The Shift to Heavy Oil, with an “Energy Microsoft” at the Forefront

But a significant portion of the world’s oil is much lower quality than the light, sweet stuff. Indeed, most oil that’s found in nature is a heavy, viscous hydrocarbon with the consistency of cold molasses. This heavy oil – defined as API gravity 22.3 or less – is difficult and costly to produce and refine. That’s why people have pumped and burned the light, sweet oil for the past 150 years. Throughout its history, the oil industry has usually bypassed the heavier oil fractions. Why go to the trouble and expense, right?

But now conventional oil resources are drying up. The reasons have to do with geology, politics, macroeconomics and the investment cycle. Boiled down, it’s the Peak Oil argument, which focuses on the worldwide decline in output of light, easy-to-get oil. And Peak Oil is a serious matter. As light oil gets scarce, however, a lot of new heavy oil plays are coming out of the industrial shadows.

Indeed, with the breakout of heavy oil into the marketplace, the world energy business is about to change dramatically. It’s kind of like what we saw with the computer revolution that began about 30 years ago. Big, heavy mainframes gave way to small-scale, distributed and personalized computing power. At the heart of the revolution was the operating system, much of which wound up coming from Microsoft.

Today, the energy industry is on the cusp of a revolution equally profound. And in the forefront of that change is the company that I’ll describe in this issue of Energy and Scarcity Investor. This visionary firm is sort of an “Energy Microsoft.”

How Much Heavy Oil Is Out There? A Lot!

First, let’s define a few terms and look at some numbers. According to oil service giant Schlumberger, only about 30% of the total world oil resource is the conventional, light, sweet crude (technically, API gravity 22.3 and above). Heavy oil (API 22.3 and below), by comparison, makes up about 15% of the world’s oil resource. Extra-heavy oil (API gravity less than 10) makes up 25% of the world’s oil resource. And nearly 30% of the world’s oil resource is in the form of tar sands and bitumen (with API gravities in the low single digits – it doesn’t flow at all).

Schlumberger estimates that there are between 6-9 TRILLION barrels of heavy oil in the world. Big numbers, right? Especially since the current total world demand for oil is in the range of 30 billion barrels per year. With heavy oils, we’re talking about 200-300 years’ worth of potential supply. (That’s at current rates of use. If we can get it all. Which we can’t. So it won’t happen. But it illustrates the point.)

Where is all of this heavy oil? Here are the nations with the largest estimated deposits:

This list goes on to include other nations with significant heavy oil deposits, such as Brazil, Saudi Arabia and Indonesia. Further down the list of countries holding sizeable heavy oil resources are Australia, South Africa, Nigeria, Libya, Argentina, Peru and Vietnam.

So you can see that heavy oil (and extra-heavy oil, tar sand and bitumen) is a vast and underutilized energy resource. Of course, keep in mind that nowhere near all of this resource is recoverable under even the best scenarios. But the point is that heavy oils, of all types, constitute immense energy potential – many decades worth of supply. And it’s all but certain that, as conventional oil becomes scarcer and more expensive to extract, the world’s energy industry will turn to heavy oils. It’s already happening.

Early and Current Efforts with Heavy Oil

Looking back in history, people and nations used heavy oils when necessity demanded. During World War II, Italy supplied its military (and the military of Germany) with oil products from a modest-sized heavy oil deposit in Albania. The Soviets, desperate for oil products, utilized several heavy oil deposits in south-central Russia. The Japanese exploited heavy oil deposits in Japan, Indochina and Indonesia.

Today, the energy industry has an array of projects that exploit heavy oils. Chevron, for example, lifts about 80,000 barrels per day of heavy oil from its large complex (of 8,000 wells!) at Kern River, California. Venezuela’s national oil company PDVSA produces about 400,000-500,000 barrels of heavy oil per day from projects in the Orinoco region. Offshore Brazil, Petrobras (NYSE:PZE) has a deep-water project targeted at a string of heavy oil deposits. And BP has several billion barrels of heavy oil resources located under the Arctic tundra near the conventional oil fields of Prudhoe Bay, Alaska.

When it comes to tar sands and bitumen, the massive developments in western Canada offer a $500 billion example. The Canadian tar sands projects currently yield nearly 2 million barrels of oil per day out of bitumen, strip-mined from the near-surface prairies of Alberta.

