OIL Traders International, LLC. is engaged in international petroleum trading and often does business with Russia. All of the company’s clients in the United States are end consumers of fuel. Largest American airlines, cargo transporters, and trucking companies have great demand for oil and petroleum products originating in Russia. At the same time, structuring an international petroleum deal is by no means easy. Russian-American Business interviewed the president of OIL Traders International, LLC. Mr. Danny K. Houck in Oklahoma City.    

– Mr. Houck, your family has a long and – by some accounts – legendary history in the oil business in Oklahoma. How was it like growing up during the oil boom? Was it largely predetermined that you would also work in the petroleum industry?

– My dad grew up in Seminole. He was born in 1929. And at that time Seminole was the oil capital of the world. More oil was produced in Seminole County, Oklahoma than in any other place in the world. Drilling rigs were everywhere.

With all that heritage, with my father’s work in the oil business, that was all I knew growing up. I was around it, immersed in it, and loved it... The oilfield was on a steady up climb starting in about 1962. It was just steady, good, solid growth. In about 1978, things started going crazy. My dad was buying millions dollars worth of new equipment every year just to keep up. He couldn’t get enough equipment to match the demand for his services. These trends continued for several years, until the implosion of the domestic oil industry. Oil was as high as 68 dollars a barrel. There were new companies popping up every day. Everybody was in a hotshot business.

At the Petroleum Club here across the street, million-dollar deals would be signed during dinner on napkins. It also happened at the Beacon Club at the top of the First National Bank building, at Junior’s Club and at Cowboys’ here in Oklahoma City. Everybody had an oil well, everybody had a Learjet. Money flowed like a gushing well. If you had any sense at all and knew about the oil business – you were bankable... A lot of what happened I blame on plain optimism. In 1980, they were predicting that by 1990 oil would be over 200 dollars a barrel, and that by the year 2000 it would be something like 333 dollars a barrel. The banks would loan you 35 percent of your stated reserves.

When the price of oil collapsed, it was not coming down steadily. It was a fall from Mount Everest basically overnight. I will never forget it. We were on vacation in Alice, Texas on July 2, 1982, and my dad got a call from Oklahoma. A lot of the people that owed my father millions and millions of dollars had accounts at Penn Square Bank, which was one of the largest banks in Oklahoma City. My dad had heard rumblings that the oilfield was going to slow down in the future, and could have sold out to investors from New York... The rumor was that the bank was insolvent, and we came back immediately. On the morning of July 4, the bank was declared insolvent by the comptroller. Over 2/3 of my dad’s accounts receivables in all 5 of his businesses were tied to Penn Square Bank... It was all of the sudden like being on another planet.     

Since that time, the oilfield has come back. We had a surge in 1995-1996. We had another spur in 1999 and 2000. Come about 2003, things started looking pretty good.  Confidence started going up. Brand new drilling rigs were starting to be built for the first time in more than 20 years. 2005, 2007, and early 2008 were good times.

– Your father, J.C. Houck, made significant inventions in the oilfield services technology. How have his designs impacted oil production in the Oklahoma oil patch and elsewhere in the U.S.?

– One of my father’s businesses was service-related – the inspection of oil country tubular goods – casing and tubing on the production side and drill collars and heavyweight drill pipe and drill pipe on the drilling side. We did electronic and magnetic inspection: dye penetrants, mag particles, ultrasonic inspection. He was one of the pioneers in the business. My dad came up with quite a few API standards that are used worldwide under the RP7G protocol. He built one of the first EMI casing inspection units in San Antonio, Texas. He also had one of the first NDT casing units. On the ultrasonic side – and we’ve discovered this already after the boom – my father created the technology to test the drill pipe at the place where most of the failures happen. There is an area where the tool joint and the drill pipe are put together with inertia welding. Failures in the pipe usually occur along the seam. My dad’s method was designed to test a 3-foot segment of the pipe to detect any cracks that EMI testing might possibly miss.

Also, my dad invented the mud-weighing system. The most important factor in drilling a well is the mud weight – if it gets too low, then there would be a blowout. In the past, there would be a guy in the mud house that would do the weighing. My dad put several of his engineers from the electronics department to make the process more efficient. This was in the days when computers were just coming around… My dad made a lot of significant contributions to the oil industry. Unfortunately, we lost him in 2008, but he was one of a kind.         

