“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

Source: Energy, Brazil, Gold: What More Could You Want?

Back in the 1960s and 1970s, a few major companies took out oil exploration concessions there from the government of South Africa. In 1974, Shell (NYSE: RDS.A / RDS.B) discovered a gas field off the southwest coast with the Kudu project. Early estimates were 1 trillion cubic feet of reserves, but current estimates range up to 10 trillion. Kudu was big, but nobody much cared about natural gas back then. Gas was too cheap, and southern Africa was too far away.

There was hardly any development around Kudu for the next 20 years. South Africa was under international sanctions due to its apartheid regime, so oil companies and other outside investment stayed away. Almost nothing happened with energy development until Namibia became independent in 1990.

By the early 1990s, the gas field at Kudu intrigued foreign oil companies. Kudu showed a large hydrocarbon resource. Clearly, there was significant potential. But nobody really understood the offshore geology. Plus, back then, it was tough to drill in water more than about 1,500 feet deep. Namibia didn’t make for an investment magnet.

But with the recent success of offshore Brazil, the energy exploration expectations of the world have been fundamentally altered. The same brilliant researchers and scientists that discovered the potential of Brazil’s Tupi field are now doing extensive research in offshore West Africa, in particular offshore Namibia. One researcher I’ve been following very closely believes the offshore areas of Namibia are ‘geologic analogues’ to Brazil.

Source: The Next Great Oil Frontier

“If they [the Fed] keep printing money to buy bonds,” said Mr. Cheng, “it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.” Mr. Cheng was referring to over $2 trillion of Chinese foreign reserves, the world’s largest holding.

“Gold is definitely an alternative,” said Mr. Cheng, “but when we buy, the price goes up. We have to do it carefully so as not to stimulate the market.”

From Mr. Cheng’s lips to God’s ears – and now to ours. We have direct testimony from a high-level cadre that China, while cautious, is a key driving force in the gold market. China is buying.

We already knew that the Chinese are buying gold – and hoarding it. For example, China is the world’s largest gold-mining nation. China mines more gold each year than the US or South Africa. Yet what are the net gold exports from China? Umm…zero. That is, China doesn’t export gold (unless you buy a Panda coin or something.) Overall, in fact, China is a net importer of gold.

Sure, the Chinese use gold in industry, such as for electronics, jewelry and the like. But much of the rest of Chinese gold purchases go into state coffers, or into “off-books” storage. I’ll bet that there’s a lot of gold in “industrial stockpiles” in China, which are really just strategic monetary reserves for China’s Central Bank.

The implication from Mr. Cheng is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks. At the same time, it’s more than likely that China will buy gold whenever there’s a price dip.

The significance is that the Chinese seem to be prepared to establish a floor under any correction in gold prices. This limits the downside for well-positioned gold miners such as we hold in the Energy & Scarcity Investor portfolio.

Is there an upper limit to gold prices? Well, I expect to see the gold price rise, but slowly and in a long series of plateaus. I also expect to see pullbacks, usually based on world monetary and political events.

So we’ll surely have some roller-coaster rides with the prices for the mining shares. How it all unfolds for us as investors will depend on when, and to what degree, monetary-driven inflation begins to bite into the economy. When it becomes totally obvious, it’ll probably be too late to protect and preserve your wealth and purchasing power.

The problem for us in the West is that most of the politicians and major media just DO NOT GET IT. Or at least, the ones that do “get it” generally don’t report things honestly to the citizens. They’re probably afraid of what might happen when the citizens really figure out how much the political classes have screwed up the world.

So you see these rosy-sounding headlines about how the economy is “improving” and things are “getting better.” Huh? What planet are these guys on?

The tide of inflation is rolling in. It’ll lift the boats of the gold miners.

Regards,

Byron W. King

Source: A Floor Beneath the Gold Price

At this level, gold isn’t overly dramatic. We haven’t seen any really big moves one way or the other. The big moves will happen, eventually, I believe. We just have to be patient.

Why do I believe that gold will soar? Well, we’re still in the early chapters of the overall “gold story.” The plot is still forming, although I believe that all of the main characters are on stage.

We have excessive U.S. government spending. It’s out of control, to all intents and purposes. We have the deepening federal deficit, and associated exploding national debt. We have significant monetary players overseas, like Japan and China and Middle Eastern nations, holding trillions of dollars worth of U.S. bonds and other paper — and getting nervous about it. We have a hollowed-out North American economy that’s turned into what historian Charles Maier calls an “empire of consumption.”

