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Reports: Russian repeats warning on missile sites

By MIKE ECKEL, Associated Press Writer

MOSCOW — The commander of Russia's strategic missile forces has repeated warnings that Russian ballistic rockets could be aimed at U.S. missile defenses in Europe if the system is ever built, news agencies reported Wednesday.

Col. Gen. Nikolai Solovtsov spoke a day before Russia's foreign minister visits Poland, which has agreed to allow U.S. missile interceptors on its territory.

"I cannot rule out that, in case the top military-political leadership makes such a decision, both the missile defense facilities in Poland and the Czech Republic and other similar facilities in the future could be designated as targets for our ICBMs," Solovtsov was quoted by ITAR-Tass and Interfax as saying.

Poland and the United States reached a deal last month on building the site for 10 U.S. missile interceptors by 2012. Observers said the conclusion of the deal, clinched after months of protracted negotiations, was prompted by Russia's war last month with Georgia, which had alarmed former Soviet bloc countries and others neighboring Russia.

The United States has said the defenses are meant to protect Europe and America from attacks from Iran.

But Russian officials have said repeatedly that they consider the site a threat and have threatened to attack Poland _ a NATO member _ possibly even with nuclear weapons

"These 10 interceptor missiles cannot significantly devalue (Russia's) attack potential, although this will certainly make some negative effect on it. But the point is that the United States doesn't want to take on any legal obligations but is only asserting verbally: we aren't threatening you," Solovtsov was quoted by Interfax as saying.

"They already promised in words when they unified Germany that not a single NATO soldier would be there. And where are they now?" he was quoted as saying.

Foreign Ministry Sergey Lavrov was to go to Poland on Wednesday for talks with Polish Prime Minister Donald Tusk and others.

In an interview published Wednesday in the Polska daily, Lavrov said Washington had destabilized the military balance between Russia and the United States and he said Poland, and its decision to host missile defense, had become "an element of a very dangerous game."

"This means that Poland took revenge on us for having defended the Ossetians," he was quoted as saying. "This was a mean action and a political mistake."

"Unfortunately, the Europeans are following voices from outside the continent and are pursuing a policy that is in conflict with European mentality.

Russia Threatens Military Response if U.S., Poland Follow Through With Missile Defense Deal

MOSCOW — The United States and Poland signed a deal on August 20th to place a U.S. missile defense base just 115 miles from Russia — a move followed swiftly by a new warning from Moscow of a possible military response.

For many Poles — whose country has been a staunch U.S. ally in Iraq and Afghanistan — the accord represented what they believed would be a guarantee of safety for themselves in the face of a newly assertive Russia.

Negotiators sealed the deal last week against a backdrop of Russian military action in Georgia, a former Soviet republic turned U.S. ally, that has worried former Soviet satellites across eastern Europe. It prompted Moscow's sharpest rhetoric yet over the system, which it contends is aimed at Russia despite Washington's insistence the site is purely defensive.

After Wednesday's signing, Secretary of State Condoleezza Rice dismissed any suggestion the 10 missile defense interceptors — which Washington says are intended to defend Europe and the U.S. from the possible threat of long-distance missiles from Iran — represent a threat to Russia.

"Missile defense, of course, is aimed at no one," Rice said. "It is in our defense that we do this."

She denounced an earlier threat from a Russian general to target NATO member Poland, possibly even with nuclear weapons, for accepting the facility.

Such comments "border on the bizarre, frankly," Rice told reporters in Warsaw. "The Russians are losing their credibility," she said, adding that Moscow would pay a price for its actions in Georgia, though she did not specify how.

"It's also the case that when you threaten Poland, you perhaps forget that it is not 1988," Rice said. "It's 2008 and the United States has a ... firm treaty guarantee to defend Poland's territory as if it was the territory of the United States. So it's probably not wise to throw these threats around."

Hours after the signing, Russia's Foreign Ministry warned that Moscow's response would go beyond diplomacy. The system to be based in Poland lacks "any target other than Russian intercontinental ballistic missiles," it said in a statement, contending the U.S. system "will be broadened and modernized."

"In this case Russia will be forced to react, and not only through diplomatic" channels, it said without elaborating.

The Center for Arms Control and Non-Proliferation in Washington criticized the deal, saying the U.S. missile interceptors are technologically unproven and will only confirm Russian suspicions the system is directed against Moscow and not at Iran.

The deal follows an earlier agreement to place the second component of the missile defense shield — a radar tracking system — in the neighboring Czech Republic, another formerly communist country now in NATO.

"We have achieved our main goals, which means that our country and the United States will be more secure," Polish Prime Minister Donald Tusk told Rice after the signing.

Many Poles agreed. "After what happened in Georgia, I believe that this is good protection for us," said Kazimierz Dziuba, 49, a hospital worker in Warsaw.

The Georgian conflict "made the Americans agree to this deal sooner because the Russians are getting too bossy," Dziuba said.

Not all Poles were happy, however.

Alina Kesek, an 82-year-old retired office clerk who lived through World War II, when Nazi Germany and the Soviet Union divided Poland between them, and then experienced four decades of Moscow-dominated communist rule, said the Patriot missiles were a "kind of provocation" toward Russia.

"This means a threat from the Russian side," said Kesek. "I am not very pleased with this deal."

Some residents in the northern Polish town of Redzikowo, where the missile defense facility will be located, fear it may expose them to retaliatory attacks or other dangers.

Along with the main deal, the two nations signed a so-called "declaration on strategic cooperation," which is to deepen their military and political partnership.

It includes a mutual commitment to come to each other's assistance immediately if one is under attack — enhancing existing obligations both have as NATO members.

The declaration also was accompanied by a promise from the U.S. to help modernize Poland's armed forces and to place a battery of Patriot missiles there by 2012.

Rice said the deal "will help both the alliance and Poland and the United States respond to the coming threats."

Poland and the United States spent a year and a half in formal talks, which snagged in the final phase on Poland's demands for the Patriot missiles and other points.

However, the deepening U.S.-Polish friendship dominated Wednesday's proceedings.

"In troubled times the most important thing is to have friends," Rice said. "But it is more important to have friends who share your values and your aspirations and your dreams. And Poland and the United States are those kind of friends."

Approval for the missile defense sites is still needed from the Czech and Polish parliaments. No date has been set for lawmakers in Warsaw to vote, but the deal enjoys the support of the largest opposition party as well as of the government.

Source: Associated Press

Venezuela announces plans for military exercises with Russia

By Simon Romero and Clifford J. Levy

CARACAS, Venezuela: Chafing at the reactivation in recent weeks of an American naval fleet in Latin American waters, President Hugo Chávez said Sunday that Venezuela could engage in naval exercises with Russian ships in the Caribbean before the end of the year.

Chávez's words echoed news reports here over the weekend that four warships with as many as 1,000 sailors from Russia's Pacific Fleet could take part in a training exercise in November off Venezuela's coast. Salvatore Cammarata Bastidas, Venezuela's chief of naval intelligence, said the exercises were aimed at strengthening military ties.

