Ah, the drumbeat of worry over shutting down our wonderful federal gummint!

Poor g-man souls…  it’s “scary.” They might get locked out of the federal building, unable for days on end to place the yellow-tinted papers in the yellow basket, or the blue-tinted papers in the blue basket.  Unable even to play solitaire on the computer screen, once the right-colored papers are all in the right-colored baskets.

And those flinty Congress-bubbas may not give them back pay for the work they don’t do.  Alas.

I begin by thinking of all those oil workers along the Gulf of Mexico, “locked out” of their offshore drilling jobs for the past year or so, by the total moratorium on drilling permits. (OK, a few tokens here and there.) Yep, ask the folks at Seahawk Drilling, which just got sold in a bankruptcy sale.  It’s no fun to get locked out.

Oh well, back to the government shutdown…Too bad that the Democrat-controlled Congress didn’t pass a budget last summer…before the 2011 fiscal year kicked in on October 1, which was 5 weeks or so before the election that changed the political dynamic.

Too bad that the Democrat-controlled Congress didn’t pass a budget last November or December, during the lame duck session — when the votes were there — but the worthies were too busy passing “Don’t Ask, Don’t Tell” legislation and other such matter that’s so vital to the future of the republic.

So now the affected government workers are worried that post-Friday, the gravy train grinds to a halt.

No mo’ gravy! Yep, on a personal level, that sucks. Paychecks are nice. No argument from me on that narrow point of life.

But then again, a stable, growing, productive economy is nice too. Balanced books are nice. Responsible governance is nice. Humility in public affairs is nice. Understanding that the best form of politics is good, efficient government? That’s very nice.

On a personal level, it’s “scary” to me to ponder the exploding expenditures of the feds. Budgets and cost structures that NEVER go down, in good times or bad.

It scares me to think of the deficit spending, the devaluation of the dollar, the inflation in prices for goods, the lack of investment across the economy because of distorted tax policies, the strangle-hold that government unions have on public discourse.

It scares me to think of the demagoguery coming out of the White House, and the Democrat caucus in the Senate & House — the distortions of truth: “The researchers will put down their test tubes and stop seeking the cure for cancer.” Sheesh! A few days or weeks, until Congress hashes out some budget cuts? And therefore it’s the end of the line for scientific research? Gimme a break, you LSOS! [Lying Sack of Stuff—ed.]

It scares me to think of how many politicians’ solution to the national problem is to make me work longer and harder… for them. Really, who the hell are THEY, to tell MOI that I have to put more skin into the game that they’ve rigged against me. Screw ‘em.

Yes, it scares me to think of what a mess things become when bubbles pop, including government — the final frontier.

Then again, sometimes you just have to roll the dice and see what comes up.

Regards,

Byron King
Whiskey & Gunpowder

Why You Shouldn’t Worry About a Federal Shutdown on Friday was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

As a long-time follower of the world oil industry, I was immediately struck by how one key target of the rioters and protesters was France’s petroleum distribution system. Clearly, the protesters understand the ideas of the 19th Century military theorist Karl von Clausewitz, who advanced the concept of finding the opponent’s “center of gravity,” and then bringing force to bear on that point.

The protesters were going for the jugular of modern societies, which is the energy supply. In France this week, over 3,000 — out of 13,000 — gas stations ran out of fuel after panic-buying by motorists. Also, eleven out of France’s 12 oil refineries remain on strike. Add to this that “flying pickets” are moving around, blocking fuel distribution depots. Thus has lack of fuel shut down major sectors of the French economy.

Indeed, the Charles de Gaulle Airport in Paris — a key transportation hub for the world, and not just France — suffered from a severe shortage of fuel for arriving aircraft. French authorities advised air carriers to land with enough fuel to take off, and fly somewhere else to gas up.

Pres. Sarkozy sent riot police to confront the blockades of refineries and fuel terminals. He knows that his response to the energy-based tactics of the opposition will make or break his political power. The jury is still out, but my hunch is not to bet against the power of the French state on this one.

What’s the Real Issue?

On the surface, the French rioting seemed like a political squabble over a high-visibility social entitlement. Considering the passion of the protesters, it’s like the current retirement age in France — 60 years — is some sort of sacred number. The protesters make it sound like Pres. Sarkozy wants to destroy a deep-rooted individual right that dates back to time immemorial of which, to use an old phrase, “the memory of man runneth not to the contrary.”

But the age-60 retirement number is not exactly some icon of bloody struggle, hewn out of the rock of revolution and war. No, the age-60 retirement eligibility dates only back to 1983 when the Socialist Party, under then-president François Mitterrand, reduced the former age of retirement from 65.

That is, the age-reduction for retirement was just a vote-buying political move during a time of relative peace and prosperity in France. Which gets us closer to identifying the real core issue behind the social unrest in France. It’s a lesson for all of us, in fact.

Times Have Changed — An Earthquake Across History

Neither France, nor the Western world generally, is living in a time of relative prosperity. Not anymore. Maybe not ever again.

Things have changed in this world, probably forever. The economic rise of China has caused an earthquake across history. That, coupled with the self-inflicted collapse of much of the Western way of running capital markets and managing economic growth over the long haul.

In just the past 15 years or so, China has evolved into a nation of immense demand. China has become the key player in a world of fierce resource competition. Look around. Things like energy, minerals, water and food are scarce, and getting scarcer. China is driving a long-term bull market in resources of every sort, from oil to iron, copper to cotton, cement to soybeans.

No “Value” in Value-Creation

On the other side of the coin, China is a land of mind-boggling, low-cost productivity. In almost every industrial arena and sector, the overall competition from Chinese firms has driven costs for many things. How low? Well, often down to right around the intrinsic value of the inputs — the plastic, the copper, the steel. As for the labor input? It’s not too much to say that Chinese competition has removed much of the “value” from value-creation.

Indeed, one of the major global economic issues today is that when Western businesses go head-to-head against Chinese competition, in almost any industry, nobody makes much money anymore.

So if this is the world in which we live, how can France remain a wealthy country? How can the West retain its status and historical standards of living? Tough questions, eh? But well worth asking.

What Can Nations Afford?

It takes us back to those French retirement riots. In France — and in the U.S. as well — government has promised far more than it’ll ever be able to deliver.

Retire at age 60? Who can afford that? Who’ll pick up that bill? Where’s the money? The government will collect taxes from who, exactly?

Really, when it comes to the French riots, it’s NOT just that the age-60 retirement idea lacks any sort of serious historical pedigree. Not at all. The problem is that the days of an entire nation retiring early are over.

