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

Global consumption is growing almost twice as fast as for oil, it is the cleanest-burning of the fossil fuels, and it is comparatively cheap: it currently trades at about half the cost of crude oil on an energy-equivalent basis.

In an energy-hungry world, it’s therefore not surprising that there’s now a mad scramble to procure long-term supplies and bring them to market.

Let’s take a look at some of the current major developments…

Pipelines. Russia, which has the world’s biggest reserves of natural gas, is building a direct link to Germany beneath the Baltic Sea, and planning others to China and Italy. These are enormous undertakings. The 3,000km Italian link, for example, is expected to cost $15bn.

Elsewhere, the ConocoPhillips-BP pipeline to bring North Slope gas from Alaska to Canada’s oil sands industry and the lower 48 US states will be the largest private-sector construction project in North America. And the pipeline China is building from Turkmenistan in Central Asia to Shanghai will stretch for 9,000 kms.

Liquefaction. An alternative means of moving gas is to liquefy it by freezing, ship the liquids across oceans, then turn it back into gas. The technology is not new, but LNG (Liquified Natural Gas) facilities are hugely expensive. For years this limited its transportation to countries not accessible by pipeline, mainly Japan.

But high energy prices have now made LNG viable on a large scale. And there are other advantages. European nations, for example, nervous about their increasing dependence on Russian gas, are looking to alternative sources such as North Africa, using LNG. China signed a $60bn deal with Qatar last month to buy three million tons of LNG a year over 25 years from 2011.

With its volumes growing 7% a year, LNG is the fastest growing of the fossil-fuel industries. Because of the massive investments required, it is dominated by a handful of very large multinationals.

New Reserves. Oil majors are boosting efforts to find and tap hydrocarbon deposits that are primarily gas, with oil as a side-product.

The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.

There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.

Coal-bed Methane. The “fire-damp” found in coal deposits – the curse of miners throughout the ages – is almost pure methane and an excellent substitute for natural gas, which is about three-quarters methane. It may be recovered from worked-out collieries or from coal deposits left unexploited because they are so gassy they are too dangerous to mine, and already accounts for a tenth of natural gas production in the US.

BG Group, the global specialist in the discovery, extraction and supply of natural gas, plans to build the world’s first plant to produce LNG from coal-bed methane piped 400km from fields in the interior of Queensland, Australia.

Liquid fuels. Although currently used as gas to fuel central heating, industrial furnaces and power stations, natural gas can be converted into liquid fuels. In Qatar, which has the world’s third largest gas reserves, they’re building plants to do just that.

Worldwide demand for natural gas has been growing at an average rate of nearly 3% a year, compared to oil’s 1.7%. China’s gas consumption is forecast to triple over the next 12 years, India’s to double. Yet between them they have less than 2% of global reserves, so they will be forced to look to imports from the Mideast, Russia and Australia.

Investing in natural gas: major role in power stations

The strongest demand growth area for natural gas is in electricity generation. Dirk Beeusaert, chief executive of Suez, the world’s biggest operator in the field, says the investment cost per kilowatt of power from gas turbines is “half that of a coal plant, and a third of that from a nuclear plant of the same capacity.”

Gas power stations can be built quickly, are flexible in operation, reduce dependence on other resources such as coal, oil and nuclear – and have particular attractions in these times of ecomania. Not only do they produce less greenhouse gases than other fossil fuel, but they can be used efficiently to generate intermittent power, to fill the gaps when turbines driven by wind and water shut down because of calms or droughts.

A couple of decades ago, gas accounted for little of the world’s electricity generation; now it fuels almost one-fifth.

Although the oil majors are giving increasing attention to finding and producing natural gas, most of the world’s resources are closed to them, or are politically high-risk. Russia seeks to use its gas supplies as a strategic weapon in its dealings with Europe and is squeezing out foreign companies. Iran is a different kind of political minefield. Qatar is happy to partner international oil firms, but is also right in the middle of the potentially explosive Middle East.