Next week, I’ll be in Denver for the American Association of Petroleum Geologists (AAPG) convention. I’ve been a member of AAPG for 30 years, and it’s been a source of great professional education and growth for me. I’ll attend the exhibits and talks and meet with several energy companies to get the latest insight into what’s going on out in the field. I’m even scheduled to be a judge on some of the programs for geothermal and heavy oil. All that, and I’m visiting with some hard rock miners while I’m in the area.

Naturally, I’ll look for great investment ideas and keep you posted.

Until we meet again,
Byron King

Source: Heavy Oil Becomes More Appealing As Light, Sweet Crude Runs Out

This from Money Morning:

Brazil’s economy has been given a second chance. And so have prospective investors.

Brazil will use that second chance well – shouldn’t we?

Although there are a number of ways to play this promising “BRIC” (Brazil, Russia, India and China) market, including some excellent companies, the best way to capitalize on Brazil’s terrific prospects is through the iShares MSCI Brazil Index (NYSE: EWZ).

Brazil’s Shrewd Game Plan for the Current Financial Crisis

Vale (ADR NYSE: RIO), formerly known as Companhia Vale Rio Doce, is the largest exporter of iron ore in the world. It has thrived and continued to expand production of this critical resource, supplying China, Japan, Europe and other major global steel-making operations.  The story behind Petrobras Energia Participaciones SA (ADR NYSE: PZE) is even more impressive: After decades of government initiatives focusing on oil self-sufficiency – which includes deep-sea drilling and the now-vaunted sugar-cane ethanol program – Brazil achieved that goal last year. Now, with the biggest oil discoveries in the world in decades, Brazil is well on its way to becoming an oil superpower.

As President Lula said, “God has given Brazil one more chance.”

And us, as well.

Late last week, Brazil’s hopelessly mismanaged neighbor, Argentina, had to seize its privatized pension fund money in order to meet its fiscal obligations. We’re also watching as Hungary, Belarus and the Ukraine approach the International Monetary Fund (IMF) for help.  This directly contrasts with Brazil, which has amassed $200 billion in foreign reserves, having become a net creditor of the world.

So, in this crisis, both the Central Bank of Brazil and the Brazilian government have acted very quickly to backstop the liquidity effects against their banks.  The Central Bank of Brazil has been continuously superbly managed, despite changing administrations: and is very experienced in crisis management. It is currently managed by Henrique Meirelles, a highly experienced and greatly respected international banker. Meirelles has operated in the tradition of Brazil’s inflation-fighting central-banking pioneer Gustavo Franco.  Franco was one of the economic advisers who put together the Plano Real, which brought Brazilian inflation down dramatically under former President Fernando Henrique Cardoso. Franco was followed at the Central Bank by Arminio Fraga, formerly associated with George Soros in the Quantum Fund, and finally by Meirelles, who was formerly with Fleet Bank.

It’s important to note that the Lula administration has many officials who have previously held senior positions with major international banks.  This is a clear indication of professionalism, transparency and commitment to serious macroeconomic and monetary policy management.  No more “brincadeira” – playing around.

President Lula went on to say that the government will buy bank stakes in order to shield its financial institutions from the global crisis.  This is happening today, as the government’s largest banks have been authorized to buy stakes in Brazilian banks.  Much like the U.S. Federal Reserve has done in here in the United States, the Brazilian Central Bank also has been authorized to enter into swap operations with other central banks in order to restore liquidity to the Real, which has been under pressure.

To add further liquidity, the Brazilian Central Bank has reduced minimum reserve requirements for the banks, extended an almost $2 billion line to the banking system to finance exporters and injected some $71 billion to ease liquidity.  The Central Bank explicitly requires the banks to lend the money and monitors closely their activities to prevent them from instead using the capital to buy – and sit on – government bonds.

The Brazilian Central Bank also has had to resort to selling only about $23 billion of its more than $200 billion in total reserves, in order to cushion the decline of the Brazilian Real. The upshot: Brazil today operates from a position of macroeconomic strength, like China, India and Russia.

And the Central Bank has stimulated housing by easing liquidity requirements and encouraging banks to lend more.  This policy will soon gather more strength. Similarly, the government banks, rather than international investors, are the most likely to finance a huge electricity project coming for bid. And Brazil’s plans for a major infrastructure build-up should not have problems obtaining financing.

