World Oil Snapshot: Big Picture and Investable Advice 33 comments
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I like to give actionable advice, and there will be some investing ideas and suggestions throughout this article. But let's look at the big picture first.
To an oil man, natural gas should be flared off or farmed out. Yes, of course, gas is an important resource. Perhaps Michael Fitzsimmons is right, and we should subsidize retail distribution of compressed natural gas (CNG) to power bulldozers, airplanes, motorcycles and lawn mowers. If enough people get behind an idea, there's nothing to stop a government mandate, no matter how nutty. Synthetic jet fuel? Zero emission hydrogen-powered cars? Carbon sequestration? Oil from algae farms? Uh, okay. Whatever pipedream miracle you can sell a Congressman makes equal sense if your purpose is to loot the public purse and pocket a subsidy, like GM or AIG or C.
Oil men don't give a damn whether the billions they pay in royalties and taxes are wasted. We're busy looking for 40 API crude -- not gas, not condensate (very light Natural Gas Liquids); not tar sands, coal seam methane or asphalt; not super heavy or sour or tight formations that have to be acid fracced and drilled horizontally in ultradeep water as a novel engineering experiment.
What oil men want is a big porous, permeable sandstone or carbonate, charged by rich organic shale downdip, with a structural or stratigraphic trap that was in place before the oil migrated. It could be an "elephant" or a little reef with a couple million barrels in place. Onshore or offshore doesn't matter. That's purely a question of scale. But the objective has to be light sweet oil. We need to produce 73 million barrels a day, rain or shine, recession or no recession.
This chart comes from Rembrandt Koppelaar. Conventional crude provides 91% of the 475 trillion BTUs of energy we consume every day from liquid hydrocarbons. Condensate in old gas fields contributes 7%. Corn and sugar cane are 2%, most of it used in Brazil. If you deduct government subsidies and sunk costs of oil & gas exploration, which happen concurrently, crude oil pays the whole freight of modern transport and about half of all industrial output. Zero out oil and nothing works. No mining, shipping, manufacturing, mechanized farming, distribution, construction.
The industrialized world is called industrialized because we consume 2/3 of the world's crude oil production and because we leapfrogged everyone else in political stability and rule of law. Laugh if you want to, but privately-owned Western oil companies grew into global giants because they were domiciled in jurisdictions that respected contracts and share equity. Exxon (XOM) and Shell (RDS.A) are strong enough financially to write off losses in Russia, Iran, Indonesia, Latin America, etc. because their corporate roots are deep and thick, over a century of compounded investment and know-how.
The blue shaded areas are OECD industrialized wealthy countries. They produce about 1/4 of total world oil supply and consume 2/3 of global production. This lop-sided equation is particularly scary in Japan, Korea, Germany, France, Ireland, Switzerland, Austria, Poland and Turkey because they produce 1% and import 99% of their oil supply. The United States domestically produces about 29% of its baseline conventional oil demand. We rely on Canada and Mexico to ship another 10% of US supply. But more than 60% of US and 75% of all other OECD conventional oil supply comes from OPEC, Russia, and former Soviet states like Kazakhstan.
OPEC home consumption continues to rise each year, to quench infinite demand for super-cheap subsidized gasoline, electric power generation, prestige national flag carrier jet fuel, construction, desalination plants and petrochem feedstock. In the next decade, Persian Gulf exports will decline slightly faster than predictable natural decline of their ancient oilfields.
Note that South America (ex OPEC-member Venezuela) and China have marginal surpluses, and that there is a mysterious black segment on those pie charts that I can't explain in detail. Southeast Asia, Central Asia and Miscellaneous Africa are part of the story. But there is considerable noise in the data complied by EIA and IEA. Chinese production is continually revised up, up, and down again.
However, two trends are very definitely established by highly reliable production data, the first of which is Saudi Arabia's role as a "shock absorber" within OPEC.
As you can see from this chart, Saudi increase/decrease in oil production moves the total OPEC output almost barrel for barrel, moderating supply and demand fluctuations to accommodate buyers and to facilitate rolling supply agreements -- which explains why the US turns a blind eye to Saudi political repression and treats the Kingdom as a military ally. Here's a list of the weapons we sold and a recap of US strategic involvement.
