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The Next Great Oil Frontier

Byron King — Thu, 24 Sep 2009 18:32:01 +0000

Offshore Nambia is quickly becoming one of the world’s greatest frontier oil provinces.

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

Three Reasons China is Positioned to be the Oil Sector’s Next Big Profit Play

Keith Fitz-Gerald — Tue, 18 Aug 2009 17:53:06 +0000

If you’re looking for the next “Big Oil” play, bet on Beijing. As we’ve been reporting for the past several years, China has been on a global commodities shopping spree, which includes locking up every source of oil that it can.

The Red Dragon has cut deals in Africa, South America Russia and the Middle East – and won’t stop there. Even the mainstream news media is finally becoming aware of this crucial trend.

But here’s the thing. It’s not enough just to know that this is happening. In order to profit, an investor really needs to understand why it’s happening – and to invest accordingly. Investors who lack this insight may make the strategic misstep of betting heavily (or exclusively) on the Western heavyweights – Exxon Mobil Corp. (NYSE: XOM), BP PLC (NYSE ADR: BP) or Royal Dutch Shell (NYSE ADR: RDS.A, RDS.B) – while ignoring the oil sector’s real growth story, which is China.

Just this year alone:

China and Russia have signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China. Actually seven agreements in one, the terms depict a deal worth trillions of dollars – including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loansto Russian oil companies Transneft and OAO Rosneft Oil Co. China even gets a cut of Rosneft’s production, as part of the deal.
In Africa, China’s CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Shanghai Petrochemical Co. (NYSE ADR: SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil Corp. (NYSE: MRO). A key point of note: Angola – historically one of Exxon’s favorite investment targets – has recently overtaken Nigeria as Africa’s biggest oil producer.
While noting that it’s hardly a done deal, The Wall Street Journaldid report earlier this month that China National Petroleum Corp. (CNPC) is interested in buying all or a part of Argentina’s YPF SA (NYSE ADR: YPF) for $14.5 billion.
In Africa, China’s CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Shanghai Petrochemical Co. (NYSE ADR: SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil Corp. (NYSE: MRO). A key point of note: Angola – historically one of Exxon’s favorite investment targets – has recently overtaken Nigeria as Africa’s biggest oil producer.
Reports continue to circulate that CNPC will be taking the majority stake in Iraq’s Rumaila oilfield from BP. Rumaila is Iraq’s biggest oil field, producing more than a million barrels of crude oil per day.
And China has become quite chummy with Brazil’s Petroleo Brasileiro (NYSE ADR: PBR). Petrobras is developing a huge new offshore field – one of the biggest new discoveries in decades, in fact – and any deal would include a production-supply agreement.

This flurry of deals hasn’t been a surprise to Money Morning readers. Even so, it’s worth taking a moment to look at some of the key catalysts behind many of these deals. Let’s look at the Top Three:

Nervous Reserves: China is sitting on the world’s largest pile of cash – more than $2.3 trillion by some estimates. With an estimated 70% of that, or about $1.61 trillion, in U.S. dollars, there is no question it’s a huge source of financial firepower strength at a time when global markets are uncertain, if not downright weak. But it’s also a liability, too, in that China can’t diminish its high-concentration of greenback holdings without pushing the dollar off a cliff. So buying oil is a great way for China to diversify its reserves without kneecapping poor old Uncle Sam.
Those Not-So-Free “Free” Markets: China has less faith in the “free” markets than the West does. Ironically, the United States and other Western powers are partly to blame for Beijing’s free-market skepticism. For instance, not only did the United Statesslam the door in China’s face when China tried to buy Unocal Corp. [now a part of Chevron Corp. (NYSE: CVX)] a few years back, but when former U.S. President George W. Bush invaded Iraq, the war summarily cut off China’s ability to source oil from that Middle East member of the OPEC 12 (the Organization of the Oil Producing and Exporting Countries). Prior to the invasion, Beijing really didn’t consider the need to diversify China’s foreign-oil sources so our military action prompted their economic reaction. Now the genie’s out of the bottle.
Peerless Perspective: China’s leaders know that they must lock up oil supplies at a time when the Western world can’t seemingly be bothered to understand that this is a zero-sum game. In other words, China views the global financial crisis as an opportunity to be exploited for economic gain and the security of its people, not as a problem to be solved. China understands the big picture, and even though we apparently painted it, the West doesn’t. By scouring the earth for oil at a time when the West is hamstrung by the global financial crisis, not only is China able to strike more favorable deals at more favorable prices, but it’s locking up huge supplies of commodities for its own use for years, even decades, to come. In doing so – and this is the part of the equation so many experts don’t get – these resources are no longer available for our use here in the United States, which has major supply and pricing implications for this market.

