Investment News Briefs Tuesday, September 1, 2009

The first was an unprecedented $41 billion liquefied natural gas (LNG) deal with Australia, which was announced last week. The deal calls for PetroChina Co. Ltd. (NYSE: PTR) – Asia’s largest oil and gas company – to buy 2.25 million tons per year of liquefied natural gas (LNG) from the Gorgon field in Western Australia over a period of 20 years.

It is the largest deal ever brokered between the two nations.

The Gorgon field has yet to be developed but is considered to be a key global resource and an economic boon for Australia.

“The Gorgon Project is globally and nationally significant with a resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years from the time of start-up,” said Chevron Australia Managing Director, Roy Krzywosinski.

“Furthermore, the Gorgon Project is Australia’s largest single resource project and is set to deliver significant economic benefits and create around 10,000 indirect and direct jobs during peak construction.”

Chevron Corp. (NYSE: CVX) owns and operates 50% of the field.

Yet this is just one of the mega-deals signed between China and Australia. China was Australia’s second largest merchandise trade partner in 2008 with two-way trade of $56.3 billion (A$67.74 billion). Australian exports to China grew 37% in 2008 from the previous year to $27 billion (A$32.48 billion) and comprised chiefly of raw and lightly processed farm, mineral and energy products.

“China needs us, we need China,” said Australian Trade Minister Simon Crean.

Of course, China’s demand for natural gas and other resources is growing so fast that it needs more than Australia.  That’s why the Red Dragon recently signed a $5.6 billion deal with a consortium of energy companies operating off the coast of Myanmar.

The consortium, led by South Korea’s Daewoo International Corp., will supply China National United Oil Corp. (CNUOC) with 500 million cubic feet of natural gas a year from 2013 to 2043. The supply, which will come from Myanmar’s A-1 and A-3 offshore blocks, amounts to about 7% of China’s current gas consumption, Reuters reported.

The consortium – which also includes India’s Oil and Natural Gas Corp., Myanmar Oil & Gas Enterprise, India’s GAIL Ltd., and Korea Gas Corp. – will invest a total of $5.6 billion in the project and be responsible for production and offshore pipeline transportation.

Land transportation will be jointly managed with CNUOC. The two parties also plan to build oil and gas pipelines through Myanmar and into China’s southwestern Yunnan province, Reuters reported.

Few Western countries, or Western companies do business with Myanmar, which has been heavily criticized for its human rights violations. The military junta that controls the country is considered one of the most repressive and brutal regimes in the world today. Forced labor, child labor, human trafficking, and instances of sexual abuse are widespread.

However, China, which has itself been a target among human rights watchdogs, chooses to overlook these discretions, preferring instead to focus on Myanmar’s resources. And in its defense, China is rightly concerned about securing enough raw materials to support its booming economy and a population of about 1.3 billion people.

Natural gas, for instance, accounts for just 3% of China’s total energy needs, but its use is expected to grow rapidly as energy demand increases. China currently consumes about 7.3 billion cubic feet per day, but that is expected to grow at a 10% compound annual rate to 18 billion cubic feet per day by 2020, according to Bernstein Research.

And China is doing the right thing by securing long-term supplies of natural gas now, while prices are low and supplies are high. It’s taken similar action with other commodities over the past year, stocking up on large amounts oil, copper, and iron ore as prices swooned.

China Gases Up While Prices Are Low

Natural gas prices yesterday (Thursday) fell to levels not seen since 2002 after the U.S. Energy Department said the amount of gas in storage hit a record high for this time of year.

Natural gas stockpiles rose by 52 billion cubic feet to about 3.2 trillion cubic feet in the week ended Aug. 21 –21% above year ago levels. Levels are now so high that some experts believe the United States will run out of storage capacity before winter begins.

“We have never been here before in terms of what to expect when storage gets this high,” Aubrey K. McClendon, Chief Executive Officer of Chesapeake Energy Corp. (NYSE: CHK), told the New York Times. “It’s like a balloon; there comes a point where you can’t blow any more air into it.”