Age-60 retirement is an idea that’s ridiculous and unsustainable in a world of Peak Oil — and Peak “Everything Else,” for that matter. We in the U.S. — and Canada, U.K, Australia, and so many other places across the world — need to take heed.

Until we meet again,
Byron King
Whiskey & Gunpowder

November 15, 2010

Riots in France a Symptom of Declining Western Wealth was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And why should they be? They’re sitting on the sidelines holding US treasuries worth $797 billion. That’s quite a chunk of change.

Of course I’m talking about China.

The Chinese have been the biggest foreign creditor to the United States and in recent statements they’ve made it clear that Washington needs to maintain the value of the dollar.

“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” said Chinese Premier Wen Jiabao.

It’s estimated that around 50% of China’s total reserves are held in US treasuries. And they know that the reserve currency they hold is depreciated with each passing day.

With so much riding on the price of the dollar you can bet that Beijing has been keep a close tally on America’s spending — and the results can’t be pleasing.

To say the least, Chinese faith in the dollar is feigning.

And I’ll give you one guess as to where they are going to spend their $797 billion nest egg… Gold!

Right now China is 6th on the list of world gold holdings with around 1,000 tonnes of gold reserves. Not bad right?

Wrong.

When you look closer at the statistics you can see that China has a mere 1.9% of its total reserve holdings in gold. Compare that to the U.S. with 77% and you’ll start to see China’s future motivation.

China is in the market for a reserve currency that’s stable. And when it comes to stability nothing glitters like gold.

Need proof? Look no further than another developing world powerhouse… India.

Recently India made a bold move to start protecting itself from the U.S. dollar and fiat currencies in general…

News broke that India made a huge gold purchase from the IMF — somewhere in the neighborhood of 200 tonnes.

Previously, the government of India held 350 tonnes of gold reserves. This 200 tonne purchase is a 57% increase in India’s reserves. Now that’s what I call a stand against paper currency!

The Indian transaction may be the largest single central bank purchase of gold ever. The only comparable event was the U.S. government seizure of gold from circulation within the nation back in 1933, along with steady U.S. government purchases in the 1930s and 1940s.

I spoke with an acquaintance of mine who works in the “financial” side of the U.S. government — I cannot say what Cabinet department, but his office has a view of the White House. I asked why the IMF sold the gold to India, and not China.

My acquaintance replied, “It’s all about balance. India holds a lot of U.S. Treasuries and needs gold to diversify its assets. We can’t let all the IMF gold go to China and leave India in the dust. China is already building up its gold reserves due to being the No. 1 gold producer in the world and still a net importer. Besides, if the news hit the wires that China just bought all the IMF gold, it would crush the dollar. So the deal was that India could buy 200 tonnes.”

Put it all together and the global outlook for the U.S. dollar is dreadful. As time passes more countries will try to escape the depreciation of the dollar — and that leads them to one option for wealth preservation: gold.

Okay, so no one wants paper dollars and instead they want gold — that’s easy right?

Not so fast…

Approaching “Peak Gold”

Just like the “peak oil” phenomenon, we’re headed for “peak gold.” It’s all about how much gold is left unprocessed underground. The more we take out, the harder it is to find more. And the harder it is to get to.

For instance, miners used to pan for gold in streams. Today, just to get enough gold for a wedding band, you need to crush up to 20 tons of rock.

And remember, gold isn’t just for jewelry, coins, or bars of bullion. Gold goes into computers, cell phones, and satellites. It’s used in medical lasers, industrial lasers, and in spacecrafts. It plays a major role in medical research. It’s even used for treating some diseases.

According to the World Gold Council, the world mined 2,414 tonnes of gold in 2008 — 64 tonnes less than the year prior. It was even less gold than mined in 2006.

Meanwhile, the amount of gold used in jewelry and industry alone topped 2,186 tonnes — add that to demand for bars and coins (which has really been ramping up lately) and you’ll see that, by necessity, at least 425 tonnes had to come into the market — most likely by central banks out of their dwindling hoards, a practice that cannot continue indefinitely.

And that’s not even including industrial use or the demand from vastly popular gold investment holdings like ETFs!

In fact, when you get down to brass tacks, the supply outlook for gold is down right dismal.

Over the past 10 years large gold discoveries have been inexistent. The discoveries that are being made tend to be in more remote and less geopolitically attractive areas.

Tough new environmental laws and 20 years of low mining investment don’t help. But it’s really geology that’s conspiring against the miners most. Nobody can find the big gold deposits anymore. It looks like they’re all tapped out.

With gold prices up, they’re looking. More holes open up in the ground. More tons of rock go through the mills. But so far, the average quality of the gold they’re finding has gone down.

The low hanging fruit of the gold mining universe — the easy deposits and rich mines — have started to disappear. Gold’s already rare. But it’s getting more rare by the day.

This rarity is running into increasing demand. There isn’t a more fundamental argument for rising prices. And if the U.S. dollar continues to plummet there’ll be no stopping the yellow metal’s upward charge. Again, it’s economics at work. Gold is priced in dollars, so as the currency becomes less valuable, the metal naturally becomes more valuable.

You want to accumulate gold investments now, while prices are still relatively low. Sure, gold prices are at all-time highs, but they still have a long way to go…over $2,000…maybe as high as $3,000…or even $5,000!

Until we meet again,
Byron King
Whiskey & Gunpowder

October 1, 2010

More Reasons Gold Is Going to $2,000 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

For that reason alone, precious metals should always have a permanent place in your portfolio. It is the ultimate hedge.

But today holding gold is more important — and can be more profitable — than it’s been in years. That’s because we’re seeing a repeat of the same forces that pushed gold from $35 to over $800 between 1971 and 1980. I’m talking about things like a weakening dollar, easy monetary policies and geopolitical uncertainty.

Now, if you’ve watched the news, you know gold has already breached the $1,000 mark. But there’s every reason to suspect this is only the beginning. Even after this tremendous run-up, we expect gold to head higher… much higher. That’s because gold’s “true” high is actually closer to $2,000!

Let me explain…

When people talk about the gold price, then tend to forget one thing — the dollar’s decreasing value over the years. So comparing yesterday’s gold price to today’s is like comparing apples to armadillos.

Adjusted for inflation, a $35 ounce of gold in 1971 would be worth $175.55 today. 1975 gold rockets to $697.02. In today’s dollars, 1980 gold, the peak year at $850, clocks in closer to $2,275.99.

So, in real terms, gold has a long way to go before it reaches its top. The question is, how likely is that?