Bamboozled by the Western media – which has perpetuated the “global-recession-means-lower-demand” story – it simply hasn’t dawned on most people here in the West that China doesn’t care about the majorlong-term impact this global buying spree will have on our economy.
Besides, this whole story thesis is flat out wrong. While the recession is definitely dampening our use of oil and gasoline, China’s oil demand is growing by more than 20% a year. And of the 8 million barrels a day that China already uses, half comes from imports. Beijing sees those as troubling statistics, which means that China:

Absolutely must lock up as many significant external supplies oil as possible right now.
And must accelerate its domestic exploration-and-processing efforts at warp speed.

Nor is this a static situation. China’s auto market is growing by 50% a year. It’s already the world’s largest, having passed the United States earlier this year. In fact, according to some estimates, China will have more cars on its roads in the next 20 years than all those we currently have in this country – even if you include the engine-less “restoration project” your next-door neighbor’s son has sitting under an oak tree in their back yard.

China’s never known high prices and its consumers haven’t either. So they don’t care like we do about what “price” is posted at the pump. Sure, you can argue as many Western analysts do, that China’s fuel is highly subsidized, but so what? That’s a moot point. Consumers who remember what it was like back when gasoline was 99 cents a gallon aren’t going to grouse about how it now costs $6 a gallon – these newly minted motorists will merely see gasoline as just part of the cost of having a car.

Because it understands its need for continual economic progress – as well as the role oil has to play to make that a reality – China is doing whatever it takes to guarantee future supplies, including structuring deals in ways that have caught Western companies by surprise. For instance, China’s companies are looking at how they can get a deal done by giving the other party something it actually needs. Moreover, in a move that’s as frustrating to Western leaders as it is surprising, many of these deals come with no strings attached. I suppose you could call it the “Red Dragon Option” – although Western firms would do well to embrace these as potential Harvard Business Review case studies.

After reading this overview, a U.S investor might want to conclude that China’s already got this one wrapped up and that “any resistance is futile.” But that’s not necessarily true. While China’s grown by leaps and bounds in terms of its financial sophistication when it comes to these deals, the country still lacks the relative exploration-and-production technology to go after the deep-water reserves and complicated fields where most of the still-undiscovered oil remains. Those are also the same kinds of locations where natural gas may be the better bet.

And that suggests that investments in both sectors – including deep-water drillers and companies that specialize in natural-gas liquification -may pay off for investors anxious to dine with the Red Dragon, instead of being listed as an entrée on the menu.

Source: Three Reasons China is Positioned to be the Oil Sector’s Next Big Profit Play

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Global Slowdown and Plunging Profits Have ‘Big Oil’ Companies Searching for Ways to Rebound

Bob Blandeburgo — Fri, 31 Jul 2009 22:10:08 +0000

In late January, Exxon Mobil Corp. (NYSE: XOM), the world’s most ubiquitous oil giant, capped off a whipsaw year in the global oil markets by reporting net income of $45.2 billion, an all-time record for corporate profits that shattered the former record it had set a year before.

The number was so big and the results beat Wall Street estimates by so much at a time when the credit crisis was wreaking havoc on so many other sectors that Oppenheimer & Sons (NYSE: OPY) oil analyst Fadel Gheit couldn’t help but quip that he didn’t think Exxon “will be lining up for any TARP money or government handout anytime soon.”

Exxon wasn’t the only heavyweight reaping the benefit of a zooming energy market that had seen crude oil climb to an all-time record of $147 a barrel in July. The combined revenue for Exxon and Chevron Corp. (NYSE: CVX) for all of last year actually exceeded the gross domestic product (GDP) of all but 16 of the world’s nations, Bloomberg News reported.

What a difference a few months can make.

If the name of the game is corporate profits, the global economic slowdown has transformed some of the world’s biggest oil companies from leaders to laggards.

Global-energy heavyweights Exxon and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) yesterday (Thursday) became the latest players to feel the one-two punch of dwindling demand and rising supplies, reporting profit drops of 66% and 67%, respectively.

Exxon’s net income fell to $3.95 billion, or 81 cents a share, compared to $11.68 billion, or $2.22 a share, in the same quarter a year ago. The results were well below Wall Street estimates for earnings of $1.02 a share. Shell’s bottom line fell to $3.82 billion, or 62 cents a share for the second quarter, compared to $1.87 per share in the same period last year.

“Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products,” said Exxon Chairman and Chief Executive Officer Rex Tillerson.

With consumers and companies alike slashing costs in any way possible in an environment of spiraling unemployment and the looming possibility of inflation as a result of government stimulus efforts around the world, Exxon, Shell and other Big Oil companies are feeling the squeeze and are cutting back in almost every way possible.

