Crude oil futures gained $1.66 to settle at $114.53 a barrel on the Nymex. The euro, meanwhile, inched up 0.1% against the buck, off a six-month low of $1.4630.

Energy and oil expert Byron King says investors can expect oil to continue to head northward for all the familiar reasons. Oil’s long-term fundamentals are little changed since hit spiked to $147 a barrel at the end of July. And you can now pick up resource plays in 2008 at 2005 prices…

It’s not like anyone is finding new large oil deposits out in exploration land. Indeed, a whole lot of looking is leading to not very much finding in the exploration patch.

The big oil companies are taking oil out of the ground. But generally, they are not replacing their reserves through reserve growth or resource expansion. To the extent that the oil companies are expanding reserves in the short term, it’s by searching further out in the ocean or further north in the ANWR And that raises the cost structure for production.

It’s a rare oil company that replaces its annual output with new reserves.

Compounding the problem, much of the world is off-limits to the traditional exploration and production model. The large national oil companies (NOCs), such as Saudi Aramco, Sonangol, Petroleos de Venezuela, Gazprom (LON:GAZP), Rosneft (LON:ROSN), etc., control the bulk of the world’s resources. About 85% of the world’s oil and gas reserves are controlled by NOCs. About 7% of the world’s hydrocarbon reserves are controlled by the Western companies.

Working Hard in a Tough Environment

So the traditional Big Oil outfits (Exxon Mobil <NYSE:XOM>,Shell <NYSE:RDS.A /RDS.B>, BP, Total <NYSE:TOT>, etc.) are scrambling hard to replace the reserves that get pumped out via normal production. Even in the places where the Western companies can operate, it’s no picnic.

The Washington Post — in an editorial, no less — was downright sympathetic as it described the difficult operational scenario for Shell Oil Co. on a major lease in the U.S.:

“The five leases that have made up the Shell Perdido project off Galveston since 1996 are not classified as producing. Only when it starts pumping the equivalent of an estimated 130,000 barrels of oil per day at the end of the decade will it be deemed ‘active.’ Since 1996, Shell has paid rent on the leases; filed and had approved numerous reports with the MSS [Minerals Management Service], including an environmentally sensitive resource development plan and an oil spill recovery plan that is subject to unannounced practice runs by the MMS; drilled several wells to explore the area at a cost of hundreds of millions of dollars; and started constructing the necessary infrastructure to bring the oil to market.”

The Washington Post concluded, “The notion that oil companies are just sitting on oil leases is a myth.”

So it’s tough out there in the field. It’s hard work to find reserves and lift them to the surface. There are rising production costs, and now the producers are selling into a declining market price.

Stock prices are down. Yes, it hurts if you’ve been buying shares in the past year or so. But the other way to look at it is that some great companies are now on sale. You can pick up resource plays in 2008 at 2005 prices.

Keep your eye on the long term, and don’t panic out of any buying opportunities.

Source: Oil Exploration – A Lot of Looking, Not Much Finding

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?

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.