– How is the oilfield different now from what it was 30 years ago? Do you think the oil bust can happen again?

– The oilfield is different in two ways. Domestically, this generation is unlike the one that came before. You don’t have the electricity you used to have. You don’t have the characters you used to have. It’s not ostrich boots, Rolex watches, jets, and ladies of the night. You do not have the same relationships with bankers as you used to. It’s true that bankers and oil and natural gas go together. Back then, the bankers were your best friends. You banked with them during the day and then partied together at night. In the past, things got done instantly. If the oilfield would have continued to grow, we would now consider all those people geniuses.

Also, what is different now is that the international market exerts a significant influence. Of course, the international component was important in the past too, but the world was not as close. Today we have cell phones and the Internet. Some people were doing business overseas even then. My partner – the legendary Carl Swan – together with Arm & Hammer and T. Boone Pickens was doing large offshore projects and had all kinds of offshore concessions in the 1960s and 1970s. At the same time, there were not that many Americans overseas. Now, it’s a global market…

I think we are just setting ourselves up time and again for these crazy 2– to 4-year booms. If you are gambling millions and millions of dollars, you should be rewarded for that. Everybody likes to hit home runs, but I think the global oil industry would be happy with singles and doubles if it would be a steady businesses without all these upheavals. When you lose money in this businesses, you lose a lot of money – you have to lay off many employees. That’s why all the mergers happened in late 80s and early 90s. The companies had to consolidate to stay afloat.

– The price of petroleum is a key factor in today’s world, and the economic systems of many countries depend on how much a barrel of oil costs. At the same time, some economic analysts are skeptical as to whether the true supply-and-demand mechanisms govern oil prices. In your professional judgment, is the price of oil on world markets today justified? 

– Yes. Capitalism is based on the law of supply and demand. You would think that if you ran a business that provided the most used commodity in the world, then everything would be just perfect for you. Oil is used for everything – plastics, leather. Even the cement that holds together this building has additives. If you remove petroleum from our daily life, we would probably crumble and die in a day.

People need to realize that oil is a precious commodity that is not going to last forever. It is not possible to make all cars run on hydrogen fuel cells. Will we have something different 100 years from now? I am sure that we will. Are we still going to use natural gas and oil? I’m sure we are. Everybody has the wrong notion that oil is used only for car fuel. In the U.S., about 65 percent of a barrel is used for transportation including fuel for cars, trucks, and airplanes. The rest of it is used for everything else in the world.

In the ideal utopian world, there would be a set oil price, which would be adjusted every year for inflation. We don’t need 300-dollar oil, and we don’t need 40-dollar oil. I think that a realistic price for a barrel of oil should be from 100 to 120 dollars. Natural gas needs to be around 12 dollars per 1 000 cubic feet.

As long as oil is traded on open markets, there will be pricing cycles. It doesn’t take a scientist today to notice that the oil price cycles about every four weeks. It goes up to around 80, and then comes back down to around 70. But every time it comes down, it doesn’t come down quite as low. When it goes up, it goes up a little higher. The situation with natural gas is similar. Is that the way we want to treat this precious commodity? There needs to be a rethinking of it.    

– What types of petroleum products does OIL Traders International, LLC. trade in? Do you handle crude oil in addition to refined products?

– We trade in Russian Gasoil D2 GOST 305-82, low sulfur diesel, ultra low sulfur diesel, high speed diesel, jet fuel, both JP54 and jet A1. We also trade in AGO and PMS, which are fuels for the African marketplace. We trade in Mazut. Through our good relations in the Middle East, we also can provide crude oil.

As for the delivery locations – we like to take the fuel at Houston or Rotterdam. Even more than Rotterdam, though, we’d like to take the fuel at Vladivostok, or Novorossiysk, or the port of Primorsk. Rotterdam is so back-logged nowadays. We also like buying spots and ships – doing tanker takeovers.     

– Are you offering value-added services to your clients?

