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.

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.

In the three years or so that I’ve been editing Outstanding Investments I’ve tailored the energy side of the portfolio heavily toward deep water oil exploration. And people say well gee, you have an awful lot of exposure for one segment of the industry. Well, that’s because that’s where the oil is.

Gary: Exactly.

Byron: You go where the oil is and the big oil is in deep water. I mean, there’s oil on shore in some parts of the world, but these are parts of the world where most investible plays can’t go. I mean, Saudis, they have lots of oil. Venezuela, they got lots of oil. Mexico, they got more oil than people give them credit for although they’re doing a horrible job of exploiting it. It’s the resource nationalism of the world.

On shore and in many parts of the world — Russia as well as all through the Middle East — the big private oil companies are just publicly owned and other oil companies are just not able to get their foot in the door. Or if they do, it’s under very, very, very limited, very circumscribed procedures. BP bought into the recovery of the rocky oil industry, but they’re getting paid a fee per barrel that they produce.

It’s a pittance really in terms of what’s coming out of the ground and the contribution that they would make towards bringing it out of the ground. So anyhow, where is the big oil in the world? How does a big oil company “move its needle”? How does it move its reserve needle? You go offshore, and you go into deep water, because that’s the last frontier. It’s the unexploited oil deposits. It’s big deposits. You can get these super wells out there where you can make 20,000…30,000…50,000 barrels a day out of one well. Because of these huge volumes and high pressures. Which the flip side of that is that if you blow out your well, which is what we’re seeing you can make a big mess in a fast hurry. That’s what we’re seeing in the Gulf of Mexico right now.

Gary: That can happen on shore as well. But under water, under all that water, that’s the other side of it. That when things go wrong…

Byron: That is the other side of it and I honestly am highly critical of the oil industry and the regulatory side of the house, too, for a distinct lack of imagination over the last 20 years. Everybody was imagining going further out and going deeper and deeper water, deeper and deeper wells. But there has been precious little R&D done in deep water well control, and deep water blow outs. We are watching — say in the last month — 20 years worth of research and development happen inside of a month.

They are literally just taking ideas, throwing them against the wall to see if they stick. You know, whether it’s that big box. Whether it’s the top hat, the top kill, the junk shot, the bridging shot. You know, all these different things that they’re talking about. We’re watching 20 years worth of R&D happening inside of a month and nobody really thought about it. Nobody put any big money into it.

Instead the money went into technology to conduct the operation and in a sense, the idea was that we’re going to put money into building really good equipment, and our technology is so good, and our procedures are so good that nothing bad will ever happen. Well something really bad happened. Now what? I mean that argument doesn’t hold water anymore, which is why at least in the U.S. — and it might be something that spreads elsewhere in the world — the offshore deep-water drilling regime anymore is going to become a much more exclusive club.

Only larger companies with deeper pockets who can afford the regulatory requirements need apply in the offshore deep water drilling space. To the extent that the U.S. government and other governments in the world really permit that kind of deep water drilling. There’s a, there’s a very loud and growing louder, very vocal segment within the political crown out there that just wants to say “see, we told you so.” This deep-water stuff, you should never do it.

To which I say there’s really an element of energy hypocrisy here because the same people who are saying we shouldn’t drill offshore are also the same ones who say we shouldn’t drill on shore. I mean, for the lack of drilling on 640 acres of land in the Arctic National Wildlife Refuge, for example – when I say 640 acres, I mean an acre here and an acre there. I don’t mean like all in one big spot either.

For the lack of drilling in the Arctic National Wildlife Refuge, which you do in the wintertime built on ice pads using ice roads when it’s 40 below 0, and all animal and plant life is in a hybernetic state. And we do understand how to drill in an on shore arctic environment. That is quite doable. And we have existing infrastructure 20, 30, 50 miles away in Prudhoe Bay and a working pipeline, the Alaskan pipeline.

For this lack of drilling in the Arctic National Wildlife Refuge that is all the more incentive for the energy industry to go into the far offshore and drill wells so far away that if something bad happens, it’s almost impossible to conceive of how you could control the problem. You know, in a very perverse sort of way, it’s almost good that the well blew out offshore Louisiana. Not that it’s a good thing because that’s not a good thing.

Gary: Of course.

Byron: But if this well had blown out, or if a well had blown out 8,000 miles away, let’s say 150 miles offshore of some African littoral, that is 2,000 miles away from the nearest serious infrastructure in Angola or South Africa or something like that. You know, I mean, how, how could you possibly begin to mobilize the resources to fight a deep-water blow out similar to what we’ve seen and what’s going on in the Gulf of Mexico. I mean, the Coast Guard and the U.S. government has, and BP of course something like 750 ships under its control right now.

They’ve got hundreds of aircraft flying all over the place, gathering data, spreading disbursements. They’ve got 250 miles of deployed booms in the water trying to keep that oil away from the shorelines and the marshlands. And really, they’ve done a remarkably good job of keeping the oil away from the shorelines and the marshlands. Yeah, there are tar balls here and there, but, you know, the oil hasn’t washed into the marshes yet. You know, they’ve kept the oil out at sea.

