Today, we’re experiencing what has been termed the “Nuclear Renaissance.” There are two aspects to this. One is domestic. The other is international, but related to the first because U.S. politics affects the ability of American companies to export nuclear technologies and products…

There is no energy shortage. The world abounds with easily accessible nuclear fuels. What we have is a shortage of common sense. If not for the anti-nuclear movement, we would be several generations ahead in the technology. Energy would be abundant and far cheaper.

“The nuclear renaissance is dead,” writes Agora Financial managing editor Chris Mayer in his Capital & Crisis newsletter.

“Long live the nuclear renaissance!” insists your Whiskey editor.

“…Eventually…” he sheepishly adds, “and just not with uranium…”

Or as Patrick Cox Patrick Cox recently put it:

The biggest long-term impact from the tsunami, beyond the incredible personal losses experienced by so many Japanese, will probably be on the nuclear power debate. In the short term, we’ll see opposition to nuclear grow. In the long term, however, I think it is going to be very good for thorium nuclear power.

Sadly things are not going nuclear’s way just now. Like a man photographed walking out of a brothel, nuclear will require some fast-talking to save its reputation.

Chris Mayer counters Patrick’s optimism:

No one can say what the effects of the Japan disaster will have on the nuclear industry. It’s too early. But we can guess. My guess is that the nuclear industry has just been dealt another major setback akin to Three Mile Island. Japan alone makes up 11% of the world’s demand for uranium. I suspect it will use less in the future.

I suspect many of the plants in Europe, both planned and existing, are in jeopardy. I think some of the reactors on the drawing board will die on the drawing board. The whole process of developing nuclear energy will slow. The industry will feel the chill from Japan for years. That’s my guess.

The facts won’t matter. Look at what happened in the Gulf after BP’s oil spill. All drilling ceased. It didn’t matter what your safety record was. And even now, drilling permits are incredibly difficult to come by.

Of course Chris likely has the right of it for now. The near-term outlook for uranium stocks may indeed be very dim (but Chris has a wealth of other investing options set to make more gains).

But nuclear itself remains the most promising source of clean, abundant (read: “cheap”) energy. We’re going to have to use it if we want to be able to afford to keep the lights, the air conditioning, heating, laborsaving appliances and computers on.

The nuclear you knew and love — the one based on uranium — may be down and out…but there’s another nuclear on its way. And it looks to be unstoppable. If you’re wondering what how this new nuclear will be different, Patrick Cox has the answer:

The answer is the clearly superior fuel, thorium.

Thorium is far more abundant than usable uranium. Thorium reactors produce far less waste products that are much less hazardous…Thorium nuclear power generation is inevitable. The problems demonstrated with Japanese water reactors will, I believe, hasten the transition.

The biggest problem with nuclear energy isn’t safety, according to a recent Washington Post article; it’s the cost.

“Concerns about safety lead to extensive regulatory approval processes and add uncertainty to plant developers’ calculations — both of which boost the price of financing new nuclear plants.”

Far be it from us to bash costly and ultimately useless regulation. Let’s instead look at the bright side…

“It’s not clear how much these construction costs would fall if safety fears subsided and the financing became cheaper — and after the Fukushima catastrophe, we’re unlikely to find out.”

It seems the article writer has little appreciation for the demand for cheap energy or for thorium’s ability to eliminate the dangers inherent in uranium use.

A lot of people will change their tune about nuclear when they see just how expensive other energy sources can get…and when they realize how needless their fear of nuclear really is, especially when it comes to thorium power.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder

March 23, 2011

Why Thorium Nuclear Power Is Inevitable was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Yet this is not unusual for Big Oil these days. In fact, most are making big bets on natural gas.

Exxon Mobil completed eight projects last year. Seven of them were for natural gas projects — not oil. Of the three scheduled this year, two of them are gas. ConocoPhillips paid $5 billion for Origen, an Australian gas company.

