From the perspective of the U.S. oil and gas industry, it has been a good month for Energy Sec. Bill Richardson.
It began with meetings in Saudi Arabia, after which Richardson described the types of projects the Saudis might open to participation by U.S. companies. The event was historic. However slowly, Saudi Arabia is reopening its oil and gas upstream to foreign investment.
The Saudis will welcome international capital in what Richardson and his counterpart, Saudi Oil Minister A* Al-Naimi, described as "infrastructure" projects involving natural gas and in limited, mostly downstream, oil ventures. Exploration and production projects remain off-limits.
Explaining restrictionsAl-Naimi had a simple, if incomplete, explanation for the restrictions. The kingdom, he said, doesn't need more capacity to produce oil since it can't sell all the oil it's able to produce now. It wants to concentrate on projects that put gas to valuable use within Saudi Arabia, including manufacture of exportable goods. What Al-Naimi didn't mention was that factions within Saudi Arabia still resist the presence and influence of outsiders and would agitate against direct foreign participation in oil development.
Things change, however. "Those who invest today in developing the industrial base of Saudi Arabia will probably be the ones that will be involved when and if the upstream is available for investment," Al-Naimi said.
Just days after the Riyadh meeting, Richardson announced that DOE would divert federal offshore royalty oil to storage in the Strategic Petroleum Reserve. The program involves 100,000 b/d from leases managed by the Minerals Management Service, beginning in April and ending when it replaces 28 million bbl withdrawn from SPR in recent years.
The timing makes sense. From the government's point of view, the program takes advantage of an opportunity to acquire oil cheap for inventory.
Some U.S. producers naturally would prefer that the government buy oil directly from them in this period of depressed price. Yet all producers benefit from oil withheld from a surfeit market. The DOE's 100,000 b/d alone won't lift prices, but it definitely removes oil from commerce; the government has no other plans to buy for SPR. And DOE followed the SPR initiative with announcement of small programs to help independent producers keep old fields on production and to help the smallest producers survive.
Under current market conditions, producers should welcome any and all forms of help. But Richardson's Saudi and SPR initiatives cast interesting shadows beyond the present.
With the SPR program, Richardson will demonstrate a concept long rejected elsewhere in the Clinton administration: royalty in kind. The Department of Interior, which wants to implement a royalty management program that won't work, has refused to more than tinker with the idea of the government's taking possession of royalty oil and selling it through agents. Lately, Interior Sec. Bruce Babbitt has resorted to making wild accusations against the industry in defense of his department's ill-advised proposal.
So along comes Richardson to just do what Babbitt says government cannot. The clash is delectable.
Challenging old notionsRichardson's Saudi foray holds similar appeal beyond details of the agreement. It challenges old notions that Saudi oil somehow contradicts U.S. security interests and that long-term use of oil-symbolized nowhere better than the kingdom's 260 billion bbl of reserves-is something governments should avoid.
Since popular conceptions usually hurt the petroleum industry, it's encouraging to see an energy secretary work in ways that repudiate myths of the day. And by offering help in a time of extreme market distress, Richardson's February initiatives reaffirm petroleum as an industry the country can't afford to take for granted.
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