Out at sea that oil, you know, at least to the extent it gets to the surface, it bakes in the sun, and it’s a nice warm latitude of sunshine there. And the Gulf waters are warm, and there are oil-eating bacteria that are doing their thing. It’s not a good thing at all to have this happening. I’m just saying that in terms of mobilizing the military and the government and the civilian government and the industrial resources of the Gulf Coast to fight this oil slick. I guess you couldn’t pick a better place to have a deep-water well blow out and I can think of a lot worse places to have a deep-water well blow out.

Gary: There are going to be people who listen to this or read this and say that we were maybe a little callous or flip about it when we say this is the best case scenario for a disaster, that we’re able to control it. But isn’t that the reality of it. I mean, you’re drilling for oil. These things are going to happen. Do you feel that there is an element of inevitability in it?

Byron: Well, I hate to be so fatalistic about it as to say that you’re going to do something that’s ultra dangerous, which is drilling for oil far off in deep water, and say these things are going to happen. I really subscribe to that NASA mission control attitude that Gene Krantz had when he was running things down at NASA: perfection is the price of admission to mission control.

And I don’t think it’s too much to ask of the oil industry that they be perfect in terms of what they do and how they do it out there. I mean, if they can’t do it perfectly, I don’t think it’s too much to ask that they just tie the ship up to the pier and stay ashore and find something else to do with their capital. Because the problem is that a deep water blow out is so — the scope is so vast. These super wells are so prolific.

This blow out is spurting 5,000 barrels a day. That’s because the Cameron blow out preventer actually did work partially. I mean, that well could be blowing out – and I was just on a phone call yesterday listening in with Admiral Mary Landry of the Coast Guard. She said that the absolute worst-case scenario on this well is 55, 000 barrels a day. This well could be 11 times worse that it is, which tells you that the Cameron blow out preventer is doing something. You know, so I don’t want to go through life and I don’t want to write an investment newsletter that says oh, you know, this is just kind of the price we pay to work in these frontier areas.

Well, if that’s the price we’re going to pay to work in a frontier area that’s too high of a price because it’s not just the Gulf of Mexico. It’s the idea that lots of people are going to be drilling offshore. Brazil, the Mexicans want to drill in their deep water… offshore Africa, offshore India, in the frozen arctic ocean, off of Greenland, north of Norway. Things like that. The idea that we can somehow accept a blow out as the price or the cost of doing business…that’s just not acceptable to me.

And yes,, we have to have absolutely incredible technology, and it has to be really good and work real good. And it says something that Cameron and BP, or that Transocean and BP can modify the Cameron blow out preventer and not tell Cameron about it and not have some sort of an approval from the Mineral Management Service in the way that airlines have to keep their jets up to spec under the FAA. You know what I mean? I think there’s something wrong there.

Gary: Well, I certainly want to agree with you. I guess my concern is all those who will come out of the woodwork and decry what’s happened here…and then drive twenty miles to a supermarket and shop for goods brought in from across the country by a fleet of trucks. They just don’t appreciate how necessary offshore drilling is for their way of life to continue. It’s one thing to say BP or Transocean fouled things up royally, but it’s another to say that they shouldn’t be drilling in deep water at all.

Byron: Yeah. But hey, guess what: we’re on the backside of peak oil, or we’re on the backside of the Hubbard Curve.

Gary: Exactly!

Byron: Yeah, that Hubbard Curve thing. Sure, maybe in Saudi Arabia they can still lift oil out of the ground for $5.00 or $8.00 or $10.00 a barrel, but there’s just not that much cheap oil out there anymore. And so $70.00, $75.00 a barrel, $80.00 a barrel oil, there are a lot of people are still making a lot of money off that. And then there are plenty of hydrocarbon molecules out there in other unconventional spots. When we run out of $70.00 barrel oil, I assure you that there’s lots of $200.00 a barrel oil out there. And so companies are going to be making money in different places in different ways.

But right now and for quite awhile, the money is going to continue to be in deep water exploration. These oil companies have to get it right so disasters like the Gulf of Mexico don’t happen, but they also absolutely have to be out there in the deep water.

Byron King and Gary Gibson
Whiskey & Gunpowder

May 25, 2010

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

Byron King: Exactly. The days of drilling a hole beneath the soil in Texas, inserting a pipe and watching oil gush out are gone. We’re never going back to those days.

It gets into what we’re dealing with here in the search for deep sea oil… The energy industry has to go deeper and deeper to make things work. Risking more and more capital – and unfortunately, lives – along the way.

Look at what we’ve seen in the last 20 years or so, since 1990, when the oil industry really started to go deep. There was something like an “arms race” to develop better and better deepwater technology, to go for the next levels down.  We’ve seen this race to deeper and deeper water. And it’s all because the so called “cheap oil” is gone.

It used to be that drilling at 1,000 feet water depth was the edge of technology!  You know, back then in the early 1990s it was 1,500 feet, then it was 2,500 feet, then it was 5,000 feet…7,500, 10,000. Now they’re drilling at 12,000 feet of water.

It’s doable.  But it’s mind-blowing as well.  I mean, 12,000 feet of water is where the Titanic sits.  That’s how deep that water is. Let me stress: 12,000 feet is really deep water.  So in 20 years, we’re gone from 1,000 to 12,000 feet: huge, huge technological leap. And the only thing that lets you do that is technology.