One country that is benefiting from all this is Australia, which has reserves almost as large as those of the US, production that is likely to continue expanding for the next quarter-century, and a business-friendly environment. Chevron’s Gorgon project alone, which got its go-ahead from regulators a few months ago, expects to produce more than a trillion cubic metres of gas over its 60-year life.

That’s exactly what’s happening. The global boom in liquefied natural gas (LNG) is just getting started. And the big boys in the energy industry are all cutting eight-figure checks to build the infrastructure. The U.S. Energy Information Administration went so far as to say, “[LNG] growth will require a $250 billion investment over the next 30 years.”

It’s already started. PriceWaterhouseCoopers says, “Given the number and scale of new LNG projects proposed or under construction, global production capacity could more than double by the end of the decade.”

There are bound to be quite a few investment opportunities with that kind of money being thrown around. As you can see in the chart above, Big Oil is on pace to become major LNG producers. But the largest player of all will be the world’s top natural gas company, Gazprom.

Russia’s de facto state-controlled natural gas company has long been eyeing its opportunity to increase its grip on the world through LNG. Now the major energy companies are falling in line to provide the opportunity the company/country (sometimes its tough to tell the difference) has been waiting for. Learn how Gazprom is going to do it, and how you can take advantage of the coming LNG boom.

Good investing,

Andrew Mickey

Editor in chief, BreakAway Investor

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Source: The $250 Billion Energy Bet

Now, we may not be dealing with a bunch of Einsteins at the head of these oil majors, but they’re not dopes either. They understand what’s going on. So, why is it that when ExxonMobil, Royal Dutch Shell, BP, and ConocoPhillips all reported in the last two weeks, each and every one of them said the same thing.

Profits are up on price increases. And volume is flat. Let me repeat that. VOLUME IS FLAT. What the heck is going on?

Take these companies with market cap’s of several hundred billion dollars … the latest drilling technologies … thousands of acres … billions of barrels of proven reserves … tens of billions more of unproven reserves – add it all up and they can’t produce more oil this quarter than they did last quarter or the quarter before?

Have these companies gone OPEC on us?

I mean, we know that OPEC keeps production just low enough to keep prices high. But they only provide about 40% of the world’s oil.

What’s the excuse for these private oil majors? Have they also found it in their interests to keep a lid on production? (This wouldn’t be the first time we’ve seen a manufactured shortage to hike prices.)

I almost wish there were an unholy conspiracy between OPEC and the other oil producers. If there were such a thing, it might mean with a little arm-twisting, we could get non-OPEC producers to push up production.

But, alas, there is no conspiracy.

There is something else … something much more ominous…If we were talking about food, I’d say there’s a worldwide famine brewing. But it’s oil, which isn’t quite as brutal as a famine. People have to eat. But do they have to drive?

No. But a worldwide shortage of oil is knocking on the door. Right now, supplies are tight. But they are more or less in balance … with admittedly no excess capacity to spare. It’s not going to last. Global oil demand is about to leave oil supply in the dust.

Shell’s production fell six percent year-on-year. BP’s fell two percent. ExxonMobil’s fell 10 percent. According to Credit Suisse, overall production will fall two percent this year from last. I believe that underestimates the slide.

And while OPEC – being OPEC – has no quarrel with the soaring price of oil, the fact is, even OPEC countries (except for Saudi Arabia) can’t produce more than what they are now.

Saudi Arabia is producing 12.5 million bpd (barrels per day). It has plans to increase that amount to 15 million. Or should I say “had” plans. The Saudi government has put those expansion plans on hold. It doesn’t want to take the risk of expanding into the teeth of a global recession.

OPEC as a whole plans to increase oil production by five million bpd. That won’t be enough. Global demand should increase by 11.5 million bpd by 2030.

Russia came to our rescue in 1999 when it finally opened up its fields to Western participation. Russian production rose by four million bpd from 1996 to last year. During the same period, Saudi Arabia’s production increased by 600,000 bpd.