Meanwhile, Chevron hammers away at its mammoth liquefied natural gas plant off the coast of Australia, at a total cost of more than $40 billion. (Liquefied natural gas, or LNG, is easier to transport.) Most of the oil giants are also slamming billion-dollar fistfuls to pick up shale gas acreage in places such as the Marcellus in Appalachia.

This shift creates new opportunities for investors. But before we get to those, let’s try to understand what’s happening.

There are several things at work here. One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget. Another factor at work is that 90% of the world’s oil reserves are in the hands of national oil companies. They are off-limits for the likes of Exxon and others.

By contrast, natural gas deposits are more plentiful. They are also getting cheaper to develop. The cost to build an offshore LNG terminal is about half of what it was only two years ago. The big LNG plants can be just as expensive as anything in the oil world, but — unlike oil — these projects don’t usually go forward unless there are long-term contracts in hand to support them. Some of these contracts go for 20-year terms. This makes the business more appealing to the majors, who don’t have to sweat the huge ups and downs they endure in the oil markets.

With contracts in hand, the gas business is just one of putting together an Erector Set. As The Economist notes, “The gas business is really an infrastructure business: drill wells, build gas plants, install pipelines and accrue profits.”

But there is more. The world’s use of natural gas is growing faster than its use of oil. The IEA’s guess is that oil consumption grows half a percent a year. Natural gas consumption, by contrast, should rise more than 50% in the next 20 years. Total, the big French oil company, is even more bullish. It estimates that China will use much more natural gas than is commonly assumed. Only a lack of infrastructure keeps China’s appetite for natural gas under wraps. But China is in the process of building that infrastructure today. It is only a matter of time before the nat gas markets feel its impact.

Finally, natural gas is cleaner burning. There is a lot of talk of carbon taxes of one kind or another, not only in the U.S., but abroad. I believe it is matter of when, not if, governments punish dirtier fuels. Natural gas will benefit.

However, I don’t expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it. Natural gas producers are all expanding production. Most are spending more to expand production than their cash flow supports. This is happening even though most look like they don’t make any money at $4 nat gas. (A recent survey put the industry average at $5.74.) This doesn’t bode well for the price of natural gas in the short term. As beaten up as it is, it could stay here for a while, or even go lower.

And so we hold only one pure play on natural because it is a low-cost producer with no debt, so it can still create shareholder value in a low-price environment.

Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.

The following chart shows the cost curve for the lower 48 states in the U.S. These producers need $7 gas to make money. If this is right, then our pure natural gas company in Capital & Crisis will make a lot of money.

This is because logic dictates that we should expect the price of nat gas to gravitate toward the cost of the marginal producers. (And since our company’s costs are under $2, it stands to make a lot of money when gas turns around. I’m content to wait it out…and buy more).

But let’s get back to natural gas in broad terms. Even though pricing looks unexciting in the near term, demand looks healthy long term. The world will burn more natural gas in cars and buses of the future than it does today. It will burn more natural gas to heat and cool homes than it does today. It will rely more on natural gas to provide electricity.

Long-term investors should treat these things as inevitable. Big Oil certainly is. And we are already building the infrastructure to support all of that future growth today. The best way to play this latter trend is in another idea we already own.

Regards,
Chris Mayer
Whiskey & Gunpowder

September 20, 2010

How to Profit When Big Oil Bets on Natural Gas 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.

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.

It’s energy. Yes, all those factories require power. But so do iPods and air conditioners. So do cell phones and computers. The modern consumer economy is a plugged-in economy that eats electricity like locusts devour crop fields.

As a result, China has added power plants as fast as they can make ‘em. China adds more every day, accounting for about 80% of worldwide construction. The Economist reports that the capacity China adds in 2010 will exceed the entire installed base of Brazil. In the next two years, China will produce more power than the U.S.

Where does the power come from? About 80% of it comes from coal. Not just coal, but awe-inspiring amounts of the stuff. Consider that in 2000, China used about as much coal as the U.S. Here we are 10 years later, and China consumes three times as much as coal as the U.S.