In the same sense you have a much, much better computer today than you did in 1990, you have much better offshore drilling equipment today than you did in 1990.  You have bigger, better rigs.  You have more powerful rigs. You have far better positioning, far better station keeping.  You got much stronger steel.  You’ve got better pipe. The way they do these risers is just astonishing.  Risers are not just pieces of steel pipe.  These risers are an entire, complex mechanical and hydraulic system that connects the drill ship on the surface with the workings on the sea floor 2 miles down.  These things are incredible specimens of engineering.

Keeping with the risers, they’re wrapped in this stuff called syntactic foam.  This foam is super high-tech stuff.  It keeps the risers buoyant.   So you have riser sections that, in the air, weigh many, many tons.  But in the water, it’s essentially buoyant.  You can push the risers around with a little remote operating vehicle with a couple of little propellers on the back of it.  So this stuff is really astonishing.

Gary: OK, so all this new technology is needed. The risks seem great. They obviously wouldn’t be doing this if the reward of finding new oil wasn’t great. But with the recent disaster in the gulf, the question on everyone’s mind is… what happens when that technology fails? So can you shine a little more light on the disaster itself. Starting maybe with all the players involved? I know you’ve recommended a lot of these deep-sea oil companies in your paid Outstanding Investments newsletter…

Byron: I’ll tell you more about what I’m telling Outstanding Investments readers in a second. But first, lets talk about the players…

Transocean owned the rig, and they were under contract with BP.  In the world of offshore drilling, the leaseholder or the operator — in this case, BP — really is driving the bus. It’s like chartering an airplane to go from here to there, but you have to file the flight plan and you have to work the airline to decide what is it that you want on the airplane. From the looks of it, Transocean was doing what the BP people wanted them to do.  BP basically lost control of the well.

From what I’ve seen and heard from the witnesses, BP was trying to make up for lost time, with a well that was behind schedule and over budget.  During the drilling, the BP guidance was to put extra weight on the bit.  OK, so they drilled faster.  But then they wound up cracking and fracturing the rock on the way down,  This made it more difficult to complete the well and cement it.

Ultimately, when the investigators recover all the data, the blowout preventer, examples of the down-hole pipe and cement…  when they get it all torn apart and figure out what happened, there’s going to be just a huge amount of human error in there.

So right now, when they say “Oh, you know, this piece of equipment failed or this piece of technology didn’t work or whatever”, that’s just not the whole story.

Sure maybe some piece of equipment failed or the technology didn’t work, but that’s because there was some sort of human control or human intervention or human oversight that let things progress from one bad situation to another bad situation.  And from bad to worse to the absolute worst. That’s what we’re seeing.

Again, though, it’s because offshore development is the future of oil. The oil industry wouldn’t be taking these risks if cheap oil was still with us. We’re just starting to scratch the surface of this deep-sea stuff. The cheap stuff’s gone. Gotta go offshore…

Gary: Right. So there’s BP and Transocean. Who else is involved…? Or, said a different way, what other technologies are needed?

Byron: Well, then there are the blowout preventers. And in the particular case of the gulf disaster, it was a Cameron product…

And you know, Cameron builds good blow out preventers.  They invented the blow out preventer.  There would be no blow out preventers if it weren’t for a guy named Mr. Cameron.  And so they know what they’re doing.

But the thing to keep in mind is that now you’re taking this onshore blowout technology, and adapting it to the oceanic environment, and more recently, to do it in a deep water environment.  So you’ve got these blow out preventers working under miles of water.

Now what happens with the blowout preventers is that when somebody builds a deep-water rig or a deep-water drilling vessel, they usually buy two blow out preventers, and they put them on the drilling ship or the vessel.  And they install one of them when they’re drilling the well.  The other is a backup.

When they’re finished drilling the well, the drilling people uninstall the blowout preventer and haul it back to the surface.  One way or the other, these blowout preventers are on the ship or they’re on the sea floor doing their thing.  And when they’re back on the ship, that’s when people do maintenance on then.

Now what apparently we’ve seen over the years is Transocean working with its client, which in this case is BP, and making certain modifications to the blowout preventer.  And that’s troublesome to me. Not that they made the modifications; it’s more the way that the modifications were made.  It’s the system under which people can modify these blow out preventers.

In this case, it got to the point where, when they went to try to shut off the blowout preventer in the first couple of days after the well blew, the BP people were trying to do things that were physically impossible to do.  That is, the drawings that they had for how the blowout preventer works weren’t the same as the real blowout preventer down on the seafloor.

Gary: Yeah, more of the finger pointing was about the newer drawings and where they were and why they weren’t available when they should have been. BP said a lot of time was wasted trying to operate blowout preventers on the ocean floor that didn’t match the drawings they had. But whatever accusations BP and Transocean want to hurl back and forth, Cameron is looking pretty good. They built good blowout preventers, like you said, and they’re not the ones who modified them or were trying to use them with plans that didn’t contain the modifications.

Byron: It would be like an airline company buying a jet from Boeing, and then doing its own modifications to the airplane and not having FAA approval or not working with Boeing to record the modifications.  And then the mechanics go to work on the aircraft, and it’s kind of like, “Wait a minute! What we’re finding here – this isn’t the Boeing spec and this isn’t what left the factory.”

Another analogy would be, you buy a car from Ford or General Motors, and then over the years, you swap out a different engine.  You swap out the transmission.  You put in different suspension.  You do most of your own maintenance.  You buy your own parts.  And you drive that car really hard.  And maybe you even drive it into the dirt.  And then years later, you have a traffic accident – you have a motor vehicle accident with that car. And now you’re going to go back and sue Ford or General Motors. Well, that’s kind of strange.

