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Canada's drawing interest as oil drilling moves onshore

Kerri Shannon, Money Morning
0 Comments| May 23, 2010

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Occidental Petroleum Corp. (NYSE: OXY, Stock Forum) announced Wednesday it was doubling the capacity estimate for a California oil field discovery as U.S. offshore drilling restrictions fuel onshore interest.

The Los Angeles-based oil explorer has focused on onshore oil production for years and estimates its current discovery near Bakersfield, California holds up to 500 million barrels of oil, valuing it at more than $34 billion at current prices.

"There is a lot of new interest in onshore-production potential in the U.S. and Occidental is at the forefront of that," Brian Youngberg, an analyst with Edward Jones & Co., told Bloomberg.

Occidental, the fourth largest U.S. oil and gas producer, made the announcement at a meeting with investors and analysts Wednesday in New York. Chief Executive Officer Ray R. Irani detailed the company's long-term strategy for profitability.

"Oxy could achieve annual production growth of between 6% and 9% over the next five years and could grow in excess of 9%, depending on success in our exploration and asset development programs," Irani said.

The company plans to invest $27.5 billion in projects over the next five years, with 55% of that going toward U.S. fields in California, Texas, Colorado, Kansas and New Mexico. Other pursuits will be in the Middle East and Latin America.

"We will also continue to emphasize our health, environment and safety programs," said Irani. "Oxy is one of the top safety performers in the oil and gas and chemical industries and consistently ranks among the safest companies in the U.S."

New Orleans investment bank Howard Weil Inc. estimated in September the California field could hold even more oil – up to one billion barrels. It's hard to determine the exact size of the area because of the need for special equipment to process natural gas in the wells with the crude supply. Occidental is building a gas processing plant slated to be finished in 2011 to develop the field quickly.

U.S. oil drilling has been increasing despite concerns over BP PLC's (NYSE: BP, Stock Forum) Gulf oil spill. Offshore drilling fell last week but overall drilling was raised due to an increase in land rigs.

Stricter regulation on the way

The new interest in onshore production comes in the oil spill's wake as U.S. Congress proposes legislation that would tighten offshore drilling rules.

The Interior Department has already placed a moratorium on new offshore drilling permits until May 28 and that could be extended, pending the completion of a safety review.

A series of panel hearings this week will probe the government's role in the spill cleanup. The Interior Department has been under fire for ineffective oversight of the offshore drilling industry and for not conducting required environmental studies.

Some new policies likely to come about after the spill's examination include separating the Minerals Management Service's oil royalty collection and safety inspection roles, stricter permit procedures and higher safety standards. The Obama administration has already asked for $29 million to pay for more inspections, and the $75 million cap on BP's liability could be raised to as high as $10 billion.

Canada draws oil interest

The Canadian oil sands have gotten more attention lately as offshore drilling permits are at a stand still, although the expensive price tag and environmental concerns continue to fuel the opposition.

Oil generated from Canadian oil sands is expected to jump ahead of conventional Canadian oil to become the top source of U.S. oil imports this year, and could make up as much as 36% of U.S. oil imports by 2030.

"The uncertainty and the slowdown in drilling permits in the gulf really underscores the growing importance of Canadian oil sands, which over the last decade have gone from being a fringe energy source to being one of strategic importance," oil historian Daniel Yergin told The New York Times. "Looking ahead, its importance is only going to get bigger."

The Obama administration is currently reviewing a request by a Canadian company to build a 2,000-mile underground pipeline to run from Alberta to the Texas Gulf Coast, significantly increasing U.S. access to oil-sands oil. Another pipeline that will go to Illinois has already been approved.

Canadian politicians have touted the oil sands as a safer oil source because leaks in pipelines would be easier to detect and manage.

Opponents to the pipelines are haunted by the Gulf spill nightmare and argue there is no emergency plan in place for a spill. The pipeline route is dangerously close to a large water supply for many U.S. homes. Environmentalists also argue against the greenhouse gas emissions during the refining process and the amount of water needed to wash out dirt from extracted oil-sand oil.

Still, some energy companies see it as the industry's future.

Devon Energy Corp. (NYSE: DVN, Stock Forum), the second largest U.S. independent oil and gas company, is producing 35,000 barrels of oil-sands oil daily and expects to increase production to 200,000 barrels a day by 2020.

The company is selling its offshore and international assets to focus on onshore oil pursuits in North America.

"If you need crude to fuel your economy, you'd really better be thinking about Canada," Chris Seasons, Devon Energy's Canadian-unit president, told The New York Times.

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