There are a couple of problems with coal. One won’t surprise you, but one may. First, coal is a dirty fuel. You have to spend only a few days in Beijing or any of the big cities to see what burning so much coal does to the sky.

This creates many health problems in China, and the Chinese know this. Hence, there has been a lot of money flowing to alternative modes of power generation — like wind and nuclear.

The other problem with coal, which might surprise you, is that China may have hard time making more of it. This line of thinking comes from Richard Heinberg at the Post Carbon Institute.

As he points out, China is now burning some 3 billion tons of coal per year. In the last decade, it added 2 billion tons of production. That’s quite a feat. But as Heinberg points out, it gets much more difficult from here.

“Imagine building mining and transport infrastructure three times the size of the entire U.S. coal and rail industries in just 10 years,” Heinberg writes. “That’s what it will take for China to maintain 7% growth rates.” Heinberg calls his 7% assumption “conservative,” as China’s growth rates to date have been much higher.

Another limiting factor is water, of which the Chinese are already relatively poor. As Heinberg points out, “A typical 500-megawatt coal-fired power plant uses about 2.2 billion gallons of water each year to create steam for turning its turbines — enough water to support a city of 250,000 people.”

China will be pressed to produce the coal it needs domestically. In fact, after being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year’s total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia’s coal exports — and Australia is the world’s largest coal exporter — and growing.

“This means if China imports double again next year — not an unrealistic scenario — China will need to import more coal than Australia can currently provide,” Heinberg notes. “One more doubling of import demand and China will be wanting to import 600 million tons per year, about the total amount of coal exported by all exporting nations last year.”

This is fairly astounding math. And the first thing it makes me want to do is buy coal. It doesn’t take a lot of brains to see that if this kind of demand scenario unfolds, it is going to drive up the price of coal everywhere.

And as coal is still the primary means of generating power in the world, it’s going to have ripple effects throughout the energy chain. Natural gas-fired plants, for instance, will look increasingly valuable, especially as natural gas prices continue to wallow in the mud.

Another idea is to look at the engineering and construction firms (E&Cs). The E&Cs are in the business of building the hardware you need to process and produce energy. They build coal-fired and nuclear plants. They build refineries and liquefied natural gas (LNG) terminals and biomass boilers. If you need more energy, you need an E&C.

E&Cs rise and fall with spending on energy projects. As oil demand (and pricing) has recovered in 2008 and 2009, this sets up strong capital spending for the next several years. This idea is particularly timely, because the market has knocked down one of the leading E&C firms by 25% in just the last month. It’s a compelling value, as you’ll see in today’s market.

Regards,
Chris Mayer
Whiskey & Gunpowder

June 21, 2010

China and Why Coal Prices Will Soar was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Here she is, in all her haze gray glory. Meet the Transocean Discoverer Inspiration.

What is this floating giant? Well, in the big scheme of things Inspiration is the future of the world’s oil supply.

Inspiration, and other ships much like her, is the great, gray hope for anyone who plans to use liquid hydrocarbons any time in the next 50 or 100 years. If you use oil, then you had better want this baby to work as advertised.

The Most Powerful Drill Ship Ever Constructed

In a practical sense, Inspiration is the newest, most modern, most powerful drilling ship ever constructed. She just put to sea in late 2009, fresh from her builders at the Daewoo Yards in South Korea. She’s already had her shakedown cruise.

Now Inspiration is at work, under long-term contract with Chevron, drilling holes in the bottom of the sea to test the deepest oil prospects that the geologists can dream up.

The New Deep Gold Rush

There’s a new deep-sea gold rush going on, except the prize is oil. Inspiration is among the vanguard of a new class of technology. The designers have been building ‘em bigger, stronger, and more powerful. The ships can lift more, string longer drill systems, go farther down, and find the really hard stuff.

Inspiration is among the largest drilling vessels ever to hit the water, and oh what a career is laid out for her. In case you missed it, the future is now.

How Deep? How Strong? How Much More?

