he said.
http://www.enidnews.com/localnews/local_story_124001929.html