– We can arrange the procurement of large volumes of petroleum products. We have very reliable contacts and connections. We also can arrange logistics, transportation, and storage of the fuel. We conduct negotiations with tank farm facilities and shipping companies.

– The trading of oil is a global business. It requires frequent travels and business meetings with foreign partners. To what “exotic” destinations has the petroleum business taken you over the years? What interesting people have you met?

– In this hemisphere, it has taken us to Mexico, primarily down by the Yucatan Peninsula. It’s taken us to Venezuela, to Peru, to Nicaragua, to Argentina, and to Brazil. It also has taken us into Canada.

On the African continent, it has taken us to Morocco, to Libya, Egypt. In the Middle East, it took us to the UAE, Bahrain, Saudi Arabia, and Iraq. In the European area, it’s taken us to Malta, Hungary, Norway, and Russia. In Asia, we’ve worked with Kazakhstan, China, Malaysia, Singapore, Indonesia. We also had partners in Australia.      

Geography was not one of my favorite subjects in school, but by working in the oil business you learn the world very quickly. The oil business is your passport to the world. You go places and meet people that you would not otherwise ever know. You see things that nobody else sees.

In Mexico, we got to know PEMEX officials. The heads of the two largest family-owned drilling companies in Mexico are dear friends. I met with the directors of PDVSA, the Counsel General, and other prominent officials. We’ve met the Russian Counsel General, and the Ambassador from Russia. We were received by one of the sheiks of Abu-Dhabi… We’ve travelled around.   

– Is it easier to work with American companies – buyers of petroleum products – or with foreign companies that sell the fuel?

– I would say that it is difficult to work with both and you have to balance their interests. Trying to ascertain the legitimacy of the buyers here in America is extremely difficult. You have to select them with outmost caution and know that they are for real. When you have that much fuel tied up, it could cost you hundreds of thousands dollars a day just for storage. If you have the fuel, you’ve got to move it. You must have a buyer that can perform.  

– According to a recent Wall Street Journal article, the volume of fuel sold on spot basis in 2009 reached record levels. Oil companies would literally send tankers of crude oil to the shores of other countries and have them sit there until the fuel would be sold at the highest possible price. Does it not seem that these practices would contribute to market volatility? Why is the spot market so attractive?

– Fuel is not as easy to get a hold of as one would think – at a good price, that is. This business is no different than any other business.

These countries and companies with refineries often have their own ships. It does not cost them that much money to send a vessel to U.S. or European costs. It’s really not a gamble – if you have the right price and the fuel is real, then there will always be someone willing to take it.

The key here is “real fuel”, as 99.9 percent of the transactions you hear about or see on the Internet are all fake. The fuel does not exist. Selling fuel on the spot market is also a smart way to do it because buyers like instant gratification. In that case, the purchasers would not have their dollars tied up for as long as they might have had otherwise. Whoever decided to sell the fuel as spots had a very good idea – it’s not some large crazy amount that no one would be able to get their arms around, but a perfectly manageable quantity that is easy to sell. At the same time, what is premium to the seller is still a good deal to the U.S. buyer. Everybody makes money and everybody is happy.  

– In mid-20 century, the “Seven Sisters” of the oil industry that controlled the petroleum business in the world were Standard Oil of New Jersey, Royal Dutch Shell, Anglo-Persian Oil Company, Standard Oil Co. of New York, Standard Oil of California, Gulf Oil, and Texaco. In 2007, Financial Times identified the “New Seven Sisters” – the most influential and mainly state-owned national oil and gas companies – as Saudi Aramco (Saudi Arabia), OJSC Gazprom (Russia), CNPC (China), NIOC (Iran), PDVSA (Venezuela), Petrobras (Brazil), and Petronas (Malaysia). How should American oil companies position themselves on the world market – both in terms of upstream and downstream operations – in view of the growing importance of these supermajors? 

– The United States is the oil industry – the expertise is still here. In many cases, the top managers of national oil companies are either from America or have an American education. Many countries rely on U.S. engineering and technology. Without the U.S., the global oil industry would not work as effectively.

America still is on the cutting edge of new technologies and new recovery processes. American oil companies will always be engaged in joint ventures and joint partnerships with the “New Seven Sisters” of the world. I think each one needs the other equally. As our global economy and the global market get closer, we all need to work together. But, the world still looks to America for coming up with the new next best engineering trick.