Left to their own devices, the doofus Saudis would have collapsed Ghawar ten years ago. It's kept alive by Western engineers led by Dick Cheney's Halliburton (HAL). That's my first actionable stock pick at any price you like. I agree with Matthew Simmons that the Saudi reserves are in decline. All the more reason to buy and hold Halliburton.
Speaking of fields in decline, trend #2 is a trainwreck.
At least half of the North Sea's recoverable reserves have been produced. The probability of finding and producing another 20% is less than 1. The probability of producing every drop of oil-in-place is zero. Ditto Mexico, except that there's the additional insurmountable problem of Pemex, perhaps the world's worst National Oil Company (NOC), although Pedevesa became a serious rival for that distinction when they fired 15,000 US-trained technical staff and managers, and replaced them with politically correct Chavez supporters. So it goes in the Land of NOC, from oil prospect to prospect around the world. If you want to kill a discovery or a producing oil field, nationalize it.
Nigeria is an especially sad story. Half of its potential was nationalized and looted. The US majors know that there's more exploration to be done in the prolific Niger Basin, but their platforms, pumps and pipelines are being broken down by armed gangs and "bunkering" thieves. No one trusts the Nigerian Government. No one wants to work there. Game over.
So, are there are any other prospects to explore?
I've warned on PBR repeatedly, and I think you're a chump unless you play it as a momentum trade. Price volatility in Chinese NOCs Sinopec, PetroChina (PTR) (aka CNPC) and CNOOC make these a crap shoot, unless you have insider enlightenment a day before market swings. China's oil companies will do well in the long run, but I wouldn't buy and hold. Ditto Russian super-majors. The only way to make money in Russia is to have a crystal ball at the Kremlin.
I think it's instructive that Exxon, Shell and BP all got screwed big time in Russia, about $10 billion each (so far). When you consider that their primary source of new oil reserves was a flurry of M&A in the last couple decades, when it was easy to inflate assets, and that -- surprise! -- production agreements with Russia aren't worth the paper they're translated on, one wonders if our integrated US/UK privately-owned International Oil Company (IOC) model is broken? It might be. Exxon quit the downstream retail gas station business. Prudhoe Bay is kaput. Petrobras (PBR) loses money on every tank they fill with ethanol. There hasn't been a new US refinery built in 30 years. Marathon waited years to get planning permission to cook Canadian heavy.
National champions Total, ENI, Itochu, and Wintershall are equally vulnerable. I can't comment on Conoco or Hess, but look at billions invested in ultradeep Gulf of Mexico (GOM), do the arithmetic and figure out how much production it will take to achieve payback. Remember we're talking about oil -- not gas or condensate.
I don't have any position in oil company stocks but if I was tempted to invest I'd buy the Canadians, especially Husky on arctic exploration projects. Cairn Energy has a block or two in Greenland. But this is absolutely *not* a meaningful aspect of the oil & gas industry investment picture. The world needs $2 trillion in new capital expenditure to maintain our current level of 73 million b/d for another decade, after which peak oil will slowly and inexorably trim global production. Most of that capital investment will flow from China and Japan to badly-run NOCs, starving Western majors again.
This is an extremely important issue. Proven oil reserves and oil production at ALL of the Western investor-owned majors flatlined and began to decline during the past few years, which explains why they started throwing money around like casino gamblers in Russia, the Caspian, China, Brazil -- regardless of prospectivity or political risks. With the collapse of oil prices from $140 to $50, their budgets have been hammered, hiring has been frozen, projects shelved. There is a real sense of crisis in the oil business. We bumbled along with low prices before, in the 80's and 90's, but there has never before been anything in the Oil Patch as utterly adverse financially as the present, and another round of merger consolidation won't solve the problem.
The Cheney Plan was to conquer Iraq and give each of the majors a piece to develop. It didn't work, and it can't be done. Iraq is going NOC, probably in partnership with the Chinese. Ditto Brazil, pawning its offshore proved and imaginary pre-salt reserves to China. Watch them wrap up Africa next. Algeria and Libya would love to kick out the Americans (again) and tighten the thumbscrews on Europe.
The White House will bumble along, chasing photo opportunities and tolerating corruption, smiling at bonehead dictators and bowing to make-believe Kings, until and unless the United States adopts a rational Oil Policy.