For example, Petrobras should easily be able to finance the estimated $163 billion needed over five years to continue developing its ambitious mega-oil project out of its own cash flow, government and bank financing and profit-sharing arrangements where it chooses.   Vale and other major exporters should likewise have little difficulty in moving forward. These companies, like the government, are committed to continuing with their long-term investment plans, despite the current problems.

Nor have Brazil’s market-supporting measures stopped there. Brazil has required all companies to report their derivatives positions and even to estimate future potential losses under certain scenarios on a quarterly basis, starting immediately.  This will greatly increase transparency, dispel fears and increase confidence.  Some companies saw their currency derivatives positions get hit hard in the recent sell-off.  But these hits, which in some notable cases wiped out the quarter’s profits, are a one-time effect, so it represents a buying opportunity in those stocks.

Finally, the Brazilian banking system is sound, with strong capitalization and low delinquencies.  Credit expansion has been strong in the recent years, but not overdone.  And banks like Spain’s Banco Santander SA (ADR NYSE: STD), government banks and others are taking advantage of the crisis to buy loan portfolios from their weaker rivals, as has been the case in most liquidity crunches in emerging markets.

The critics will refer to this crisis as the first major test for Lula.  And many doubt whether he will resist the temptation to throw monetary and fiscal prudence out the window.  But Brazil, as has been seen for decades, is much more than just Lula.  Its technocratic administration and central bank have decades of experience in crisis management. Brazil’s strong local companies, which are world leaders in many industries, and committed investors, including major multinational companies, are heavily vested in the country’s success.

Going for Growth

As the Brazilian government has done in the past, I expect it to stay the course for the long term, to maintain its inflation-targeting discipline (as the Central Bank recently announced), and stimulate its economy as inflation drops markedly. That will keep Brazil in the running to be one the engines of growth in the world for the next couple of decades.

As we’ve seen, the country’s prudent monetary and fiscal policies, coupled with its solid macroeconomic position, strong reserve position, and controlled inflation will lead to good growth. Gross domestic product  (GDP) is expected advance at a rate of between 4% and 5% next year. And since only 13% of GDP comes from exports, Brazil will have lots of room to maneuver.  The slowdown in the advanced economies will give Brazil – as well as India, Russia and other emerging economies – room to start cutting domestic rates as inflation abates, just as China is doing right now.

In China, savings are 10% of GDP more than investment, so a slowdown in foreign capital inflow to China is a blessing, since it will allow the Beijing government to deploy its own capital to work and increase China’s internally driven growth as opposed to export-driven growth.  The same phenomenon will be pervasive throughout the emerging markets that – like Brazil, India and China – have not squandered their newly found wealth.

Hence, at the current prices, Brazil is – if you’ll pardon the Wall Street slang – a “screaming buy.”  In fact, as we speak, foreign investors are flying in droves to Brazil to buy beachfront property at a discount.  Prices of financial and real assets have been hit by excessive fears of a Global Depression.  When you see that G7 nations have injected more than $3 trillion into their economies in order to backstop the credit crunch, and another economic stimulus plan in the United States is almost a given, you have to realize that this will have an enormous positive impact on the fragile global market situation we are seeing today.  As the credit markets thaw out, despite ongoing hedge fund de-leveraging, we will see renewed waves of buying and Brazilian financial assets will be amongst the biggest winners.  Do not be left to watch from the sidelines as I once was.

Recommendation: Buy iShares MSCI Brazil Index (NYSE: EWZ) in increasing increments over the next eight weeks.  This means that you will be increasing the amount of money deployed every week, until you’ve invested the total amount that you’ve set aside for this ETF purchase, just before the year comes to the end of the year.

PS. This is a cut version of Horacio’s popular ‘Buy, Sell or Hold’ column, published every Monday on Money Morning. For a more in-depth report on Brazil, follow the link below.

Source: Buy, Sell or Hold: iShares MSCI Brazil Index

Don Miller says industry insiders are now betting on triple-digit crude oil prices for the next decade. And long-term oil futures show demand will continue to outstrip supply, as Asia industrializes and proven reserves diminish.

Don says Transocean Inc. (NYSE:RIG), StatoilHydro ASA (NYSE:STO), and Petrobras (NYSE:PZE) are likely to benefit from new drilling projects. And the company that supplies equipment lines for 90% of oilrigs, National Oilwell Varco (NYSE:NOV), is also well placed for profits.

