The Daily Reckoning PRESENTS: As the disaster that Iraq has
become continues, the oil services industry looks elsewhere
to replenish dwindling supplies of crude. Just as it was in
software 20 years ago, opines John Myers, picking the
eventual winners will lead to incredible investment
fortunes.
THE QUEST FOR OIL
By John Myers
Oil is the largest single traded commodity in the world. It
supplies about 95% of all transportation fuels and 40% of
the world's commercial energy. It also provides feedstock
for thousands of manufactured products and is critical for
food production.
While global consumption has continued to rise steadily,
worldwide oil discoveries have declined progressively since
the 1960s. The challenge for oil producers is that each
year, the world consumes more than three times the amount
of oil that is discovered.
"The time has come for a rational response to the
inescapable reality that oil is finite and available
supplies will soon be insufficient to satisfy growing
demand," writes Dr. Colin J. Campbell, a petroleum
geologist at the London-based Oil Depletion Analysis
Centre.
A growing number of analysts predict that global oil
production will peak within the coming decade and then
start to decline, leading to higher energy prices with
major economic consequences.
Big Oil acknowledges the increasing difficulties of finding
new sources of petroleum to replenish reserves. In an
effort to reverse this trend, petroleum companies are
turning to technology. The oil service industry is
providing the instruments to locate previously undiscovered
reserves and the tools to glean existing reserves from
abandoned wells.
Since petroleum technology and service companies hold the
keys to the world's remaining oil reserves, that puts them at
the top of the investment chain, in my opinion. And just as it
was in software 20 years ago, picking the eventual winners
will lead to incredible investment fortunes.
Moreover, the petroleum industry, and the companies that
service it, have the full weight and support of the federal
government [for what it's worth... ]. Early in his
presidency, George W. Bush announced that one of his
administration's priorities was to provide the nation with
secure energy supplies. The president insisted that part of
his strategy was to maximize North American production.
Washington's Oil Doctrine was announced in a May 2001
National Energy Policy report. The report concluded:
"America must build strong relationships with energy-
producing nations in our own hemisphere, improving the
outlook for trade, investment, and reliable supplies... As
a result, the United States will rely increasingly on
imports of both natural gas and oil from Canada."
Big Oil has admitted that finding large oil pools has
become a major problem. One remedy that has worked at the
corporate level has been a rash of takeovers. In May 2001,
Conoco announced that its Canadian unit would buy Gulf
Canada Resources for $4.33 billion; in August of the same
year, El Paso Energy acquired Canadian-based Velvet
Exploration Ltd. for $228 million. These are just two
acquisitions in a string of Canadian petroleum companies
that fell into U.S. hands.
But although buying reserves might look good on a balance
sheet, it doesn't add a drop of new oil to the world's
reserve base. The only way to do that is through
exploration. After years of falling exploration budgets,
oil companies are once again aggressively searching out new
reserves.
According to a 2003 survey, Canada will set the global pace
for exploration and development spending this year. The
money will be fueled by U.S. majors and independents
shifting capital to Canadian activities, says investment
banker Friedman, Billings, Ramsey & Co. Inc. The Virginia-
based firm projects U.S. exploration and development
spending will edge up by a mere 0.2% to $32.08 billion,
while Canadian spending will race ahead by 12% to $11.9
billion.
Oil exploration companies are fulfilling Friedman & Co.'s
prediction. The total U.S. count of working rigs at the end
of June was 1,067 - up from 838 units that were working in
June 2002. Renewed exploration is even more remarkable in Canada,
where 337 rotary rigs were working at the end of June compared to
210 in June 2002.
The petroleum industry is more optimistic about its chances
of finding new oil and gas than Washington is. I will get
to why Big Oil has high hopes in a minute. But first let's
look at the energy quagmire that our federal government has
gotten us into.
In June, Energy Secretary Spencer Abraham called for more
conservation and fuel-switching by utilities. His concern
is over low gas inventories and high summer demand,
limiting storage injections ahead of next winter. In a
letter to 30 U.S. lawmakers, Abraham wrote that in the
Department of Energy's view, there are only 'limited
opportunities' to boost supplies over the next 12-18
months.
Of course, the federal government has good reason to fret
about oil. The Middle East, home to two-thirds of the
world's oil reserves, remains a tangled mess with America
taking pot shots from the world press while our GIs are
taking rifle fire from irate Iraqis.
Baghdad fell to U.S. forces in early April. Since then,
efforts to restart Iraq's oil industry have been delayed by
looting, sabotage and technical problems. According to The
Wall Street Journal, "Continued attacks threaten to set
back U.S. efforts to pacify Iraq's restive populace. Long
lines are again a common sight at Baghdad gas stations,
with drivers waiting hours to fill up at prices still
higher than before the war."
In June, two Iraqi oil pipelines exploded - merely the
latest violence that has occurred in an occupied, but not
yet conquered, country. The first explosion shut down a key
fuel pipeline 150 kilometers west of Baghdad. The second
pipeline carried crude oil to Syria.
Saudi Arabia, the world's oil kingpin, holding one-third of
the world's conventional reserves, has also been
experiencing unprecedented terrorism.
The Saudi Ras Tanura oil terminal, the largest in the
world, used to be a stop on sightseeing tours. But today,
the facility that processes 4.5 million barrels per day -
or half of the oil that the kingdom produces - is
surrounded by elite security troops. The tightened security
follows a string of attacks by extremists in the country,
including a June gun battle between al Qaeda and police in
the holy city of Mecca.
But blanket security may be an impossible proposition in
this desert nation where oil is almost as plentiful as
water. A retired oil engineer who spent 30 years working in
Saudi Arabia told me that there are many choke points
inside the country where a bomb could disrupt the flow of
Saudi oil.
Al Qaeda understands that petroleum is America's Achilles'
heel. In June U.S. intelligence warned that al Qaeda may be
targeting petroleum facilities and pipelines in Texas.
Ironically, an attack on Texas would do less strategic harm
to the United States than an attack on Saudi Arabia.
As of this past April, the United States imported a record
12.3 million barrels per day (mb/d), almost 6% more oil
than it was importing in April 2002. Meanwhile, U.S. oil
production continued to slide down the slippery slope of
decay. Our nation is producing 5.8 mb/d of oil, down from
the 1970 peak when America produced 11.3 mb/d. Over the
past few years, U.S. production has declined at a rate of
4% per year.
Yet new technologies promise not only the discovery of new oil
and gas fields but also the ability to extract new
hydrocarbons from abandoned oil fields. Just how important
is this endeavor? A study completed in 1995 showed that in
the United States from 1983 to 1992, about 85%, or 20
billion barrels, of proved oil reserves were from old fields.
To recover old oil and discover new oil, the petroleum
industry has armed itself with a bevy of new technologies.
The big oil companies are betting that they can reverse the
decline of America's petroleum production and boost
Canada's production. If they are successful, the companies
that deliver effective oil service technologies will
generate windfall profits.
Good investing,
John Myers
for The Daily Reckoning
Editor's note: John Myers - son of the great goldbug C.V.
Myers - has been helping readers earn surprisingly
lucrative returns in stocks largely unknown to Wall
Street's wunderkinder since his early 20s. Our man on the
scene in Calgary, John has his fingers on the pulse of
natural resource profits - including oil, gas, energy and
gold. For more details on John's analysis of the post-war
state of energy - as well as a clue to his recommendations
- see the following free report:
America's Next Crisis
[
www.agora-inc.com]