2012 January 27

The Master Resource Report 2012-01-27

Brazil takes another wack at the corporate Piñata.

While this is not a shot at Brazilian oil giant Petrobras it is a clear example of why we are so concerned about the corporate national champions in Brazil. They may have a lot of oil and iron ore but will investors make any money?

Bloomberg reported that “Vale SA, the world’s biggest iron- ore producer, said Brazil delivered “unfavorable rulings” on 9.8 billion reais ($5.6 billion) in unpaid taxes.”

For further insights on some of the risks and issues surrounding state capitalism take a look at the January 21st issue of the Economist.

Shale drilling cost

The following questions and answers are from the Occidental Petroleum Corp. fourth quarter 2011 earnings conference call held on January 25th. The first question concerns drilling costs and gives a specific Bakken range. The key remark was “They’re still too high…”

The second question reinforces our concerns about the difference between what is being said and reality in many of these new “game changing” programs.

The approximate time into the conference call is indicated for each question.

Question (31:48): “First question is quickly Can you please give us an update Steve on current well cost drilling in the Bakken?

Answer: Bakken well costs haven’t really changed from the third quarter. They’re still too high, I mean for what you get relative to our other projects. Somebody else may have different hurdle rate than we do. We’ve cut back, I don’t think we’ve have had any real inflation. Bill, Jessica on the Wolf Berry we’re looking depending on where you are in the basin 2 to 2 1/2 million dollars completed well cost there. In the Bone Spring those long reach horizontals are somewhere in the 6 to 7 million dollar per well range.

Question: In the Bakken I think the last update was 8 to 8 1/2 million. So that’s…

Answer: That is still a good number.

Question: (42:30) Some Permian E&P’s talking about the Wolf Berry again with the inclusion of some other embedded zone that vary from area to area are talking about 25% increase in EUR compared to a couple of years ago that their reservoir engineers are giving them and a little bit less than that on IP rates. But I was wondering if you are experiencing similar performance given the application of new hydraulic fracturing techniques?

Answer: I think we need to hire their reservoir engineers because they have different numbers than we do.

Another example of cost was given by EOG Resources during a January 10th Investor Presentation. It seems clear at least from their perspective there is a price floor around $85 per barrel today. That is not much below the $100 per barrel price mentioned in last week’s report that several Opec members need to balance their fiscal budgets.

EOG Resources Investor Presentation – Slide #8:

If WTI Averages $85+ Capex Will Be at Least at 2011 Levels

- Total Liquids Growth ≈ 27% vs. 2011

If WTI Averages <$85 Likely Reduce Capex from 2011 Levels and Reduce

Targeted 27% Liquids Growth to Manage Balance Sheet

Note: Currently clients and advisors at Ravenna Capital Management do not hold positions in Occidental Petroleum, EOG Resources, Petrobras or Vale.