Oil spill panel calls for tighter federal rules, new fees for drilling

The presidential oil spill commission said Tuesday that the federal government should require tougher regulation, stiffer fines and a new industry-run safety organization, recommendations that face an uncertain future in the new Congress.

Former senator Bob Graham (D-Fla.), one of the commission's co-chairmen, said that the Deepwater Horizon accident was "both foreseeable and preventable," and that Congress and the administration needed to enact reforms in order to prevent a repeat of the massive BP oil spill in the Gulf of Mexico last year.

"I am sad to say that part of the answer is the fact that our government helped let it happen," Graham said. "Our regulators were consistently outmatched."

The panel proposed several safeguards aimed at strengthening regulators' control over the oil and gas industry, including establishing an independent safety agency within the Interior Department that would be headed by someone for a fixed term in order to insulate the appointee from political interference. Graham said such a person should have "a background of both science and management."

It also called for funding the regulatory agency that oversees offshore drilling, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), with fees from the companies who are tapping into the nation's petroleum resource.

William K. Reilly, the commission's other co-chairman, emphasized that it would be a mistake to focus just on the three companies involved in last year's accident. "The solution to the problem has to be industry-wide."

Graham, who along with Reilly will testify before both the Senate Committee on Energy and Natural Resources and the House Natural Resources Committee on Jan. 26, said he hoped the "searing impact" of the Deepwater Horizon explosion and its aftermath would "override an ideological preference for less government, less government intrusion and less government cost" that could impede legislative action.

Both Louisiana Sens. Mary Landrieu (D) and David Vitter (R) endorsed the panel's recommendation that 80 percent of the Clean Water Act fines and penalties linked to the Gulf of Mexico oil spill go to environmental restoration. Landrieu said it would give "added ammunition" to a proposal that already has White House support.

But in a sign of how the two parties remain divided on how to regulate drilling, Landrieu said the report found a path forward for deepwater drilling while Vitter criticized it for failing to do so.

"The report could have easily said 'end of deepwater drilling,' but it doesn't," Landrieu told reporters in a conference call. "I think that's the really big takeaway - that this commission, having examined a horrible incident that occurred, has basically concluded that deepwater can be done safely."

In an interview, Vitter said he was concerned the report "didn't make any statement, any observation about the gulf still almost being shut down, nine months after the fact."

He added that although he was open to creating a new safety office within Interior, and didn't object outright to the idea of imposing fees to help regulate offshore energy exploration, he lacked confidence in the administration's ability to oversee drilling operations.

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Shell diverting LNG to Japan to help offset energy supply drop; lifts oil output targets

AMSTERDAM - Royal Dutch Shell PLC said Tuesday it plans to divert liquefied natural gas and fuel oil to Japan to help replace energy sources damaged in last week's earthquake and tsunami.

Shell, Europe's largest publicly listed oil company, also said it planned to boost its oil production to 3.7 million barrels per day by 2014, with CEO Peter Voser vowing that a "wave of new production" will continue.

Voser said Shell's refining assets in Japan were not damaged in Friday's disaster but it was too early to say how much assistance the government wants and Shell can give. Major LNG companies need to cooperate on rerouting planned shipments and it is not clear how much capacity in Japan can be used to generate electricity from LNG.

The country may in the meantime use fuel oil or crude oil power plants that are only slightly damaged. Voser said LNG diversions could lead to price increases in Europe in the short term.

Shell is not planning for scenarios in which global demand or prices for oil and gas decline on a long-term basis. Growing populations, improving living standards and a lag in investment mean that energy prices are still headed up, Voser said.

Shell's new output target compared with production in 2010 of just 3.34 million barrels of oil and equivalents, which was up from 3.14 million in 2009 thanks to heavy investments in places such as Russia's Sakhalin Island and offshore Qatar, both LNG projects.

Voser said Shell had made mistakes around the turn of the century, when it was pumping more than 4 million barrels of oil per day, not so much because of the major accounting scandal it suffered - in which managers were caught overestimating proven reserves - but instead because executives at the time hadn't spent enough on new capacity.