It goes something like this.
Drill, baby, drill -- starting with the Michigan Formation in Lake Huron and St. Peter sand under Lake Michigan. Open the Outer Continental Shelf (OCS) and state waters of Carolina; the Santa Barbara California OCS; Eastern GOM; and western coastal waters of Alaska. To hell with polar bears. To hell with royalties and triple taxation, too. Reward US oil exploration and production. Drill the BLM Permian Basin pronto, no matter what the allegedly archeological impact is.
Obviously natural gas, coal and nuclear are important. I'm not claiming that oil is the *only* energy we need to develop for our future security and prosperity. But oil is irreplaceable as a transportation fuel. There aren't going to be any coal-fired fighter jets escorting Obama's 747, or CNG-powered Freightliners on I-80 hauling food to Chicago and Altoona. Not today, not tomorrow, not ever.
Disclosure: Author holds no positions long or short in energy
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This article has 33 comments:
> jack
Any Bush voters out there?...how do you like Von Altendorf's take on Iraq? Let me take that a step further...Cheney tried to buy Iraq with over 4000 American lives.
Could've had a jump on an actual energy plan, but every redneck in 2000 voted.
And by the way, this is a beautiful article. I just hope that the 'right' people read it.
GET OVER IT !!!
Overall, this is the best and most reasonable energy article I've read on SA. Well-thought and well-reasoned. Thank you!
But I'm sorry to say that, with the current Congress and Administration's absurd animus toward oil (and almost all else but wind-driven fans), I wouldn't be surprised if China and Russia don't take control of most of the world's oil production because US energy policy is controlled by a few fanatical eco-maniacs who claim the planet is about to roast to cinders because of C02.
Moreover, I wouldn't be surprised to see the current US government place another heavy tax on oil companies—rather than dropping the ones they have on them now and going the reasonable route you recommend.
You seem to have sense enough to know that "global warming" is an utter hoax, but whether you do or not, thank you very much for leaving that nutty canard out of your article.
I look forward to reading your future articles.
I agree with the call for more drilling, but currently the limit on effectiveness is refining, closely followed by storage. We hear about refining shortage, yet when I was in Houston in December 2008, I heard a great deal about refineries running only about 75% capacity. Obviously they shut down during the hurricane, but there was no damage restricting operations, other than transportation issues. That caused a little reported gasoline shortage in the south east. All the parts need to be in place; if you drill, then you must be prepared to get all the other cogs in the wheel turning.
What's needed today is to explain the achievements of oil men like Robert Orville Anderson en.wikipedia.org/wiki/... -- and the uniquely American culture of entreprenuerial enterprise that gave us enormous wealth, employment, widely shared educational opportunity, clean wholesome food for our children, affordable housing and health care (until very recently) and steady growth of safe, secure savings. The great lesson of last year's crash is not American recklessness or gluttony, but rather the weakness of large institutions. Google did not emerge from IBM.
wonderful to see someone with age and wisdom writing on SA.
someone who remembers how things used to be, but i fear will never be again.
Just my take on the HERO call recently, it was mentioned about idling and trying to sell some capability by them, though with a stipulation that purchasers had a "no drill" clause. Honestly I don't know who would buy from them, nor what use they have for those idled assets, other than the barges. The other bad comment, made a couple times on that call, was that Pemex is a bit flaky, which leaves an open question of how or if that affects future revenues and earnings.
To their credit, it sounds like HERO is doing a great deal to streamline operations, potentially becoming more profitable. Definitely HERO shares are way down, and I think deserve to be watched. However, I suggest caution, because they might just go sideways.
Anyway, I think if you want a Green Infrastructure play, look at Statoil (STO), and read about their working tidal, wave, and wind systems. The other play I think might be interesting is ABB AG (ABB), because they could become a big player in improving the power grids, which is a necessary advancement for any alternative energy infrastructure. Obviously, there are other companies that do these things equally well, and all these companies could go sideways for quite a while.
Disclosure: I own Statoil (STO), but I got into it as a long play. I might buy into Hercules (HERO) or ABB AG (ABB), but I am in no hurry on either. I watch their competitors closely, and suggest comparisons.
On Apr 30 05:27 PM Freya wrote:
> HerrHansa: whats your opinion of HERO?