I guess that’s a way of moving to Cameron as an investment idea.  I mean, Cameron stock fell really hard in the couple of weeks after the Gulf of Mexico blow out.  But I think Cameron is going to come out of this looking pretty good.  They are not going to come out as blameworthy, because they didn’t build a bad or defective product.  The problem with the blowout preventer came long after this particular item left the Cameron factory.  So I think Cameron has been way over sold in that.

Gary: OK, we normally don’t talk specific stock stuff in Whiskey, but since you brought it up, readers may like to know a little more about the opportunities…

So lets talk more about that for a second. You’re saying Cameron’s a good “value” play in that way? And you’re not worried about Cameron at all?  You’re thinking they’re going to come out of this looking absolutely fine and that people will pile back into it because they made a good profit?

Byron: I think that Cameron is going to come out of this looking a lot better than many people think right now.  There will surely be a lot of emotional finger-pointing as the Gulf blowout progresses.  But I think that when people point the finger of blame at Cameron, they’re pointing the wrong finger at the wrong outfit.

Gary: Right.

Byron: Really, it’s so emotional that some people are pointing their middle finger at the companies involved.  We need to keep in under control, and follow the facts.

Gary: I mean, these guys, they invented the blow preventer.  You said without them there would not even be this technology in the first place.

Byron: There are really only a couple of companies in the world that make these blow out preventers.  One of them is Cameron, and another one is General Electric Oil and Gas, and those are the two I’d say largest suppliers.  It’s a very small industry.  And there just aren’t a lot of people, a lot of good companies out there building these items.  And they are super high technology items.

Anybody who thinks that a blowout preventer is just a big steel valve with a couple of pistons and some pipes and a few knobs and levers and bells and whistles and stuff…  Man, you don’t understand what goes into these babies.

The steel that goes into these blowout preventers gets traced back to the iron ore in the mill.  I mean, the, the quality is so, so high.  And the engineering and the testing that goes into these things… All because they’re intended not to fail.

But in this case, the blowout preventer appears to have not “failed,” but not “worked as intended” because it was damaged in some way.  There are claims that a rubber annular device was damaged several weeks before the blowout.  And if that’s true, that explains a lot to people who understand how these blowout preventers work.

But it doesn’t make Cameron a bad idea for the Outstanding Investments portfolio. Cameron is still a fantastic company to own. What’s happened here is a tragedy, of course, but as far as good investments like Cameron, it just makes them cheaper for a little while.

Byron King and Gary Gibson
Whiskey & Gunpowder

May 21, 2010

Deepwater Disaster Doesn’t Change Need for Deepwater Drilling was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In A.D. 934, there was a massive lava flow from Iceland’s Eldgja fissure system. It unleashed the largest basalt flood in recorded history. An ash cloud blanketed Northern Europe and weakened many political structures. This eruption helped keep the Dark Ages dark, and in particular harmed the English political system. It’s no coincidence that William, Duke of Normandy, conquered England a century or so later, in 1066.

Then there was the Laki eruption in 1783, with another immense outpouring of lava in Iceland. This eruption emitted large volumes of poisonous gas, including fluoride and sulfur dioxide chemicals that poisoned half of Iceland’s livestock. The gas cloud blew over Scandinavia as well, causing many deaths and hardships that included a long famine.

There were many deaths further south in Western Europe, as well, in 1783. Then came several years of extreme weather. Among other problems was a shortfall in farm output. This led to a drop in tax receipts for governments across the continent. In France, King Louis XVI eventually had to summon the Estates General to ask for new taxes. Instead, he wound up with the French Revolution.

Do not discount the immediate or long-term human, economic and social effects of natural phenomena. I hope that the Icelandic volcano goes back to being dormant. But it’s nothing that anyone can control.

One way or the other, the Icelandic volcano is important to you as an investor. This situation is bad for the European economy. It helps explain why the euro dropped in value last week, while the dollar strengthened. Also, note that as the dollar rose, the price of gold fell, retreating from an otherwise bullish advance.

And what about energy concerns?

The most immediate, and most public, effect of the Icelandic volcano is that transatlantic flight has reverted to the pre-Charles Lindbergh days. Basically, there is no more flying to and from Europe across the North Atlantic. (OK, maybe you can route through Spain, but you get my point.)

Right now, for example, one of the world’s largest carriers, Lufthansa, is completely grounded. Most other European carriers are likewise not operating, or running a drastically reduced schedule. The airline industry is losing about $200 million in revenues per day, while stranding millions of passengers.

According to Eurocontrol, which operates the airspace in Europe, about 20,000 flights per day are canceled. By my back-of-the envelope calculation, that translates into about 1.5 million barrels of jet fuel per day that’s not being burned to power airliners. That’s just shy of 2% of total daily world oil demand. So with this fast hit to demand, it’s no wonder that the price of oil has dropped about $4 per barrel in the past week.

Right now the volcano is creating a “peak airspace” condition that is driving down the price of oil…but which almost perversely mimics the effects of Peak Oil. How’s that for irony? Sure the price of oil is dropping as a consequence of the eruption. But this same scenario of curtailed world trade is what will result when the price of oil rises and forces world trade to slow down.