He warned an oil company can cut costs too far and enter a shrinking phase with limited investment and financing options. That won't happen on his watch, he told reporters during an exposition on the company's strategic plans for the coming year and beyond.

"We're 'back' now, and I can tell you we are not going back to where we were 10 years ago," he said.

Shell's annual report released Tuesday said the company added more to proved reserves than it pumped in 2010, and now has more than 14 billion barrels of proved reserves - enough for an estimated 11 years of operations.

Voser said the company plans $100 billion in capital spending in 2011-2014 to continue growing.

The company cited a list of 20 projects under construction and another 30 under consideration that will take it through 2020.

Chief Financial Officer Simon Henry gave a quick breakdown of some planned investments, including $5 billion into heavy oil projects in places like Canada and Oman, $12 billion in "tight" gas and oil exploration in the U.S. and Brazil, and $20 billion each into deep water development projects and integrated gas facilities.

The company is planning for oil prices of $60-$80 - well below current rates - and said the company would be able to support investment plans of $25-$27 billion per year and still maintain $10 billion in annual dividend payouts with oil at $50 per barrel.

In February Shell reported full year 2010 net profit of $20.1 billion, up from $12.5 billion in 2009, as production rose, inventory values increased, and refining operations improved.

Voser said the company plans to cut $1 billion in costs from its "downstream," or refining and chemicals operations this year, though employment will remain about flat companywide at around 93,000, after 7,000 jobs were cut last year.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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International Energy Agency says Libyan oil exports halted, production down to a 'trickle'

CAIRO - Libya's oil exports have "ground to a halt" because of the fighting between rebels and pro-government forces, and it could be months before the country's crude resurfaces on world markets, the International Energy Agency said Tuesday.

The Paris-based group, whose members are mainly oil-consuming industrial nations such as the United States, also said that production from the North African nation appeared to have "slowed to a trickle" as the fighting and mounting unrest prompted an exodus of foreign oil workers and led international companies to halt their operations in the country.

The IEA said that while the rebellion against Libyan leader Moammar Gadhafi continues, "what is becoming clearer is the country's oil production and exports could be off the market for many months due to both war-inflicted damage on oil infrastructure and international sanctions."

The fighting in Libya, which has served as the stage for the most violent of the anti-regime protests sweeping the Middle East, drove oil prices as high as almost $107 per barrel last week on the New York Mercantile Exchange before they quickly cooled after the massive earthquake that ravaged Japan. The U.S. benchmark crude futures contract was around $99 per barrel in electronic trading on the Merc on Tuesday.

The assessment, presented in the IEA's latest month oil market report, reaffirms the belief of many in the market that Libya's vital oil industry was all-but-shuttered amid the fighting. The country sits atop Africa's largest proven reserves of conventional crude, and had produced about 1.6 million barrels per day. Most of its exports went to Europe.

At least three of the major ports in the east are no longer exporting, and an official with the Arabian Gulf Oil Co. in the east said Monday that they were not expecting another tanker until mid-April from the terminal in Tobruk, near the Egyptian border.

Other ports have been shut down, with the Ras Lanouf facility suffering a fire at a kerosene storage facility. Even if they are open, tankers have steered clear because of the shelling by pro-Gadhafi forces.

Similarly, analysts believe that what little production remains is likely to have been shut in, or will be shut down, given that the net outcome of shipping oil through pipelines during a military campaign could easily be a major explosion.

Gadhafi's forces have been pushing to recapture the eastern ports, which represent at least 65 percent of the country's export capacity. The country's oil minister has said output is down by about two-thirds of its normal level, but the fighting, communication cuts and other challenges have made it impossible to independently verify the figures put forward both by the government or the rebels.

Many analysts believe that they may try to restart the fields with what limited oil labor force available to the state-run National Oil Co., but that such a step would be essentially irrelevant given that there appear to be few willing buyers of Libyan oil because of the mounting international sanctions on the country.

"While approximately half the country's output was halted in the first few weeks of the rebellion, by 11 March it appeared that production had slowed to a trickle, not least because of the fighting," the IEA said. "Indeed, it is understood that most oil field operations have been shut-in or sharply curtailed, with transport routes choked off."