Let’s take a look…

The Trillion-Dollar Sinkhole

The chart below illustrates two of the biggest problems in today’s economy.

As you can see, the amount of money in circulation has been skyrocketing for over 40 years. In fact, since the late 1990s, it’s gone up almost in a straight line.

Its reason is pretty simple. The Fed knows regular cash and credit injections make everyone feel rich. The theory goes, when you’ve got cash and low-priced credit, companies borrow and expand. Consumers borrow and spend. Families borrow and buy homes.

And for a while it seems to have worked — U.S. GDP growth had averaged 3.2% over a 5-year period. Consumption was healthy and new jobs were being created daily.

But while that sounds good, there is a serious downside to this plan… debt.

Consumers are weighed down with a backbreaking $2.4 trillion of outstanding credit. That’s over a trillion more than they had in 1998 — and every dollar needs to be paid back.

The U.S. government is also running over a $1.1 trillion domestic deficit. And it’s only getting worse…

The first wave of baby boomers has started to retire. Entitlement programs like Social Security and Medicare, in whatever form they exist, will start paying out larger sums of money relative to revenues.

Combine that with the ever-increasing multi-billion dollar “bailout” packages that congress approves and you can see that it doesn’t look like there’s anyway to reverse this deficit trend.

So instead, the government has tried another tactic to make up the shortfalls — by going deeper into debt. There are trillions of U.S. dollars now held outside of the United States. Since U.S. dollars are only legal tender within the United States, whether foreigners continue holding them depends on whether they have confidence in the dollar.

There is one final trick up the government’s sleeve. But this “solution” isn’t a solution at all…

How Can Push-Button Money Have Value?

Before becoming Fed Chairman, Ben Bernanke famously said in a speech at the National Economists Club in Washington, in November 2002…

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), which allows it to produce as many U.S. dollars as it wishes at essentially no cost… We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

In other words, if you want to juice an economy… turn on the printing presses and make it easy to borrow money at a low rate of interest. The Fed won’t lose control, he says, until short-term rates go to zero. And maybe not even then.

The problem is, money can’t escape the natural law of supply and demand. When there’s too much of it floating around, each dollar is worth that much less relative to the whole. Suddenly, you’ve got price inflation. Suddenly, every dollar you have in the bank is worth less.

Hemingway called it the “first panacea of a mismanaged nation.”

Already this disastrous stance has plummeted the purchasing power of our dollars by a mind-blowing 96%. Today it’s worth just pennies compared to what it bought a century ago. Or even what it was worth the last time gold boomed, in the 1970s.

Flooding the market with easy money like this is more like burning your furniture to keep warm! We like to think an even smarter economist, Ludwig Von Mises, got it right…

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion… or later as a final and total catastrophe of the currency system involved.”

Apparently, we’re not the only ones who think so…

More on that next time.

Until we meet again,
Byron King
Whiskey & Gunpowder

September 29, 2010

No Two Ways About It; Gold Over $2,000 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Chinese government isn’t adding to its U.S. bond position. Nor is it rolling over its previous purchases. Instead, between September 2009–June 2010, Chinese holdings of U.S. bonds fell from $938.1 billion to $843.7. That’s a drop of over $94 billion over nine months.

The Chinese are backing away from U.S. debt. They’re reducing their exposure to the U.S. dollar, and by extension their vulnerability to a declining U.S. economy.

What’s going on? Is the decline in Chinese holdings of U.S. bonds strictly an economic assessment? Or is there something else afoot? What factions are driving this decision? And what does all of this mean for precious metals?

China’s Growing Confidence, and U.S. Decline

First let’s note how, in recent years, China has exhibited a newfound measure of international confidence, if not swagger. It’s easy to understand why.

China’s leaders see that the U.S. suffers from a weak economy, hampered by chronic overspending on consumption and underinvestment in new capital. In the wake of the global financial crisis of the past few years, Chinese leaders have concluded that U.S.-style democracy and Wall Street-style capitalism are discredited.

In other words, to use a Chinese term, the U.S. is a “sunset power.” China, on the other hand, sees itself as a “sunrise power.” The Chinese are going places in this world. The Chinese have developed a different approach to development than other nations, and they have the economic statistics to back it up.

The Chinese are not afraid to trumpet their success, either. Recently, for example, the German magazine Der Spiegel noted, “All around the world, from Africa to Asia to South America, Beijing is trying to tout its model of authoritarian state capitalism as the better alternative.”

The Chinese Military Influence

One way to look at things is that we’re watching historical waves unfold. China is on the rise, while U.S. power and influence wanes. But in a nation and culture as complex as that of China, it’s also useful to take a close look at how and why things happen.

One key source of influence within China is a hard-core military faction. The Chinese military offers a viewpoint that almost always holds sway on issues of supreme national importance. Such issues definitely include areas of so-called “core Chinese interests” that cover Taiwan and Tibet, as well as the South China Sea and the Yellow Sea.

It’s common knowledge, for example, that Chinese military advisers are incensed over U.S. arms sales to Taiwan. No amount of U.S. diplomacy ever is enough to smooth the troubled waters that divide mainland China from Taiwan. Indeed, the Chinese view their relations with Taiwan as an “internal matter” and consider most U.S. activities that touch on that relationship as “officious meddling.”

In a new development this summer, the Chinese military expressed outrage over joint U.S.-South Korean military maneuvers in the Yellow Sea.

That is, the U.S. and South Korea announced plans to conduct military exercises in the waters west of South Korea where a South Korean warship was sunk — apparently by a North Korean torpedo — in March of this year. The Chinese military, in turn, went ballistic (so to speak).

“Not in the Fundamental Interest”

One recent article on the state-run Xinhua news website warned the U.S. not to move the aircraft carrier U.S.S. George Washington into the Yellow Sea. The author of the article took care in his choice of words, but left no room for doubt about the Chinese position:

“Offending Chinese people is not in the fundamental interest of the U.S. Any activity aimed at pushing a country with a 1.3-billion populace with enormous potential would be inadvisable.”

On another news site, People’s Liberation Army Daily, Rear Admiral Yang Yi, former head of strategic studies at the Peoples’ Liberation Army’s National Defense University, was no less forceful, stating:

“On the one hand, [the U.S.] wants China to play a role in regional security issues. On the other hand, it is engaging in an increasingly tight encirclement of China and constantly challenging China’s core interests.”

Adm. Yang believes that the U.S. threatens China. Earlier this year, he said:

“The U.S. is the only country capable of threatening China’s national security interests in an all-round way… Japan has no such ability, while Russia has no such motivation and India is more worried about China.”

