Oil Market Update (March 5, 2013)

Oil prices fell on Monday after political leaders in Washington failed to fight off automatic cuts in government spending that analysts feel could harm the US economy.

Government spending cuts of approximately $85 billion took effect on Friday after President Barack Obama and Congress failed to meet a deadline for striking a deal to avert or soften the reductions. The International Monetary Fund has predicted that the spending cuts could reduce US growth by half a percentage point in 2013.

Royal Dutch Shell (NYSE:RDS.A,LSE:RDSA) announced that it will pause its 2013 exploration drilling in Alaska’s Beaufort and Chukchi seas. The company made progress in Alaska, but Arctic offshore drilling is a long-term program the company is pursuing in a safe and measured way, according to Marvin Odum, the company’s Upstream Americas director.

Shell completed top-hole drilling on two wells in 2012 in the Beaufort and Chukchi seas, marking the industry’s return to offshore drilling in the Alaskan Arctic after more than a decade. After the drilling season ended, however, one of Shell’s drilling rigs, the Kulluk, was damaged in a maritime incident related to strong weather conditions.

The company confirmed that Alaska remains an area with high potential for Shell over the long term, and noted that it is committed to drilling there again in the future.

By early afternoon on Monday, West Texas Intermediate crude for April delivery was down 79 cents, at $89.88 a barrel, in trading on the New York Mercantile Exchange. Meanwhile, Brent crude was down 22 cents, at $110.19 a barrel, on the ICE Futures exchange in London.

The Canadian federal government plans to hold a call for bids for oil and gas discovery licenses for the Bent Horn lands off Baffin Island in Nunavut, according to a report by CBC. The oil field is on Cameron Island, northwest of Bathurst Island, and is already the site of exploration and production. The field produced 2.8 million barrels of oil between 1985 and 1996 before it was abandoned by Suncor Energy (TSX:SE,NYSE:SU).

“We made a decision that we wanted to re-offer those lands because there is a known resource that continues to be in place and that resource may be attractive to the private sector, to potentially another company that could bring forward today’s technology to extract the remaining resource in place,” said Michel Chenier, director of Northern Petroleum Resources at the Department of Aboriginal Affairs and Northern Development.

Chenier said the federal government is also calling on the industry to nominate lands to include in an eventual call for bids for exploration licenses in the Arctic islands.

A top Omani oil official confirmed that the sultanate aims to increase oil production to 939,500 barrels per day (bpd) in 2013; plans are also in place to raise gas output.

In comments to local media, Oil Ministry Undersecretary Nasser Al-Jishmi said, “[t]he sultanate will increase its daily production of oil to 939,500 barrels per day, and gas to 107 million cubic meters (3.8 trillion cubic feet), thanks to enhanced extraction of oil and the development of several fields.”

He said average daily production of oil and condensates rose 4 percent last year percent to reach 918,500 bpd. Average daily gas production increased in 2012 by 3.3 percent to 98.2 million cubic meters, including 80.9 million cubic meters of non-associate gas, Al-Jishmi told reporters.