Other members of the 12-nation Organization of the Petroleum Exporting Countries - most notably Saudi Arabia - have ramped up production to offset the loss of Libyan oil. Several minister have said there are informal discussions about whether there was a need to meet ahead of their June gathering to determine whether their output quotas needed to be revised to cool surging prices.

The IEA said OPEC crude oil output was down slightly less than 100,000 barrels per day in February, with increases from other members of the producer bloc largely offsetting the drop in Libya's production.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Increase in oil revenue amid unrest in Arab world gives Russia some breathing room

MOSCOW - With the price of oil climbing to more than $100 a barrel, Russia has a little more weight to throw around on the world stage, and it is doing just that.

The stepped-up flow of petrodollars into the government's coffers relieves what had been a worrisome budget deficit and lessens the urgency of reform. Good relations with the West - and especially the "reset" with Washington - are not quite so pressing when the economy here is in good shape.

Russia is benefiting tangibly from the turmoil in the Middle East and North Africa. Urals crude sold for $113 this week, up from $75 a year ago. Of that, $76.50 goes into the Russian treasury. And the spike in oil income has compensated for growing weakness elsewhere. It arrived just as Gazprom - the natural-gas giant that until recently was a potent weapon in Russia's foreign policy - has seen its clout in Europe washing away amid a flood of competition.

An emboldened Prime Minister Vladimir Putin was in Brussels in late February angrily lecturing the Europeans on energy policy and the uprisings in the Arab world. After months in which Moscow and Washington have tried to put their differences over Georgia on a back burner, President Dmitry Medvedev two weeks ago accused the country of threatening the security of the 2014 Winter Olympics, to be held in Sochi, near the border of a breakaway region of Georgia.

Earlier this year, Russia's warming relations with Poland went sour over the handling of the investigation into the plane crash that killed Poland's president and other top leaders this past spring.

But with increased oil revenue also comes the danger of complacency. Bureaucrats, defense contractors, pensioners and workers in construction and finance all stand to gain from the money coming in, along with the oil companies. But the cash also feeds corruption, encourages increased financial opacity and discourages attempts to shake up the system - all of which could spell trouble for Russia down the road.

"All of the dominant groups in Russia get a share of the increased oil revenue," said Alexander Auzan, an economist and adviser to Medvedev. "Yet it contradicts their long-term interests."

Largest oil producer

It's a powerful prop for the status quo - which Auzan and others say is unsustainable.

But as Sergei Guriev, head of the New Economic School in Moscow, pointed out, any change is going to involve a cost for someone, so why take the risk if the money is flowing in?

Russia is currently the world's largest oil producer. When the price last spiked, in 2007, Moscow was flooded with money and people close to Putin were suggesting that Russia was genuinely self-sufficient and had no need to engage more deeply with the West. The economic crisis the following year brought that talk to an abrupt end, and Medvedev began pushing for a Western-oriented program of modernization and diversification away from dependence on energy exports.

The Kremlin moved to stimulate the economy in 2008 by increasing government salaries and hiking pensions by 35 percent. Now it is stuck with those increases. With oil revenue providing 40 percent of the Russian budget, the Gaidar Institute for Economic Policy here has calculated that at any price less than $105 a barrel the government will be in the red.

That tempers any inclination toward hubris, said Daniel Treisman, a political scientist at UCLA who follows Russian developments. The Kremlin was looking at a difficult financial crunch, with parliamentary elections coming late this year and a presidential election next March, so the timing of this rise in revenue is more a relief than a goad to aggressive behavior.

"We don't need high prices," said Leonid Grigoriev, an economist and former World Bank adviser. "We need good relations, a long-term market and reasonable prices," which he put in the $70-to-$90 range.

Russia will not turn its back on the West, by any means, he said. But, especially in an election year, its leaders may be more vocal in pointing up differences with the West. In 2010, Russia had enough problems at home that it was actively trying to avoid them abroad; now, with money to address domestic issues, that caution may not be so evident.