“Pay a Costly Price”

In a recent editorial, Adm. Yang expressed dismay over U.S. policies, stating, “Rarely has there been such wavering and chaos in U.S. policy toward China.” Adm. Yang expanded the point in another article in China Daily, China’s main English-language newspaper: “Washington will inevitably pay a costly price for its muddled decision.”

Not to be outdone — or perhaps simply to offer a consistent message — Maj. Gen. Luo Yuan, deputy secretary-general of the People’s Liberation Army Academy of Military Sciences, added his authority to the discussion. In a scathing editorial in the Chinese newspaper Global Times, Gen. Luo said that moving the U.S.S. George Washington into the Yellow Sea was a “deliberate provocation” toward China and that the U.S. should “think twice about the maneuver.”

When the Debtor Challenges the Creditor

Gen. Luo followed up with this comment: “Imagine what the consequences will be if China’s biggest debtor nation challenges its creditor nation.” China is the “world’s largest market,” and “offending China means losing, or at least decreasing, market share.”

I don’t think we have to “imagine” the consequences at all. I believe we just have to look at the decline in Chinese holdings of U.S. bonds — or “decreasing market share,” like the man said.

Thus, I believe that in addition to the Chinese economic concerns about the future of the U.S. economy and U.S. dollar, the Chinese military is also pushing its leadership to back away from holding U.S. dollars. There’s a component of military strategy to the decline in Chinese bond holdings.

What Are the Implications?

Then next question is if the Chinese are NOT buying U.S. bonds, then who IS buying the bonds?

My hunch is that it’s the U.S. Federal Reserve. That is, the Fed is covering China’s retreat from the dollar. For reasons both economic and military, China is gradually exiting its dollar position. The Fed is allowing this to happen quietly, without causing a dollar panic.

Meanwhile, the consequence is that the Fed is monetizing the U.S. national debt. Over the long term, this can only lead to the further decline of the U.S currency. Looking out over the medium and long terms, it can only mean higher prices for precious metals.

Until we meet again,
Byron King
Whiskey & Gunpowder

September 15, 2010

China’s War Uses U.S. Debt Against U.S. Dollar was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In this portion of the interview, Mr. Moshiri and I discuss what’s going on 6,000 miles south of the U.S., offshore Brazil. There, over the past couple of years, we’ve learned about gigantic oil resources, buried many miles under the deepwater seabed.

To date, the most prolific oil-bearing locales offshore Brazil are in the “pre-salt” zones of the Campos and Santos Basins. Looking forward, there are many more basins left to explore along the Brazilian coastline.

In short, the future for energy development is bright down in Brazil. Here’s more of my discussion with Mr. Moshiri.

BWK: There’s news coming out of Brazil almost every week, from Petrobras and other companies that are working down there. Chevron has a large presence in Brazil. Where do you see things going now that Brazil is coming towards the end of rewriting its offshore oil laws, creating a pre-salt development entity? What do you see happening down there?

AM: First of all, the Santos and Campos Basins of Brazil are very attractive. Geologically, (these are) fantastic basins. Petrobras has done a marvelous job of handling this, in the fashion that should be an example for others.

BWK: How is Petrobras setting an example?

AM: Even as a pioneer in the deepwater, Petrobras invited IOCs (international oil companies) in a very systematic manner, starting around 1996 — and I’ve been involved with that for about 15 years. It’s (a model for) how to get IOCs involved, how to work with them closely, how to expand the relationship. We (at Chevron) have a relationship with Petrobras not just in Brazil, but outside of Brazil, where we are partners in West Africa as well. So from Brazil’s point of view, I think they’re taking the right steps since the late 1990s.

BWK: What about the new laws concerning development of the pre-salt oil resources?

AM: Regarding the pre-salt itself, and the new terms and conditions that they’ve put forward (i.e., the government of Brazil), there is a change from what it was before. But at the moment, (the pre-salt) is still an exploration play. There are going to be good surprises. There are going to be not so good surprises. To be honest, that’s exactly what happened in the U.S. Gulf of Mexico (GOM).

Until we understand the geology better, until we know what it is, (then) I think we, Petrobras and others can move ahead.

What we know today is that the petroleum system is there. The right parameters are there. Some of them probably, in some areas, will be higher or lower from the reservoir characters’ sake.

It’s a carbonate, deepwater. You can drill one well, and the next well may not be as good as the last one you drilled.

Until we assess that? Whether or not Petrobras is going to do it, or we are going to do it, is … a decision that will be up to the government of Brazil. But nonetheless, those are the two basins (Santos and Campos) that have been our focus.

BWK: Can you discuss Chevron’s major efforts in Brazil?

AM: As you know, we have Project Frade on the street.

BWK Note: Mr. Moshiri didn’t go into details in our recorded discussion. But according to Chevron’s web-site, Chevron holds a 51.7% interest in the Frade deepwater oil development project, which it also operates. The oil field lies in water depths of approximately 3,700 feet, 230 miles northeast of Río de Janeiro in the Campos Basin. Frade is a subsea development with wells tied back to a floating production, storage and offloading vessel (FPSO) — see image below. The project has an estimated price tag of $2.8 billion. Development is ongoing. The estimated output should be 68,000 barrels of crude oil and 25 million cubic feet of natural gas per day, starting in 2011.

BWK: And other large projects?

AM: (In addition to Frade), we are committed to another project called Papa Terra, which just went through E&D (engineering and design) earlier this year.

BWK Note: Chevron holds a 37.5% interest in Papa Terra, with Petrobras as the operator. Papa Terra has a planned capacity of 140,000 barrels per day of oil from a field that lies under about 3,900 feet of water.

AM: And the other thing we value a lot is our relationship (with Petrobras), and how Petrobras complements what we know and what they know to get the best out of every development and every activity.

We are hoping that the sub-salt selection activity (after the new oil law goes into effect), and to be able to work with the terms and conditions that put forward, will help get where we are for the post-salt. The same attitudes will be there, that help to collaborate on the post-salt.

BWK Note: When Mr. Moshiri references “post-salt,” he means the shallower projects, above the massive salt zone, where Chevron was working before the pre-salt discoveries of the past three years. Here’s a seismic illustration of the layers.

BWK Note (cont.): These earlier, post-salt projects — seen above in representative seismic cross-section — will remain subject to Brazil’s previous oil development law.

AM: What I mentioned about Mexico (earlier in the interview), versus Brazil, is that Brazil is very focused on production and capital efficiency. And it’s very unique.

