Peak Oil – The Rewards

We should expect a global oil shock by 2012…at the latest. But an oil shock doesn’t have to be completely shocking. Why not beat the rush and get ready for the shock now. You might even make a few dollars in the process.

Our story begins with “Peak Oil” – the belief that conventional production of crude has already peaked, and has already slipped into an irreversible decline. As “Peak Oil” moves from mere theory to indisputable fact, the global economy will face wrenching changes. But the vigilant investor will gain an opportunity to profit along the way.

As I discussed in yesterday’s edition of The Daily Reckoning, oil production seems all-but-certain to decline, despite the huge new discoveries off the coasts of Brazil, Africa and elsewhere. In fact, production is already declining rapidly from some of the world’s largest fields. Mexico’s “Catarell” Field, like a kind of Peak Oil poster child, was producing more than 2 million barrels a day as recently as 2005. But production from this field is plummeting irreversibly toward 500,000 barrels a day, as the chart below illustrates.

The recent discoveries of deep offshore oil will certainly help slow the decline of conventional crude oil production, but theses discoveries will not come on line for many, many years.

But what about alternative energy sources? Won’t they make up for the shortfall of crude oil? No chance. Alternative energies might offset a tiny sliver of falling crude oil production. But solar panels can’t lift a fully loaded Boeing 777 off a runway…nor even lift an empty Piper Cub.

So what about the many sources of “unconventional” oil and gas? Won’t these compensate for declining production from conventional sources? The short answer is no.

Geologist Art Berman, for example, offers a decidedly negative view of the latest “big thing” – 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 presents 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 US 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.

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.

But this bad news does need to be ALL bad. As the world’s mature and aging oil fields slip into an irreversible decline, production from the world’s new offshore discoveries will become increasingly important.

Therefore, forward-looking investors can begin TODAY to make selective investments in those sectors of the oil industry that will flourish during the coming oil shock. I am particularly fond of the “deepwater” sector…and have been urging my subscribers for several months to focus on the companies that facilitate deepwater oil production.

Marcio Mello, the former “explorationist” from Petrobras and now independent petroleum consultant, electrified the Denver meeting of the Association for the Study of Peak Oil & Gas (ASPO) with his analysis of several high-profile deepwater discoveries.

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 nearly 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 recent billion-plus barrel find at the Tiber site.

If his analyses of the South American, African and GOM petroleum systems are correct, the world has access to much more conventional oil than people previously believed. But accessing and producing this oil will require a trillion-dollar level of offshore, deepwater investment. It’s a 30- to 50-year project.

“Deepwater” will be a BIG business.

Some of the companies that are well-positioned for the deepwater era of crude oil production include Petrobras, Repsol (REP), BP (BP) and StatoilHydro (STO). I am also a fan of subsea equipment builders like Cameron Intl. (CAM) and FMC Technologies (FTI), plus service companies like Halliburton (HAL) and Baker Hughes (BHI).

These are a few of my favorite long-term plays for the long-term era of deep-water development.

By Byron King

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5 Comments on Peak Oil – The Rewards

  1. What made oil such a magical energy source that enabled unbelievable rates of growth and increases in technology, population, and stand of living….was it’s ease to obtain…’s cheapness….and it’s easy to store and transport. Deep water oil is not easy to obtain……is not cheap…..and never will be……and required massive expensive infrastructure to get it from source……to refinery.

    Someone has to pay for all that technology, exploration….and expensive transport systems…..offshore pipelines…….huge numbers of tankers etc.

    In history……every time that oil usage costs 4 percent or more of gross demestic product……we 4 slip into recession. At the moment….at todays usage rates…..4 percent of GDP is contitutes about $80 per barrel.

    There is no way our economies can survive the decline of conventional oil by replacing flows with deep sea sources…….tar sands and shale is even worse…..and no alternative come in under $80 per barrel… least not any that can be scaled up to fill an ever widening gap.

    People scoff at the end of the world as we know it camp……pointing out that the world existed before oil… did civilisation…….yes it did……..with a world wide population of about 1.5 billion…….and many of them living in starvation from time to time…..much lower standards of living…..high mortality rates…….lower life expectancy……and much more hard physical work for much less reward.

    If we could have had high population and stardards of living and high technology without oil……then why didn’t we…….and what makes you think we will have it after the demise of oil……..we wont…..its that simple

  2. The legend of the graph showing the decline of the Catarell field is wrong, this graph is described as ‘the actual and the predicted global production of crude’ which is wrong.

  3. The discouraging sentiment re: shale gas seems inconsistent with both the current natural gas inventory numbers and the natural gas production of the last 3 years.

    The simple fact is that oil at $80 barrel roughly corresponds to gas at $12 MBTU (measuring with energy equivalence). Even discounting 50% for the difficulties of transportation, you are still talking about $9 MBTU for gas. There are going to be lots of shale plays that are shut in at the current prices of 4-5$ MBTU that will turn profitable if the price of gas doubles.

    There are two other wild cards with natural gas – LNG build out and non US shale gas plays. A huge investment was made in LNG infrastructure over the last 4-5 years. This infrastructure has not yet fully come on line, but as it does over the next 1-2 years, the global capacity to ship gas that is otherwise stranded will increase dramatically.

    The second wild card is shale gas outside of the continental US. The shale gas exploration of Canada and Europe is in it’s infancy – if the US is any guide, there will likely be significant gas production from these sources, especially if gas tracks into the 9 dollar range.