Natural gas prices tumbled more than 6% to $2.725 per 1,000 cubic feet of gas on the New York Mercantile Exchange (NYMEX), a price not seen since Aug. 7 2002, The Associated Press reported.

However, now that gas prices have tumbled roughly 80% from last year’s high above $13, some investors believe the market is bottoming out – or at the very least, significantly below its fair value.

Chesapeake Energy stock has risen nearly 8% in the past month, despite plunging prices and mounting inventories. Devon Energy Corp. (NYSE: DVN) is up about a 5.5%.

“The perception is that gas has finally gotten to its lowest point, so people are buying exploration and production stocks,” Marshall Adkins, energy analyst at Raymond James Financial Inc. (NYSE: RJF), told Reuters.

However, Adkins does not expect a rebound to come any time soon. His firm expects natural gas prices to fall below $2.50 per thousand cubic feet in the months ahead as an inventory overhang overshadows gas’ attractive price.

Still, there’s good reason to believe gas prices will have a strong rally in early 2010. To begin with, gas companies are slashing production exploration in dramatic fashion.

Newfield Exploration Company, for instance, has announced the plans to voluntarily curtail about 2.5 billion of cubic feet equivalent of gas of its third quarter of 2009 production in response to the recent lull in prices.

U.S. producers have cut the number of rigs drilling for new gas by more than half since Sept. 2008. Oil-services company Baker Hughes Inc. (NYSE: BHI) recently reported that 688 gas rigs were active in the United States, down about 56% from one year ago.

“We think the decline curve for production will be fairly steep because of the big drop in drilling,” Rich Howard, manager of the Prospector Capital Appreciation fund, told CNNMoney.

Source: China Landing Natural Gas Deals as Prices Plummet

This from The Sovereign Society:

The oil industry is a tricky business.

I know. I was a well-site geologist for many years. Just like the stock market, sometimes the best-looking prospects are your worst duds and those you were not too sure about gush profits.

It’s a gamble, but one that can pay off big if you’re right. But what if you’re wrong? Well in the old days it was watch out below… but now, I know of a strategy that can insure against some of your losses.

I call it “PPS” and it has helped me out many times in the past. Let me explain…

Right now I’m looking again at the oil, gas and the service industry. They’ve been beaten up pretty badly. As the price of oil has dropped from $147 a barrel to below $40 last week, any company that is even remotely associated with the industry has seen it share price tumble.

The major oil companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) have seen their stock prices pull back as much as 50% from their 52-week highs. Schlumberger (NYSE:SLB), which traded as high as $111.95 this year, is now at $41.91. Baker Hughes (NYSE:BHI) down from $90 to $30 and Transocean (NYSE:RIG) has fallen from $163 all the way down to $55.

These are great companies in great industries. And no matter the environmentalists want you to believe, they won’t be going away for a long, long time.

They have war chests full of profits from the recent run-up in oil prices. They don’t need much outside financing and can wait out the economy. They’ll invest in themselves just as they’ve always done. They’ll push the limits of technology and invest in people.

And if President elect Obama has his way, and I believe he will, then we’re also going to see massive infrastructure construction projects begin next year. As we put people back to work, as money again begins to flow oil prices should begin to drift higher.

So if you want to profit as the industry turns up you should look at the iShares Dow Jones US Oil & Gas Index ETF (NYSE:IEO) and the HOLDRS Oil Services ETF (NYSE:OIH). These two ETFs will give you broad exposure across the industry.

Then to protect your downside I suggest you look at my “PPS” or Protective Put Strategy. Using this strategy, you’re going to buy one put for every 100 shares of these ETF’s. Now, to keep your cost down look to buy in the nearest month or two and look at the put options about 20% below your share purchase price.