Inspiration is designed to drill the deepest of wells, in the deepest of oil-prospective waters. In fact she’s rated to drill in up to 12,000 feet of water, or about as deep as the wreckage of the Titanic.

How can you drill in water as deep as where the Titanic came to rest? It’s hard, and expensive. And that’s the nature of things in a world where there’s such a concept as Hubbert’s Curve. Better get used to it. Better yet, invest in it.

Inspiration carries 12,000 feet of “riser” units – large-diameter, thick-cased pipe that connects the ship to the seafloor. Inside the risers, the drill pipe goes down – through a large hole in the bottom of the ship, by the way, called a “moon pool.” Eventually, it all connects together down on the seafloor, to make a hole. And the drilling mud comes back up, to be processed onboard the ship.

How deep can Inspiration drill? Down to 40,000 feet – just shy of eight miles – or some combination of water depth and rock depth that adds up to 40,000. It’s deep.

It takes a very big ship to do such things. Thus is Transocean Discoverer Inspiration just a hair over 835 feet long and 125 feet wide. She displaces over 100,000 tons. Her draft is 62 feet, fully loaded. That is, Inspiration’s keel is almost as deep down as the first oil well that Col. Drake drilled at Titusville in 1859.

Just the hull of Inspiration is larger than that of a World War II-era aircraft carrier. And updating things to modern times, Inspiration’s hull is almost as large as that of a modern aircraft carrier as well. There are few ships larger on any ocean, outside of the large crude oil carriers. But big, bigger, biggest is what it takes to drill deep holes in deep water.

Speaking of that, look at the derrick, in the middle of the ship. It’s 80 feet square at the deck, and rises up 226 feet. So the total height, from keel to the top of the derrick is well over 300 feet, or taller than a 30-storey building. The way the derrick is configured, Inspiration can actually drill TWO wells at once, which is a boon to efficiency – considering that a day at sea runs an operator near $1 million.

Power and Positioning

How much power does it take to run this ship? The generators can put out 40 Megawatts, which is enough electricity to light up a city of 40,000. It translates into about 53,000 horsepower. That’s the equivalent horsepower of about eight modern railway locomotives.

Inspiration is not designed for speed. She moves along at a stately 12 knots, transiting from drill site to drill site. But what Inspiration lacks in hull form and speed, she makes up in her ability to remain exactly above a single spot in the ocean. That is, when you’re drilling a well at the bottom of the sea, the drill ship can’t drift more than a few feet in any direction at the surface. The risers are super-strong, but not THAT strong.

So Inspiration has a remarkable array of systems that allow for “dynamic positioning.” It’s based on sonar signals from the seafloor. There’s also satellite positioning. The ship’s navigation system knows where the moon pool and derrick are located, relative to the action at the seafloor. And the ship remains in place via a series of powerful thrusters that push water opposite the drift due to wind and current. Piece of cake, right?

I’m Out Here to Feel the Energy, and Learn More

So I was 200 miles out at sea, learning about this remarkable ship and what it’s doing to find the world’s oil. I’m not part of the crew, nor am I technical staff. I’m a guest, and I assure you it’s quite rare for a vessel owner or lease operator to allow visitors. Still, in my mind, I’m a representative out here for those who subscribe to Outstanding Investments and it’s my job to find unique opportunities and ways to inform them.

My hosts are Transocean, Ltd., and Chevron Corp. Still, guest or no, I have full editorial freedom to observe, ask questions and write up what I learn. If you’re wondering, Agora Financial paid my way to get to New Orleans. Chevron is providing the helo rides, and arranged for the mandatory safety training.

Really, I need to emphasize that this is no casual visit. I had to go through two days of safety training, including helicopter evacuation and water survival. It was similar to my old Navy training, but still a good refresher. I also went through something called “Safe Gulf” training, which instructs you on how many ways you can get seriously injured or killed on an oil drilling facility. No nodding off in that class… not with the occasional gruesome photos to keep you focused.