"Go ahead and squeal, Yanquis," Chávez said in a mocking tone on his Sunday television program, adding, "Russia's naval fleet is welcome here." But Chávez qualified his remarks by saying that planning for the maneuvers was in the "preparation phase," pending decisions by the Russian government. Official confirmation of the exercises was not available from Moscow; Russian military officials released no information on Sunday about planned naval maneuvers.

But after the war in Georgia, the Kremlin has expressed increasing frustration over the presence of NATO and American ships in the Black Sea. On Saturday, after an American ship delivered humanitarian aid to Georgia at its Black Sea port of Poti, President Dmitri Medvedev of Russia suggested that the United States was encroaching on Russia's sphere of influence.

A few days before the conflict in Georgia, Russia's prime minister, Vladimir Putin, announced that Russia would bolster its relations with Cuba, Venezuela's top ally. But Russian officials at the same time denied that they would deploy military hardware there.

Venezuela has gone out of its way to strengthen relations with Russia. In addition to welcoming Russian investment, Chávez has emerged as a major buyer of Russian arms. Last month, he also backed Russia's recognition of two Georgian breakaway regions.

Chávez has framed his warming to Russia within his government's concern over the reactivation in July of the United States Navy's Fourth Fleet in Latin American waters after a five-decade lull.

Putin Vows 'An Answer' to NATO Ships Near Georgia

By VLADIMIR ISACHENKOV Associated Press Writer

Putin promises Russia will 'answer' increasing number of NATO warships in Black Sea

Prime Minister Vladimir Putin said Tuesday that Russia will respond calmly to an increase in NATO ships in the Black Sea in the aftermath of the short war with Georgia, but promised that "there will be an answer."

Meanwhile, President Dmitry Medvedev sternly warned the West that it would lose more than Moscow would if it tried to punish Russia with sanctions over the war with Georgia.

Russia has repeatedly complained that NATO has too many warships in the Black Sea. Foreign Ministry spokesman Andrei Nesterenko said Tuesday that currently there are two U.S., one Polish, one Spanish and one German ship there.

"We don't understand what American ships are doing on the Georgian shores, but this is a question of taste, it's a decision by our American colleagues," Putin reportedly said. "The second question is why the humanitarian aid is being delivered on naval vessels armed with the newest rocket systems."

Russia's reaction to NATO ships "will be calm, without any sort of hysteria. But of course, there will be an answer," Interfax quoted Putin as saying during a visit to Uzbekistan.

Asked by exactly what measures Russia would take in response to NATO ships in the Black Sea, Putin was quoted as answering, "You'll see."

As if to emphasize the country's strength — its control over a growing percentage of European energy supplies — Putin traveled to Uzbekistan to announce a deal that would tighten Russia's hand on Central Asian energy exports to the West.

In an interview with Italy's RAI television broadcast Tuesday, Medvedev said that Russia doesn't fear expulsion from the Group of Eight leading industrialized nations.

"The G-8 will be practically unable to function without Russia, because it can make decisions only if they reflect the opinion of top global economies and leading political players of the world," Medvedev said. "That's why we don't fear being expelled from the G-8."

Presidential candidate John McCain is among those who called for Russia's expulsion from the elite club of the world's richest countries.

Medvedev also warned that NATO would suffer more than Russia if its ties with Moscow were severed.

"We don't see anything dramatic or difficult about suspending our relations if that's the wish of our partners," Medvedev said. "But I think that our partners will lose more from that."

NATO nations depend on Russia as a transit route for supplies going to the alliance's troops in Afghanistan.

At a summit Monday, the European Union issued a declaration saying Russia was violating the terms of its cease-fire with Georgia. It warned that talks on a political and economic agreement with the Kremlin would be postponed unless Russian troops pulled back from positions in Georgia.

Britain and eastern European nations held out for a tougher line, but Europe's dependence on Russian oil and natural gas deterred stronger sanctions.

Russia supplies the EU with a third of its oil and 40 percent of its natural gas — a dependence that the EU's administrative body says will rise significantly in the future.

Putin announced Tuesday that Russia and Uzbekistan will build a new natural gas pipeline that will pump Turkmen and Uzbek gas into Russia's pipeline system, which Russia will re-export to Europe.

The project, which has been under discussions for several months, will strengthen Moscow's hold over Central Asian gas and undermine Western-backed efforts for a rival trans-Caspian route.


Associated Press writers Mansur Mirovalev and Mike Eckel in Moscow and Constant Brand in Brussels, Belgium, contributed to this report.

Russia Agrees to Pull out of Key Areas of Georgia

By JAMEY KEATEN Associated Press Writer

Russia's president pledged Monday to withdraw troops from key areas of Georgia after 200 European Union monitors deploy later this month as part of a revised cease-fire agreement.

Russia recognized South Ossetia and the separatist Black Sea province of Abkhazia as independent nations after the five-day war and has ringed the regions with checkpoints the West says violate the terms of a cease-fire brokered by French President Nicolas Sarkozy.

Georgian President Mikhail Saakashvili cautiously endorsed the deal, but insisted any final settlement with Russia must respect his country's territorial integrity. He made clear he still considers the breakaway regions of South Ossetia and Abkhazia part of his country.

"There is no way Georgia will ever give up a piece of its sovereignty, a piece of its territory," Saakashvili said after meeting with French President Nicolas Sarkozy, who brokered the latest deal.

The short war between Georgia and Russia — which began when Georgian forces attacked South Ossetia followed by Russia invading and routing Georgia's military — has turned into a critical event in the post-Cold War world as Russia asserts its new economic and military clout and the West struggles to respond.

Chevron to expand work in Saudi-Kuwaiti neutral zone

Bloomberg News

Saudi Arabia, the world's largest oil supplier, extended operations by Chevron Corp. in three onshore oilfields straddling the kingdom's border with Kuwait, the Saudi Press Agency reported, citing a government statement.

The Saudi cabinet approved ''an extension and amendment of the agreement'' of Chevron's operations in the Saudi-Kuwait Divided Zone, the state-owned news agency reported.

The Divided Zone, also known as the Neutral Zone, contains 5 billion barrels of proven oil reserves, shared between the two countries, and produced 600,000 barrels a day in 2007, according to information on the Web site of the U.S. Energy Information Administration.

Chevron operates the Wafra, Humma, and South Umm Gudair oilfields in the zone under a 60-year license, according to EIA. These fields contain 2 billion barrels of proven reserves and total production of about 260,000 barrels a day of Arab Heavy oil.

OPEC agrees to curb oil overproduction

Ministers of oil producing nations announce that they will cut back 520,000 barrels a day in overproduction of crude to avoid more energy turmoil.

VIENNA, Austria (AP) -- OPEC oil ministers have agreed to curb overproduction by more than 500,000 barrels, in a compromise meant to avoid new turmoil in crude markets while seeking to prevent prices from falling too far.

The move reflects OPEC efforts to cover all bases in an oil market that saw prices spike to a new record just short of US$150 a barrel in July, only to shed nearly 30 percent off those peaks in subsequent months.

An OPEC statement issued after oil ministers ended their meeting early Wednesday said the organization agreed to produce 28.8 million barrels a day.

OPEC President Chakib Khelil said that quota in effect meant that member countries had agreed to cut back 520,000 barrels a day in overproduction.


