That’s the most that can be produced. So when recession causes a temporary decrease in world consumption, it can seem like those 85 million barrels are enough. But consumption is bound to resume its upward climb, while those 85 million barrels a day are all we get. The day of reckoning has just been delayed for a little bit.

“Can’t we get more than 85 million barrels?” some folks are bound to wonder. Let’s look into that.

Those Stubborn “Peak” Curves

This week I was in Denver, attending the 2009 conference of the Association for the Study of Peak Oil & Gas (ASPO). Despite all the happy talk in the Big Media about how the oil situation is under control, I assure you that the oil situation is NOT under control.

The market meltdown and world recession of the past year has bought some time, or stolen some time may be a better way of saying it. All the “peak” curves are still out there, but are merely adjusted a bit to the right on the timelines.

As Marine Corps Gunnery Sergeant R. Lee Ermey likes to say on the television show Mail Call, “Wipe that smile off your face.” We’re staring at an energy problem that’s coming down the tracks like a runaway freight train. It’s just astonishing that more people don’t appreciate the looming impact of Peak Oil.

Meanwhile, the politicians are fooling around with the health care issue. Hmmm… I have some news for them. If you screw up energy, health care isn’t going to matter very much.

Oil Output Not Increasing

It might be a comforting thought to believe that world oil output can increase. Indeed, many policymakers in the U.S. and Europe apparently dream themselves to sleep at night pondering how the current oil volume of about 85 million barrels per day could move upward to, say, 95 million barrels per day — “if only the world oil industry were more efficient.”

Yeah, right. Except the global oil industry is not that model of dreamland efficiency. Sure, there are some bright spots. The big internationals like Exxon Mobil, Chevron, BP, Shell, etc. are good. There are some really good state oil firms like Brazil’s Petrobras and Norway’s StatoilHydro. Saudi Aramco is outstanding. These guys are all doing great work to keep the world’s pipelines and tankers filled.

But much of the rest of the world’s oil industry lacks the knack for capital discipline and crisp project execution. Venezuela’s oil industry is a basket case, what with the Chavez-led nationalizations and mass firings of recent years. Output is falling in Venezuela, and this from a nation with among the largest hydrocarbon reserves anywhere in the world.

Mexico’s national firm, Pemex, is nothing but a piggy bank for the politicians, who suck most of the investment capital away from the oil patch and into their own boondoggles. Thus is Pemex walking off a cliff of underinvestment, depletion and decline. According to Matt Simmons, Pemex may not be exporting any oil at all to the U.S. within 18-24 months.

Iran’s oil industry is in a slow death spiral, despite the occasional report of Chinese assistance with field development. Apparently, there’s a “Twitter Revolution” going on in Iran that includes people at the grass roots impeding the oil industry. Well, it worked to depose the Shah back in 1979. Perhaps the Iranians can rid themselves of their mullahs in a similar way.

Next door in Iraq, chaos reigns. According to Matt Simmons, the Iraqis “are in the dark about how to run their oil industry.” The Iraqi oil legislation is so burdensome that almost all players within the international energy industry are spurning Iraq, including the Chinese. Wow. When the Chinese won’t invest in your oil fields, there MUST be something wrong.

And so it goes. The bottom line is that we should expect a global oil shock by 2012, or earlier if global economic activity kicks into high gear. It should go without saying that despite any calamities that may come from such a thing, you would be very happy if you’d taken advantage of lower oil prices to stock up.

Until we meet again,
Byron King

October 23, 2009

Peak at 85 Million Barrels of Oil a Day was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Pemex officials were polite. They listened to Cantarell and checked their maps and logs. The Pemex representatives assured Cantarell that he was mistaken. There was no record of any oil spill coming from a Pemex ship or facility. They sent Cantarell away.

But Cantarell would not give up. He returned with the ruined nets and showed them to the Pemex officials. Sure enough, the nets were fouled with raw crude oil. So the Pemex officials asked Cantarell to take them to the place where his nets were damaged.