As an example – if the HOLDRS Oil Services (OIH) were trading at about $70 per share like it was today and I was going to use this strategy I would buy 100 shares of OIH and then immediately buy an OIH protective put. I would buy the Jan OIH 55 symbol OIDMK for about $2.35.

This strategy cost a little more then just buying the long position but I’ll tell you, do it and you will sleep better at night. It’s the same as paying $72.35 for the shares and if they take off (like I think they might) the extra $2.35 becomes almost irrelevant…but if I’m wrong I’ve covered my assets.

Source: Striking it rich on Oil…without getting Burned

Don’t expect oil prices to remain at these low levels for long, says Byron King. Demand weakness for crude is temporary. And oil-producing nations cannot sustain their own economies unless oil prices are close to $100 a barrel. Byron says it could be time for investors to slowly build up a position in oil service stocks.

This from Whiskey & Gunpowder:

Along with the market decline, the price of oil has fallen. It’s down 50% within three months. Back when oil hit $147 per barrel in July, I said that the price “ought” to be in the range of $100-110, with the possibility of a drop into the $90s. That’s what the fundamentals told me back then.

Most of the decline in oil price from $147 down to about $100 was directly related to the strengthening of the dollar. So the oil price slide in July, August and the first part of September was mostly a monetary phenomenon.

Then we had the mid-September credit crunch and market meltdown. That dragged the price of oil from $100 or so per barrel down into the $70s (with price excursions down into the $60s). The demand weakness for oil has become clear in the past six weeks or so. Everybody just sort of woke up and figured out that the world was entering into a recession. The flip side is that inventories are building back up.

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The Fed’s Handout Line Open to All Failing Companies

Who will be the next failing company to come to the Fed with hands out ready for a handout? It’s hard to tell…unless you have the right information.

One quick look at the secret 100-F document of Lehman Bros. and AIG would have predicted their collapse. Find out which company will be next by clicking here.

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This has taken down all of the oil and oil-service companies. Among the latter, Superior Energy Services (NYSE:SPN), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) have all tumbled. Even the perennially “too expensive” Schlumberger is way down.

The thing about the oil service companies, though, is that a lot of their business is all but recession proof. And much of the oil service business is immune even to wide swings in oil prices. That is, many oil company capital budgets are drawn up a couple of years ahead of time. So oil service companies should have work despite the macroeconomic situation. Not as much as in the boom times, maybe. But it’s not going to be as bad for the oil service companies as a lot of people seem to think.

There are many reasons for this. Sometimes an oil company has leases that are going to expire if it does not drill within a certain time frame. So the oil company has to drill. Or maybe the oil company has a rig under contract. So it has to drill before the contract expires and the rig moves on to other sites. Or maybe there is maintenance or a major workover on a well or field that just plain has to get done for reasons of safety or the environment. As I said, there can be a lot of reasons.

So keep an eye on the oil service companies. As Monty Python once said, they are “not dead yet.” The oil service companies are way down from previous high prices. I believe that this is a time to nibble. Don’t blow your whole wad of cash, but begin to accumulate a position while we watch how the larger economy unfolds. I think we’ll see stronger oil prices sooner, rather than later.

Oil Exporters Surprised, and Waiting at the Rope Line

Speaking of how the larger economy unfolds, some of the most surprised people on the planet are the folks who run oil-exporting countries. Hey, they believed their own press releases. They thought that oil prices would continue to rise upward, ever upward. All they had to do was figure out what to do with all the money that was going to pile up in their bank accounts. No waiting at the rope line for these worthies. But right now, demand destruction trumps even market manipulation by OPEC, not to mention the inexorable effects of depletion.

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Get Gold Cheap… Before It Takes Off Again

Gold is giving you another chance to get in for the inevitable ride up at a bargain.

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So what are the OPEC people thinking? They are hopping mad. The OPEC folks sure got used to high oil prices in a hurry. They don’t like these low oil prices. It costs money to run a petro-welfare state.