But it’s not as if jet fuel is the only cost for airlines. There’s a lot of fixed overhead, whether the jets fly or not. Now there’s discussion of the need for a bailout for European, and some U.S., carriers. Oh, great. Another bailout. Anybody have any spare money lying around?

Meanwhile world trade is indeed suffering. Perishable items, from flowers to exotic fish and fruits, are rotting on the loading docks. High-value items like computer chips and diamonds are sitting in secure warehouses. Much other airfreight is just stacking up on the pallets. FedEx and UPS together carry about $1.3 billion of goods per day between North America and Europe. Right now, it’s almost all shut down.

The ripples are global. For example, Chinese auto assembly lines are slowing down due to lack of electronic components from Germany. There are reports of mass layoffs in nations as far apart as Kenya and Colombia, due to the inability to export goods via airfreight to Europe. Then consider all the personal and business disruptions and expenses from casual and business travelers unable to fly.

Can the world economy take this hit? British newspapers are claiming that the economic crunch is worse than right after Sept. 11. Indeed, the airline hit alone has already lasted longer than the post-Sept. 11 groundings. And it’s going to continue for how long? Nobody knows. Or put another way, do YOU want to be on the first airliner to fly through an ash cloud?

Is this really an air safety problem? Or is it a government regulatory problem? According to NATO officials, an F-16 suffered severe engine damage over the weekend while flying through the ash cloud. Finnish officials also announced that one of that country’s F/A-18s suffered massive engine damage during a routine test flight, due to the ash.

For another opinion, we go to Giovanni Bisignani, director general and CEO of the International Air Transport Association. He believes that European governments have been far too reactive to the Icelandic volcano. There’s “no risk assessment, no consultation, no coordination and no leadership,” he told The Washington Post.

Not sparing any sugar, Mr. Bisignani adds that “Governments must place greater urgency and focus on how and when we can safely reopen Europe’s skies… This crisis is costing airlines at least $200 million a day in lost revenues and the European economy is suffering billions of dollars in lost business.”

My inner geologist has, on occasion, pondered the implications of natural disaster on world trade. Consider the effect of earthquakes. In historic and current times, we’ve seen horrendous examples of disaster all across the world, from wealthy nations like the U.S. and Japan, to developing countries like China, to impoverished places like Haiti.

The San Francisco earthquake of 1906, for example, caused many banks and insurance companies in the U.S. and Britain to fail. This led to the Panic of 1907. The Panic of 1907 led directly to the creation of the U.S. Federal Reserve in 1913.

OK, so creating the Federal Reserve wasn’t quite the same thing as the barbarians crossing the Rhine and defeating the Roman Legions. But even if the Iceland volcano calms down tomorrow, say, and the airlines get back to “normal” in a week or two, what then? Just carry on with business as usual? Or will your worldview change?

Until we meet again,
Byron King
Whiskey & Gunpowder

April 22, 2010

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

We just had a week in the 70s, with more to come. The grass went from ochre to bright green in about thirty-six hours. The buds are popping like mad. This is usually what the first week of May is like around here, and that fact alone may explain New York state’s relentless population drain over the past forty years.

I was out on my bicycle, naturally, taking it all in — like, why sit inside and sulk because the weather is strange in a pleasant way? — and I ventured into the outlands east of town, where an impressive number of gigantic new houses had landed like alien mother-ships in the former cow pastures and wood lots. Of course, the aesthetics were an issue apart from the socio-economics of it, but nonetheless interesting.

Each new, gigantic house seemed the result of a losing struggle to reinvent basic design principles that did not require re-invention. I doubt the spirit of joyous “creativity” among the star-architects has seeped down to the level of the provincial house-builders, who, after all, are just assemblers of modular materials like dimensional lumber and eight-foot sheet-rock. It’s their inability to assemble these parts coherently that’s really striking, so what you get is an endless variety of mistakes along with a complete absence of anything done really well — which may be the essence of what the “diversity” craze has really meant to us, the ethos of current times.

The abiding quality of all these houses was grandiosity (by which I do not mean grand-ness). That, too, is a signature of these times in America — the nation too big to fail and tragically destined to do just that on account of its too big to fail-ness. And, of course, one could not fail to wonder, cruising by these hideously ponderous houses, whether as a matter of fact they were failing in terms of the owners’ ability to keep up with the payments, for instance. One after another, I pictured a husband and wife within sitting in the sunny breakfast room on Easter morning humped in tears as they sorted through stacks of bills and bank statements… and I imagined the yellow foreclosure tape a few weeks hence atop the weird split-block portico treatments and misbegotten arrays of concrete balusters, and the colossal Palladianesque windows with their pathetic snap-in muntins (and the fantastic solar heat-gain, not figured-in by the designer-builder, that would turn the lawyer-foyer into something like a crematorium by two p.m.)… and the pension fund in Wisconsin or Norway that was sitting on the booby-trapped CDO that contained this sketchy mortgage and thousands of others just like it… and, well, this choo-choo of thoughts led to envisioning the train-wreck of economies and nations that lies in wait just around the bend….

One also could not fail to reflect on the recklessness of a nation that placed untold million-dollar bets on the idea that it would be possible to travel anywhere in an automobile from houses like these a few scant years from now. This far along in the tribulations of our time, most Americans still have not heard of peak oil, and the few who have regard it as some figment that Ralph Nader or Al Gore conjured up on an acid trip in a sweat lodge.  The more sophisticated among the mentally unwashed are certain that the earth has a creamy nougat center of low-sulfer light crude oil, or they heard that the Bakken formation in Dakota holds more oil than Saudi Arabia, or that the whole US car and truck fleet will be electrified in a year or two, or that we can drill-baby-drill our way to permanent oil abundance, or just that the American can-do spirit will come up with something to keep Happy Motoring alive because we’re the greatest! Such grandiosity!