A drill ship like Inspiration is a complex industrial facility. It’s full of all sorts of stored energy that can severely injure you, if not kill you. You have to be ultra-cautious and totally safe. There’s the usual fuel and chemicals that you find on a large ship. There’s also hydraulics, pneumatics, electrical power, mechanical energy (springs, coiled cables and such), and good old gravity – with big stuff hanging over your head.

It’s a lot like being in the Navy. All those years on active duty and in the Reserve have taught me quite a bit. But this is more than that. It’s different, in a very industrial way.

Simply, this is a massive drilling ship. It’s not “power projection” like in the Navy, where the gray boys shoot missiles and launch jets. No, this is power projection straight down, eight miles into the crust of the earth. It’s all about extracting energy. It’s all about obtaining the oil that this world needs. It’s all about how technology and capital investment are evolving to exploit the deep oceans of the world. There’s a lot here to provoke serious thought – including investment angles – and I’m doing a lot of thinking on this topic.

Until we meet again,
Byron King
Whiskey & Gunpowder

April 7, 2010

The Future of the World’s Energy Supply was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

As a researcher who likes to chase down facts, I know that credible scientists continue to debate whether and how much humans really do contribute to global warming. However, it’s the rare politician who acknowledges this controversy. Instead, they join the herd of scientists and pseudo-scientists who tend to cherry pick among the findings to fit their preconceived conclusions. An unfortunate state of affairs, but, alas, a consequential one, because these same politicians are awfully fond of regulation — and they’re becoming more so.

So it’s not surprising that we are on course for a real mess in terms of government regulations concerning carbon emissions, taxes, tariffs, and such. Detrimental results are likely for certain sectors of the economy, such as the oil and coal sectors and associated refiners, heavy industry, and the transportation sector.

As a scientist, I currently accept the near-unequivocal evidence that Earth is in a warming spell, but I also know that in past geological times, there have been many such periods of warming and cooling. I remain on the fence as to what impact anthropogenic (human-sponsored) emissions are having on the global trend. Perhaps more importantly, at some level I am haunted by the belief that even if we are responsible for global warming, we are too late, and there is nothing we can do about it.

Pragmatically, our job here is to point our subscribers toward prudent investments, and it is pretty clear that there is opportunity and danger in industry that is regulated, subsidized, and penalized by government. It’s also clear we are just now at the beginning of what will be pronounced government intervention — for example, the U.S. House of Representatives bill (H.R.2454) aimed at reducing U.S. greenhouse gas emissions 17% from 2005 levels by 2020 and 83% by 2050. The bill allows tariffs on carbon-intensive goods (such as steel, cement, paper, and glass) if they are produced in countries the United States judges to be shirking their responsibility in reducing greenhouse gas emissions.

Herein lies the problem, even if you believe cutting emissions will make a difference: the new big greenhouse gas emitters (i.e., China, whose growing use of coal recently pushed it to the #1 spot in greenhouse emissions, with India rushing to catch up) must curb their emissions… but in doing so, they will be denied the standard of living that in theory those of us who screwed up the atmosphere in the first place enjoy. This is hypocritical, and the hypocrisy is not lost on the developing nations. That’s why I think that global accords on emissions are not going to work.

Going forward, I see the impact of climate change regulations – tariffs, taxes on emissions, subsidies, carbon credits, and carbon trading – becoming a major factor in not only the energy sector but also the associated technology sector. And since governments tend to be rather fickle and make decisions that defy logic, our job has gotten that much more titillating.

Regarcs,
Dr. Marc Bustin

December 17, 2009

What Does Global Warming Have to Do with Energy Stocks? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The cause of the crash was a batch of purloined e-mails from the University of East Anglia and its so-called Climate Research Unit (Climate Research Fabrication Unit is more like it). When the contents of the e-mails hit the fan, the U.K. Telegraph headlined that “This Is the Worst Scientific Scandal of Our Generation.”