I know that Mr. Gabrielli (Sergio Gabrielli, CEO of Petrobras) probably doesn’t want me to call his oil company a national oil company, which it’s not.

Petrobras is very focused on (capital efficiency), and it’s very much in line with what we think. If Petrobras knows that something is not working, or it’s too much, or whatever? I think they do build flexibility into the system to make sure they do the right thing. Therefore I’m optimistic about Brazil.

I feel like it’s not totally petro-politics (in Brazil). In some other countries, it is totally petro-politics. (In Brazil), it is petro-economics. If economics doesn’t drive them where they want to go, they would bring in other companies. They’ll create flexibility. I’ve seen that for 15 years.

BWK: So you believe Chevron has a solid relation with Petrobras?

AM: For us, we (Chevron) operate Frade. Papa Terra, our new development, will be operated by Petrobras. I have full confidence in Petrobras, that the project will be delivered and operated. Therefore we are complementing each other. That’s the reason that development in Brazil gets handled at a much faster pace than what we’ve seen in other places in the world.

BWK: One last point about Brazil. Last year, about July 2009, a senior member of the National Petroleum Agency (ANP) of Brazil said that “there’s no risk in the pre-salt.” Do you agree or differ with that assessment?

AM: As a geologist, you know that Mother Nature will always give us a surprise. Even in mature basins, we’ll always get some surprises. We hope always for the better. But I think his comment was aligned with knowing the basins. His comment was misunderstood in the form of ‘no risk.’

BWK: A lot of people use the word risk, but don’t really understand its meaning in the world of oil exploration.

AM: (The) comment goes back a few years ago. None of us knew that (the pre-salt) basin was existing there. We drilled a couple wells below the salt, but everybody’s focus was post-salt. But a couple discoveries? And continuing exploration? Petrobras and others? We are finding out that yes, this could be a significant basin.

It wasn’t a matter of drilling the well. It’s a matter of knowing the basin. Like with the Wilcox in the GOM.

BWK Note: Wilcox is a highly productive, oil-bearing formation, covering a vast area, that’s a target for many shallow, deep and ultra-deep wells in the U.S. part of the GOM.

AM: One of the things we focus on is understanding the prospectivity of a basin. I think he (the ANP man last year) was referring to that. Yes, there are several prospects in here. If you do your homework, your geology, your technical work, probably your risk is extremely reduced.

No doubt about it, (offshore Brazil) pre-salt is a basin. A basin (with) carbonate reservoirs that can perform very well. You need to find where the oil is, and where the productivity is going to come from.

Therefore I put it (the comment of the ANP man) in the framework of yes, we identify a basin, and the more work we do, the more risk will come down.

This last comment pretty much sums up Chevron’s approach to energy development. Do the work. Then do even more work. Don’t be afraid to spend money and apply technology to obtain the data you need. And the more work you do, the more the risk comes down. It’s what makes Chevron a successful oil finder.

Great Opportunities Offshore Brazil

The bottom line is that there are phenomenal opportunities for future energy exploration and development offshore Brazil. Developing Brazil’s pre-salt energy resources will require hundreds of billions of dollars of capital. Brazil will need hundreds of modern drilling ships and related service vessels. The long-term effort will require world-class exploration and development technology. And it all has to be operated by superb and skilled people.

Chevron is one of the world’s best-run independent oil companies. It has a solid record, over the past century, of successful exploration and development. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success — certainly in deepwater development — is built upon its highly skilled and talented people.

I expect that, as things unfold, Chevron will be right in the thick of things offshore Brazil, working closely with the Brazilian government, Petrobras and other partners.

Until we meet again,
Byron King
Whiskey & Gunpowder

September 8, 2010

Still Profiting from Deepwater Drilling was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

One particular oil field is central to the problem. It’s called Cantarell. It’s a super-giant, offshore oil field that was discovered in 1976 — based on a natural oil seep under about 150 feet of water, by the way.

After decades of production, Cantarell is getting long in the tooth. Oil output from Cantarell, is declining rapidly. Cantarell is depleting at an astonishing rate. Meanwhile, the yield from new Mexican oil fields is simply not making up the difference.

The Mexican government obtains about 40% of its national receipts from oil-related revenues. Yet due to falling oil output, especially from offshore, Mexico will likely cease being an oil exporting nation by 2015. This looming problem holds dire implications for the national balance sheet of Mexico, as well as — by implication — for U.S. energy and national security.

One obvious question is, Can Mexico rebuild its oil industry? Right now, there’s not nearly enough internal Mexican investment in exploration and new oil development. It’s quite evident that Mexico has under-funded what’s called “maintenance capital,” the funds necessary just to keep the day-to-day operations and equipment working.

Another problem is Mexico’s lack of success in discovering and developing new oil resources, despite its national jurisdiction over a large slice of the oil-rich Gulf of Mexico.

One major element of this lack of exploration success is that Mexico’s constitution severely restricts foreign participation in Mexico’s energy development. That is, foreign oil companies are banned from exploring for and drilling for oil in Mexico. Considering Mexico’s crashing oil output, it’s fair to ask if Mexico should change its approach to development.

Recently, I discussed these important issues with Ali Moshiri, President of Chevron Africa and Latin America Exploration and Production Company.

Here’s what I asked Mr. Moshiri about Mexican oil development, followed by his reply.

BWK: In the U.S. we’re seeing remarkable discoveries in the deepwater Gulf of Mexico (GOM). Could you share your views about what’s happening across the GOM, down in Mexico? Is there hope for deepwater oil helping Mexico reverse it’s decline rate for oil production?

AM: With Mexico, the new government reforms are in a positive direction. The fundamentals have to be decided by the Mexican government, which has to decide how they want to risk exploring their basin.

The Mexican government has to decide if they want to risk future exploration via Pemex (Petroleos Mexicanos, the Mexican national oil company — NOC), or via the private sector. They need to recognize that if the private sector is going to get involved, it has to be via a meaningful way. A meaningful way would be via sharing the risk and the upside.

BWK: Do you think we’ll ever see large, new discoveries in the Mexican GOM areas?

AM: I personally believe that Mexico is under-explored. They’re lagging behind on exploration offshore, and they underestimate the complexity and what is required. It all needs to be reassessed.

If you look at the U.S. deepwater GOM, there was a long era (to get to) where we are today. And you cannot look at today, and say you are going to take the U.S. GOM and image it into the Mexican area.

BWK: So what do you think it will take for Mexico to accomplish the exploration, and find the potential resources that are out there?

AM: Number one is that (Mexico needs to allow) the flexibility that is required for private sector, for IOCs (international oil companies). It’s IOCs that are the ones who really know how to go from phased exploration into development.