Fannie, Freddie stock in nose dive

By David Ellis, CNNMoney.com staff writer

Common shares of both twin mortgage buyers plummet in first trading session after government enacts rescue plan.

NEW YORK (CNNMoney.com) -- Investors in Fannie Mae and Freddie Mac common stock saw their stakes in the mortgage giants plummet in value Monday, a day after the government announced a dramatic rescue of the two companies.

On Sunday, the U.S. government assumed control of the twin mortgage buyers to help shore up the ailing U.S. housing market.

That sent shares of the two companies, which had fallen more than 80% so far this year ahead of Sunday's announcement, into a tailspin just after the opening bell Monday.

Fannie (FNM, Fortune 500) shares plunged 80%, while Freddie (FRE, Fortune 500) stock was down 75% in morning trading on the New York Stock Exchange.

The exchange had suspended pre-market trading of both common and preferred stock of the two institutions Monday to allow investors to digest the actions taken by the government over the weekend.

The NYSE would not comment on whether Freddie or Fannie was at risk of being delisted from the NYSE, but said it was monitoring all the rules that apply to companies that have seen the value of their stock evaporate overnight.

U.S. seizes Fannie and Freddie

Treasury chief Paulson unveils historic government takeover of twin mortgage buyers. Top executives are out.

NEW YORK (CNNMoney.com) -- Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.

The move, which extends as much as $200 billion in Treasury support to the two companies, marks Washington's most dramatic attempt yet to shore up the nation's housing market, which is suffering from record foreclosures and falling prices.

The sweeping plan, announced by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.

"A failure [of Fannie and Freddie] would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said at a press conference in Washington. "And a failure would be harmful to economic growth and job creation."

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500), which were created by the U.S. government, have been badly hurt in the last year by the sharp decline in home prices as well as rising mortgage delinquencies and foreclosures. All told, the two firms have racked up about $12 billion in losses since last summer.

On Sunday, officials stressed that both Fannie and Freddie will be open for business on Monday morning, although the firms will have undergone a dramatic facelift by then.

Freddie CEO Richard Syron and Fannie CEO Daniel Mudd will no longer run the agencies, while the FHFA will assume control of the boards. Regulators took care not to foist blame on the two executives, adding that they would stick around to help with the transition.

Syron and Mudd will be replaced by two finance veterans charged with restoring the mortgage titans to health. Herb Allison, the former chairman and CEO of pension provider TIAA-CREF, will head Fannie Mae. Allison formerly served as president of Merrill Lynch.
David Moffett, who served as vice chairman and chief financial officer of U.S. Bancorp until early 2007 and then joined the Carlyle Group private-equity firm as a senior adviser, will take over Freddie Mac.

At the same time, dividends on both common and preferred shares will be eliminated in an effort to conserve about $2 billion annually. All of the firms' lobbying and political activities will be halted immediately and charitable activities reviewed.

In addition, the Treasury Department announced a series of moves targeted at providing relief to both housing and financial markets.

Paulson said Treasury would boost housing by purchasing mortgage-backed securities from Freddie and Fannie, as well as offering to lend money to the companies and the 12 Federal Home Loan Banks. The home loan banks advance funds to more than 8,000 member banks. (Read what Paulson said.)

The Treasury, with fellow regulator FHFA, will also buy preferred stock in Fannie and Freddie to provide security to the companies' debt holders and bolster housing finance.

The government, in agreeing to backstop the firms, said it would receive $1 billion in each company's senior preferred stock. The government will also receive a quarterly dividend payment and the right to own 79.9% of each company.

How we got here

Sunday's announcement brings an end to months of speculation about the fate of the two firms. Shares of Fannie and Freddie, which have fallen more than 80% as of the end of Friday's session, were hammered this summer among concerns they would need to raise additional funds to cover future losses or need to be taken over by its federal regulator. Investors feared that either step would reduce or wipe out the value of current shareholders' stakes.

In mid-July, the Treasury Department and Federal Reserve announced steps in to make funds available to the firms if necessary and Congress approved the sweeping proposals later that month.

Shortly thereafter, regulators stepped up their review of Fannie and Freddie. Paulson announced in August that he had tapped Wall Street firm Morgan Stanley (MS, Fortune 500) to help him examine the firms.

Sources familiar with the matter told Fortune that Morgan Stanley had determined that both Freddie and Fannie faced "meaningful" capital issues before deciding last week that government intervention was necessary. Morgan Stanley has called a firm-wide meeting on Monday morning to explain the deal.

Officials ruled out a capital infusion - a less drastic option than convervatorship - after considering questions such as whether the government would have to keep putting money in and how best Treasury officials could protect taxpayers, according to one of the sources.

In the end, the route taken amounts to "a timeout, not a liquidation," says the source. "Conservatorship leaves all options open for the next administration."

Following an exhaustive review, FHFA's Lockhart said Sunday that the two companies could not continue to operate without taking "significant action."

Fannie and Freddie have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy.

The two firms buy loans, attach a guarantee, then sell securities backed by the loans' income stream. All told, they own or back $5.4 trillion worth of home debt - half the mortgage debt in the country.

Reaction to the news

The Treasury-FHFA plan, which was widely anticipated after financial markets closed on Friday, drew praise from regulators, lawmakers and some market experts.

President Bush called the move "critical" to the housing market recovery. "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth in the future," he said.

Federal Reserve Chairman Ben Bernanke, who along with Paulson has led efforts to help get the U.S. housing market and the broader economy back on track, endorsed the move by Lockhart and Paulson.

"These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke said in a statement.

Sen. Charles Schumer, D-N.Y., a member of the Senate Banking Committee, said that Paulson had "threaded the needle just right" with the plan, noting that it will likely be met with praise from other lawmakers.

At first blush, Wall Street seemed encouraged by the news, although the true test will come when financial markets around the globe open Monday. Pimco's Bill Gross, a widely followed bond fund manager, said that the Freddie-Fannie plan was the right move.

"This is a significant step and almost exactly what we had hoped for," Gross told CNNMoney.com Sunday.

In addition to confirming the government's sovereign credit rating, Standard & Poor's affirmed its sterling AAA rating on both Fannie Freddie on the news, adding that its outlook for the two firms is stable.

Unanswered questions

The cost of the government intervention remains unclear however. Experts argue that it will depend in large part on the structure of the rescue, the direction of home prices and mortgage default rates.

Still it seems almost certain it will run into the billions and will most likely eclipse such other high-profile government bailouts including than the Federal Reserve's $29 billion backing of Bear Stearns assets when it was taken over by J.P. Morgan Chase.

Paulson said that the cost to taxpayers would largely depend on the future financial performance of Fannie and Freddie.

Another unintended yet unavoidable consequence may be the impact to the nation's banks.

Some of the nation's largest financial institutions including JPMorgan Chase (JPM, Fortune 500) and Sovereign Bancorp (SOV, Fortune 500) own a big chunk of the estimated $36 billion in preferred shares of Fannie and Freddie, according to research published last month by Keefe, Bruyette & Woods, an investment bank that specializes in financial firms. Those stakes are at risk of being wiped out as a result of Sunday's announcement.