Want to know what the price of a barrel of oil will be in eight years? Exactly $119.50 a barrel.

There’s no shortage of pundits predicting where oil prices are heading. And every day seems to bring new reasons to change the forecast – a resurgent dollar, Americans curtailing their driving habits, oil supply reports… The list goes on.

But the guys who really know the future of oil prices are those sitting right in the driver’s seat – oil producers.

Every day, they make bets about the direction of petro prices on the futures market. And right now, they’re telling you – in no uncertain terms – oil’s got a floor price of $100 a barrel for years to come.

“Oil-flation” is here to stay, but this free report reveals four ways you can beat it starting now…

The Future Price of Oil – And Why You don’t Need a Crystal Ball

Crude oil is the world’s most actively traded commodity. Every day, oil producers trade futures contracts on the New York Mercantile Exchange (NYMEX) to hedge against price swings.

At the end of the day, they – along with speculators who bring liquidity to the market – determine the price of oil, which is simply a reflection of the market’s attempt to balance supply and demand.

So, that prediction of $119.50 a barrel? That’s a recent closing price on NYMEX for the December 2016 contract.

Fact is, NYMEX has over 1,000,000 active futures contracts or “open interest” on crude oil for the next eight years and not one trades below $112 a barrel.

That means the guys in the business – the ones who make their living producing and selling oil – are predicting oil will be priced over $112 a barrel for most of the next decade.

Why are they predicting the continuation of triple digit oil prices?

Plain and simple, the markets are telling us future demand for oil will outstrip supplies.

Demand for Oil Keeps Growing

Although demand is highest in the developed world, exploding economies like China and India are quickly becoming large oil consumers.

The United States is still the world’s largest consumer of petroleum and our thirst for oil is growing rapidly. Between 1995 and 2005, U.S. consumption grew from 17.7 million barrels per day (bpd) to 20.7 million bpd – a 17% increase.

In the same time frame, China’s consumption vaulted from 3.4 million bpd to 7 million bpd – a 106% increase. And that number’s rising, as China surpassed 8 million bpd for the first time in June.

Meanwhile, India’s oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million bpd.

All totaled, Asia accounts for 60% of the world’s new oil demand.

Putting a worldwide number on it, the International Energy Association recently increased its 2009 oil demand forecast to 87.8 million barrels a day.

On top of that, The U.S. Energy Information Administration projects world consumption of oil to increase to 98.3 million bpd in 2015 and 118 million bpd in 2030. That’s a 35% increase by 2030.

Oil Production Dropping?

By now, you’ve probably heard of the Peak Oil theory – that worldwide oil production has peaked and is now dropping. Consider:

• The U.S. Energy Information Administration Energy contends that world production leveled out in 2004, and reached a peak in the third quarter of 2006.
• Oil tycoon T. Boone Pickens recently told Congress, “I believe you have peaked out at 85 million bpd globally.”
• And at a recent industry conference, the chief executive officer of Total SA (ADR: TOT), the French oil major, said the industry would be lucky to produce 95 million bpd by 2020.

But whether you believe Peak Oil is true or not, at least nine of the largest 21 oil fields on the planet are in decline.

In 2006, a Saudi Aramco spokesman admitted that its mature fields are declining 8% per year. It’s now clear that Ghawar, the largest oil field in the world, has peaked.

The second largest, the Burgan field in Kuwait, started down in 2005. And Mexico announced that its giant Cantarell Field entered depletion in 2006.

Reserves Don’t Equal Production

Then there’s the matter of oil reserves, a moving target if there ever was one.

You see, oil reserves are classified three ways: proven, probable and possible. Proven reserves have at least 90% to 95% certainty of entering production. Probable reserves have 50% probability. And possible reserves have a 5% to 10% chance.

A 2007 report by the Energy Watch Group pegged total world proven plus probable reserves at between 850 and 1,250 billion barrels. That’s 30 to 40 years of supply if demand holds steady – which it won’t.

But as Sadad I. Al Husseini, a former VP of Aramco, said in October 2007, “Reserves are confused and inflated. Many of the so-called reserves are in fact speculative. They’re not delineated, they’re not accessible, they’re not available for production.”