Personally, I look at these houses scattered around what was only recently a dedicated farm landscape and I am quite sure that the denizens within will be marooned in their great rooms, and that very probably many of them will have no job to go to — in the conventional sense of what we think a job is, in some corporation or institution — and that in a surprisingly short span of years these buildings will be ruins or squats. I think these thoughts after struggling up a rather steep hill more than half-a-mile (and many others previously). A trip anywhere from here, to do anything, and the return trip, would occupy an entire day even for someone in decent physical condition. Somebody accustomed to rations of Cheez Doodles and Mountain Dew would be dead by then. There will be lots of dead.

On the macro level, the feeling spreads across the USA that our troubles are behind us. Employment is ticking up. The S & P index only goes up now. The banks have stabilized and those “toxic assets” (which I call “frauds” and “swindles”) have been disarmed and safely buried under Yucca Mountain. Housing starts may still be weak, but the “gaming” industry is making great strides in places like the old Puritan commonwealth of Massachusetts, so soon we’ll have a virtually automatic economy of leisure-and-entertainment paid for by creaming off a small percentage of the quarters pumped into video slot stations. No doubt the Chinese will be jealous and try to imitate us.

All these lovely mild days, I was not unconscious of the eeriness of the weather and the possible insidious effects of it on the local ecosystem in everything from the added generations of deer ticks carrying Lyme disease and the death of the honeybees to the fate of this year’s apple crop. I confess: it made me very nervous. Something is happening… out there.

Regards,
James Howard Kunstler
Whiskey & Gunpowder

April 6, 2010

P.S.: Click here to listen to my new play Big Slide about life as the long emergency gains traction.

Peak Oil and Unpaid Mortgages Will Kill Suburbia was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

We’re Not Alone…

Thank GOD! I thought to myself. They’re here!

My mind raced. We’re not alone in the galaxy. The aliens have arrived. They’re going to save us. Kind of like at the end of Star Trek: First Contact.

My mental gears kept turning. Unless they’re here to destroy us with death rays, like in The War of the Worlds. And then eat us, like in The Thing. All while they take our oil, gold, rare earths, tungsten, cobalt, vanadium and other good stuff. Like in Independence Day.

I wondered if an alien would leap out from the floating disk and say, “Take me to your leader?” Hmmm… But would some trigger-happy National Guardsman pull a Kent State and shoot him, like in The Day the Earth Stood Still?

Oh, man. We don’t want to get pushed around by the aliens, of course. But if somebody shoots the alien, it’ll make for trouble. We’ll have an interplanetary crisis on which hinges the fate of humanity.

Hmmm… If somebody shoots the alien, my advice is to sell your stocks. Go to cash, pronto. Meanwhile, you’d definitely be glad you bought gold — and TOOK DELIVERY! See? I told you so. When you buy gold, take delivery.

It’s All About Ratings

I pondered the cosmic implications for, oh… all of about half a second. Then I listened to the television announcer in the background. He described how an errant balloon was drifting over Colorado with a little boy onboard. Damn, I thought. No aliens. Just a bad imitation of The Wizard of Oz.

Then the milk of human kindness began its slow IV drip into my veins. For as much as I’d have preferred real aliens landing to take over (c’mon, could they be worse than the current crop of commissars?), I worried about the little boy.

I figured that yes, maybe it was happening like the TV drones were saying — although TV drones often lie like rugs. A wayward balloon? A little boy? OK, it might be real. If so, then it’s high drama, literally. Stranger things have happened. Remember the OJ slow-speed chase in the white Ford Bronco, through Los Angeles, down Interstate 405, back in 1994? Historic, no?

Yep, maybe some little tyke climbed into a gondola. I’d hate to have the kid fall to his death from a balloon. In living color. On the 42-inch flat-screen TV with awesome resolution. Of course, the TV news vultures would be all over the story. Live at Five. I can only imagine the headline in Variety: “Kid Falls, Ratings Soar.” That’s showbiz, right?

Except, as you surely know by now — unless you’ve been living on Mars or something — there was no little boy on the flying saucer. It was just some guy trying to do a publicity stunt. It was all a hoax.

Not a Hoax — We’re in Trouble

I’ll tell you about something that was drifting over Colorado last week, and it’s NOT a hoax. It’s Peak Oil. I attended the 2009 international conference of the Association for the Study of Peak Oil and Gas (ASPO), out in Denver. Here’s the long and short of it. We’re in trouble. With a capital “T,” and that rhymes with “P,” and that stands for Peak Oil.

Last week, I told you about how Marcio Mello, one of the explorationists that discovered the offshore Tupi oil field of Brazil, gave ASPO a spellbinding stemwinder of a keynote talk about the newly discovered oil resources of the Brazilian pre-salt play. It was a great talk. I believe Marcio. Not only do I believe him, but I’m choosing investment ideas based on his research. Marcio has changed the thinking within the world oil exploration community. Marcio is a player. He’s a game changer.