On this last point, we can now see how much of the conventional wisdom about carbon dioxide (CO2), and related “global warming,” marches to a drumbeat that permits no foot to fall out of step. The East Anglia e-mails reveal a transnational cabal of scientists whose ethics and methods mirror those of Stalin’s favorite biologist, Comrade Trofim Lysenko.

That is, these modern Merlins of global warming have massaged the climate data to fit their preconceived anti-CO2 theories. For many years, the climate change Godfathers have humiliated and intimidated scientists who dared to disagree. They’ve squashed dissent. They’ve blackballed academic journals that didn’t toe the line of politically correct global warming wisdom. And they’ve done it all under the rubric of “peer-reviewed” science — where they are the peers über alles. Nice work, if you can get it.

The global warming crowd claims that the climate change is a phenomenon that’s wholly man-made — mostly in the industrialized West, and particularly by industries in the U.S. of A. The science is settled, they claim. You can’t argue with it. No, indeed. And how convenient!

But as someone who studied geology (admittedly at Harvard, where they’ve been teaching the subject only since 1787) and has been in and around the earth sciences for over 35 years, I always wondered why the proposed remedies for global warming and climate change are not really solutions to the alleged problem.

I mean, the so-called remedies for global warming mostly call for U.S. and other Western nations to pay high-energy taxes on carbon-based fuels. And the remedies call for the West — especially the U.S. — dramatically to curtail CO2-emitting energy sources. Oh, and Wall Street will be able to trade “carbon credits,” like it’s done with such success in the field of mortgage-backed securities and the like.

Meanwhile, under the proposed cap-and-trade schemes, the developing world gets a whole banana boat full of unspecified “climate reparations” from the West, all while burning lots of coal and using more and more energy from any and every source. Huh?

To my way of seeing things, the proposed remedies for global warming never added up. Now, with the release of the East Anglia e-mails, we know that things were never supposed to add up. The whole global warming and remedies process is designed to lasso a perceived “environmental” problem and use it to fulfill a laundry list of campus-Marxist political agendas. And quite a bit of the mainstream West swallowed it, hook, line and sinker.

Now that the cat is out of the bag (to change metaphors), is cap and trade dead? Have we reached a teachable moment about things like future energy use and industrial development? Will we see a period of backing down and thorough re-examination?

Or are there too many big shots, with too much ego and too much money, already too invested in the man-caused global warming process to admit of any doubt? Follow the money, I suppose.

Then again, there might not be much money to follow. Sometimes, deliverance comes from the strangest places…

Until we meet again,
Byron King

December 10, 2009

Global Warming Is a Politcal Science was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Then suddenly a new-found U.S. natural gas producible reserve is suggesting that the U.S. in fact will be self-sufficient or close to it as soon as 2030.

Why are all of these things happening?

A bit of it, of course, is due to the drop in the overall economy, but it has a lot to do with the concept of gas shale, and that’s really what we are going to focus on today.

Where Does All This Gas Come From?

The gas comes from organic matter that is within the rocks. It evolves, bacteria work on it, it generates gas, and most of that gas and oil end up in reservoir rocks, such as the sandstone.

But the rocks with which the organic matter is in the first place, are fine-grained rocks that we use the loose word “shale” for. These are the rocks that have the organic matter that’s cooked, that generates the gas. The gas is generated from the fine-grained rocks and it migrates out into our reservoir rocks, which is our conventional gas production.

If we were to look at the shales in more detail with an electron microscope, you would see that it’s very fine grained and the pores are small. If we look at sandstone, the porosity and permeability (the ability of gas to flow through the rock) is great, and that’s why we can produce it at commercial rates. Traditionally we haven’t been able to produce any gas from shales because there are no pathways for the gas to go out at a very fast rate. Until recently
we’ve pretty much ignored these rocks.

If we blew up the pore in sandstone to the size of the Eiffel Tower – by comparison, the pores in shales are about the size of an eyelet on the compound eye of a bee. In other words, they’re really, really small. There’s a tremendous size/scale difference and that’s why the gas tends to be retained.