Top banking regulators, including the Federal Reserve as well as the Federal Deposit Insurance Corp., said in a joint statement Sunday that a limited number of smaller institutions have significant preferred share holdings in Fannie and Freddie. They added they are prepared to work with these institutions to come up with a plan should they need to raise capital.

Still, the rescue of Fannie and Freddie could go a long way toward its intended aim - bringing stability to the housing market while making it easier for consumers to obtain affordable mortgages.

OPEC considers cutting oil production to prop up crude

Associated Press

VIENNA, Austria — With oil prices off nearly 30 percent from their highs of almost $150 a barrel, OPEC oil ministers are considering what was unthinkable just a few weeks ago — cutting back output to prop up the price of crude.

No one is predicting much of a cutback — if any at all. Still, such a move would not even have been thought of with oil prices setting record after record back in July.

But the bull run appears to have paused, if not ended, which means a new look at options for Tuesday's meeting of the 13 ministers at OPEC's Vienna headquarters.

Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 percent. Back then, OPEC's main concern was pushing back against arguments from the U.S. and other key consumers that an output increase was needed to end rocketing prices. Oil ministers insisted there was adequate supply to meet demand, and blamed speculators and a weak U.S. dollar for crude's stellar rise.

But now, the greenback has strengthened, world demand has decreased due to creaky economies, traders' appetites for commodities have cooled — and suddenly the market appears to have turned bearish. Oil markets, however, will also be keeping a close eye on Hurricane Ike, which on Sunday was an extremely dangerous Category 3 storm projected to move into the oil-producing Gulf of Mexico after passing over Cuba.

Light, sweet crude for October delivery fell $1.66 to settle at $106.23 a barrel Friday on the New York Mercantile Exchange — its lowest close since early April.

The downward spiral has led to calls from OPEC price hawk Iran — the group's second-largest producer — to reduce output from the nearly 30.5 million barrels a day being pumped last month by the organization's members.

Not far behind is Venezuela. While moderating recent demands for immediate output cuts, Venezuelan Oil Minister Rafael Ramirez has drawn the line at $100 per barrel of oil. Anything below that should serve as a wake-up call for OPEC to tighten the spigots, he says — sentiment that is shared by other OPEC members.

Still, a major cutback is unlikely without Saudi compliance, and the Saudis — de facto OPEC policy setters who are now producing nearly a third of total OPEC output — have given no hint they favor that option. Saudi Oil Minister Ali Naimi has instead talked about a floor of $80 as the red line for action.

OPEC has reason to be cautious.

Despite their precipitous fall, prices remain 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Any OPEC move Tuesday to pare back output would result in a howl of protest from the U.S. and other major consumers, and give a larger platform to Republican presidential candidate John McCain and Barack Obama, his Democratic counterpart, to call for reduced dependence on foreign oil.

Additionally, OPEC understands that high prices drive down demand and will likely try to find a balance between high profits and a price that the market can accept.

In a forecast last month, OPEC predicted that the world's forecast appetite for oil for this year overall will have fallen by 30,000 barrels a day and noted that world demand growth next year will be "the lowest since 2002." And on Wednesday, the U.S Energy Administration reported a 3.5 percent drop for products including gasoline and other oil-based products compared with last year.

Such factors have led some experts to predict OPEC would opt for no change.

"The ministers will hold the status quo (although) there is going to be the usual jawboning from the usual suspects" for a cutback, said oil analyst and trader Stephen Schork. Even now, "oil is by no means cheap and that is certainly adding a lot of pressure to the (world's) economies — the smarter ones, the Saudis, the Qataris the Kuwaitis are aware of this."

Others think that OPEC, which accounts for about 40 percent of world oil production, will compromise between doing nothing — thereby chancing a further erosion in prices — and slashing boldly — thereby risking skyrocketing prices and an ensuing fallback in demand.

That middle way would mean agreeing to pare away at overproduction without reducing the overall output quota of 27.3 million barrels a day set in November for the 12 OPEC members under production limits.

Energy analyst Catherine Hunter of Global Insight estimates overproduction at between 600,000 and 800,000 barrels a day and says this is the likely "first target of cuts." And because most of the extra production comes from Saudi wells, such a move could be easily accepted by most OPEC members.

"Ultimately, OPEC wants to know what the market will bear," she wrote in a recent analysis, adding that with the world's developed economies expected to perform poorly — and a resulting overspill to East Asian markets — "the answer may well be, not much."

Chip Hodge, portfolio manager with MFC Global Investment Management, also thinks that if OPEC issues a call for cuts it will be in overproduction, adding the organization has little additional wiggle room.

"Oil prices are still higher than where they were a year ago," he said. "They just don't have much to complain about."

Sarkozy in Moscow talks, pushes for EU monitors

By JAMEY KEATEN, Associated Press Writer

French President Nicolas Sarkozy on Monday pressed Moscow to honor its pledge to withdraw troops from Georgia, while Russian soldiers prevented international aid convoys from visiting Georgian villages in a tense zone around the breakaway province of South Ossetia.

Georgia said Monday that far from withdrawing, Russia reinforced its positions on the outskirts of the Georgian Black Sea port city of Poti over the weekend.

Sarkozy has been criticized for giving the Russians too much room for interpretation in the peace deal signed Aug. 12, and his diplomatic blitz Monday to Moscow and Tbilisi may be his last chance to save it — and his own credibility as a peacemaker.

"This is the accord that should be put into place," Sarkozy said of the original cease-fire deal.

Sarkozy's EU delegation also was pushing for a quick deployment of several hundred EU monitors to Georgia. But just after Sarkozy arrived Monday morning, a Russian Foreign Ministry spokesman said Moscow is against an independent EU monitoring mission in Georgia.

Russian tanks and troops entered South Ossetia after Georgian forces began an offensive to gain control of the pro-Russian territory, which has had de-facto independence for more than 15 years. The Russians quickly repelled the soldiers and drove further into Georgia.

Nearly a month after the five-day war, Russian troops remain entrenched deep inside Georgian territory. Georgia and the West have accused Russia of failing to honor its pledge to withdraw its troops to positions held before the fighting broke out Aug. 7. The dispute has plunged relations between Moscow and the West to near Cold War levels of animosity.

But Russia says those troops are peacekeepers and that they are allowed under the accord to help maintain security around Georgia's breakaway provinces of Abkhazia and South Ossetia.

Moscow has recognized the two regions as independent states, a move denounced in Georgia and abroad. The regions make up roughly 20 percent of Georgia's territory — and include miles of prime coastline along the Black Sea.

In South Ossetia, the convoy of four vehicles from U.N. agencies waited for about an hour at the checkpoint in Karaleti, but was turned away after a brief discussion with a Russian general who arrived to negotiate. The three aid agency SUVs and a World Food Program truck loaded with wheat flour, pasta, sugar and other staples were headed to Georgian villages around South Ossetia.

"We tried to do a preliminary humanitarian assessment mission. It didn't work out today as we would have hoped, and we will make every effort to continue to conduct such missions in the future," David Carden, who was leading the interagency mission by the World Food Program, UNICEF and the U.N. refugee agency, told The Associated Press.

The Russian general left immediately after the exchange, and a serviceman at the checkpoint said he was not authorized to comment on the reason for the refusal. Russian servicemen said the general was Maj. Gen. Marat Kulakhmetov, head of the Russian peacekeeping forces in South Ossetia.