But let’s get real about this. Sure, there’s a LOT more oil out there. As in, “out there,” 150 miles and more offshore, in 8,000 feet of water and deeper, beneath 20,000 feet of rock and salt. You see the problem, right?

Yes, that offshore resource is out there, and it’s super hard to extract. This is not the “easy oil” of the good old days. (Just kidding. It’s never been easy.)

But we’re looking ahead. And that’s why we’re invested in the future of deep-water oil, plus subsea equipment builders and service companies. These are long-term plays, for a long-term process of deep-water development.

Meanwhile, Brazil is still building the shipyards in which it will build the drill ships and platforms, which will develop the offshore arenas, over many, many years. Again, you see where I’m going with this, right?

Sure, there’s a lot of offshore development going on now. But there’s much, much more that’s going to happen in the coming decades. It HAS to happen. And that’s the problem. It’ll take time. And capital. And many people with critical skills. And some of those critical skills have not yet been developed. And it’s just super complex. By comparison, maybe building a flying saucer is easy.

Peak Oil: We’re There

By every measure, the world’s output of crude oil peaked between 2005 and 2007. Peak Oil? Hey, we’re there.

What do I mean? That’s output of crude oil, as in conventional petroleum that flows or gets pumped out of wells. Yes, the worldwide total output of what we generically call “oil” has risen — slightly — in recent years. But that’s because there are increasing volumes of natural gas liquids (NGLs) in the mix, plus unconventional oil like what the global marketplace obtains from Canada’s oil sands.

Let me focus on NGLs for a moment. In other words, the global energy industry is blowing down the gas caps on older fields. That’s how you get NGLs. That, and spinning the NGLs out of tight gas, like what we see with another recent addition to the OI portfolio.

In a macro sense, it means that the global energy industry is pulling what’s left of the conventional oil out of the early-discovered fields and taking the gas too. When it comes to Peak Oil, we’re there, and in fact, we’re past it.

The future of conventional petroleum output is downhill, even with the future output from the deep-water offshore discoveries. That deep-water oil will sure help, but it won’t power the world of the future the way it powered the world of the past. We live in a different world now.

Thus, the energy future is all about transition to something else. It gives a whole new meaning to that phrase, “Take me to your leader.” Huh? What leader? Most of the world’s policymakers are clueless about this.

More on NGLs, and “Oil Pharmacies”

Let me clarify things some more. NGLs are hydrocarbon fractions that are not methane and ethane. NGLs are present in the high-pressure, high-temperature gas that flows from the ground. But NGLs are not gaseous at surface conditions. After a short time at the surface, NGLs condense out of the gas flow and become liquid. It goes back to Boyle’s Law and the “ideal gas law” in chemistry.

NGLs condense out of natural gas flows, from oil field gas caps and from some tight-gas output like we see in the Marcellus Shale of Pennsylvania. NGLs include things like propane, butane, pentane and other items up the hydrocarbon chain, up to and including high-grade gasoline.

NGLs are nice. But they’re not crude oil. According to Matt Simmons last week in Denver, “There’s no such thing as West Texas Intermediate [WTI] oil anymore.” Mr. Simmons states that places like the pipeline crossroads at Cushing, Okla., are little more than “crude oil pharmacies” anymore.

That is, there are lower and lower flows of conventional oil from the wells of the traditional U.S. oil patch. Thus, operators at Cushing take whatever oil they can obtain from one place, plus whatever oil they can obtain from another place. They mix and match, and blend it all with synthetic crude from Canada. Maybe they add some imported oil juice and then send it down the line as WTI.

Along those lines, Venezuelan economist Carlos Rossi stated to ASPO his analysis of oil trends in the U.S. “You are worried about your foreign oil imports now,” he said. “You in the U.S. import about 65% of your oil today. You don’t like it. But if you follow the clear trends, by 2025, you’ll be importing about 92% of your oil. You’ll like that even less.” No doubt.

On that cheery note, let me quote James Kunstler, who recently summed up the problem, describing “the tragic evolution of an industrial economy into a financial-finagling economy.”

Jim Kunstler’s view is that sooner or later, the citizens will awaken and wonder how the energy situation could get so out of hand, or “stealing of their future,” as he phrases it. “Whatever else one might say about American culture,” adds Kunstler, “it is keenly attuned to a sense of heroes and villains. We take great pride in our ability to blow away the bad guys.”

Maybe those aliens realize this. And that’s why they haven’t shown up yet.

Until we meet again,
Byron King

October 27, 2009

Deep-Water Oil Won’t Cure Peak Oil was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

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.

In a riveting talk that lasted well over an hour, Marcio detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin.  If Marcio’s estimates are correct, Brazil may be the location of near 200 billion barrels of additional petroleum resources.  That’s well within the range of current resource estimates for Saudi Arabia.

For good measure, Marcio described the petroleum potential of offshore West Africa — another 130 billion barrels — as well as the Congo region, with 50 billion barrels or more.

Finally, Marcio described the “unknown potential of the US back yard, the Gulf of Mexico (GOM).”  Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana.  He showed early work he performed on a number of GOM areas, including the site of BP’s (BP: NYSE) recent billion-plus barrel find at the Tiber site.

It was clear from the reaction of many in the ASPO audience that Marcio hit nerves.  If his analyses of the South American, African and GOM petroleum systems are right, then in the future the world has access to much more conventional oil than people previously believed.  But it’s not the same as saying the nothing has to change in modern habits of energy use.  Getting this oil will require a trillion-dollar level of offshore, deepwater investment.  It’s a 50 to 100 year project.