The reason that gas migrates out of the rocks is that they’re surrounded by water. All the other pores are filled with water, and because gas or oil is lighter than water, there is a buoyancy effect. It migrates until it’s trapped.

But shales are so fine grained, you don’t need a conventional trapping mechanism. The gas does not move out of these shales because of capillary pressures, and also because the gas is actually absorbed into the mineral and organic surfaces.

That means when we find these shales and these types of deposits, they are not localized. They are very, very laterally extensive, so you don’t really have any exploration risk in terms of finding the shale. The exploration risk is really in whether or not you can develop it.

The economically recoverable gas from the shale is now possible due to development and success of horizontal drilling technology – the development of fracking technology. Higher gas prices in the past gave us the confidence and allowed us to develop the technology. A huge factor is confidence. We know we can do it economically, so we are willing to spend the big dollars that are required to drill and frack one of these wells.

Technology has now made it possible to produce gas from rocks that we couldn’t produce gas economically 10 years ago.

In the past we were drilling more and more wells that produced less and less gas. All of a sudden, things have changed with these shale wells. We are drilling fewer wells, and each well is producing more and more gas – because of the frack technology and the wells being horizontal. Things have changed completely.

Finding and Development Cost

How much it costs to produce the gas, of course, is going to be equivalent to the resource size – the producible resource size. The bottom line is, there’s lots of gas that could be produced at relatively low prices. For example, EnCana’s projection of producible natural gas is absolutely enormous.

What’s Happening in the Rest of the World?

The rocks are a little bit different in North America than everywhere else, but there certainly are similar shales in Europe. North Africa has wonderful-looking shales, and so do a few other places – Eastern Australia, for example. There is no reason to suspect they won’t be equally successful producing gas from tight rocks in those areas, as we have been in North America.

There are certainly lots of gas shale potentials in Europe and many companies like Conoco, Exxon, Shell are there – Shell is drilling some gas shale wells in Sweden, for example. Other companies are working in England.

So all of a sudden we are looking at a world where natural gas is perhaps not in a shortage anymore.

Part of the problem is, we have been a little bit too successful – if you’re a service company, a drilling company, or a producer in North America. We’ve been so successful in finding gas that we’ve driven the price way down. The price, in fact, has been too low to sustain drilling and, in some cases, production.

We’ve got a market, we’ve got demand, and we have supply. U.S. natural gas storage is at a maximum. We’re filled up; no more natural gas, please… for the time being at least.

So What Does It Mean for the Price of Natural Gas?

Since gas prices have taken a major dive, so has the rig count. The rig count is how many rigs are actually drilling. Currently in North America, we’re probably at a 35% to 40% usage of the rigs. This is way down, and the implication is important for the gas price.

Low gas prices means, suddenly we’re drilling a lot fewer gas wells. No one wants to drill anymore.

Currently, in order to maintain U.S. production, we have to add between 17, 18, 19 Bcf (billion cubic feet) additional gas per day. At the current rate of drilling, we’re adding 9 Bcf a day production, so there’s obviously a shortfall.

And a shortfall means eventually the price of gas has to start going up.

Right now, there are a huge number of drillable wells – prospects all ready to be drilled. As soon as the natural gas price gets up above a certain level, these wells will suddenly become economic, and people will start developing them.

So it’s not like we are going to find new “stuff,” we’re just going to start producing the “stuff” we already know exists.

Which Companies Are Going to Lose and
Which Are Going to Win with
the New Metrics of Natural Gas?

Losers:

• Gas-weighted companies are in trouble today.
• Small companies with debt, I think are finished – if they’re gas producers.
• Companies only operating in North America are going to have a tough time. If you’re offshore, you’re probably in a lot better shape.
• Companies with no technical expertise – producing gas from shale requires a team of people who actually understand what they’re doing.

Most small companies just can’t play in that sandbox. When things go bad, they go bad. You have to be able to drill a number of wells successfully to be successful. If you can only drill one well and you have no operational experience, you should just take your wagon and go home. That leads me to the winners.