An official at the headquarters of Russian peacekeeping forces in South Ossetia said later by telephone later that the U.N. convoy was turned away because no official request for passage had been submitted. The official, who said he was not authorized to give his name to the media, said aid deliveries must be escorted by peacekeeping forces.

Carden said U.N. authorities had told the Russian of their plans.

On Friday, Russian forces barred the ambassadors of Sweden, Latvia and Estonia from villages beyond Russian checkpoints where they wanted to deliver aid, assess the situation and verify allegations of ethnic cleansing, the ambassadors said in a statement.

A vehicle from CARE International on an assessment mission on behalf of several non-governmental aid agencies was also turned away Monday before the general arrived.

Wolfgang Gressman, an emergency response adviser to CARE International, said he had been turned away Sunday and told to come again Monday after submitting a list, in Russian, of the agencies involved.

Also Monday, Georgia accused Russia of a "campaign of harassment and persecution" in South Ossetia and Abkhazia and urged the International Court of Justice to intervene to halt killings and forced expulsions.

Russia also accuses Georgia of crimes against humanity, for launching a massive attack last month on South Ossetia, killing Russian peacekeepers and dozens of civilians.

The 15-judge tribunal, unofficially known as the World Court, will likely take years to deal with Georgia's case.

Georgia, meanwhile, said that five armored personnel carriers and about 50 troops were added to a post near the Georgian Black Sea port city of Poti and one APC and 10 troops were added to a post on a main road into the city, a government statement said.

Georgian officials had said previously that there was a total of about 100 Russian troops at the two posts.

Georgia also said that two Russian air force jets illegally entered Georgian airspace Sunday and remained over Georgia for about 45 minutes.

At a Russian checkpoint in Karaleti outside South Ossetia, Tamazi Kaidarashvili, an ethnic Georgian who is one of only a few dozen people remaining in his village north of the checkpoint, said he hoped the EU would persuade Russia to withdraw forces.

"As long as the Russian boot is in the Caucasus, there will never be peace," he said.


Associated Press writers Steve Gutterman in Karaleti, Georgia; Vladimir Isachenkov and Mansur Mirovalev in Moscow; and Mike Corder at The Hague contributed to this report.


N. Dakota oil pipeline capacity limited as production, imports climb

Nick Snow
Washington Editor

The Federal Energy Regulatory Commission told a Senate subcommittee this week that increased production of crude oil in North Dakota and Canada has exceeded the capacity of the region's pipeline. The Senate Appropriations Committee's Energy and Water Subcommittee is trying to decide what improvements need to be made in the refinement and transportation infrastructure to increase crude output from North Dakota's Bakken Shale formation

WASHINGTON, DC, Sept. 4 -- North Dakota crude oil production and imports from Canada exceed current pipeline capacity in the region, Federal Energy Regulatory Commission Chairman Joseph H. Kelliher told a US Senate subcommittee Sept. 3.

"Both domestic and Canadian crude oil production are increasing, exacerbating the competition for limited pipeline capacity. There have been additions to pipeline takeaway capacity in the region, not enough to limit constraints or accommodate future increases," he told the Senate Appropriations Committee's Energy and Water Subcommittee at a field hearing in Bismarck, ND.

FERC supports energy infrastructure development and has participated as a member of a crude oil market infrastructure task force that the Interstate Oil and Gas Compact Commission initially convened in 2006 to investigate Rocky Mountain crude oil market dynamics, Kelliher continued. "However, the parties themselves must resolve who will commit to support the development of new infrastructure and who is willing to pay for it," he said.

The subcommittee's chairman, Byron L. Dorgan (D-ND), said that he convened the hearing because he wanted to determine what steps will need to be taken to transport and refine the increasing amount of crude being produced from the Bakken Shale formation in western North Dakota.

"With the current infrastructure, it is a challenge to transport the oil from wellhead to refineries, both in and out of state, without experiencing a bottleneck. As this new oil is produced, we need to make sure the transportation infrastructure exists so that future oil production is not limited," he said.

Already increasing

Williston Basin oil production within the state and imports from Canada already put pressure on pipeline capacity, Kelliher said. North Dakota's oil production rose from 125,000 b/d in 2007 to 147,000 b/d in March, he noted. Existing pipelines are operating at full capacity, requiring that they apportion that capacity among shippers, he said.

Meanwhile, crude oil imports from Canada also have risen, according to Kelliher. Annual Alberta Basin oil production levels for 2007 published by the province's conservation board showed a 3% increase from 2006 to 1.86 million b/d, he said. "Significantly, Canadian imports are projected to reach 3.4 million b/d by 2017," he indicated.

He pointed out that imports from Canada currently comprise 20% of total US crude supplies and are the United States' largest foreign source. "We expect this trend to continue. These imports are reliable supplies from a friendly country and improve our energy security," Kelliher maintained.

"However, Canadian imports require space in the pipeline and can create bottlenecks in capacity that can limit the amount of crude oil that can be moved out of the North Dakota production region. Pipelines serving North Dakota are increasing their capacity; nevertheless, it is likely that with additional growth in North Dakota oil production and Canadian imports, the pipelines' proposed capacity increases still will not be adequate to transport North Dakota production without capacity prorationing among shippers seeking that capacity," he added.

Other scheduled witnesses at the hearing included Lynn D. Helms, director of the North Dakota Department of Mineral Resources; Harold G. Hamm, chairman and chief executive of Continental Resources Inc. in Enid, Okla.; Kevin Hatfield, regional director for Enbridge Pipelines Inc.'s North Dakota system, and State Rep. Shirley Meyer (D-Dickinson), co-chair of the Task Force to Establish a North Refinery.

Contact Nick Snow at nicks@pennwell.com.

Iran, Venezuela press OPEC to reduce output


As Oil Prices Fall, OPEC Faces a balancing act, Venezuela and Iran have put OPEC on notice that they want oil output decreased to keep prices above $100 a barrel. Producers have gotten used to higher prices, which are up 14% this year and have more than quadrupled in five years. OPEC leaders are scheduled to meet next week in Vienna.

The decline in oil prices has been a welcome relief for consumers and a rare piece of positive news in a bleak economic landscape. But for oil producers that have grown accustomed to rising revenue, falling prices are turning into a cause for concern, if not quite panic.

Oil prices have dropped by a third in seven weeks and appear to be headed below the symbolic $100-a-barrel threshold for the first time since March. Though oil remains expensive by historical standards, the speed of the decline is prompting some soul-searching within the OPEC cartel.

Venezuela and Iran, the leading price hawks in the group, said they did not want oil to fall below $100, a price Iran’s oil minister recently said was a “minimum.” Both countries signaled that members of the Organization of the Petroleum Exporting Countries needed to reduce output to bolster prices.

Other OPEC members, like Algeria and Kuwait, fear that high energy costs might jeopardize their exports as the global economy slows. Saudi Arabia, the world’s biggest oil exporter, has not specified a price it considers fair, though King Abdullah has said that $100 was too high.

