Enough oil from Tar Sand

"180 billion barrels, therefore, elevates Canada to the number two slot on the petroleum pecking order, right behind Saudi Arabias 259 billion barrels (if we are to believe the official numbers). However, the Alberta Energy and Utilities Board believes that rapidly emerging technologies will boost recoverable reserves to 315 billion barrels, thereby vaulting Canada into the number one slot."



TAR BABIES
By Eric J. Fry
Source


Ouch! We commodity bulls suffered more pain and misery yesterday than an insubordinate sailor on the HMS Bounty. Mr. Market viciously lashed us resource investors, as if he were wielding a cat-o-nine tails. The salty and seasoned buyers of resource stocks understand that sell offs in the sector tend to be fast and furious, which is why we mentioned earlier this week the idea of finding backdoor plays. Even so, the trauma of sharply falling share prices is always slightly more shocking and slightly more painful than anticipated.

Yesterdays most notable lowlight would be the nine-dollar intraday drop in the shares of Phelps Dodge, as copper prices suffered their biggest one-day drop in 14 years. Other notable lowlights - a $1 drop in the price of crude oil and a $6.00 drop in the price of gold - became highlights by days end, as both commodities reversed themselves and charged higher during the afternoon. Perhaps - although we strongly doubt it - the bull market in natural resources is winding down. This bull market seems to be the real deal - potent, durable and long-lived...so lets turn our attention to this new buying opportunity, and in the process return to Mr. T. Boone Pickens.

What do T. Boone Pickens and your New York editor have in common? Almost nothing, as it turns out. The 76-year old oilman has about $10,000,000 in the bank for every year that he has walked the earth. Your 45-year old editor has barely amassed 10,000,000 pennies in total. Pickens earned a few of his millions in the 1980s by raiding large corporations. Your editor has never raided anything larger than a cookie jar. Pickens runs a billion-dollar, oil-based hedge fund. Your editor once used an oil-based paint...

But there is one lone similarity between the wealthy Texan and the house-poor New Yorker; we are both keen to invest in the oil sands of Alberta, Canada. Specifically, we both own shares of Suncor Energy, a company that extracts synthetic crude oil from oil sands - also known as tar sands. Our number one pick is Suncor, Pickens informed Bloomberg News last August.

And as many Rude Awakening readers might be well aware, Suncor has also been a long-time recommendation of Outstanding Investments, which first recommended the stock in April of 2001 at a price of $12.69. The stock closed yesterday at $32.58.

But Suncor, itself, is not the focus is todays column. (After all, every investor is fallible. So what difference does it make that three fallible investors all like the same stock? Furthermore, dear reader, please remember that your editors stake in Suncor does not in any way imply an endorsement of the stock or a recommendation to purchase the stock.) Rather, our interest lies in the long-term investment appeal of the oil sands themselves. Suncor is but one of the three main publicly traded entities devoted to extracting syncrude from the oil sands - the other two being Western Oil Sands, also a recommendation of Outstanding Investments. WTO on the Toronto Stock Exchange) and the Canadian Oil Sands Trust (COS-U on the TSE).

The oil sand

The oil sand reserve is massive - currently pegged at 175 billion barrels, based upon current extraction technologies. But few investors or global energy consumers paid much attention to this vast resource...until recently. For one thing, this gargantuan oil reserve did not technically exist until early last year. North Americas share of the worlds oil reserves, Petroleum News reports, rocketed to 18 percent last year from 5 percent in 2001, for one reason the vast oil sands reserves of northern Alberta. Now that the sprawling resource has been officially added to the global energy mix, Cambridge Energy Research Associates said Canadas oil reserves alone rose to 180 billion barrels from 5.6 billion barrels and helped push the world tally up by 18 percent to 1.213 trillion barrels.

180 billion barrels, therefore, elevates Canada to the number two slot on the petroleum pecking order, right behind Saudi Arabias 259 billion barrels (if we are to believe the official numbers). However, the Alberta Energy and Utilities Board believes that rapidly emerging technologies will boost recoverable reserves to 315 billion barrels, thereby vaulting Canada into the number one slot.

In an era of $50 oil, and increasingly unreliable supply chains, the oil sands of Alberta assume a far more prominent position - strategically and geologically - among the worlds largest deposits. For one thing, $50 oil renders the relatively high-cost production of syncrude immensely profitable. Secondly, as Outstanding Investments argued persuasively in an April 2003 Daily Reckoning essay...

Since homegrown sources of hydrocarbons are satisfying less and less of our domestic energy needs, we must rely more and more on foreign sources. All else being equal, domestic is better. Net-net, the world has changed suddenly and dramatically in ways that should enhance the long-term value of the oil sands.


Is it any wonder the Chinese are descending on Alberta to secure long-term supplies from the oil sands? Sinopec Corp., the giant Chinese energy company, is eyeing a major investment in Alberta's oil sands, Canadas Globe and Mail reports, as it pushes to secure supplies for its booming home market. That push comes even as the United States increasingly looks to the oil sands as a secure source of supply for its own uses, with terrorism and other geopolitical upheaval threatening conventional oil production overseas.

Not for nothing is Chinas wandering eye for oil reserves wandering to the West. Supplies from the East - not to mention the Middle East - have become increasingly unreliable. Just last month, the troubled Russian oil company, Yukos, abruptly halted crude oil shipments to Petrochina, forcing the Chinese to look elsewhere for supply...and so they are. Petrochina has begun negotiating with the Canadian Oil Sands Trust to structure a long-term agreement to buy synthetic crude from the joint venture in which the trust is the largest shareholder.

Meanwhile, officials from Sinopec, the other large Chinese oil company, have been sniffing around in the oil sands recently. I met with them in Beijing [last June], explains Alberta Premier Ralph Klein, and true to their word they came over to examine the potential of investing in the tar sands. We encourage their investment...what they're talking about is either joint-venturing with an existing oil sands developer or acquiring a new lease.
Until recently, investors exhibited little evident preference for safe oil reserves, versus at risk oil reserves. But over the last several months, the oil sands stocks have been outpacing the shares of multinational oil giants like BP and Exxon.

We would not be surprised to see this trend continue, as the worlds oil buyers develop a growing appetite for Albertas safe and sane oil sands reserves.