Yes, you can find companies that can explore. But when you explore, and then you find hydrocarbons in 8,000 feet of water, the next step is how you can develop it. How much money do you need? You can say, well, you need X-millions of dollars (to) develop it. But how do I finance it?

It gets into capital efficiency. Capital efficiency would be, how do I go ahead and finance this project? By production sharing? Finance it by myself? Some other way? How do you finance the development? Those are things that we think need to be addressed in Mexico.

BWK: What about contractors? Do you think Mexico could accomplish its energy goals by hiring, say, service companies, or using large oil companies as contractors, to do the exploration, the seismic, the drilling and such?

AM: The IOC has to be perceived as a partner. You cannot perceive the IOC as a contractor. This is my personal opinion.

Working with the IOC as purely a contractor will slow down the process. You have to look at the IOC as a partner, and a partner meaning sharing the risks as well as the rewards.

If Mexico gets this concept, and understands it, I think the progress and the basin is good enough to do things in the right way, and (Mexico) can be able to catch up the U.S. GOM and the U.S. sector.

So according to Chevron’s Ali Moshiri, there’s hope the Mexican energy sector. If Mexico opens up to foreign risk-sharing, and makes a good use of the expertise of international oil firms, then the nation can increase its future oil output.

But Mexico needs to permit outside, independent oil companies to participate as partners in exploration and development. That means to share the risk and rewards. In other words, Mexico should leverage foreign capital and technology, while sharing the eventual oil production in an equitable manner.

Even then, if everything goes right, it’s going to be a multi-year project to restore Mexico’s oil output to what we’ve seen in previous years. From where things are now, it won’t be easy.

The Overall Strength of Chevron

Chevron is one of the world’s largest and most capable independent oil companies. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success — certainly in deepwater development — is built upon its many highly skilled and talented people.

I can say these good things about Chevron based, in part, on my first hand knowledge. I’ve had the opportunity to visit a Chevron deepwater drilling project in the GOM. From what I’ve seen, Chevron exhibits a strong culture of safety and technical excellence.

Other Investment Opportunities in Deepwater Energy

There are, of course, other companies working on deepwater oil exploration and development projects across the world. If you’re interested in learning about another deepwater development, I can tell you about a small, Canadian company that has acquired a remarkable play offshore Africa. Just follow this link and listen to a presentation on this investment idea.

Until we meet again,
Byron W. King
Whiskey & Gunpowder

August 9, 2010

Mexico’s Crashing Oil Industry was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In our talk, Mr. Moshiri and I looked at the future of offshore oil and gas exploration and development. Here’s part of what we discussed, with more to come in future articles.

BWK: Mr. Moshiri, you run a division of Chevron that includes Africa and Latin America. How much oil and gas do you pull out of the ground every day?

AM: For Africa and Latin America, on a gross basis, Chevron is producing somewhere around 840,000 barrels per day.

BWK: That’s about 1% of all the oil that the world uses every day, at 85 million barrels per day. Can you say some more about what’s happening in the areas with which you deal?

AM: (My area is ) the Atlantic Basin. … If you look down at the southern part of the Americas and Africa, people are ignoring the contribution it’s making worldwide.

The basins in this area are different. It’s not necessarily like the Middle East, that they are huge fields. But there are many accumulations. On the aggregate, they’re significant. Not only to the Chevron portfolio, but overall to the supply of oil to the market.

If you look at this area, they’ll always be a net exporter. They’ll always produce more than they can consume. My personal view is that if they continue their level of economic growth, that they assume is going to be above global, they’ll still be an exporter.

It creates an environment for industry to include them as part of the energy equation. The barrels can move to other locations where they don’t have that balance.

BWK: Are you only looking for oil? What’s the larger hydrocarbon picture?

AM: The (Atlantic) basins have similarity, but at the same time the basins have both oil and gas. It’s not just oil. At the moment, the focus has been tremendously towards oil. I believe that both basins in West Africa as well as in Latin America have tremendous potential for gas for the future. But because of lack of infrastructure, they haven’t got to the point similar to Asia Pacific of the Middle East yet.

But if you look ahead 15 years, they’ll get to the point of contributing natural gas, through LNG (liquefied natural gas) or pipeline. … That’s the next phase. Today it’s very much focused on the oil side.

BWK: In the Middle East, you’re looking at a mature, 60-70 year old concept of exploration. Also, culturally, you’ve got similarities of climate, ethnicity to some extent, religion too. Not that everybody’s the same. But by comparison, if you’re moving from the Caribbean Basin to West Africa to Brazil to Angola, you’re going to see a lot of different people and different governments and different cultures that you’re going to have to work with. Can you comment?

AM: Absolutely. If you look at the Chevron operations, we deal with ten different countries. Three of them are in OPEC. Two of them are observers in OPEC. Therefore five of them are very much within the framework of the OPEC community. That shows that each of them have (their) oil policy and different view compared to when you look at places like the US, Australia, UK and Europe.

For that matter, you have to deal with each country separately. You have to understand, first of all, the geology, the technical aspects of it. And also the policies. The policies vary.

I’m not saying it’s good or bad, whether it’s in the hands of the government or the private sector. That’s what we deal with in this area. Not only do we have to worry not just about the technical side, but about the fiscal, commercial aspects of it as well.

BWK: Can you comment about what you’ve seen over the past 20 years, with the rise of the national oil companies (NOCs) in these regions, and how you’ve had to adapt from the way you used to do business to the way you have to do business now in the NOC environment?

AM: The reality is that with the truly conventional aspects of oil and gas, the technology is there. The know-how is there. Whether or not we have it, or a service company has it. It’s there. So the view of the NOC is that they have more than one option on just the conventional (development).

For example, (what) if you discover an oil field on land, say light oil? Then building it, developing it, putting it into the market is relatively conventional. So what we would focus on is increasing the recovery factor. We focus on getting more out of the ground.

The next phase is what I’d say depends on technology. You get into deepwater. The technology is different. The incremental cost is significant. Room for efficiency becomes a greater part of how we develop things. Yes, everybody (says that they) can develop deepwater. But how you manage expensive wells that you’ve got to drill? How do you test the basin? How do you commit to the investment? Those are significant.

As you see in the market today, it’s almost becoming like there are a lot of people who can explore. But there are not a lot of people who can develop deep water.

BWK: I had a chance to visit a Chevron operation in the Gulf of Mexico (GOM) in March. Chevron had the Transocean vessel, Discoverer Inspiration, drilling in over 6,700 feet of water, about 200 miles off the Louisiana coastline. The target depth was over 30,000 feet. It was quite an operation.