Then we also have the utter incompetence and hubris of upper-level U.S. politicians and policymakers. They’re collectively so out of touch that they don’t even know that they’re out of touch. We have the parallel incompetence of the Big Media, with their overall “infotainment” approach to presenting vital news to the American people.

Where’s the tragic theme? There’s this sense of denial that anything really bad can possibly happen. It’s the monetary equivalent of a Dec. 6 or Sept. 10 kind of thinking. It’s a failure of imagination at the highest levels.

And whatever does happen, there’s this attitude that the U.S. can add complexity to the system and “spend its way” out of anything. Big government? Sure, and let’s make it bigger. (Hey, let’s have the government take over health care while we’re at it.) Stimulus? Go for it. Bail out Wall Street? Of course — aren’t they too big to fail? Cap and trade, and thus cripple the U.S. energy economy? Yep, we’ll just “conserve” more energy and build lots of windmills. Right?

It’s just spend, spend, spend, spend, spend. Or control, control, control, control, control. And bureaucratize, bureaucratize, bureaucratize, bureaucratize, bureaucratize. Modern governance is all about spending money we don’t have on complexity that we, as a society, cannot afford in any sense of the word. And few of the power brokers at the top seem to think that there’s anything wrong with it. They’ll just pass another law, spend some more money.

The tragic part of this drama is that the high and mighty are setting themselves — and the U.S. economy — up for a terrible fall. Sooner or later, with all the spending and new bureaucracy, we’re going to have an implosion and see a collapse in the level of complexity. Those green “notes” that the Federal Reserve prints — with the nice pictures of dead presidents on them — will not be worth nearly what most people believe.

Neither you nor I can do anything to prevent it. (OK, write to your congressman, for all the good it’ll do. Or go to a town hall meeting, for all the good it’ll do.)

The answer, of course, is to protect yourself and your family, and save what you can. When the mighty tumble, be sure not to be standing there in the crash zone.

Source: My Favorite “Mistake”

Then for a national perspective, I looked at The Wall Street Journal, which published a slightly different alliteration, “Decade of Debt: $9 Trillion.” And finally, for an international view, The Financial Times summed it all up in characteristic British understatement, with, “US Says Debt Outlook Worsening.” Oh, you don’t say.

The big problem – obviously, the headline issue – with the US economy is too much debt. (That’s the BIG problem. There’s a long list of other problems after that.) And the debt problem is getting worse, not better.

Debt is ubiquitous across US society. Debt permeates the culture. Practically the whole nation has bitten off more than it can chew. Within the past two generations, the US economy has transformed from what Harvard historian Charles Maier calls an “empire of production” (which is what won the Second World War, for example) to an “empire of consumption.”

The lunch bucket-toting factory worker, or the beam-walking riveter constructing a skyscraper, symbolized the former empire of production. Those iconic workers are no more. They’ve been replaced by the image of vast tracts of McHouses blanketing the landscape. Or of parking lots filled with new cars outside coast-to-coast malls, with their owners inside maxing out their credit cards.

It’s the difference between an economy that creates surplus capital and an economy that consumes capital to gross deficit. Professor Andrew Bacevich of Boston University summed it up this way in his recent book, The Limits of Power. “The evil genius of the empire of production was Henry Ford. In the empire of consumption, Ford’s counterpart was Walt Disney.”

Come to think of it, we should be so fortunate as to be indebted just because we collectively took too many trips to Disneyland. As a nation, the US has borrowed and spent far beyond its means. You know what I mean. I don’t have to get into the details on that point. In particular, the political class just can’t seem to say no.

The other side of that debt coin is a widespread inability to repay. Households are so deep in debt that they’ve stopped buying, and I don’t care what the so-called consumer confidence surveys say. Less buying means that business profits are down. Where businesses are showing profits, a lot of it is because they are goosing the bottom lines through layoffs and spending cuts.

Layoffs? That’s putting it mildly. Many of the recent job losses are permanent. They’re structural. It’s not just the good old days, when the company said, “Go home and we’ll call you back in a few months.” No, in many cases, the jobs are gone forever.

It’s not just factory jobs, either. Those jobs were the first to go. The US economy lost millions of its old-line factory jobs over the past 25 years or so. It brought us into the age of the Rust Belt. Some economists and deep thinkers bragged about how this was somehow “good” for America. (Call me old-fashioned, but I could never quite figure that out.)

