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Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

Living deep inside the oil economy and studying it on a daily/weekly/monthly basis for the past 10 years, I looked forward to reading this book. Matt Simmons is a well-respected investment banker deeply involved in the energy throughout his career. I've read his pronouncements for years in my industry trade journals.

The premise and description of the book led to more anticipation. Unfortunately this book fails to deliver. Co written by a retired magazine editor, this mismatch of information is an exercise in endless repetition. Every major Saudi oilfield is named at least 100 times (don't make me count). And the endless superlatives used to describe these fields gets old fast. Padding. Nothing but padding.

The first chapter gives an absurdly concise history of Saudi Arabia. Disney could not have written a more patronizing introduction. Skip the first chapter and read Oil God & Gold. Oil God & Gold has something this book lacks. A good writer with a compelling story.

This is not meant to denigrate Mr. Simmon's premise. It is sound and it needs to be heard. Unfortunately, this 400 page book could easily have been condensed into a 100-150 page intensive analysis. But it is written in a series of chapters and sections that endlessly repeat the same information over and over. Make your point and move on. Please.

Overall a disappointment. I agree partially with Mr. Simmon's premise but only partially. He had 400 pages to make a point but wasted it. This has been one of my more difficult reads of the year, not by its content, but by the sheer effort of will required to read the entire damn thing. Pass on this one.

Well, your humble correspondent has grown his staff from 3 to 10 in a bit under 2 years. And although that is pretty damn proactive and a huge investment in resources on the part of the Company, we still cannot keep up with demand. Thus the lack of posting.

But it has been damn interesting seeing this industry through this current up cycle. The lack of materials and concurrent increase in prices is both frightening and fascinating to be a part of.

As I am deeply involved with manufacturing, I get to see firsthand the consequences of ridiculous regulation by our wonderful government.

For example, Castings and Forgings.

If you are a manufacturer working in metal, basic services are critical to manufacturing. A diversified domestic foundry and forge base is necessary for a healthy market. That existed only two sweet years ago. But then the EPA got involved. They decided that a forge or a foundry that produced above a certain tonnage of output a year was a major emitter and would now be required to install some pretty onerous emissions controls. The regulation allowed for a two year(?) compliance window.

Well guess what happened. None (to my knowledge) of the forges and foundries required by law to install emissions equipment by the drop dead date did (I'm sure the really large facilities had the economies of scale to do this but I do not know. Make me do detailed research and I will). They shut their doors instead.

Let's see. We are in a huge demand market for castings and forgings. And because of a regulatory agency which did not grasp the economic consequences, our domestic metals industry has taken a severe blow. Foundries and forges closing on a daily basis across the country.

Well guess what that does now? We get to travel the world to find what we need, establish quality assurance to make sure what we are purchasing is within tolerance and ship it in raw form across the planet. Yeah, that will bring prices of our products down.

And so the dominos fall. I work for a domestic manufacturer that employs thousands. Let's see. No metal available domestically (or available so far out in time due to demand on the exempt smaller facilities). Shipping costs crushing our margins, making us uncompetitive in the world marketplace (that free trade thing)? Goodbye manufacturing jobs. It has not happened yet. But I see the writing on the wall.

Saudi Arabia has pledged to increase the production from their oilfields. As many of these fields are veterans and depleting, this requires drilling and infrastructure development. Which costs big bucks. Since this ramp up is occurring now, the Saudis are learning quite rapidly about oilfield economics. When oil is consistently above $50, oilfield manufacturers, suppliers, engineering firms, etc. cannot keep up with demand. And from Econ 101, increased demand and limited supply means prices go up. The initial $12-15 billion project has now inflated to $15-18 billion. As expertly reported in Rigzone:

Costs Rising for Saudi Oil Expansion Plans

And although that is interesting in its own right, the tidbit that Saudi is focusing on a $35 a barrel floor on oil prices is most interesting. Just last year the OPEC basket was targeted roughly between $24 and $30 a barrel. This is a damn good indication that those days are long gone.