Winners:

• Big companies with some capital to play with.
• Companies with operational experience, or companies that have the depth to develop that operational experience.
• Companies with early land position and low finding and development costs or finding and exploration costs.
• Technically competent companies.
• Small companies who have decent land and have big-company partners.

Some small companies got an early land position, opening the door for big companies to farm in on them. These are perfect situations. The big company is paying the load, and the small company will still get the advantage.

My Prediction for Gas Prices

In my opinion, gas will be $6 or $7 next year. Prices will then soften down to $4 or $5 at the end of next year. Ultimately, the best buys for investors will be small-caps that are farmed out or big companies that have long-term positions.

Regards,
Dr. Marc Bustin
Casey Energy Opportunities

December 9, 2009

The Future of America’s Natural Gas was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

What seems to be at stake for the knuckleheads is their identity, their idea of what it means to be an American, which boils down to being an organism so specially blessed and entitled that it is excused from paying attention to reality. There were no doubt plenty of counterparts among the Mayans when the weather changed and their crops failed, and certainly the Romans had their share of identity psychotics who doubted reality even when Alaric the Visigoth was hoisting off their household treasure.

Reality doesn’t care if we are on-board with its mandates or not. The human race has to get with whatever program reality is serving up at a particular time. Are we shocked to learn that scientists fight among themselves and cheat as much as congressmen?  Does that really change the relationships we understand about parts-per-million of carbon dioxide in the earth’s atmosphere and the weather?

What the people of the world can do or will do about a change in climate is something else. My guess is that the undertow of entropy is now too great to provoke any meaningful unified change in behavior.  The collapse of the US economy is too close to the horizon, and the so-called developing nations will have problems equally severe.  In the meantime, it is unlikely that any of the major players will burn less coal and oil, or not cheat on each other even if they pledge to burn less.  People who are not knuckleheads will make the practical arrangements that they can. These will, by definition, be localized, small-scale, and non-global communities, doing what they would have to do anyway.

A parallel identity mania afflicts those who have decided that the Bakken shale oil deposits and the Marcellus gas play will allow the USA to cancel any modifications to our living arrangements. This cohort of knuckleheads wants to believe the public relations of the oil and gas industry, and in particular the bankers who are arranging the financing for these ventures. The facts are irrelevant to their identity-claims (that the USA has limitless energy resources). In fact, the Bakken shale formation is unlikely to produce more than a few hundred thousand barrels of oil a day in a nation used to burning about twenty million.  A few hundred thousand might mean a lot if were only used to light kerosene lamps, but it is unlikely to keep the faithful motoring off to WalMart and Walt Disney World – which is the exact expectation of the knuckleheads.

Shale gas is a similar story. It will be too expensive to get out of the tight rock at a flow that will allow business as usual to continue.  It certainly won’t be produced at under $10 a unit, and the nation’s comprehensive bankruptcy accelerates every day, making it less likely that the public can pay premium prices within the framework of our current living arrangement.

The Green Shoots crowd – a sub-category of identity maniacs, who think the USA is immune to the laws of history and physics – has made common cause with the oil and climate knuckleheads to proclaim that we are returning to normal, back to the “consumer” orgy, the suburban sprawl nexus of McHousing and miracle mortgages, and new frontiers of corporate profit-raking.

They are tragically wrong.  Instead, we’re headed into the wildest king-hell debt workout that the world has ever seen, which will propel a lot of people used to working in air-conditioned cubicles into a world made by hand.  We march day by day into the great holiday season with mortgages going unpaid and the credit cards getting cancelled and money disappearing and the fears and grievances mounting.  Pretty soon, the folks doing “God’s work” at Goldman Sachs (and their tribal kin on Wall Street) will announce their annual bonuses (because they are publicly-held companies, which have to do so).  Won’t that be a galvanizing moment for us all?

Regards,
James Howard Kunstler

December 8, 2009

Climate, Oil, Reality and Delusion was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.