Now people with white collars are getting hit with permanent job losses in sectors like banking and law. Many parts of the nation’s financial districts are the new Rust Belts of America.

There are former lawyers waiting on tables, stealing jobs from the traditional class of table servers, starving artists. At many silk-stocking firms, even the formerly sacrosanct legal “billable hour” is under attack. And I know doctors and architects who’ve been laid off.

So joblessness is up, and it’s not about to come down anytime soon. With joblessness up, tax collections are down across the board. Unemployment compensation accounts are running out of money. Public assistance accounts are running down. Some states want to give early release to prisoners to save the costs of incarceration.

In Michigan, for example, some counties are no longer repaving the roads. They just grind the asphalt to gravel and save the cost of paving. It’s a foretaste of things to come, I believe.

I don’t see where the problems of indebtedness have been cured. We’re not even close. Maybe it’s my inner bankruptcy attorney at work. Where’s the wipeout? Where’s the discharge? How has all that bad paper out there been voided? It hasn’t.

Regards,

Byron W. King

Source: An Empire of Consumption

The trip was sponsored by the American Petroleum Institute (API), which paid for the airfare and accommodations. Managers at both Syncrude and ConocoPhillips granted me access to any parts of their operations I wanted to see (within allowances for safety). And everyone answered any and all questions I asked.

Post-trip, I have complete editorial freedom to write about what I saw and learned. And I learned a lot. So this is Part I of a two-part series. Watch for Part II.

The Past and Future of Oil and Oil Sands

The first thing that struck me about visiting the oil sands of Alberta was how much geological and social similarity there is to the oil patch of Pennsylvania.

Geologic similarity? Yes, because the reason that the hydrocarbons are so near the surface in both areas — Pennsylvania and Alberta — is that the Pleistocene glaciers scraped off much of the overlying rock. When the glaciers retreated about 10,000 years ago, they left hydrocarbon-bearing rock formations exposed near the surface, or buried not too deep. This led to oil seeps, which led to people being curious about the black, gooey stuff.

To be sure, the hydrocarbon resource is quite different between the two places. That is, in Pennsylvania, you have light, sweet crude oil that flows easily and is soft and smooth to the touch. Indeed, Pennsylvania crude feels like hand lotion. (It’s the origin of Vaseline, for example. And some people use it as the basis for a shampoo.)

While in Alberta, the “bitumen” from the oil sands is as thick as cold molasses, and very sticky. It’s got some sulfur in it as well.

On a warm day in August, oil sands have the consistency of really stiff, dry oatmeal. Bitumen is a far cry from hand lotion.

And as for social similarities? Well, the Indians of old used to skim the oil from streams near Titusville, Pa. So did people of the “First Nations” of Alberta, who used to recover the tarry bitumen from the rocks along the Athabaska River of northern Alberta. Thus both oil and oil sands have been around for a long, long time.

Early white explorers in both Pennsylvania and Alberta noted the oil seeps. They wrote in journals and logs that eventually somebody could do something with the substance.

Eventually, both Pennsylvania and Alberta had their oil booms. In fact, we’re soon coming up on the 150th anniversary of Col. Drake’s oil discovery at Titusville, Pa, on Aug. 27, 1859. Pennsylvania’s oil boom is colorful history at this point (although Marcellus Shale development will soon change that).

Whereas Alberta is still in the midst of its oil sands boom. It’s a boom that’s going to last for quite some time, I believe.

“Easy” Oil Versus Heavy Oil and Bitumen

There’s a reason Col. Drake started an oil boom in Pennsylvania more than a century before Alberta enjoyed the same thing. Col. Drake found some of that so-called “easy” oil. No, it’s not easy to find. It’s that Col. Drake’s oil flows easily from a well.

That is, for all the oil that mankind has pumped out of the ground in the past 15 decades, almost all of it has been the light, sweet stuff that flows easily. Generally, when people looked for oil they bypassed the heavy oil and bitumen. Until lately, of course.

When we think about the concept of “Peak Oil” today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the “old fashioned” kind of oil deposit that Col. Drake was drilling. The light, sweet, easy-flowing oil is getting harder and harder to find, certainly in significant quantity.

But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be “heavy,” with lots of carbon atoms and not so many hydrogen atoms.

Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

It just so happens that most of that Canadian bitumen is located in Alberta (with some is in Saskatchewan). And Fort McMurray, about 250 miles north of Edmonton, is the heart of the development process.