For OPEC’s leaders, who meet in Vienna next week, trying to manage the decline in prices is tricky. Cutting production at today’s elevated levels could spark a backlash and paint the cartel as greedy. Conversely, leaving production unchanged at a time when demand growth is slowing could precipitate a price collapse, as in the late 1990s.

“They are playing a balancing game,” said Michael Wittner, the global head for oil research at Société Générale, in London. “If prices are too high, they will kill the golden goose and hurt consumption. But at the same time, they see the weakening economy and are thinking the world doesn’t need so much oil right now.”

Oil settled at $107.89 a barrel on Thursday, the lowest level in five months. The drop accelerated even after Hurricane Gustav’s passage over the Gulf of Mexico caused modest disruption to oil and gas production.

Despite a fall from the record high of $145.29 a barrel on July 3, oil prices are up 14 percent this year. They have more than quadrupled in five years.

Drivers are getting some relief as gasoline falls from this summer’s records. If oil drops below $100 a barrel, that would most likely drive gasoline prices below $3.50 a gallon, down from July’s peak of $4.11. Gasoline now sells for an average of $3.68 a gallon. But falling oil prices could jeopardize investments in new sources of energy, whose economics would look less favorable.

Producers have gotten used to the high prices, which have fueled an unprecedented economic boom in the Middle East, Russia and South America. From the gleaming towers of Abu Dhabi to the new cities burgeoning in Saudi Arabia, producers are relying on a petroleum windfall to develop industries, attract businesses and expand their economies.

This year, OPEC’s export revenues are likely to exceed $1 trillion, according to estimates from the Energy Department. The exporters have earned $642 billion during the first seven months of 2008, nearly as much as they did for all of last year.

Demand for oil in the United States, the world’s biggest market, has fallen by about one million barrels a day as a result of high prices, sluggish economic growth and the tight credit market. The economic slump is spreading to Europe, and could also affect Asia, the main driver of growth in oil demand.

At a meeting of producers and consumers in Jeddah this year, Saudi Arabia pledged to keep pumping at full throttle to bring prices down. The kingdom is OPEC’s biggest producer and the group’s de facto leader. At the same time, analysts said, the Saudis realize that if they keep their output at the present level, they will create a glut. The kingdom is pumping about 600,000 barrels a day more than its official OPEC quota of about nine million barrels a day.

Some analysts believe the group may opt for an informal cut in production, reducing output without much fanfare, instead of a formal announcement that could prove politically tricky.

Another option may be to convene another meeting in six to eight weeks and announce a big reduction then. The group is already scheduled to meet in December, but that could be too late to act if prices keep declining.

“The focus of the debate among OPEC ministers gathering in Vienna next week will not be whether there is a need to cut crude oil production, but rather when,” a consulting firm, PFC Energy, said in a note.

Some analysts suspect that OPEC is already trying to prevent prices from dropping below $100 a barrel by discreetly paring production.

Saudi Arabia, for example, has reduced its output in the last month by 50,000 to 100,000 barrels a day, according to estimates. Saudi Arabia, like most OPEC producers, does not provide real-time production figures.

Many questions will hover over next week’s meeting, among them: What is the minimum price that OPEC is willing to defend? Will the cartel prove more effective than it has in the past at keeping discipline among its members?

OPEC’s 13 members account for about 40 percent of the world’s oil production. It does not set prices directly. Instead, its members manage global supplies through production quotas that are periodically assigned to all countries except Iraq.

“While OPEC does not appear unhappy to see oil prices falling back from close to $150 a barrel, the point may be rapidly approaching when that sentiment changes,” according to a recent analysis by the Center for Global Energy Studies, a consulting firm in London. “The danger for those looking forward to more reasonable oil prices is that OPEC, haunted by the price crash of 1998, overreacts and cuts production too sharply.”


Cheney slams Russia for war against Georgia

By STEVE GUTTERMAN Associated Press

TBILISI, Georgia — Demonstrating Washington's commitment to beleaguered Georgia, U.S. Vice President Dick Cheney flew in today and condemned Russia for what he called an "illegitimate, unilateral attempt" to redraw Georgia's borders by force.

Speaking during a closely watched trip to this U.S.-allied South Caucasus nation, Cheney also assured Georgian President Mikhail Saakashvili that the United States was "fully committed" to his country's efforts to join NATO.

"Georgia will be in our alliance," Cheney said.

One of the U.S. administration's most hawkish figures and a longtime critic of Russia, Cheney was visiting three ex-Soviet republics that are nervous about Moscow's intentions — Georgia, Azerbaijan and Ukraine.

His trip signaled to Moscow that the United States will continue to cultivate close ties with Georgia and its neighbors even after Russia showed it was not afraid to use its military against countries along its border.

"America will do its duty to work with the governments of Georgia and our other friends and allies to protect our common interests and to uphold our values," Cheney said in a joint appearance with Saakashvili.

"Russia's actions have cast grave doubts on Russia's intentions and on its reliability as an international partner," Cheney added.

He told Saakashvili that the United States was at Georgia's side "as you work to overcome an invasion of your sovereign territory and an illegitimate, unilateral attempt to change your country's borders by force, that has been universally condemned by the free world."

On the eve of Cheney's arrival, the White House announced a $1 billion commitment to help the small but strategically located nation recover from its war with Russia.

"The free world cannot allow the destiny of a small independent country to be determined by the aggression of a larger neighbor," U.S. Secretary of State Condoleezza Rice told reporters in Washington.

In his remarks today, Cheney also thanked Georgia for sending troops to Iraq. Georgia has been the third largest contributor of troops to the U.S.-led operation there.

"Now it is the responsibility of the free world to rally to the side of Georgia," Cheney said

Saakashvili, meanwhile, said Georgia was committed to a peaceful resolution of its disputes with the breakaway regions of South Ossetia and Abkhazia. Russia, which has given military, political and financial support to the two areas, has recognized both as independent nations.

A day earlier in Azerbaijan, Cheney said Washington has "a deep and abiding interest" in the region's stability. Georgia hosts a critical oil pipeline that brings 1 million barrels a day from the Caspian Sea shores to Turkey, and on to Western Europe.

Cheney planned to make the massive U.S. aid package a major highlight of his meetings in Tbilisi, but it will likely leave unanswered the question of potential U.S. aid to rebuild Georgia's military.

Since the war in Georgia in early August, Russia has boldly asserted it has what President Dmitry Medvedev called "privileged interests" in its sphere of influence, which includes the former Soviet states in the Caucasus.

Military aid from the United States, with the help of some Western European countries, was key to transforming the Georgian army and navy from their ragged post-Soviet condition into a credible fighting force. Depleted by the war, it will need more Western aid to rebuild the military if it is to join NATO.

But angry Russian officials have repeatedly said that U.S. military aid was instrumental in emboldening Georgia to try to retake South Ossetia by force on Aug. 7. During the five days of fighting that followed, Russian forces routed the Georgian military from South Ossetia and drove deep into Georgia.

U.S. officials have placed at least part of the blame for the war on Russia, but new U.S. military aid to Georgia would further aggravate relations between Washington and Moscow, which are already at a post-Cold War low.

Russia has condemned the U.S. use of warships to deliver aid to Georgia as a form of gunboat diplomacy. The flagship of the U.S. 6th Fleet in the Mediterranean, the USS Mount Whitney, arrived in the Black Sea on Wednesday with a cargo of aid.