According to the International Monetary Fund, Iran, Venezuela and Nigeria need oil prices above $95 per barrel just to cover their respective national budgets. Saudi Arabia requires oil prices above $75 to cover its budget. Well over half of the revenues of the Russian Federation come from taxes on hydrocarbons. Mexico gets over 40% of its federal revenues from taxes on Petroleos Mexicanos (Pemex), the national oil company.

So low oil prices are causing problems for the oil-exporting states of the world. No major oil exporting country can long afford to see oil prices where they are now. Come what may, OPEC is going to turn valves and reduce supply. It’s just a question of how soon this will occur, how much oil OPEC will take off the market and what that will do to pricing. No less an authority than Hugo Chavez of Venezuela recently stated that “Venezuela can live with a price of $90 to $100 per barrel. But not less than that.”

“The Era of Cheap Oil Is Finished”

According to Iranian Oil Minister Gholamhossein Nozari, “The era of cheap oil is finished.” When a reporter from the New York Times asked Nozari what price Iran would want for its oil, Nozari declared, “The more the better.” Nozari stated that he is urging his fellow OPEC members to cut production by up to 2.5 million barrels per day.

How much oil is 2.5 million barrels? By comparison, the $6 billion BP (NYSE:BP) Thunder Horse Platform — 20 years in the making in deep water in the Gulf of Mexico — should produce 250,000 barrels per day by the end of 2009. So with one move by OPEC, there goes the equivalent of 10 Thunder Horses.

OPEC representatives are touring national capitals, urging non-OPEC oil producers, such as Russia, Mexico and Norway, to follow the cartel’s lead and cut production, according to Reuters news services. OPEC is trying to engineer a coordinated move to drive oil prices back up over $100 per barrel.

Most OPEC nations have already reached their own version of “Peak Oil.” Traditional oil-export powerhouses like Iran and Kuwait have admitted as much. Aside from Saudi Arabia, most OPEC exporters see a window of less than 20 years for significant international oil exports. By then, internal rising demand and falling output (due to depletion) will severely constrain the world oil markets. So all OPEC nations are interested in selling oil now for as much as they can get.

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The End of Cheap Oil

You wouldn’t think so. After all, oil prices just plummeted…

But the fundamentals are clear as day. Oil is destined to get a lot more expensive.

It’s going to change life in the U.S. and the world…forever…but you can protect yourself and prosper… Click here to take advantage of oil’s temporarily lower prices.

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“We Want the Money Now”

Last May, I attended the Offshore Technology Conference in Houston. I had a revealing discussion with an oil manager who works for the national oil company of an African country. He told me this:

“The Saudis think there is an ‘optimum’ price for oil. They don’t want to raise prices too much, too fast. They say it will kill the economies of the West. But for my nation, we disagree. There is no ‘optimum’ price for oil. We don’t care about the economic effects on Western consumers. If Western consumers want to drive, they will pay. Or they can walk, like millions of people do where I come from. So we pump oil every day. We want to get as much as we can for the oil. We want the money now so we can fund the priorities of our national government. We cannot tell the people that they have to live in poverty for another generation because we are afraid that Westerners will not be able to drive their Mercedes-Benzes.”

So you can see why the odds favor rising oil prices within a few months.

Source: Oil Prices Down…for Now

Many in the mainstream press are calling an end to the “commodities bubble.” But oil and energy expert Byron King warns investors against betting against cheap oil and gold.

Byron says what we are seeing now is a short- to medium-term correction in the trends for energy and resources. Investors who buy beaten-up oil service stocks and gold miners now stand to make major profits…

Back when oil was in the $140s, I said – in both print and broadcast interviews – that oil prices were running up too far, too fast. I predicted that oil prices would decline to $100-110, based on the fundamentals. Well, we’ve seen the decline and we’re almost there.

High oil prices have caused big changes in patterns of consumption. Indeed, the U.S. Department of Energy just announced that U.S. oil demand fell by about 800,000 barrels per day during the first half of 2008, compared with the same period last year. This is the biggest volume decline in 26 years, since the recession of the early 1980s.