Oil Sands — Surface Mining

Large-scale oil sands development began in the 1970s. It took gigantic levels of capital investment, like tens of billions of dollars. That’s not pocket change. So a group of lease-owners got together and pooled their capital to form privately held Syncrude Canada, a joint venture. First mining started in 1978.

The way Syncrude operates, it’s not really “mining.” It’s landscape architecture. Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle. It’s quite a farsighted model for long-range resource development.

Thus for much of the 1970s, Syncrude performed baseline environmental studies and data gathering. It started digging in 1978. At first, the pit looked like a moonscape of open-pit mining. See the photo below. It looks like a mess, right? Well, there’s more to the story.

The mining process is fairly straightforward. Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.

The loaders haul the rock to a crusher. The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building. The Syncrude operation washes the bitumen off the sand using naphtha. Then it separates the bitumen, recovers the naphtha for reuse and takes the clean sand (and it’s clean) and replaces it in a previously mined pit.

The process uses a lot of water, but not as much as the horror stories you might hear about “draining the rivers” of northern Canada. Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like “all the natural gas of northern Canada”). Pretty much everything about the operation is built with cogeneration in mind, so the company continuously recovers the heat at each stage. That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, and then it may take five or more years to fill it back up with sand during the restoration process. Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although the company has some artistic license with the contours. It covers the land with the original topsoil, which has been in cold storage (northern Alberta… it’s cold up here for 10 months of the year). Then it replants trees, and that’s saying something, because the growing season is under two months. It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.

Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day. It takes the 8-API bitumen and upgrades it to oil that’s competitive with West Texas Light. Then it delivers it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur free (refiners like that). In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the step pyramid at Saqqara, Egypt. And along the way, Syncrude sells the sulfur to the chemical industry.

The former Syncrude mine that I visited is about 3.5 miles square, and formerly about 200 feet deep. Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.

For the cynics out there, I’d say that it’s not some environmental Potemkin village, because you can’t fake a replanted forest of 25-year-old trees. You can’t fake a 300-bison herd. Not on a former mine site 3.5 miles square.

Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the “other” issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the U.S. wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.

That’s all for now. In Part II, I’ll discuss the in situ process that I saw at the ConocoPhillips Surmont site.

Until we meet again,
Byron King

Source: Update on Canada Oil Sands, Part I

Wind-based electricity is still about twice the price of coal- and gas-generated electricity. The thing that’s keeping windmills in the ring is public subsidies like tax credits, as well as large-scale public policy support, like renewable portfolio standards, that requires utility companies to generate certain percentages of ‘green,’ carbon-free power.

While we’re at it, windmill systems are extremely capital-intensive. They require lots of upfront investment in land and leases, roads, grid access, concrete foundations, steel towers and complex turbines and blades. Then you need about three windmills, in different locales, just to assure you have 24-hour power generation — due to the fact that the wind does not always blow when and where you need it.

With the U.S. credit system still broken — and to all appearances, the economy going back into the ‘double dip’ of the Great Recession — things probably aren’t going to get much better for windmills in the next year. Maybe someday. Not now.

Source: Energy Investors Beware

What Are These Oil Sands?

Back in Pleistocene time, the glaciers covered much of northern Alberta.  In places, there was a mile of ice.  During some of the warmer periods, there was a lot of melting.  On occasion, and in some places, there were giant, glacial-dammed lakes.

Every now and again, these glacial dams would break, sending massive volumes of water downstream, wiping away pretty much everything along the way.  Well, it turns out that in this scoured-out area that included much of the rock covering some lower Cretaceous deposits of oil.  Or rather, it was “oil” that had long ago lost the volatile components.  The stuff is properly called bitumen.

Thus we have an area in northern Alberta that’s about the size of New York State.  That area holds near 1.4 trillion barrels of bitumen resource.  To be sure, not all of it is recoverable.  In terms of recoverable “reserves,” there are only (ahem…) about 175 billion barrels, or over eight times the total of U.S. oil reserves.

Of those 175 billion barrels, about 20% are near enough to the surface to strip mine.  That’s within about 250 feet or so.  Any deeper, and the cost-benefit calculation dictates that you have to recover it via a well-and-pumping process.  Still, that makes for about 35 billion barrels of bitumen that could be extracted by mining.  (About 1.5 times total U.S. oil reserves.)  The actual, mineable area is about the size of Rhode Island.

The Heart of Oil Sands Country

All of which gets me back to why I was in Fort McMurray.  This is the heart of oil sands country.