The U.S. aid package is about the same as the estimate given by Prime Minister Lado Gurgenidze of how much damage Georgia's economy suffered from the war.

Cheney arrived from neighboring Azerbaijan, the starting point for a major oil pipeline that crosses Georgia and ends in Turkey.

Because of the trip's itinerary, "we see this as a very clear sign that alternative energy routes and sources will be secured," Georgian national security council head Alexander Lomaia told The Associated Press.

The pipeline is the only direct route for Europe-bound Caspian oil to bypass Russia. Caspian oil also goes to Georgian ports by another pipeline and by rail.

Cheney is expected to spend only about four hours in Georgia. The stopover contrasts with U.S. President George W. Bush's exuberant visit in May 2005, when Bush spoke to a vast crowd in Tbilisi with Saakashvili.

Medvedev, meanwhile, harshly criticized the United States and urged the Washington to "reassess its relationship with the Georgian regime."

"The United States has actively helped Georgia build its military machine and pumped money and weapons into that," Medvedev said in an interview with Italy's RAI television.

"Regrettably, at some point they have given Mr. Saakashvili a carte blanche for any actions, including the military actions," he said.


Associated Press writers Jim Heintz and Misha Dzhindzhikashvili in Tbilisi; and Jennifer Loven and Matthew Lee in Washington contributed to this story.

Many Gulf refineries still idle

But post-Gustav picture appears better than after Katrina and Rita

Hurricane Gustav may be long gone, but more than a dozen Gulf Coast refineries remained shut down Wednesday, raising the specter of higher gasoline prices if the plants don't reopen soon.

Some refiners were waiting to restart plants until damage reports were complete, while others were scrambling just to restore power in a region where more than a million people were still without electricity.

Even so, U.S. consumers should not see big hurricane-related spikes in pump prices like those seen after the 2005 hurricanes, analysts said.

Refineries and other key infrastructure appear to have suffered far less damage with Gustav than they did with Katrina and Rita, boosting chances they will restart in days rather than weeks. Falling oil prices and weaker U.S. gasoline demand this year could also blunt the storm's effect on pump prices, they said.

"If this had occurred in May or June, or even early July, you might have seen a spectacular reaction to the upside," said Tom Kloza, chief oil analyst with the Oil Price Information Service in Wall, N.J., referring to peak summer periods for gasoline demand.

Gustav, however, should create only some "kinks" in the distribution system and not send prices much higher than normal for this time of year, he said.

The average U.S. price for regular gasoline fell a fraction of a penny Wednesday to $3.68 a gallon, while diesel rose nearly a cent to $4.27 a gallon, according to AAA's Daily Fuel Gauge Report.

Gustav hit Monday west of New Orleans as a weaker-than-expected Category 2 hurricane. Ahead of the storm, many refiners in southern Louisiana and East Texas halted production or reduced output.

Two days later, 13 Gulf Coast refineries representing 2.5 million barrels a day of capacity remained closed, the U.S. Department of Energy said. That's roughly 14 percent of the nation's 17.5 million barrels per day of refining capacity.

Another 10 refineries in the region were running at reduced rates, the department said.

But refiners, including Exxon Mobil Corp., Valero Energy Corp., ConocoPhillips and Shell, said they were working to resume normal operations as quickly as they can.

"We continue to monitor the situation closely and will return personnel and resume operations as soon as safely possible," said Prem Nair, spokeswoman for Exxon Mobil, whose Baton Rouge and Chalmette, La., refineries were still closed Wednesday.

Marathon Oil Corp., meanwhile, said it had planned to restart its largest refinery Wednesday night, according to Bloomberg News. The Garyville, La., plant was shut down before Gustav arrived.

William Veno, industry analyst with Cambridge Energy Research Associates, said strong fuel profit margins provide "plenty of incentive" for refiners to get up and running soon.

He predicted downed Gulf Coast refineries will return in phases and that robust U.S. gasoline stockpiles will help dampen the effect of plant outages on pump prices.

Elsewhere Wednesday, offshore oil and natural gas producers, pipeline companies and operators of other key infrastructure were also racing to return to business.

Though nearly all oil and natural gas production in the Gulf of Mexico was still halted, several oil companies and drillers were hoping to begin redeploying evacuated workers Wednesday.

Markets, however, continued to shrug off Gustav. Light, sweet crude for October delivery fell 36 cents to settle at $109.35 a barrel on the New York Mercantile Exchange, after dipping as low as $107.22.

Natural gas futures rose less than half a penny to settle at $7.264 per million British thermal units.

Meanwhile, the Louisiana Offshore Oil Port, a key hub for imported oil near Grand Isle, La., remained closed as of Wednesday morning, the Energy Department said. The so-called LOOP, which handles about 12 percent of the nation's crude imports and is tied by pipeline to about half the nation's refining capacity, was still doing damage assessments, the department said.

In addition, oil and gas pipelines in the region were expected to restore service as early as today, and 22 major natural gas processing plants that were shut down have reported no major damage to facilities and were expected to resume operations as gas begins to flow, the Energy Department said.

By BRETT CLANTON Copyright 2008 Houston Chronicle


US energy companies: Locked in shale, riches beckon

Energy services companies among those eager to tackle natural gas work

Crews operating dozens of pieces of equipment conduct fracturing treatment at a Dan A. Hughes Co. well in the Barnett Shale near Denton in North Texas.

Oil and natural gas exploration companies aren't the only ones licking their chops at emerging shale formations in Texas and other states that may hold vast untapped supplies of natural gas.

Major oil field services firms, including Schlumberger, Halliburton and Baker Hughes, also see big opportunity and are jockeying to get their share of the work.

To those firms, the complex shale formations could bring a windfall of new contracts that call on specialized technologies, which have become indispensable in these frontier areas.

Perhaps nowhere is that truer than in the Haynesville Shale play, a major discovery in northwestern Louisiana and East Texas. Not only is it estimated to be the nation's largest natural gas field and the fourth-largest in the world, it may be among the most difficult of its kind to unlock, creating high demand for sophisticated service work.

New optimism

Such predictions have given leading oil field services firms new reason to be bullish about the U.S. after a drop in natural gas prices and an oversupply of land drilling rigs brought a dismal year in 2007.

Gas futures last year sank below $5.50 per million British thermal units after hitting a record near $15 in late 2005 when hurricanes Katrina and Rita disrupted Gulf of Mexico production.

Natural gas closed Friday on the New York Mercantile Exchange at $7.943 per million British thermal units, though it traded at more than $13 earlier this summer.

The services companies are cautious about exaggerating the potential of the new shale plays, like Haynesville, given the shortage of data about them and technical challenges of operating there.

"It's kind of touted as the next gold rush, yet there are some people who are very concerned — will it come to pass?" said Joe DeGeare, manager of the eastern U.S. area at Baker Hughes' oil tools division.

Incentive to explore

Going after shale gas is nothing new. Oil and gas companies began drilling wells in areas like the Barnett Shale near Fort Worth more than two decades ago.

But technological advances and higher natural gas prices this year have given producers greater incentive to explore in shales and other unconventional rock formations once thought too difficult to reach.