Sure, some headlines describe what’s going on as something like the “oil bubble” or “commodities bubble” popping. Some people are talking and acting as if we were going back in time to the last era of cheap energy, cheap gold and cheap commodities. But don’t believe it. Don’t bet on it. And don’t play the markets that way.

A Gold And Oil Correction Was Due

What’s going on? We are in the midst of a short- to medium-term correction in the trends for energy and resources. Keep this in mind: This is a CORRECTION, not a fundamental change in the long-term correlation of things.

The long-term trends are still upward, in terms of value and pricing. But for now, the money is leaving energy and resources for pastures that look greener.

What pastures are greener? Well — speaking of green — the U.S. dollar is strengthening. It turns out that the euro is not the powerhouse currency that a lot of people believed it was. So the dollar has been strengthening against the euro for the past couple of weeks.

The Euro Can Go Down

And it turns out that euroland has its own economic problems. In fact, the euro can go down against the dollar, as well as up. That’s exactly what has happened. Euro down, dollar up. So in consequence, we are seeing the dollar going up, and oil and gold going down.

There is more to the equation. The economists are describing a recession occurring in parts of the euroland economic space. Germany — with Europe’s largest economy — has been hard hit, so there’s been quite a bit of drag on the euroland economy.

And then there are indications that the long-awaited U.S. recession is finally just around the corner. Really, we are just in the middle innings of the banking meltdown and housing crash in the U.S. The recent stock market turnaround may just be the seventh- inning stretch. I expect to see more large banks and investment houses either fail or get bailed out before the end of 2008.

So with two of the world’s largest economies about to enter the doldrums, world markets are seeing demand for energy and commodities slacken.

Thus, we have monetary issues with the dollar. And there are demand issues with economic slowdown in two of the world’s largest economic blocks. Prices for benchmark items like gold and oil are falling.

Stocks to be looking at…

And this is taking the stuffing out of energy and gold stocks. The mining stocks are down. The oils and service companies are down. It’s painful to watch. But it’s not a reason to give up.

As I said, this is a correction. This is an August swoon. Share prices are down, so it’s time to look at your shopping list. You can pick up shares in 2008 and pay 2005 prices. You can build a portfolio for the next five years with some prudent stock picking in the next couple of months.

Some of the most beaten-up oil and oil service companies are Apache (APA: NYSE), Halliburton (HAL: NYSE), Baker Hughes (BHI: NYSE) and Superior Energy Services (SPN: NYSE).

Some of the most beaten-up miners are Kinross Gold Corp. (KGC: NYSE), Yamana (AUY: NYSE), Hecla Mining (HL: NYSE) and the development-stage NovaGold (NG: AMEX).

When oil and gold turn around – which they will – all of these companies should do very well.

Source: The Gold and Oil Correction

Despite this recent drop in oil prices, BP (BP: NYSE) reported a 28% increase in second-quarter profits, led by surging energy prices. BP also announced that it would continue to fight for its interests in its troubled Russian partnership, TNK-BP. All of this bodes well for the tenure of CEO Tony Hayward and his efforts to get more out of BP than his predecessor John Browne.

Don’t panic if oil falls and the oil stocks follow. Depending on where you got into the oil run-up, you ought to be sitting on some nice gains. If you have gains, don’t be shy about selling a portion of your shares and taking the gains off the table. Build up some cash reserves for other opportunities.

Long term, over the next three-five years and longer, the price of oil is headed back up. So keep an eye out for any bargains in the oil patch and nibble. Don’t feel compelled to spend down all your cash just because a stock has a bad day. In this market, there will be more bad days ahead. So be patient and careful.

Meanwhile, don’t be afraid to take advantage of any oil declines to build your positions in great companies like Halliburton (HAL: NYSE) or Baker Hughes (BHI: NYSE).

Where Is Oil Headed?