>
> I've been touting it as a Green infrastructure play (Logistics for
> offshore Wind Farms) but I would think you might have other views.
Geologists shrug. The sea comes in, the sea goes out. Combustion is 3% of the carbon cycle. Forest fires and volcanoes are worse.
But try to remember that this is more of a forum for adults. Grownups are trying to talk here. Thanks.
On Apr 30 10:08 AM blu wrote:
> carolinacoast,
>
> GET OVER IT !!!
We are surely doomed because of the moron phenomenon sweeping the country with all their quack science theories. And as long as they have the ears of those in power, there will be no effort to improve our position globally w.r.t. energy. Instead, they will pour m/b/trillions down the rat-hole looking for the instant gratification of solar panels or propellors mounted everywhere. They will never realize that there is no other energy source except hydrocarbons which can deliver the BTUs to move this country's large machinery and thus, power the economy.
I agree completely that global warming be damned we need to drill. As for global warming I tend to believe 6 billion people are going to have an impact but its not as important as liberals make it out to be. How self agrandizing they are! But developing "local" oil only buys us time. It doesn't get to the end game which is... After consuming all the prehistoric biomass what next? Nuclear fer shur dude! Go Fitz!
But for the time being I think oil pretty much dominates my long investment ideas.
Perhaps . . . but oil men of the United States are also not going to be caught flat-footed and have the real possibility of revised US tax laws and regulations wantonly rape and pillage their bank accounts either. Already relocating to Zug, Switzerland has been Noble Corp, Transocean, Foster Wheeler and Weatherford International. And as the national deficit climbs to a more unsustainable level coupled with the value of the US dollar drifting lower, time will determine whether the class warfare in America continues and the companies of the oil energy sector will be huge targets of our current administration and congress; thus, increasing the incentive to move on . . . from US shores to a friendlier territory.
T. Boone Pickens says that you can drill, drill, drill, all you want off the Atlantic coast and you will not find enough oil to justify the cost of drilling. The reason, he says, is that you need to drill at the mouth of large rivers like the Mississippi whose sediment created the oil in the first place.
Don't know who is right on this difference in opinion as I consider you both experts on oil exploration.
If hydrogen can eventually be cost effectively used to produce electricity, would this not alleviate the demand for oil if we utilize more electric cars? Same for Solar , etc.
I am convinced of our dependence on oil, and your excellent article reinforces that view, to the extent that is possible.
PS: Why do you not own oil stocks?
Pickens does have one thing very right in his statement, which is the implied message that drilling in some locations is too expensive to allow reasonable profit levels. Companies that have a low cost per barrel in retrieving oil can make some drilling areas profitable. Unfortunately, the price of a barrel needs to increase (and likely stay about $60) in order for more drilling.
The other thing about buying into oil companies is that many of them are investing in alternative energies. That is one of the things that attracted me to Statoil (STO); though also that there cost per barrel is very low compared to some of their rivals.
Hydrogen and Fuel Cell technologies: tough to tell when this will happen on any large scale. I notice some public transit applications, though I see vastly more going to natural gas. Electric cars have a cost issue and disposal issue with batteries, though some dedicated system of management, or cleaner battery technology might change that. Some solar technologies look interesting, though I think larger roll-out depends a bit upon commercial real estate, or retrofitting into existing buildings. Then there is a bit of a cash flow problem now for alternatives. I can see eventually investing in something in these sectors, though I think I have one to three quarters to make any decisions.
Any reason for UNG over GAZ?
Not like that idjit Lewis.
Alan: based on your recommendation and the lack of news on Ivanhoe Australia, I picked up IVN at $6.42 today.
YH: I'm out of Zenn.
Jade: Man never landed on the Moon, The Earth is Flat and the Center of the Solar system.
Global warming is normal. Greenland was Green a 1,000 years ago. I suppose you want to get rid of Greenhouse Gases too?
I've been touting it as a Green infrastructure play (Logistics for offshore Wind Farms) but I would think you might have other views.
Thats how Rabid the extremists are. And thats also why we will go down the tubes.
I also personally believe That you should deplete someone else's oil supply before depleting you own.
I look forward to future articles.
Taking a look back, are there any changes you your opinion on IVN?