Mad Oilman has been up and running since Christmas (thanks to Mrs. Oilman). I had originally thought this would be focused at least 50% oilfield 50% everything else. Well obviously that has not happened. I think the main problem is that Mad Oilman has access to wonderful daily oilfield news services and he forgets that the majority of the world does not. If there is a counrty with exploitable oil or gas, I'm fairly aware on a daily basis of what is hapening in those countries. As it affects my bottom line. The most recent Syria embargo by the United States cost my group a bit over a million dollars. For equipment manufactured to specifications and ready to be loaded on a ship. Embargo is announced, equipment is now ours. We'll eventualluy canniblaize it as it is all new equipment, but that it still a big financial hit to take due only to world events.

Well Mad Oilman will attempt to write once a day on the machinations of the oil industry and it's intersection with world politics. And in this industry there are huge dollars involved.

Today's commentary involves the country of Bolivia. Bolivia has siginificant gas reserves. They have not been expoited to their full potential. This denies the Bolivian government a significant source of income, especialy export income.

There's a bit of a socialist revolt going on in Bolivia right now The President has attempted to resign but he has been denied. Chavez flu has spread from Venezuela to Bolivia.

The sypmptoms of Chavez flu are Populist prounouncements and promises. Those require loads of short term cash. Paying off the boys, as it were. Bolivia is taking this route:

Bolivian Congress to Review 76 E&P Contracts

Review, as to ignore contract law. Increase royalty rates. Increase taxes. Post facto. Needless to say, many of the contract holders are a bit upset about this. They built their own internal economic investment models based on Bolivian law at the time. And of course they included a risk factor. Their dollars are already sunk into capital projects in Bolivia (wells drilled, pipelines built, etc). Now they have been told "Sorry, restart, OK?"

Risk in Bolivia has just skyrocketed due to this decision. Many companies may abandon their contracts as they are no longer economically viable based on the new tax regiem. Investment dollars in new development have now evaporated as well. So for short term gain, Bolivia has effectively wiped itself off of the global E&P map. There are too many other opportunites elsewhere. Brazil will still be involved as they are an importer of Bolivian gas, but as a potetial global exporter, Bolivia has through economic ignorance removed itself from the global playing field. Tragic and sad.

Update!

The Bolivian story was linked to through Rigzone. Rigzone is an internet based daily oilfield newsletter. Due to generous corporate sponsorhip, this daily newsletter is free. If you are interested in the oilfield from an economic, corporate, financial, technical or government perspective this is a wondeful resource.

Last week your humble correspondent had the distinct mission of visiting one of our many facilities worldwide. And although there are myriad wonderful international destinations where oil may be involved (as well as what we euphemistically call the 'garden spots' in the industry) this trip was relatively local. Odessa, Texas.

Odessa is flat. And for the most part a desert. This is the Texas most of the world imagines. Cowboys, horses, cattle, and harsh country. Due to the flatness of the surroundings, the sky is spectacular in this part of the world. Massive and endless.

This can be a harsh place, noted for the unrelenting sun and heat of summer. February lends its own special signature to this stark land. Rain, cold and northerly winds stopped by nothing make this oilman long for the oppressive summer heat. Three days of a February on the high plains is enough. The town of Odessa is impressive in the representation of so much technology in an area that seems to be slowly disintegrating.

Business successfully concluded, Mad Oilman boards the plane home. And in a curse of seating misses a beautiful thing. Halfway through our climb to altitude, the pilot makes an announceement. "For all those passengers seated on the right side of the plane, take a look out of your windows. There's a B-2 stealth bomber being refueled by a KC-135 in the distance".

Of course I was on the left side. And being a full regional jet (Embraer I believe) there was nothing I could do to see this magificent display.

Selfishly choosing the single row aisle of the jet upon check in, I missed the opportunity for a wondrous sight. Looking at the flesh mound seated across from me, I also missed a miserable 90 minute flight seated next to that behemoth. Easily 400+, that passenger nearly blocked the aisle and fairly cowered the wee passenger next to him into the wall of the jet.

Excitement over, flesh mound turns to nap. And the roar was something to behold. It can accurately described as the equivalent of a large chainsaw with stuck valves. Except for the belching smoke (but not by much). Still, it would have been worth it.

Mad Oilman