By Al-Husseini’s estimate, 300 billion of the world’s proven reserves should be re-categorized as speculative.

On top of that, about 70 oil-producing nations don’t reduce their reserves to account for yearly production. As noted investor Jim Rogers says, “Despite consistently pumping 8 million bpd for over two decades, Saudi Arabia has repeatedly stated their reserves are at 267 billion barrels.”

Organization of Petroleum Exporting Countries (OPEC) member nations even have economic incentives to exaggerate their reserves, as the OPEC quota system allows greater output for countries with bigger reserves.

The reality is this: it’s highly likely we have a lot less than 1,200 billion barrels to burn in the next 30 to 40 years.

And increasing demand could have us running on fumes in an even shorter span.

New Production — a Pipe Dream?

Even though we continue to hear about new oil discoveries, new oil reserves will be harder to find and extract.

Take Kazakhstan, for instance. Its oil fields are slated to be the third largest in the world. The heralded Kashagan field should produce 1.5 million bpd at its peak. But technical problems continue to plague the project.

In 2005, production was scheduled to start in 2009. A year ago that was moved to 2011 and now it’s been pushed back to 2013. And the projected cost has risen to a whopping $50 billion.

Canada’s oil sands are another example. Production could reach 5 million bpd by 2030 in a “crash program,” but the oil contains contaminants such as sulfur and carbon that are difficult to extract and leave highly toxic tailings.

Frankly, the most easy-to-extract oil has been found. Price increases have led to exploration where high technology is required and where it is much more expensive to extract the oil.

We are replacing OPEC oil that costs $3 per barrel to produce with deep-water and other nonconventional sources at $60 per barrel and up.

And that’s why the markets are predicting triple digit oil prices are here to stay.

Four Ways to Play “Oil-Flation”

Here’s a four-prong strategy to help you ride the oil bull market into the future and get your share of the profits.

Lehman Brothers predicts that oil producers will spend a record $369 billion on energy projects this year. With oil prices still in record territory, oil companies are drilling wells in waters previously considered cost-prohibitive. And with President Bush calling for the reopening of offshore drilling, look for the trend to accelerate.

Money Morning Investment Director Keith Fitz-Gerald recommends StatoilHydro ASA, an integrated oil company headquartered in Norway. The company is now the world’s largest energy operator in waters more than 100 meters deep and produces, on average, 1.7 million barrels of oil equivalent per day.

It has proven reserves of more than 6 billion barrels of oil, has operations in 34 countries, and is expanding aggressively to diversify internationally.

You might also look at Transocean Inc., the world’s largest provider of offshore drilling services for oil and gas wells. Its fleet includes ultra-deepwater and harsh environment semisubmersibles, and drill ships.

In November, Transocean merged with GlobalSantaFe, combining the world’s No. 1 and No. 2 offshore drilling companies. The company now owns 138 offshore rigs, twice the number of its nearest competitor.

It also just signed a $1.69 billion agreement with Petrobras, Brazil’s government-sponsored oil company to provide rigs for its newly discovered Tupi field. With over 40 billion barrels in reserves – three times the size of Alaska’s Prudoe Bay field – Tupi could be a bonanza for both companies.

Another way to capitalize is buying companies that outfit drilling rigs with pipe, fittings, and provide oil-exploration and field-management services. National Oilwell Varco is the “picks and shovels” play in the oil services industry, with the lion’s share – over 60% – of the market for rig gear.

The company’s huge product line is found on about 90% of all drilling rigs. It’s been growing revenues at almost 40% for the past three years while increasing earnings per share by a whopping 68%.

And don’t ignore the burgeoning alternative energy field. Both Sens. Obama and McCain are pledging over $150 billion in renewable and alternative energy initiatives during the next decade.

As Fitz-Gerald likes to say, “alternative energy is an alternative no longer.” Vestas Wind Systems (PINK: VWDRY) is the world leader with over 35,000 wind turbines installed in 63 countries. It is the industry leader in wind technology with 23% of the market worldwide, and a full 85% share of the market for turbines with a capacity of 2 megawatts and higher.

Be cautious with this one as its stock is up over 300% in the last 18 months. But with a surging government investment climate in alternative energy in the U.S., the company should continue to benefit.

Source: Four Ways to Fight the “Oil-Flation Epidemic”