AM: I’m glad you took a visit to some of our operations. (You should see) some of the other remote places like offshore, deepwater off Nigeria. You can see how those places are highly technically driven.

And for as much as we’ve gone so far into developing these (deepwater) fields, the technology is not there to work over the wells when there are problems. The technology is not there to create efficiency for working over some of these wells. For example, if a well goes off production in West Africa, and it’s in the swamp, or in Block Zero, off Angola, in shallow water, we move a rig in and we know how work over the well.

But if a well goes off production and it comes to a work-over, if it’s in deepwater, in say 8,000 feet of water, then you almost have to spend as much to work over a well, as you spent to drill the well. Therefore we are looking for the technology, and expanding our expertise, how to go back and do some of that work. To work those kinds of wells over.

BWK: Can you describe how Chevron’s relationships are changing over time, with the NOCs?

AM: Yes, our relationship with the NOCs is changing, moving to a different direction. The next phase goes several years down the road, gets into the non-conventional hydrocarbons. Like tight sands and shale gas. I always use the U.S. as the base, where we started.

I’ve been in this business 32 years with Chevron. I remember when 500 feet of water was deep water. But now 500 feet of water is a conventional development, or work-over, with high recovery factor. And I think we need to expand that one all the way.

In some of the other regions, especially my region, we are not to that point yet. Again, it’s because some of these basins have not matured yet.

BWK: Can you elaborate on that concept of maturity? How are things different between, say the U.S. and further south in the Atlantic Basin?

AM: (The U.S.) Gulf of Mexico shelf is mature. But if you look at it south, from Mexico down to Argentina, or West Africa or sub Sahara or East Africa, we are still at the first phase of understanding the basins, understanding the potential, developing the technology around it, and being able to transport it.

Some of the discoveries (that) some of the companies have, in sub Sahara Africa, the transportation is going to be the issue. That region is going through a different phase. The transportation is about one phase behind where we are in the U.S.

According to Chevron’s Mr. Moshiri, there’s great potential for future energy development in the Atlantic Basin. The hydrocarbon resource is there — both oil and natural gas — and development is at an early stage.

The future will see more exploration and development, moving from oil into gas. The local markets will doubtless expand, but there’s still quite a bit available for export. But to accomplish this, the transportation infrastructure needs to expand. In short, there’s much left to accomplish in an immense swath of the world.

The Future Challenge of Energy Development

There are great opportunities for future exploration and energy development in Latin America and Africa. This will require trillions of dollars of capital over many years. That, plus world-class technology, superb and skilled people, as well as close coordination between developers and the national host governments.

Chevron, the subject of this article, is one of the world’s best independent oil companies. From its roots in the California oil patch of more than a century past, Chevron has a solid record of successful exploration and development. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success — certainly in deepwater development — is built upon its highly skilled and talented people such as Mr. Moshiri and the many members of his extensive team.

Other Energy Opportunities

There are many other companies working on deepwater oil exploration and development projects across the world. They range from very big to not very big, from independent to nationally-owned and operated.

If you’re interested in learning about another aspect of deepwater development, I can tell you about a small, Canadian company that is developing a remarkable play offshore Africa. Just follow this link for more information on this investment idea.

Until we meet again,
Byron W. King
Whiskey & Gunpowder

August 4, 2010

Africa, Latin America and Energy Development in the Atlantic Basin was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

We need to consider what it means for our future investment strategy — indeed, there are more lucrative opportunities if you look in the right places.

Certainly in the U.S., and doubtless the world over, the GOM disaster will spark tighter restrictions and higher costs for deep-water development. So let’s look at what’s going on with deep water and then compare it with what’s happening far from the sea, in the interior of the North American continent, up in Canada’s oil sands country.

The bottom line is that the GOM oil disaster will benefit energy development in Canada — and you can profit. But this gets ahead of the discussion…

Declining Support for Deep-Water Development

First, the BP (BP: NYSE) oil well blowout caused a decline in public support for deep-water development. The political forces simply are no longer aligned for strong growth in U.S. deep-water development, at least for the next few years. In other parts of the world, things may be better for offshore development. But even that is yet to be determined. We’ll have to watch, on a country-by-country basis.

Second, the U.S. government has just closed down the GOM, one of the world’s great oil provinces, to further drilling. We have a “six-month moratorium” on U.S. deep-water development, hastily enacted by the Obama administration. It’s already the subject of fierce litigation in federal court, but these things typically don’t play out quickly or smoothly. Thus, the moratorium will likely prove to be long. We’re already seeing upstream oil operators declaring force majeure and breaking contracts with drilling companies for GOM-based rigs. That kind of drastic legal remedy wouldn’t occur if people thought the moratorium were going to end anytime soon.

Third, the GOM blowout and oil spill will surely lead to stronger, more adversarial and more expensive regulatory scrutiny. Everything will take more time. Everything will cost more to accomplish. This will include industry having to obtain more permits. We’ll see more frequent, and more intrusive, inspections. Overall, there will be much more stringent environmental control.

Altered Risk-Reward Profile

The long and short of it is that deep-water energy development — in the GOM, and possibly worldwide — will face increased costs and extended project timing. We’ll see this at every step, from the regulatory approval process for new drilling to project construction, commissioning, operations and decommissioning.

In the U.S. for sure, the entire risk-reward profile for the deep-water GOM has altered dramatically. And in this world of mobile capital, we’re sure to see capital shift to other locales where the resource potential offers a better return. That new balance favors Canadian oil sands.

There’s “Peak Oil,” and Then There’s Canada

That term “Canadian oil sands” is truly loaded. Some people hear it and go ballistic, ripping into the amounts of water and natural gas and environmental impact there is in recovering “bitumen” — the correct term — from the frozen north. Other people hear the same term and smile at the geological fact that there are a lot of other hydrocarbon molecules out there in the rest of the world besides conventional crude oil.

Which gets us to another point. For as much as the term “Peak Oil” has made it into the common language, we need to keep in mind what we’re really discussing. The global energy production curves show conventional crude oil output peaking in many parts of the world. U.S. crude oil output, in fact, “peaked” in 1970. But you need to understand that the oil output that’s peaking is the old-fashioned kind of oil, like what Col. Drake was drilling back in 1859.

That is, the light, sweet, easy-flowing oil is getting harder and harder to find, certainly in significant quantity. It’s one big reason why the energy industry has moved offshore into deep water. That’s where the big new oil finds are.