Near 200 years ago, early explorers noticed gooey oil seeping out of the banks along the Athabaska River.  On warm days, with direct sunshine, the stuff actually flows.  Mostly, it has the consistency of peanut butter.  Unless it’s cold up here – which happens a lot – and it’s hard as a rock.

Needless to say, people talked about these “oil sands” for a lot of years.  Then in the 1960s, some people within Canadian industry and the Alberta government began to do something about it.  They decided to develop them.  It’s a long, long story.

Here’s the Short Version

The short version of the story is that large-scale oil sands development began in the 1970s.  It took gigantic levels of capital investment, like tens of billions of dollars.  That’s not pocket change.  So a group of lease-owners got together and pooled their capital to form Syncrude Canada, a joint venture.  First mining started in 1978.

Thing is, the way Syncrude operates it’s not really “mining.”  It’s landscape architecture.  Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle.

So for much of the 1970s, Syncrude performed baseline environmental studies and data-gathering.  Then they started digging in 1978.  At first, the pit looked like a moonscape of open pit mining.

The process is fairly straightforward.  Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.)  The loaders haul the rock to a crusher.  The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building.

The Syncrude operation washes the bitumen off the sand using naphtha.  Then they separate the bitumen, recover the naphtha for reuse, take the clean sand (and it’s clean), and replace it in a previously-mined pit.

The process uses a lot of water, but not as much as the horror-stories you might hear about “draining the rivers” of northern Canada.  Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like, “all the natural gas of northern Canada.”)  Pretty much everything about the operation is built with co-generation in mind, so they continuously recover the heat at each stage.  That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, then it may take five or more years to fill it back up with sand during the restoration process.  Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although they have some artistic license with the contours.  They cover the land with the original topsoil, that’s been in cold storage (northern Alberta… it’s cold up here for 10 months of the year).  Then they replant trees, and that’s saying something because the growing season is under two months.  It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.

Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day.  They take the 8-API bitumen and upgrade it to oil that’s competitive with West Texas Light.  Then they deliver it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur-free (refiners like that).  In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the Step-Pyramid at Suqqhara, Egypt.  And along the way, Syncrude sells the sulfur to the chemical industry.

I visited a former Syncrude mine, about 3.5 miles square and formerly about 200 feet deep.  Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.  For the cynics out there, I’d say that it’s not some environmental Potemkin Village because you can’t fake a replanted forest of 25-year old trees.  You can’t fake a 300-bison herd.  Not on a former mine site 3.5 miles square.

Bottom line is that this is an immense operation.  Syncrude employs 5,000 people, plus 2,000 contractors.  Paychecks are north of $100,000 per year.  Every oil sands job supports 3 local jobs, 6 provincial and 9 others across North America (especially at Caterpillar, where they build those giant, 400-ton loaders).

In the coming weeks I’m going to delve deep into North American oil sands operations and any companies that may be set to profit. Oil sands are nothing new, but now may be the perfect time to scoop up shares of a small player or two…

Regards,
Byron W. King

Source: The Oil Sands in Alberta, Canada

When we think about the concept of ’Peak Oil’ today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the light, sweet, easy-flowing oil that is getting harder and harder to find, certainly in significant quantity.

But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be ’heavy,’ with lots of carbon atoms and not so many hydrogen atoms.

Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the ’other’ issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the United States wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.

Source: The Saudi Arabia Next Door

By August of last year, the price of oil was retreating, and it was a hard slog on the way down. By midwinter, in December 2008 and January 2009, oil prices were in the $30s per barrel – a drop of over 75% within six months. It was a wild ride.

Natural gas had a similar rise and fall last year. In July 2008, the NYMEX price for natural gas was around $13 per mcf (thousand cubic feet). By October 2008, that price was cut in half. In fact, natural gas prices trended down throughout the chilly winter of 2008-2009. The current economic pullback – our Great Recession – means that many industries, as well as the electric power sector, are using less natural gas. Think of the mills, plants, factories and other industrial and commercial sites that have scaled backor closed. They don’t need nearly as much natural gas or electric power.

Thus, energy demand has tumbled in North America. The price of natural gas has fallen, and hard. For a while this spring, gas prices couldn’t find a bottom. It’s only been in the past two months or so that the price of natural gas leveled off at around $4 per mcf.

Right now with natural gas prices under $4 we have an extraordinary opportunity! $4 natural gas is the equivalent of $30 oil – it just won’t last.  Better yet, I’ve got the perfect way to play this trend – a company that could hand you as much as 340%.