Treisman, like many others, did not think much would ever come of Medvedev's modernization plans - it's not the sort of change, he said, that can be ordered from the top down. But the oil bulge makes the Westernization of the Russian economy less likely. It helps big companies - which, Grigoriev said, already dominate the economy to a much greater extent than in other developed countries - and it hurts small ones, where jobs and creativity tend to be nurtured.

Information technology firms, with high labor costs, will suffer, Guriev said, and they are central to Medvedev's vision for the future of Russia.

Gazprom loses clout

Part of what got Putin so riled up in Brussels was Europe's treatment of Gazprom, a gigantic state-owned operation that at one time had unchallenged sway in the European energy market. Gazprom was a powerful tool in the Kremlin's hands, useful when threatening Ukraine and a reminder to the rest of Europe that Russia had to be given its due.

But that was before American companies began extracting cheap natural gas from shale deposits, and before developments in liquefied natural gas (LNG) technology made inexpensive transportation by ship possible.

Qatar set up a new LNG port to ship gas to the United States, but when it couldn't compete there it turned to Europe instead. Today, Europe can buy gas cheaper from Qatar than it can get by pipeline from Russia. European companies have been renegotiating their contracts with Gazprom - downward - and the European Union has insisted that Gazprom divest itself of its pipelines.

Russia will still sell gas to Europe, said Pierre Noel, an energy expert at England's University of Cambridge, "but the pricing regime is changing." Gazprom, he said, will eventually have to change with it.

But the turmoil in North Africa has temporarily masked even Gazprom's difficulties. When the Libyan gas pipeline across the Mediterranean was shut down, Italy, which is Gazprom's second-biggest customer, relented for now in trying to renegotiate its contract.

If production in Algeria, a much bigger supplier than Libya, were to be disrupted, that would make Gazprom a power to be reckoned with again.

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BP to sell $7.06 billion in Argentina assets to help cover gulf oil spill costs

BP has agreed to sell its share of an Argentina-based oil and gas company for $7.06 billion in cash, bringing to about $21 billion its total sales of assets to help cover costs stemming from the Gulf of Mexico oil spill.

After the sale, BP will be most of the way toward its goal of selling as much as $30 billion in assets by the end of 2011 to help cover spill costs and bolster cash holdings to assure investors and lenders of the oil giant's financial stability. The sales are expected to reduce BP's assets by 10 to 15 percent.

The price of the Argentina operations fell $2 billion to $3 billion short of what many analysts expected. Nonetheless, the latest sale of what is considered a non-core asset for BP demonstrates the huge scale of the London-based oil firm's operations. In addition to asset sales, BP is raising more than $2.5 billion a quarter for spill costs from the suspension of its dividend.

BP announced Sunday that it would sell its 60 percent interest in Pan American Energy's oil and gas operations in Argentina to Bridas Corp., which already owns the other 40 percent.

BP acquired the interest when it bought Amoco in 1999. Since then, BP has revived output from the aging Argentine fields, which now produce about 100,000 barrels of oil a day and 450 million cubic feet of natural gas per day. The vast bulk of that production comes from one field, Cerro Dragon, about 900 miles south of Buenos Aires.

But Argentina's tax policies have diminished the attractiveness of operating there, analysts said.

Bridas was founded by the Bulgheroni family of Argentina. In May, the China National Offshore Oil Corp., which has been expanding its worldwide operations, bought 50 percent of Bridas for $3.1 billion. CNOOC's deep pockets helped make the BP sale possible; it will provide much of the cash for the transaction.

The price CNOOC paid earlier this year for its share of Bridas led many analysts to believe that BP would get more for its interests. The CNOOC purchase of Bridas implied a value of $15.5 billion for the entire Pan American Energy operation. That would have translated into a price of $9.3 billion for BP's share.

The sale does not include Pan American's operations in Bolivia.

"Today's agreement further demonstrates both the high quality and attractiveness of the assets throughout BP's global portfolio and also the company's ability to meet our significant financial commitments arising from the Gulf of Mexico tragedy," BP chief executive Bob Dudley said in a statement.