Cantarell took several Pemex representatives to a spot about 50 miles offshore. Despite the distance from land, the depth was relatively shallow — about 150 feet or so. One of Cantarell’s guests noticed an oil slick on the surface. The Pemex men realized that Cantarell had stumbled upon a naturally occurring oil seep.

Natural oil and gas seeps have long provided invaluable information to oil explorers. The seeps are evidence of active petroleum systems nearby. For example, Col. Drake’s famous well at Titusville, Pa., in 1859, was nothing but a hole pounded down near a known seep in the muddy bed of a body of water called — appropriately enough — Oil Creek.

But in the early 1970s, Señor Cantarell found something the likes of which Col. Drake could not have dreamed. The offshore seeps that Cantarell located were evidence of a massive hydrocarbon system deep within the rocks below. Oil was migrating upward from a highly charged reservoir. And, oh, what a reservoir!

This reservoir set a chain of events into motion that should lead you to some great profits. Here’s how it happened…

Pemex Drills the Oil Seeps — And Finds a Freak of Geology

The offshore waters and seabed of Mexico belong to the Mexican government. So Pemex began a program to investigate Cantarell’s find.

In 1976, Pemex drilled the first exploration well in the area. The results were beyond anyone’s wildest expectations. The Cantarell oil field (named in honor of the fisherman) was simply gigantic. Today, we know that the Cantarell discovery may have held nearly 20 billion barrels of oil. Much of that oil has been extracted over the past 30 years, but Cantarell easily ranks as one of the largest oil fields in the world.

And the Cantarell oil field is also a freak of geology.

The productivity of the oil-bearing zones at Cantarell — that is, the microscopic system of pores and permeability within the rock — apparently resulted from an impact with a rock from outer space about 65 million years ago.

Many geologists believe that this impact came from an asteroid with a diameter of about six miles — the size of lower Manhattan. The asteroid hit the Earth with the power of 50,000 hydrogen bombs. The force of the collision penetrated the Earth’s crust down to the mantle. The blast dug out what is called the Chicxulub crater — more than 110 miles in diameter — underneath the Yucatán Peninsula. And this impact may have been the “extinction event” that killed off the dinosaurs.

Whatever happened to the dinosaurs 65 million years ago, in more modern geologic time, the Chicxulub crater developed into an oil-bearing region of the Earth’s crust. So there was a massive oil field to exploit in modern times.

In the late 1970s, Pemex invested heavily in drilling Cantarell. And Cantarell began to yield its oil in 1979. When the oil started flowing, there was a national celebration in Mexico. The president of Mexico declared that the future role of the government would be to “administer abundance” flowing from Cantarell. We’ll address that notion shortly.

A Giant Oil Field — Cantarell

From the early 1980s to about 1995, Cantarell produced over one million barrels of oil per day (bpd). Output was steady. One of the best customers for Pemex oil has been the U.S., which has long imported well over one million bpd from Mexico.

And then, in the 1990s, Pemex began a systematic program to increase oil output. Mexico’s government wanted to raise more revenues from oil sales. The government wanted more of that “abundance” to administer. So Pemex built the world’s largest nitrogen injection project right on top of Cantarell.

That is, a large system of air pumps strips nitrogen gas from the atmosphere to inject it into the upper parts of the Cantarell reservoir. This maintains reservoir pressure, and thus increases (at least in the beginning it increased) the oil production. Oil output from Cantarell rapidly increased to nearly two million bpd.

But by the end of 2005, oil production stopped rising. In fact, oil output dropped below two million bpd as 2005 wore on. In January 2006, Pemex announced that Cantarell had “peaked” in daily output and would begin a process of irreversible decline.

What happened was that Pemex accelerated the depletion of the Cantarell field. There is only so much oil in any oil field. You can extract it slowly over time. Or you can apply technology to extract more oil more quickly. In the case of Cantarell, the nitrogen injection squeezed the “easy” oil out of the field. One could say that the nitrogen project worked too well.

