Random Notes

Jim Brown
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Largest oil products inventory in 20 years. Mexico changes its "no outsider" tune. Massive coal plant expansion. Rig counts back to pre bust 2008 level.

Inventories of crude oil and refined products rose to 1.13 billion barrels and the highest level since the government began tracking weekly levels in 1990. It is hard to rationalize higher oil prices when inventory levels are hitting record highs.

However, the latest EIA petroleum report last week showed that gasoline demand actually rose by 250,000 bpd over the same week in 2009. Despite the weak economics Americans are still driving and that driving is increasing with only two weeks left in the summer season. Once past Labor Day you can bet that demand will slow and inventories will continue to rise. Prices may test support at $70 until the supply and demand equation normalizes.

Mexico has been holding the line on "no outside oil companies" since Pemex began. There was actually a law on the books that the President of Mexico lobbied to get changed in 2008. With Mexico's budget going down in flames because of the drastic decline in Mexican production the government has relented and Pemex is soon expected to hire foreign oil companies for the first time to explore and produce in the Gulf of Mexico.

Carlos Morales, director of exploration and production said Pemex will offer four contracts by September and another three contracts by year end. Pemex expects Exxon, Shell and Chevron to help develop reserves after changes to Mexico's oil laws in 2008 to allow the country to hire foreign firms.

The contracts will be performance based and begin on shallow water fields and at mature projects as a prelude to more attractive deepwater contracts. Pemex estimates it has 30 billion barrels of oil in the Gulf. They desperately need to produce that oil to offset the dramatic plunge in production since 2004. 60% of the Mexican budget depends on oil revenue and that income has fallen by 40% in the last three years. Mexico's production has declined nearly 1 million barrels per day to 2.52 million.

Pemex is spending $11 billion on energy investments over the next five months. That is 60% of its yearly budget.

In the past international oil companies have been reluctant to partner with Pemex because they are not allowed to own the oil or book the reserves. In 1938 Mexico nationalized the assets of Chevron and Mobil and created Pemex from those assets. With drilling opportunities shrinking around the world Pemex believes it can draw these companies back into the gulf with the performance based contracts.

Clean energy was a platform plank for the current administration. However, that plank was removed from the WhiteHouse.gov website along with some other energy promises over the last couple weeks. Wanting to have clean energy is not the same thing as actually moving in that direction.

An API examination of the U.S. Department of Energy records found that there are more than 30 traditional coal fired plants that have gone into service over the last two years or are under construction. It is the largest expansion of coal fired plants in two decades.

This is not clean coal since there really is no clean coal. This is "cleaner" coal with extra emissions curbs but far from the clean coal targets of the administration. The administration budgeted $3.4 billion in stimulus funds to foster clean coal carbon capture plants. However, the new investments in traditional plants is more than $35 billion. The stimulus funds were a drop in the proverbial bucket. Officials claim clean coal technology is still 15-20 years away from reality.

For companies constructing a traditional coal plant today they are betting lawmakers are not going to agree on an expensive carbon tax that would put them out of business. If the control of the house or senate occurs in November then that tax will be a long way off.

Sixteen plants have begun operation since 2008 and 16 more are under construction. Combined they will produce an estimated 17.900 megawatts of electricity and power up to 15.6 million homes. They will also generate about 125 million tons of greenhouse gases annually. That is the equivalent of putting 22 million additional cars on the road.

Baker Hughes said the U.S. rig count rose +11 to 1,651 last week and the highest level since December 26th 2008. The bulk of the increase came in Oklahoma with the third most rigs behind Texas and Louisiana. At the peak in 2008 there were 2,031 rigs operating.

Oklahoma's rig count rose by 16 last week with Texas losing four, Wyoming -2 and one each in Colorado, New Mexico and Pennsylvania. Gas drilling rigs fell by -7 to 985.

Jim Brown

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