At the end of the third quarter, BP had incurred costs of $11.6 billion as a result of the oil spill, not counting the $3 billion first installment it had paid into a $20 billion escrow fund. Even after those payments, the company had nearly $13 billion in cash and $17 billion of bank facilities it could draw down. The company expects the total cost of the oil spill to ultimately reach $40 billion.

Dudley said BP would seek to sell other assets that might be "strategically more valuable to others than to BP."

Under the terms of the agreement, Bridas will pay BP a cash deposit of $3.53 billion, with the balance of the proceeds due on completion of the sale, which is expected to be completed by Dec. 28.

In China, CNOOC announced that it would join with Bridas's Argentine shareholders to provide $4.94 billion, or 70 percent, of the purchase price. The remaining 30 percent will be covered by loans, or additional cash contributions if necessary.

As of Dec. 31, 2009, BP's 60 percent interest in Pan American accounted for 917 million barrels of oil equivalent reserves, about 5 percent of the company's overall reserves. Production from Pan American accounted for 3.6 percent of BP's global output.

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When oil prices rise, Russia has freedom over a barrel

The judge had already postponed the verdict without explanation ("The court does not explain itself," said a spokesman). Before reading it, he barred journalists and the defendant's family from the courtroom. No one should have been surprised, therefore, when Mikhail Khodorkovsky - the Russian oil baron who once defied the Kremlin - received a further six years in prison last week, on top of the eight he's served. This time, he was sentenced for "stealing" an impossible quantity of oil, the same oil he has already been accused of selling without paying taxes.

In fact, nobody pretended that the Khodorkovsky verdict was anything but a political statement, one of a series of gestures the Russian government has made to its own public and to the rest of the world in recent weeks. The blocking of corruption investigations; the expressions of support for the brutal and violent "elections" in neighboring Belarus; the deaths of journalists; all of these seem designed to contradict the distinctly friendlier, reformist language that the Russian president, Dmitry Medvedev, was using until recently. A mere two years ago, Medvedev had even denounced Russia's culture of "legal nihilism" - a phrase some construed as a reference to the Khodorkovsky case.

Why the change of tone? Why now? Many complex theories have been hatched to explain it. This being Russia, none can be proved. But perhaps the explanation is very simple: Oil is once again above $90 a barrel - and the price is rising. And if that's the reason, it's nothing new. In fact, if one were to plot the rise and fall of Soviet and Russian foreign and domestic reforms over the past 40 years on a graph, it would match the fall and rise of the international oil price (for which domestic crude oil prices are a reasonable proxy) with astonishing precision.

To see what I mean, begin at the beginning: In the 1970s, oil prices began to rise significantly, along with the then-Soviet Union's resistance to change. The previous decade (with oil prices at $2 or $3 a barrel, not adjusted for inflation) had been one of flux and experimentation. But after OPEC pushed prices up in the 1970s, oil revenue poured in - and the Soviet Union entered a period of internal "stagnation" and external aggression. Soviet leader Leonid Brezhnev invested heavily in the military, halted internal reforms and in 1979 (when oil was at $25 a barrel) - invaded Afghanistan.

Brezhnev was eventually followed by Yuri Andropov, who had the good fortune to run the Soviet Union when oil prices were still high (at his death, in 1984, they averaged $28 a barrel). Andropov could thus afford both an internal crackdown on dissidents and a continued tense relationship with the West. But Andropov was followed by Mikhail Gorbachev, who took over just as prices plunged. In 1986 (with oil down to $14 a barrel), he launched his reform programs, perestroika and glasnost. By 1989 (when oil was still only at $18) he allowed the Berlin Wall to fall, freed Central Europe and ended the Cold War.

Prices fluctuated, but they did not really rise again in the 1990s (plunging as low as $11 in 1998), the years when Boris Yeltsin was still trying to be best friends with Bill Clinton, the Russian media were relatively free and there was still talk, at least, of major economic reforms. But in 1999 (when oil prices rose to $16 a barrel), Yeltsin's prime minister, Vladimir Putin, launched the second Chechen war, the West bombed Belgrade, and the mood in Russia turned distinctly anti-Western once again.