Output from Cantarell is now declining at a rate around 14% per year. Some estimates are that Mexico will cease to be an oil exporter by 2012. And this will be a disaster for Mexico.

The Mexican Politics of Oil

In 1938, President Lázaro Cárdenas nationalized the Mexican petroleum industry. Indeed, for this act alone, Cárdenas is still regarded as a national hero in Mexico. Since that time, Mexican law has forbidden foreign investment in the energy sector. So Pemex has long held a total monopoly on oil exploration and production within Mexico. Pemex also controls many of the oil services that are required by any oil company, Mexican or otherwise.

But while Pemex has an oil monopoly, the Mexican government has used Pemex as both a social welfare program and a cash cow. It has to do with that notion of “administering abundance.”

One prime example is that the Mexican government has encouraged a strong union movement in the energy sector. This has led to massive overstaffing — featherbedding, really — within the oil industry. Pemex wages and benefits are among the highest in Mexico, while Pemex’s productivity is at the low end of world standards. And Pemex has over $48 billion of unfunded future pension obligations alone.

Furthermore, Pemex pays over 60% of its profits to the state and federal coffers. And over 40% of Mexican federal revenues come from Pemex. Pemex is a goose that lays golden eggs for the Mexican government. It goes back to “administering abundance.” But without Pemex, the Mexican government would rapidly become illiquid and insolvent.

Mexican government entities, in turn, use the money for social programs. But as is the case with large government entities everywhere, the politicians always seem to want more. The effect on Pemex is one of massive and ongoing decapitalization. Thus, for many decades, Pemex has not had adequate funds to reinvest in the Mexican energy sector. Much of the Pemex energy infrastructure is old and in poor mechanical condition.

To make a long story short, Pemex is deep in debt and — despite the high oil prices of late — losing money. And now output from Cantarell is crashing. The implications of all this are strategic not just for Pemex, but for Mexico and the U.S., as well.

Regards,
Byron W. King
July 2, 2008

P.S.: While Mexico tries to reestablish itself as a major player in the oil market, some American companies are beginning to make serious investments in the Mexican oil business. One such company has put itself in perfect position to capitalize on Pemex’s new plans to step up production and modernize its infrastructure. This company has been recommended to the readers of my paid service Outstanding Investments.

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

Hello, Rocca

Rocca refers to Paolo Rocca, the chairman of Ternium SA, an Italian-Argentine conglomerate that is part of the Techint Group. Ternium holds investments in flat and long steel manufacturing, processing, and distribution businesses throughout Latin America. Ternium owns equity interests in Argentina’s largest steel company, Siderar. Ternium also controls Hylsamex, one of Mexico’s largest steel companies. And Ternium controls 60% of the Venezuelan steelmaker Siderurgica del Orinoco, or Sidor.

Venezuela’s President Chavez has been critical of Sidor for selling the major part of its Venezuelan steel output overseas, thus forcing local producers to import steel products from elsewhere. Due to domestic price controls instituted by the Chavez regime, Sidor has been unable to raise prices locally in Venezuela, while the international market for steel has been strong and rising. Thus, in general, it is more profitable for Sidor to ship its product elsewhere and sell into the international export markets.

But Chavez believes that local Venezuelan industry should receive priority when it comes to a domestic firm, albeit a subsidiary of a foreign conglomerate, allocating local production. The “law” that Chavez threatened to pass was in the context of a warning to Mr. Rocca that the Venezuelan government would expropriate Sidor from the Argentine-controlled company if it resists this effort.

A Summons to Caracas

Chavez has summoned Ternium Chairman Rocca from Buenos Aires to Caracas for talks. The Financial Times of May 8, 2007, confirmed that Chairman Rocca would travel to Venezuela to meet with President Chavez. The meeting was arranged, in part, through the offices of Argentine President Nestor Kirchner, who recently provided Mr. Chavez with the opportunity to lead an anti-American demonstration in Argentina while U.S. President Bush was visiting neighboring Uruguay.