    The final piece of the gas/oil equation is the current global oil usage scenario. Globally, there is still large opportunities for people to switch from oil to gas for heating and industrial purposes. Countries like Japan and Saudia Arabia use a fair bit of oil for electricity. If the price gap between oil and gas persists (or even grows) these countries will switch these uses from oil to gas, just as the US did in the 70s.

    In short, gas supplies are globally abundant, and the global opportunity for gas-to-oil switching is large. This should plateau the price of oil for decades to come. Of course, who knows what will happen to the US dollar, but oil simply cannot trade at a price ratio of beyond 12:1 for any length of time, and shale gas will remain cheaper than deep sea oil.

  4. I have to say I think Stu is correct -much of what we do now wrt. ‘expensive oil’ (and also things like renewables) are actually subsidized by what is left of the cheaper-to-get-at stuff; e.g. Saudie Oil. Once these fields (e.g. Ghawar) go into serious irreversible decline we are stuffed.

  5. SEC vs. Goldman- 21st Century age of Enlightenment or Tyranny? Will bankers and big oil lead humanity into an enlightened 21st. Century of green energy and humanitarianism or will this be the century of World Totalitarianism of the New World Order? We know that “morality” is a “no” word for bankers, big oil and investors alike; yet they are leading us into the New World Order with their heartless and coldblooded culture of greed by the few. World conquest by tyranny is not new and it certainly is not orderly; it is chaos. Hitler already tried World domination by tyranny in the last century. The nations of Greece, Latvia, and Iceland have already fallen into “order” and Spain, France, Germany, Portugal, Ireland, Italy, United Kingdom and the United States of America are scheduled to fall into “order”. The American people do not want to lose our Democracy, Independence and Freedom; yet this World totalitarian agenda emanates from the United States of America and is lead by the Bush/Obama Administration in our name. The World is looking at the American people as their last resort for salvation and praying that the American people will stand up to this evil force and do the right thing. By saving ourselves, we will also save them. We are the only ones who can change the direction of our own country with what freedoms we have left.
    The SEC vs. Goldman is a test of strength between the American people and the World bankers, indeed, the New World Order. If the American people do not bring the bankers to Justice in our court system; the bankers will be free to dominate the World.
    The injunctions will lead to the White House and the Bush/Obama Administration which is dominated by Trilateral World bankers. Zbigniew Brzezinski is the designer and architect of the bankers Trilateral Commission and the New World Order; he is also Obama’s top advisor. Geithner, Volker, Greenspan, Bernanke, Summers, Corrigan and Peterson are all of the same banking family of World bankers (America is their host) Goldman Sachs, Morgan Stanley, Bank of America, JPMorgan Chase, Wells Fargo Federal Reserve, IMF, World Bank, BIS, etc; their tentacles reach into every economy in the World. The World total economic output in 2009 was 58.07 Trillion and the total World bond market was 82.2 Trillion. The largest market in the World is the Derivatives market at 600 Trillion and is used primarily by the bankers as a weapon of mass destruction of economies to bring them in line with the New World Order. Their modus operande is the same for American citizens as it is for Nations.(pt.1)
    The banker and oil dominated Trilateral Bush/Obama Administration has purposely driven the United States of America into debt under their expert banking management by the systematic pillaging of our Treasury. Our National debt interest is at 15% about the same as the United Kingdom according to Moody’s bond rating March 15. “the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.”
    In the financial world, loosing your AAA bond rating changes the banking agreement substantially (as every home owner knows) that is when the fine print kicks in and the spiral to the bottom begins. Look at Greece, Latvia, Iceland and now the UK. Germany, France and Spain AAA credit ratings are in danger as reported in the U.K Telegraph on March 15 (referring to Moody’s) “The US rating agency said the US, the UK, Germany, France, and Spain are walking a tightrope-“
    To control and accelerate that rush to the bottom of Nations, major banks are frontloading the odds of default of a Nation down on Wall Street in a computer so they can control and manipulate trades with high-frequency trading in derivatives. High-frequency trading is how Goldman Sacks (U.S.A) makes at least 200 million a day in derivatives on Wall Street and accounts for most of the 3.3 billion profit and 5.5 billion in bonuses last quarter. This one example of Goldman Sachs (U.S.A) operations is but the tip of the arrow head and the shaft is sure to follow. By flying the United States of America’s economy and government into the ground the New World Order of Trilateral Traitor bankers become winners. Now, who is the terrorist?
    I hope Americans have empathy for the people of Greece and all the other people of Nations who face “Austerity measures” because their destiny will soon be our own fate. The bankers are brutal; the National financial burden is on the people with forced tax followed with the gutting of social services and privatization of National infrastructure and National Natural Resource for pennies on the dollar.
    If you can empathize with these people I suggest that you take action and button-hole your representatives in Congress today and tell them to make a stand for the American People against this takeover of our government by Trilateral bankers and the New World Order. Demand that they insist that ALL of the subversive Trilateral members in government to STAND DOWN. Insist that Treason charges be served on all who conspired to overthrow our American Independence, Democracy and Freedom (there are only about 1,500 Traitors). Insist that Free Press, the watch-dog of Democracy, be restored by breaking up the monopolies in the mass Media.
    Main Street Capitalism, Competitive Market, and Free Enterprise are America’s tried and true standard and our economy and government can recover from this treachery if we act now by getting back to our roots of industry, manufacturing and technology instead of being smothered by the Multinational Corporate Empire, by proxy, by our government. Our economy needs Fair Trade not (Free (sic) Trade and Free Enterprise and Competitive Market not controlled markets by the multinational corporate monopolies.

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