Unlike conventional wells, which extract gas from porous rock formations, shale is hard and nonporous.

It also can contain oil. But oil's larger molecules make it more difficult to extract from the dense rock than natural gas.

Oil shale technology is still developing and has advanced recently as energy companies try to take advantage of high crude prices. Shale gas production is better established.

It now accounts for about 10 percent of U.S. natural gas production, but that could double over the next three years as wells in the emerging shale plays start coming online, Deutsche Bank said in a report last month.

"For all the seeming hype, we actually believe this heavy focus on gas shales is very well-placed," the investment bank said.

A fever pitch

That hype has reached a fever pitch this year as EOG Resources, Chesapeake Energy, Petrohawk and other oil and gas producers have revealed large acreage positions and capital spending plans in shale plays in Louisiana, Texas, Pennsylvania, Arkansas and elsewhere.

New investment in the Haynesville Shale, for example, is expected to more than double the number of drilling rigs operating there today to 100 or more by 2009.

Alone, such predictions would be enough to spark the interest of oil field services companies, which are paid by oil companies to manage all or part of a well-drilling project. But contracts there are expected to be especially lucrative given the challenging conditions.

At the Haynesville Shale, average well depths are 12,500 feet, with bottom hole temperatures of 350 degrees and pressures that exceed 10,000 pounds per square inch, according to a study by Halliburton.

As such, wells drilled there will demand twice the hydraulic horsepower, higher treating pressures and more advanced fluid chemistry than those used in established shale plays like Barnett in North Texas or Woodford in Oklahoma, the company said.

"In terms of activity, this is big on anybody's radar screen, whether it's the service industry or the producers," said Marc Edwards, vice president of Halliburton's production enhancement product service line in Houston.

Elevated spending

Halliburton, the world's second-largest oil field services company, with dual headquarters in Houston and Dubai, said recently it will boost its 2008 capital spending budget by $200 million, in part to capture more business in emerging U.S. shale plays.

Schlumberger, the largest services company, also may need to boost capital spending this year in response to the bigger-than-expected rebound in land drilling in the U.S., Chief Executive Andrew Gould said during a conference call last month to discuss the company's second-quarter earnings. But it has not made that decision yet, he said.

Houston's Baker Hughes has not said it will increase 2008 spending, but DeGeare said the third-largest oil field services company will be aggressive in chasing business in Haynesville and other emerging shale plays.

Striking while the iron is hot may be important, according to a fall 2007 report by Houston investment bank Simmons & Company International. The firm found that emerging resource plays are more sensitive to volatility in natural gas prices, given their high development costs, than more established plays.

Copyright 2008 Houston Chronicle

Oil Industry Waits to Assess Storm's Impact

By Steven Mufson
Washington Post Staff Writer

Relief that Hurricane Gustav's high winds were less severe than expected drove crude oil prices down 4 percent in electronic trading yesterday to $111.23 a barrel, the lowest level since mid-April, as traders assumed that the oil and gas industry's offshore platforms in the Gulf of Mexico would weather the storm.

But the hurricane highlighted the fact that threats to U.S. energy security need not come from abroad. With a quarter of the nation's crude oil production coming from the Gulf's waters, the United States has drilled offshore to sustain domestic output but made itself more vulnerable to the vagaries of the weather.

Moreover, the industry was still assessing Gustav's impact, especially on the nation's oil refineries; a dozen refineries with more than 12 percent of the nation's capacity were still shut down and 10 others were operating at reduced levels, the Energy Department said. If flooding or prolonged power outages affect some refineries, then gasoline prices could increase in the coming days or weeks.

Service stations throughout the evacuation area were closed, and many had run out of fuel after motorists scrambled to fill up their tanks as the storm approached.

"With the downgrading of Gustav to a Category 2 Hurricane this morning, concerns over witnessing a repeat of the devastating impacts inflicted by Katrina and Rita in 2005 have begin to subside," said Frank Verrastro, an energy fellow at the Center for Strategic and International Studies. But, he added, "as the storm moves onshore, high winds, storm surges, rain and flooding could still affect refinery operations."

To guard against damage and spills offshore, the industry has shut down more than 1.2 million barrels a day of oil production in the Gulf of Mexico, nearly as much as what the United States imports from Saudi Arabia, and 12 percent of the country's natural gas production. In addition, the Louisiana Offshore Oil Port, the biggest U.S. oil import terminal, has been closed since Saturday.

That disruption prompted Louisiana Gov. Bobby Jindal (R) to appeal yesterday to President Bush to release oil supplies from the Strategic Petroleum Reserve, which was created in the wake of the 1973 Arab oil embargo and which holds more than 700 million barrels of crude in underground salt caverns in Louisiana.

"A disruption is a disruption," said Kenneth Medlock, an energy fellow with Rice University's Baker Institute. "It doesn't matter if it's because of a war in the Middle East, a disruption in Africa or a hurricane in the Gulf."

But releases of crude oil from the reserve would not do much good if refineries remain closed.

In addition, the Bush administration has resisted calls by Democratic lawmakers to release supplies from the reserve to dampen prices. Bush has asserted that it should be used only to safeguard national security in an international crisis.

Verrastro said that it might be more important for the Environmental Protection Agency to issue a temporary waiver on fuel specifications and for the Transportation Department to waive restrictions on how long truck drivers can stay on the road so that deliveries of gasoline could be brought to the Gulf Coast from refineries elsewhere around the country.

Most oil experts were guardedly optimistic about how offshore production facilities would fare. During hurricanes Rita and Katrina, the offshore oil and gas installations that suffered the worst damage were the oldest, and many of those were not rebuilt. Newer platforms are able to withstand stronger storms.

However, in the earlier storms, underwater pipelines were also damaged, and that could delay the restart of offshore production even if platforms are in satisfactory condition.

Kevin Kolevar, assistant secretary of Energy, said that a category 3 hurricane was well within the design specifications for offshore drilling platforms and that production could resume quickly if there is no significant damage to platforms or undersea lines. "We don't see any indication of [significant damage] at this time, but we'll learn more tomorrow as companies start repopulating facilities," Kolevar said.

"The onslaught of Gustav reemphasizes the importance of the Gulf of Mexico energy complex and the importance of building resilience and flexibility into our energy security system," said Daniel Yergin, energy historian and chairman of Cambridge Energy Research Associates. "That means diversification."

But the United States has become increasingly dependent on the Gulf Coast. Forty percent of the nation's oil refineries are along the coast.

Some individual companies rely heavily on production in the Gulf. Shell Oil, the U.S. affiliate of Royal Dutch Shell Group, gets about 80 percent of its U.S. production from the Gulf of Mexico. So far this year, BP has been producing an average of 290,000 barrels a day in the Gulf, a company official said.

Oil companies were playing a game of wait and see yesterday. BP spokesman Darren Beaudo said the company hoped to fly over the eight offshore platforms it operates in the Gulf. "Tomorrow will give us more information," he said.

Although oil traders breathed a sigh of relief yesterday, Lehman Brothers' oil analysts warned last week, "even if this storm misses major infrastructure in the Gulf Coast, other storms pose risks this season."

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