A Clear Warning

President Chavez was quite clear and specific in his warning to Sidor and Ternium. According to an Associated Press report, Chavez said at a news conference, and in no uncertain words, “We’re going to force you to supply, first and foremost, the Venezuelan domestic market before you take [the steel] to other countries.” Continuing his blunt warning, Chavez said, “If you don’t agree, give it to me. I’ll grab your company. Give it to me, and I’ll pay you what it’s worth. I won’t rob you.”

In its own defense, Ternium executives told analysts last Friday that they are not aware of a steel supply issue in Venezuela, according to reports on the Dow Jones wire.

“I would rather not do it,” said Chavez of the prospect of nationalization, but “Sidor takes raw material overseas to produce stainless steel pipes. We cannot allow that.”

“We Should Work on a Different Model”

So Mr. Chavez has said he “won’t rob you,” but they “cannot allow” a privately held company to export its product. What is one to make of this?

Whether there is a steel supply issue or not, Venezuela’s President Chavez was recently granted special powers by his nation’s National Assembly to decree laws. Essentially, Chavez can rule his nation via executive orders, without going through the niceties of a legislative process that includes any political opposition. This is, of course, a form of one-man rule — although Chavez often qualifies his supreme and unalloyed powers by claiming that he is performing his acts in the “name of the people” or in “defense of the sovereignty” of Venezuela, or with similar words.

Also according to Chavez, “I think we should work on a different model with Latin American business owners.” By this, Chavez distinguished Latin American companies from American-owned or -based entities, particularly Western oil companies. Chavez indicated that he was asking his fellow Latin Americans to “operate differently…at least here in Venezuela.” Chavez also stated that he was prepared to require all businesses in Venezuela to supply domestic demand before exporting goods into the global marketplace.

In other recent comments, Chavez has threatened to nationalize Sidor and private banks if they fail to alter what he called “unscrupulous business practices” that harm local industries. Venezuelan commentators believe that Chavez does not plan an imminent takeover of the banks and Sidor, but instead intends to bully the Venezuelan private sector so that it falls in line with his intended socialist revolution, a current work in progress. Since early 2007, the Chavez government has been on a drive to nationalize other sectors of the Venezuelan economy, and Chavez has already moved to take state control of telecommunications and electricity companies, as well as foreign-owned investments in the oil sector.

Karl Marx’s Birthday

On Saturday, May 5, 2007, President Chavez rode in a red Volkswagen Beetle to a poor Caracas slum, where he registered his name with a movement to create a single, pro-Chavez ruling party within his country, called the United Socialist Party of Venezuela. Chavez also gave a speech, noting that the day was Karl Marx’s birthday. In words reminiscent of a hard-line Marxist version of so-called “liberation theology,” Chavez said that “If any rich person wants to become a member of the United Socialist Party of Venezuela, he will be welcome, but he must begin by setting aside his wealth to the fight against misery.” Note the eerie similarity to the Biblical injunction from Matthew 19:24, which states, “And again I say unto you, it is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.”

President Chavez continued his speech along these lines, repeatedly citing the communist ideals of Karl Marx and of Russian revolutionary Leon Trotsky (who was assassinated on the orders of Joseph Stalin and died on Aug. 21, 1940, in Mexico City). Chavez has stated on other occasions that Venezuela needs a “single socialist party” to control political interests and “more efficiently” lead the country.

Clearly, something is going on inside the head of President Chavez, a mixture of Marx and Jesus, but it is not just about helping people to “enter into the kingdom of God.” So the next time that you read of Venezuelan President Chavez saying something like, “We’re going to pass a law,” you will know what he means.

Until we meet again…
Byron W. King

May 9 , 2007

“I Won’t Rob You” was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.