Even Hugo Chavez of Venezuela conceded an important point last week. Chavez said that the price of oil ought to be about $100 per barrel. Hmmm… What does Hugo Chavez know, and when did he know it?

So will oil back down to $100? That’s a definite “maybe.” The supply-and-demand fundamentals point to an oil retreat in the short term. But then again, oil is a traders’ commodity. The slightest bad news can spike the price.

A senior official at Russia’s Gazprom (LON:GAZP) predicted not long ago that he expected oil to sell for $250 per barrel in “the near future.” How near? He did not give an exact date. Then again, was this just a case of the Russians “talking their book”?

So in the short term — the next few months — oil OUGHT to go down in price. But there are many things (hurricanes, accidents, war) that could spike the price. But don’t worry, I watch the events and trends every day – I’ll keep you in the loop.

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Where Is Oil Headed?

This piece is taken from The Growth Stock Wire. It’s in the form of a questions and answers session. But it’s well worth the read if you’re interested in the ins and outs of shale oil.

The Commodity Investor

Matt Badiali

Q: I’ve read some articles on shale gas. What is the big deal with this stuff? – H.B.A: Shale is the world’s most common rock, formed from mud and clay deposited at the bottoms of lakes and ocean basins. Shale looks like the slate you see in chalkboards or on roofs, (slate is actually shale that was “cooked” in the earth).

Clay and mud are tiny -– much smaller than sand. So it’s hard to tap shale deposits. (See the next question, about the Bakken Shale, for more details.)

Some shale is full of old plants and animals. These shales become the source rocks for oil and natural gas. In the past, it didn’t make sense to drill shale for either oil or gas. Shale presented technical challenges that were beyond most of the industry. However, that began to change in 1990, when oil-service giant Schlumberger began focusing its attention on the natural gas in shale.

The company estimates that shale contains 500 billion to 780 billion thousand cubic feet (MCF). We consume about 23 billion MCF per year, so that’s about 20 to 34 years worth of natural gas. Today, one MCF sells for more than $13. So the reward is in the trillions of dollars.

The Barnett Shale became the proving ground for shale technologies. Barnett is in the Fort Worth Basin of Texas, which underlies the entire region west of the city of Fort Worth. The Barnett Shale holds between 25 billion and 250 billion MCF.

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I’m not targeting companies that are just Barnett players for investment. However, I am interested in companies that learned how to drill the Barnett and are now leasing land in the many new shale regions.

Investors can take a look at companies operating in the Huron Shale in southern Ohio, the Fayetteville Shale in Arkansas, and the Ootla in Canada.

Q: Why can’t we pump all the oil out of the Bakken Shale? – D.S.

A: The Bakken Shale, the granddaddy of the shale oil fields, underlies northeastern Montana and western North Dakota. A recent government report put the amount of oil in the Bakken Shale between 200 billion and 400 billion barrels: enough to eliminate our oil imports for at least 45 years.

However, the report also says we can only recover about 3 billion to 4 billion barrels of that oil with current technology. That’s a terrible recovery rate… around 1% or 2%.

The problem with the Bakken Shale – and with many of the shale deposits around the world – is “permeability.”

Some reservoirs are like a glass of grape juice and ice cubes. You stick in a straw and suck up the juice around the ice cubes. That’s a permeable reservoir.

However, some reservoirs are like clusters of grapes. You know there’s a lot of juice in there, you just can’t get it out. You have to stick the straw in each grape, suck a little, and then move to the next one. That’s an impermeable reservoir.

Impermeability is one of the problems facing by companies working in the Bakken Shale and other “unconventional” oil fields. You need a way to put the straw through as many grapes as possible.

It took a long time for oil companies to realize that drilling straight down wasn’t the best way to do that. The solution is directional drilling. In directional drilling, the well is drilled at an angle using a computer to help guide the drill bit.

