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Shell Declares Force Majeure

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Everyone knew it was coming after MEND rebels attacked two pipelines in Nigeria over the weekend. Shell suspended export obligations for Nigerian Bonny Light crude after the pipelines were shut down. The force majeure is for remaining deliveries in July and for August and September deliveries. Force majeure means Shell cannot complete deliveries for circumstances out of their control and allows them to halt deliveries without a penalty.

The action by Shell did not cause oil prices to rise as you might expect. It appears all the speculators in the energy market are betting on $100 before $150 and sellers are loading the boat on every minor bounce. Crude fell to $120.14 intraday on Tuesday before rallying back at the close to edge just over the critical $122 support level. If that level breaks the next stop could easily be $110.

Valero (VLO) reported earnings on Tuesday that fell -67% on lower margins for refined products. The price of oil soared to $147 but the price of gasoline did not share the same percentage increase. Crack spreads fell from $29 in 2007 to $6 per barrel in Q2. VLO reported earnings of $1.37 and analysts were expecting $1.33. Those estimates were greatly reduced from the $3.89 Valero earned in the same quarter in 2007.

Valero also got some bad news from Mexico. The country warned that they would be exporting 15% less oil to Valero's refinery due to the sharp slowdown of production in the Cantarell field. They expect a similar decline in 2009. Mexican reserves from all sources will be exhausted within nine years without a change in Mexican law to allow independent companies to explore for oil.

BP PLC (BP) reported Q2 profits of $9.47 billion, up from $7.38 billion in the comparison quarter. This was well over the $7.6 billion analysts had expected. Production was unchanged from last quarter at 3.83 mbpd. Output at the embattled TNK-BP venture in Russia was responsible for 25% of BP's production and 14% of its profit. Refining margins fell but did not hurt them as bad as Valero because BP refines around the world where prices were higher in some locations.

BP's Thunderhorse platform in the Gulf of Mexico is on schedule to come onstream late this year according to CEO Tony Hayward. Commissioning is already underway with early production from the first well in Thunder Horse South. The northern part of the project will start up in the second half of 2009. Thunder Horse has been delayed for three years by technical problems and damage from Katrina. Thunder Horse, 150 miles southeast of New Orleans, is designed to process 250,000 bpd and 200 million cubic feet of natural gas. The platform will be supplied by 25 subsea wells. The top of the platform is the size of three football fields. The field is three miles deep under mud and salt under more than a mile of water.

Energy earnings up for Wednesday are DVR, CAM, FLS, GMR, HLX, HES, NBL, OII, SPN, TE, TSO and WLL.

Jim Brown

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