Can any of the non-OPEC countries come to our rescue once again? Russia won’t. It’s too busy renationalizing its oil and gas industry.

Mexico? Nope. Their Cantarell field is getting long in the tooth.

England? Norway? No, their North Sea production is winding down.

Venezuela? Don’t make me laugh. Mr. Hugo Chavez is more intent on using his petro-profits as a tool of foreign policy, not plowing them back into oil production to help lower oil prices for the U.S. and its friends.

And the oil majors can’t help us because they can’t help themselves. Every time they think they’re getting access to a big field bursting with oil, something happens. Expropriation … terrorist acts … renationalization…

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At last week’s Jekyll Island meeting, our friend and fellow publisher Doug Casey made a convincing case for buying real estate in… Burma. Sure, a military junta is in power, but it won’t be there forever. Meanwhile, Burma’s beachfront land is every bit as pretty as Thailand’s but it costs about a tenth as much. All you’d have to do is ingratiate yourself with the generals in power, something that shouldn’t cost more than a few million dollars.

Doug also likes cattle land in Argentina and, along with partners, has recently purchased more than 250,000 acres in Salta.

The real estate meltdown hypothesis holds the economy will radically slow and sink into a recession (or even the worst depression since the Great Depression) as subprime losses lead to prime real estate defaults and then a decline in commercial real estate, too. I see two glaring problems with this hypothesis…

First, “Dr. Copper” hasn’t gone along with the global recession predictions. Copper, and base metals in general, have remained strong, even hitting new highs. Second, the commercial real estate collapse doesn’t seem to be materializing. In fact, after suffering late last year, several commercial real estate investment trusts seem to be rebounding strongly.

Our best commodity recommendation? Get long heroin. According to sources in Afghanistan, farmers there have replaced their traditional poppy crop with wheat. Inflation is looming – even for junkies. While we suspect we’re a long way from a top in commodities in general, it does give us pause when wheat is a better cash crop than poppies…

I believe the trade of the next decade will be shorting long-dated U.S. government bonds…

With the amount of inflation the Fed is producing and with the global economy showing signs of strength (oil and copper prices), it’s a sure bet the yield on the long-dated government bond will, sooner or later, spike much higher. Right now, yields on the 30-year Treasury bond are bouncing off their lows, at just over 4%. Considering inflation, as officially measured, is higher, there’s simply no way these low rates are sustainable.

ConocoPhillips and BP are spending $25 billion to $30 billion to build a pipeline to carry Alaska’s gas to Canada and the U.S. The pipeline will move about 4 billion cubic feet of gas per day. The first destination is the Alberta oilsands in Canada – the biggest proven reserves outside Saudi Arabia.

Alberta needs enormous amounts of natural gas to get oil out of the ground. Companies are currently pumping 825,000 barrels per day. That number is expected to quadruple by 2025.

George Soros, the billionaire you love to hate, told reporters the U.S. administration “failed to perform their job… This is a man-made crisis and it’s made by this false belief that markets correct their own excesses. It will take much longer for the full effect of the decline in the housing market to be felt.”

Soros sounds like he wants to ride the “government-has-to-do-something” bandwagon. When times get tough, the “public” will clamor for the government to “do something.” Whatever it does, it won’t be good.

What’s Buffett buying now? Well, his most recently disclosed new position has been built up over the past six months. Buffett has bought a million shares of reinsurer Munich Re Group, according to a German newspaper report. Buffett bought 3% of Swiss Re in January.

Editor Sean Goldsmith recently headed up a project to uncover every company in the world that pays a monthly dividend. Then, he spent the last six months with the help of Sjuggerud, Dyson, and myself, to figure out a system that shows you which Monthly Dividend Payers will deliver you the biggest monthly checks. For example, one stock has sent out a check for 453 consecutive months. Another has returned 388% over the past five years, including a paycheck for shareholders, every single month.

For more details on Goldsmith’s complete list of the Best Monthly Dividend Stocks… and his recent research, click here.

Regards,

Porter Stansberry and Dan Ferris