But in addition to deep-water oil resources, the onshore world has immense amounts of unconventional, “heavy” hydrocarbon molecules. See the graph on the facing page from oil services giant Schlumberger that shows the world’s heavy oil and bitumen resources.

Canada has about 400 billion cubic meters of bitumen — most of it in Alberta (with some in Saskatchewan). That number translates to something like 1.4 trillion barrels of oil equivalent. How much is that? About SEVEN times the total oil reserves of Saudi Arabia. In other words, the Canadian oil sands may be the single largest hydrocarbon deposit anywhere on earth.

Reevaluating Oil Sands Risk

So yes, there are a lot of hydrocarbon molecules up in Canada. But these molecules are harder to get out of the earth than conventional oil. To produce bitumen from the oil sands requires large investments of capital, technology, energy, water and labor.

Thus, in recent years, Canada’s oil sands developers have faced increased public scrutiny. Much of it has to do with the perception of “dirty” oil, particularly the water usage and carbon dioxide (CO2) output required to extract oil from oil sands.

Then again, with the GOM disaster, and oil washing into sensitive environments along the Gulf coast, peoples’ viewpoint of “dirty” oil will likely change.

The fact is that the total CO2 emission profile for the entire Canadian oil sands operation — from one end of Alberta to the other — is about the same as the CO2 footprint for one large world-class city, such as London. And the water usage? Recent technical advances allow each barrel of water to be recycled and reused up to 19 times, for a 95% efficient process. It’s almost a closed system.

The bottom line is that obtaining bitumen from Canadian oil sands is not nearly as “dirty” as the opponents would like you to think. For investors, the environmental downside is a diminished risk factor.

Then there’s the issue of geologic risk tied into development. If you drill a well in deep water, for example, you may or may not find oil. By comparison, the oil sands resource is well established. The oil sands are well mapped. There’s really no real risk there. When you acquire an oil sands claim, you know what you’re getting. And the technology has progressed to the point that you can predict with great accuracy what you’ll ultimately recover from the ground.

Further along these lines, the experience with offshore projects is that the high-productivity wells last for only a few years at best. Then the wells and oil fields begin to enter conventional decline. In contrast, oil sands projects offer flat, stable production profiles over many decades. The historical record is that some surface-mining oil sands projects have reserve lives well north of 50 years.

For underground projects (called in situ projects, using steam-assisted gravity drainage or cyclic steam stimulation), the record is that projects can run at design rates for 20–40 years.

Thus, it’s time for investors to reevaluate the prospects for Canada’s oil sands. For many years to come, Canada’s oil sands are and will be a dominant contributor to future growth in global oil production.

Until we meet again,
Byron King
Whiskey & Gunpowder

July 21, 2010

Oil Crisis to the South, But Oil Opportunity to the North was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Run, and Don’t Look Back?

Still, that “blood in the streets” line is intimidating. There’s blood in the streets because something really bad is happening. People are dumping their shares. They want out. They’re running away and not looking back.

Often as not, people make tracks for a darned good reason. There might be a war or revolution in some area. That could lead to seizure or destruction of assets, and massive investment losses. Think of Iran in the late 1970s, or Venezuela more recently.

Then there are business sectors that crater, such as we saw with the asbestos business about 20 years ago. The class action lawsuits hit so fast and furious that many old names, like Johns Manville, were belly up before you could blink an eye.

Sometimes there are terrible events that just wreck a company’s stock. A few months back, for example, Toyota cracked up. This iconic Japanese firm got hit by a rash of news reports of unsafe vehicles, with bizarre acceleration problems and bad brakes. The lawsuits went national, indeed viral. Within days, Toyota went from one of the most admired companies in the world to being the butt of jokes from late night comedians like Jay Leno.

Or look at BP — also known as “British Petroleum,” when U.S. politicians speak its name. BP blew out a deep-water oil well in the Gulf of Mexico, and even two months later is unable to control the well or clean up the oil slick. BP stock crashed, and now it’s turning into an ATM for damage claims. As you surely know, BP even had President Obama ripping into it, in a speech from the Oval Office. How much worse can the bad publicity get? (I just hope they stop that gushing oil well!)

Opportunity Inside Misfortune?

In this article, I’m not going to dwell on foreign revolutions, or how an industrial product has fallen out of favor, or how BP is a reviled name anymore. But this kind of discussion is as good a way as any to lead into a new real-time recommendation for ESI.

Where am I going with this? Is there blood on some street somewhere? Not exactly. It’s more like there’s oil on the water — BP’s oil. And we have a chance to profit from it. Just so you understand, I’m truly sorry about the Gulf of Mexico oil disaster. But it’s giving us a chance to profit.

Yes, fate has offered us an offshore energy opportunity. Of course, BP has made a mess of its deep-water well. In turn, President Obama has banned new deep-water drilling in the Gulf of Mexico for six months (yeah, right, try indefinitely). Plus, we’ll surely see tighter regulations over drilling in shallow waters.

Point is the Gulf of Mexico has now picked up the reputation as a problematic locale for future offshore energy development.

So what are we going to do?

We’re going to invest in a beaten down natural gas driller in the SHALLOW waters of the Gulf of Mexico. The shallow water drilling will come back soon, I believe, and it offers some incredible investment potential.

In the wake of the BP disaster, the Obama administration banned new deep-water drilling, and interrupted the shallow-water work, as well. One shallow-water deep driller in particular took a hard hit, and its share price tumbled. But now the market has begun to recognize that this driller won’t see a material impact from the deep-water moratorium on drilling. It will keep on drilling, but in shallow waters. The development momentum and industrial fundamentals still favor what it’s doing.

Thing is, in shallow water, less expensive jackup rigs can be used, instead of the much more costly deep-water units. Also, in the shallow waters, it’s cheaper to stage logistics and exchange personnel from shore. Plus, it’s much easier to access and maintain the safety equipment. For example, in many shallow water projects, it’s possible to place the blowout preventer ABOVE the water line.

Also, drilling in shallow water closer to shore allows for the leverage of existing production infrastructure, such as pipelines, power cables and communication systems. This allows for rapid development after a discovery, with the added bonus that the reserves are much bigger — because in the ultra-deep play, the structures are so much larger.

So while deepwater drilling faces some obvious obstacles for the foreseeable future, things are looking good for shallow water drillers who are ready to pick up the ball. And things are looking really good for investors who know where to wade in even when there’s blood in the streets…or oil in the water.

Until we meet again,
Byron King
Whiskey & Gunpowder

June 28, 2010

How to Make 50% with an Energy Play Rebound was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.