I visited a well in south Texas where the bit went down deeper than a mile, then turned west and drilled horizontally for more than a mile. I was amazed… Here was this thick steel drill casing, steered by an engineer in a truck miles away. Now nearly all the big drilling and service companies, like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), offer steerable drilling in three dimensions.

In 1990, only about 40 rigs, or 6% of all the rigs in the U.S., were drilling horizontally. As of last month (according to the Department of Energy), 519 rigs, or 28% of the total, were drilling horizontally.

That makes it much easier for oil companies to get more out of their shale deposits. And as this technology advances, I think more of Bakken’s “grapes” will yield oil.

Some excellent companies are drilling in Bakken, including XTO Energy (XTO). But while XTO is adding reserves, you’re going to have to pay up for the growth these days. I told readers of the S&A Oil Report about the company last July, and we’re up 41% so far.

Good investing,

Matt

Source: The Commodity Investor Q&A

To answer those questions we turn to a report published in late March by UBS energy analyst Jon Rigby and his team in London. Their incredibly useful report is called, “Will there be enough production capacity?” UBS has been battered by its huge sub-prime related losses. But their work on where future oil production will actually come from nearly redeems them. They have asked just the right question at the right time, and answered it in detail.

The report reaches a number of surprising conclusions about the global oil market. It also includes a useful database of oil projects scheduled to enter production in the next five years. These are projects which could add meaningful capacity (100kbpd or more) to global oil production. We’ll look at who stands to benefit in a moment. But first, some of the report’s findings [emphasis added is ours]:

• “Declining existing basins, rising costs, increased technical challenges, stretched supply chains, geopolitical blocks and tightening fiscal terms all seem impediments to growing global production capacity for oil and gas, despite the clear pricing signals.
• “There is no obvious wall of new production coming to the market in response to high prices.”
• New projects scheduled to come on-line from National Oil Companies (NOCs) belong mostly to three major firms: Aramco, Petrobras, and Gazprom.
• New project cost is rising and becoming more technologically challenging, especially deep-water.
• “Nominal growth rates tied to global GDP now look more unrealistic as potential upstream growth slows. This appears reasonably consistent with a growing view that oil production may actually not exceed 100Mbbl/d.”

The idea that global oil production may never exceed 100mbbl/d is worth a much closer look. I’ll get to that later. But before we look at the end, let us look at the beginning of the end and where new production might come from as the world’s oil producers try to bridge the gap between 87mbpd and 117mbpd.

The good news is that there IS new production capacity in the pipeline this year and next. Keep in mind that the final investment decision on the projects entering into production this year was made anywhere from 3-6 years ago. That shows you how far in advance you have to plan for new production (assuming you’ve even found oil in the first place).

There is no such thing as just-in-time oil production. But let’s take a look at projects that will come on line between now and 2010. We’ve selected only those projects that will produce more than 200kbp or more:

If you include LNG and the barrels of oil equivalent produced from it, your list expands a little more to include the following projects:

Beyond 2010, the future is murkier. But the UBS team has identified projects for which the final investment decision has been made. Assuming cost blowouts can be avoided and the projects aren’t cancelled, here are some of the bigger projects that could come on-stream between 2011 and 2015:

There are some massive LNG and natural gas projects coming on-stream between 2011 and 2015. Gazprom, Shell, BP, and ExxonMobil all look like big winners, should oil prices stay high and pass through to higher LNG prices.

The new oil finds off-shore in Brazil’s Santos Basin are not included in the UBS report because they are not likely to enter into production during the next five years. They will be difficult to produce in any event. Petrobras says the Tupi find may contain as many as 8 million barrels, while the Carioca field may have 33 billion barrels of reserves, of which about 10 billion could be recoverable, according to Citigroup.

Current Production Trumps Reserves

One UBS claim which may surprise older oil hands is that, “the capacity to produce—not reserves—is critical to energy markets.” UBS does not conclude that current producers should be valued differently that companies with large reserves but current production challenges. But it’s worth thinking about.