But before we get to the company I’m talking about, let’s take a look at what happened to natural gas drilling…

Drilling Activity Dropped Off a Cliff

Along with the price collapse for oil and natural gas, there was a dramatic worldwide drop in the count of drilling rigs. Drilling activity scaled back precipitously, in a tumble reminiscent of the previous hard times in the oil patch back in 1981 and 1982. Here’s a comparison between then and now.

If you want more exact details, here are the most recent rig count numbers from Baker Hughes, the world’s preeminent drill bit manufacturer.

Look at that change from last year! In North America – the U.S. and Canada combined – the rig count just plain fell through the floor to a recent level below 1,000. (It has crept up to 1,065 in the past couple of weeks.)

With low oil prices, there was less drilling in the U.S. and Canada, of course. But look at the international rig count. It’s interesting that the international count didn’t drop off all that much over the past year – only about 10% or so, as opposed to a drop of almost 60% in North America.

Why the difference between North America and internationally? The big pullback in North American activity was in rigs drilling for natural gas. That is, over half the drilling activity in North America is for gas. It’s different in the international arena, where most rigs are drilling for oil.

The bottom line is this…

The low prices for North American natural gas didn’t support drilling, hence the massive North American rig pullback. Also, much of the North American gas drill-out of recent years was financed with borrowed money. And the credit crunch froze almost all of the funds that were going into the North American gas-drilling sector.

So less demand led to lower natural gas prices. Lower prices could not support the financing model for the North American gas-drilling business. The easy money for gas wells dried up. And the rig count plummeted. Now what?

The Rig Count Has Found a Bottom

It looks like the worldwide rig count has found its bottom in recent weeks. In fact, the numbers are creeping up a bit, according to Baker Hughes. What’s going on?

Since February, the price of oil has steadily crept back to the $70 range per barrel. That’s up 100% from the midwinter low. The oil price increase clearly supports more drilling.

Why are oil prices up? Here are a few reasons. Cheap oil last winter led directly to lower fuel prices worldwide. Hence, overall world demand for oil stabilized, and in some areas, fuel demand has actually strengthened. Meanwhile, OPEC has cut oil output by about 5 million barrels per day. There’s less supply hitting the markets. Also, China has been filling its strategic petroleum reserve. And Chinese demand is up, year over year. The Chinese are not only buying new cars, they’re driving them.

As for North American natural gas, the price has stabilized at about $4 per mcf. That’s a low number. In fact, it’s barely enough to keep the industry alive in the short term. Some people call it a “gas glut.” It depends on our time frame. Long term? At $4 per mcf, natural gas is barely on life-support. This situation can’t last and it’s our opportunity to get into the KEY ENABLING TECHNOLOGY of the natural gas market, and do it with very limited risk!

Depletion Still Matters

At the same time, old Mr. Depletion is working his efforts. Hydrocarbons are, of course, depleting substances. Every barrel of oil lifted to the surface is one barrel less down in the hole. Every mcf of natural gas that blows out of the formation is one less mcf down there.

So each day of hydrocarbon production brings every well one day closer to the end of its useful life. And with most modern wells, the output curves are falling off pretty steeply in the first year or two. It’s counter to what a lot of people think, but it’s reality.

Wells don’t just produce large volumes of oil and gas year after year. Indeed, it’s a rare well (at least in North America, which has been drilled like a pincushion) that produces strongly after even one year. Most wells just plain slack off and output drops after the first few months or so. Sure, a well eventually will settle in at some level of output. And that level might last for many years. But in almost EVERY case, it’s a much lower level than in the first few months of the well’s existence.

We Need to Drill Wells

The only way around depletion is to drill more wells. In a broad sense, you have to look at well drilling as a long-term industrial process. The energy industry needs a pipeline (so to speak) of thousands of drilling prospects that get drilled on a regular basis. Break the process – with wild swings in the pricing mechanism, for example – and you’ve got trouble. We just plain need to drill wells.

But with the rig counts way down in the past year, a lot of those wells we need to drill have not been drilled. Thus, the energy process is derailed. The future is NOT now. In fact, the energy future is now moving out of our immediate control. The U.S. could be looking at serious depletion-induced natural gas shortages within a year to18 months. So the drilling cycle needs to kick back into gear.

Sooner or later – and I believe sooner – the rig count HAS to head back up. On the oil side, prices can support most drilling at this point.

Until we meet again,
Byron King

Source: Prepare for the Rebound in Drilling