The two biggest technological innovations that have changed the world since the last boom are horizontal drilling and the introduction of the new drill bit. In 1981-1982, we got up to 873 land rigs here in Oklahoma and 4 530 in the U.S. Today, there are 1 334 rigs in the U.S., of which 112 are in Oklahoma. Production has become more effective.   

– The United States imported about 57 percent of its petroleum, which includes crude oil and refined petroleum products, during 2008. Are the ideas some American politicians advance about making efforts to end the dependence on foreign oil realistic? Is it necessarily bad to be dependent on foreign petroleum?

– America has to figure out if it wants a domestic oil industry – does it want to be dependent on foreign oil? People often think that the oil industry is greedy and complain about the money that oil generates when times are good. What people don’t understand is that we have a lot more lean times than we have good times.

Most of the easy-to-get oil both on shore and offshore has been tapped. It takes almost a decade to get to big offshore oil reserves even after the sites are identified. You’d need to build a production platform and take all the infrastructure to the middle of the ocean. It takes billions of dollars to build these things.

We do not need 160 dollar oil to be profitable. At the same time, companies need to have the confidence that nothing bad is going to happen in the next 10 years with the oil price, so that the project is profitable. When I turn the valve to start making money for my shareholders, is the price of oil going to be 10 or 12 dollars a barrel? Oil and natural gas – these resources do not replenish themselves. The glass is now less than half full. 

To develop production in this country, it would not be enough just to have small businesses go at it. It will be necessary to find the granddaddies – vast new reserves. But it costs a large amount of money to do so…

America’s largest problem is that we cannot articulate a definite position for ourselves. Everybody hates big oil when the oil business is making money. When the oil price is down, there is no one coming to rescue us. They love us when they need us, and they hate us when we make money.  

At this time, there is no alternative for the U.S. but to import some of the fuel from other countries. Practically speaking, it is not totally bad to import part of our fuel. It does help with America’s relationships with our Middle Eastern allies. At the same time, this approach allows the U.S. to conserve its own resources for future generations. However, the U.S. needs to implement its strategy and stick to its guns and develop a domestic oil policy that makes sense. The policy course should not punish independent oil and gas and drilling contractors for developing new fields and reserves. There government should ensure market stability and open up protected areas on and offshore for immediate exploration. 

– Trading liquefied natural gas in much the same way as oil is traded in now is considered to be the next big thing in the energy industry? What do you think the future holds in store for OIL Traders International, LLC. in the way of working with LNG?

– OIL Traders International, LLC. is very excited about the natural gas prospects. We hope to be the premiere trader in the business. Right here in Oklahoma City, we have the largest gas company in the U.S. Chesapeake Energy. Next to it is Devon Energy that’s in the process of building a new 68-story tower in beautiful downtown Oklahoma City. Kaiser-Francis Oil is another major company. We have personal relations with all 3 of these companies. 

LNG is an area where we want to become a significant player – as an importer into the United States and as an exporter too. We are perfectly positioned for this. Oklahoma is a natural gas state. It’s not oil and natural gas, but natural gas and oil.

– What is your vision for the company?

– The long-term goals of OIL Traders International, LLC. include increased involvement not only in trading, but also in exploration and production. Of course, we will continue to work with Russian refineries and companies to buy the fuel and bring it into the United States. We also intend to broaden our domestic operations – buying the fuel from U.S. refineries. We plan to get into the LNG market very heavily. We also plan taking our company into renewable energy. Oklahoma is the windiest place. In Northwestern Oklahoma, we plan to have wind farms and solar technologies. As far as oil goes, we plan to engage in exploration and drilling and build up our stated reserves.

We hope to be able to have good and mutually-rewarding joint venture relationships with companies around the world. Come to Oklahoma, we’ll buy you a pair of boots, put you in a cowboy hat, and treat you like family.  

Contact information:

OIL Traders International, LLC.

Address: 100 Park Avenue, 7th floor

Oklahoma City, Oklahoma 73102

Office: 405-231-0918, 405-590-9549

Russian: 405-701-0471

Internet: www.oilti.com