The new thinking about deep petroleum systems may allow the world’s energy thinkers to back off from raw geologic concerns about the wheres and how-muches of resources.  But like a game of “whack-a-mole,” the reduced worry about geology now translates into a new emphasis on exploration and development technology, as well as capital, skilled personnel, political issues, environmental safety and climate alteration.

In the past 20 years, Marcio has pioneered the idea of detailed geochemical analysis of “petroleum systems” in the Southern Hemisphere.  The goal of the work is to identify and locate deply buried oil-bearing zones.  Marcio’s work led directly to dozens of oil finds by Petrobras, both onshore and offshore.  His work has also led to significant oil finds in the Caribbean region, Colombia and Peru.

Some Bad News

After Marcio Mello offered his ebullient view of future oil supplies in the world’s deep waters, the next day was a return to earth for the assembled throng at the Denver meeting of the Association for the Study of Peak Oil & Gas. The day was filled with well-informed viewpoints on the looming issues of energy scarcity in a capital-constrained world. Among other things…

Geologist Art Berman offered a decidedly negative view of the latest “big thing,” which is obtaining large volumes of natural gas from tight shales. In a comprehensive review of production and flow rates from several thousand wells drilled in the past decade in the Barnett Shale of Texas, Mr. Berman has a gloomy forecast.

Looking at a large sampling of Barnett wells, the overall data reveal that initial gas flows decline rapidly. With some wells, the drop-off is as much as 70% in the first year, with further declines of 20% in the second year.

This hardly dovetails with the happy talk about how “shale gas” will supply U.S. energy requirements for the next several decades, if not a couple of centuries. It appears that most Barnett wells are short-term money losers, with a few prolific wells carrying the bulk of capital expenditure. Across the industry, according to Mr. Berman, the whole process stays afloat due to liberal application of borrowed money, as well as dilution of existing shareholders by production companies issuing new stock.

According to Mr. Berman, the picture is not much better in other shale plays, such as the Fayetteville and Haynesville shales. And similar gloomy data are just now starting to come in on the embryonic gas play in the giant Marcellus formation of Pennsylvania.

And Peak Oil Still Looming

Matt Simmons gave another of his famous talks about the specter of Peak Oil. The only things that are changing, according to Mr. Simmons, are that things are getting worse for future energy supplies. It’s difficult to say with specificity how bad things are, because the data are so poor on a worldwide basis.

“Look at what happened with the bad information we had, or didn’t have, with the financial institutions over the past couple of years,” said Mr. Simmons. “With our energy data, it’s worse. We’re in for some shocks that will change our lives in ways that’ll rival Pearl Harbor.”

Expect to see oil at $200 per barrel by the end of 2010, according to Mr. Simmons. Also expect to see net oil exports from Mexico simply vanish within 24 months or less. This will play havoc with U.S. refiners on the Gulf Coast. Mexico has simply delayed for too long its effort to explore, drill and rebuild its fast-depleting oil resources. Mexico is going to have to scramble to salvage something from its looming energy disaster. These die are cast.

Things could go wrong with energy supplies in any of a dozen places, according to Mr. Simmons. For example, there’s a stealth “Twitter revolution” in Iran that’s slowly shutting down that country’s oil production. Shutting down the oil industry was the straw that broke the camel’s back and brought down the Shah in 1979. There’s some thinking that it may work to rid Iran of its mullahs.

In Venezuela, the output of the state oil company PdVSA is declining at alarming rates due to political interference and underinvestment.

In Nigeria, the low-grade civil war could quickly morph into a large-scale civil war.

In Iraq, according to Mr. Simmons, “They’re in the dark about how to rebuild their oil industry.”

And of course, a lucky terrorist shot could take down any of hundreds of major oil installations worldwide, wreaking havoc through the following ripple effect.

Mr. Simmons admires Brazil’s Petrobras, calling it “the finest large oil company in the world today.” But the offshore success of Petrobras will simply not be able to make up for the multitude of other problems with the global energy industry. There won’t be enough oil, and it won’t arrive in time. Longer term, Mr. Simmons expects to see oil at $500-700 per barrel. “People need to understand how expensive it is to obtain oil,” said Mr. Simmons.

Much of the world’s energy infrastructure is old and rusting and will require several trillions of dollars to replace — if it can be replaced. (Is there enough steel, for example? Where will the money come from?) Add the aging work force, within which many new hires were laid off in the past year. There’s a serious lack of skilled talent across the board, and no amount of clever management and automated “expert systems” will make up the difference.

Finally, new technology is coming on line slower than most people anticipated. The deeper, more challenging environments are sucking down technology and money, and yielding less than expected in many cases. According to one study, only eight out of 100 major energy projects came in on time, were within budget and yielded the expected volumes of oil and natural gas. Thus are high costs, delays and reduced cash flows hurting the ability of the energy industry to maintain adequate levels of capitalization.

The stark fact is that oil is going to get a lot more expensive and the bull market in oil will be firmly in place for a long time. Smart investors would take advantage of any corrections or dips to get themselves set for the ride.

Until we meet again,
Byron King

October 20, 2009

An Update on Peak Oil from ASPO was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

August 31, 2009

Washington Capitulates: Peak Oil Is Real was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.