The fortunate Putin took over as president in 2000, at the start of a long and seemingly inexorable rise in oil prices. Indeed, Gorbachev's calls for internal reform were long forgotten by 2003 (when oil prices were creeping up to $27 a barrel). The days when Yeltsin pushed for Russia to join Western institutions were a distant memory by 2008, when Russia invaded Georgia (and oil was at $91 a barrel).

The new Russian president, Dmitry Medvedev, did try to sound nicer in 2009 (when oil prices averaged about $53 a barrel), leaving Putin, now the prime minister again, grumbling in the background. Medvedev locked a draconian treason law, invited democracy activists to the Kremlin, denounced the Belarusan dictator and even seemed to some to have liberalized Russian television just a bit.

But now it is 2011, Putin is very much in the foreground, and Khodorkovsky has just been sentenced by a kangaroo court. As I write these words, oil is at $92.25 a barrel.

Is this analysis too simplistic? Sure it is. But I haven't yet heard a better explanation.


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Gasoline prices hit eight-month low

With the end of the summer driving season just around the corner, traders and investors on Monday drove gasoline prices to an eight-month low on U.S. commodities markets, providing the latest sign of pessimism about the economic recovery.

The sagging commodity market price for gasoline is good news for American motorists, promising a mild easing in pump prices. It also marks the end of a summer of relative stability for retail gasoline prices, which have fluctuated by about 20 cents per gallon since the beginning of the year and have stayed in an 8-cent range for the past 69 days.

Prices have been stuck in neutral because of the continuing weak global economy and fundamental shifts in the U.S. gasoline market, the world's biggest.

The surge in U.S. consumption that many refiners expected earlier this year has not materialized. Last week, the American Petroleum Institute reported that in July, U.S. gasoline deliveries (a measure of demand) were 9.3 million barrels a day, down slightly compared with July 2009. Except for 2008, it was the lowest July gasoline demand number since 2003.

A lack of consumer confidence and continuing high unemployment have kept people cautious about spending and traveling. "With unemployment high and July regular gasoline prices more than 20 cents a gallon above those a year ago, consumers likely have been shopping and vacationing less and trimmed their gasoline purchases accordingly," said John Felmy, the institute's chief economist.

But long-term trends -- such as improvements in the fuel efficiency of American autos -- played a part too, other analysts said. A steady increase in the biofuels component of U.S. motor fuel is another reason; the four week average for ethanol production ending Aug. 13 was 854,000 barrels a day, up nearly 18 percent from a year ago and now more than 9 percent of the volume of motor fuel, according to the Renewable Fuels Association.

With consumption lackluster, U.S. oil companies have been left holding much bigger than usual inventories of gasoline. That, combined with renewed pessimism about U.S. economic prospects, has prompted traders to increase their short selling of gasoline -- betting on a further decline in prices. Short positions jumped 20 percent in the week ended Aug. 17, according to figures compiled by Barclays Capital.

Crude oil prices have also tumbled after a brief surge. The price of a barrel of the benchmark West Texas Intermediate type of crude for delivery next month stood at $72.70 at the end of Monday, down from $82.55 on Aug. 3.

"What is amazing is the degree to which the trading community failed to understand that the gasoline season ended at Memorial Day weekend," said Edward Morse, a veteran oil analyst at Credit Suisse who has been predicting stable prices for months. "All the evidence was in sight that the market was going to be oversupplied."

Morse said that refinery output was "too high, Europe was exporting too much [fuel], biofuel blending components were rising, and the fuel efficiency of the fleet has grown remarkably in the past four years."

The American Automobile Association said Monday that the average retail price of a gallon of regular gasoline eased to just under $2.71 a gallon, down more than 4 cents from a week ago and up only 8 cents from a year earlier, when the economy was more deeply mired in recession.

There have been some signs of economic recovery, however, in petroleum statistics recently. The Petroleum Institute said that there was an 11.6 percent increase in deliveries of low sulfur distillates, which are primarily diesel fuels used in trucking, and a 6.9 percent increase in kerosene jet fuel deliveries. The price of diesel fuel also fell 4 cents a gallon in the past week, but it has climbed 28 cents from a year ago.

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