“Our second quarter results were affected by the weak global economy,” Shell CEO Peter Voser when the results were released. “This weakness is creating a difficult environment both in upstream and downstream” oil production.

Shell, for instance, said it’s embarked on a cost-cutting program that will pare billions of dollars in operating expenses. In one bright spot, however, The Netherlands-based oil giant did say that it had increased its second-quarter dividend 5% to 42 cents a share, and Chief Financial Officer Simon Henry said Shell will be able to keep raising the dividend to keep pace with inflation.

Exxon’s shares fell about 1% yesterday to close at $70.72 each. They’re down about 14% from their 12-month high of $84.76. Royal Dutch Shell’s “A” shares edged up 0.13% to close at $52.53; they’re down 29% from their 52-week high of $73.97.

“There’s a lack of follow-through on production” at Exxon, Macquarie Research analyst Jason Gammel told Barron’s in an interview. “The Street rewards companies that grow production, not those who are flat.”

Exxon’s combined oil and gas production dropped 3% in the quarter, and the company blamed the year-over-year decline on restrictions imposed by the Organization of the Petroleum Exporting Countries (OPEC). Shell’s production suffered more, falling 5.3%, placing part of the blame on a politically unstable Nigeria.

The heft that gave Big Oil companies the huge advantage of global scale last year is now working against them; with their large size, and against the backdrop of a global economic downturn, finding new revenue to bump up profits – and, ultimately, their share prices – will be a major challenge, analysts say.

“I think it’s generally going to be difficult for the Big Oils to move the needle,” Howard Weil analyst Doug Leggate told Bloomberg News. “Those companies that can move the needle in terms of adding value through exploration or other methods of improving their portfolios, they’re the ones who are going to win out.”

Profit at Exxon’s production and exploration unit fell to $3.81 billion in the second quarter, down $6.2 billion compared with a year earlier. In its refining business, its profit fell to $512 million, down $1.05 billion from a year ago. Profit in the same category at Shell dropped 77%, to $1.33 billion, from $5.9 billion a year ago, mostly on lower oil prices.

The grim oil earnings news yesterday followed Wednesday’s report from the Energy Information Administration (EIA) that U.S. crude stocks rose by 5.1 million barrels to 347.8 million barrels for the week ended July 24. Estimates by market research firm Platts were calling for a gain of just 1.1 million barrels, MarketWatch.com reported.

U.S. crude stocks are 29.8 million barrels above the five-year average and 52.6 million barrels above year-ago levels, according to Platts.

“The data has been bearish for most of the year, and the market may be ready to acknowledge that we are awash in crude oil and products, and demand is lower than last year despite the fact that oil and product prices are much lower,” WTRG Economics analyst James L. Williams told MarketWatch. “We will be well into the recovery from the recession before there is any appreciable increase in demand.”

As of yesterday afternoon, crude oil for September delivery was trading at $66.80, up $3.45 a barrel. But that’s down $55 a barrel from this time last year – a 45.16% decrease.

Those hoping for a rally may find that they’ve only engaged in a bit of wishful thinking, since a number of analysts say there aren’t any catalysts for higher prices in sight.

Take James Cordier, president of Liberty Trading Group, who says that the rally to prices in excess of $70 earlier this year was “well overpriced.” He expects prices to continue to fall in the weeks and months to come, Cordier said in an interview with Yahoo Inc.’s (Nasdaq: YHOO) Tech Ticker.

Cordier points to the speculative demand driven by government stimulus packages, notably the liquid commodities in China, a nation whose economy looks “a little bit like a bubble to us.”

Cordier’s firm, which trades commodity-based options, is “selling calls with both hands.”

If there’s an upside to any of this, Cordier says it will be lower gas prices, which he expects to fall 15-to-20 cents per gallon around August or September, a welcome relief for consumers.

The low demand and rising supply of oil is catching the eye of regulators worldwide, who are applying the heat to speculators who are believed to be behind the main force behind wild swings in the futures markets over the past two years.

Here in the United States, the Commodity Futures Trading Commission (CFTC) this week held the second of three hearings on energy trading. In the United Kingdom, the Financial Services Authority (FSA) will hold a special meeting on Aug. 5 with oil companies, banks, hedge funds and oil brokers to review regulation in the market.

“A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. (OTC ADR: BNPQY), told Bloomberg. “Something has to be done to reduce some of the speculation, no doubt about it.”

Indeed, the supply-and-demand fundamentals taught in high school and college have actually come under fire just because of how speculators have allegedly distorted the oil-price market in recent years.

This year’s volatility in the market defy the “accepted rules of economics,” French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown said in an opinion column published earlier this month in The Wall Street Journal.

“The surge in prices last year gravely damaged the global economy and contributed to the downturn,” the two statesmen said. “The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery. Governments can no longer stand idle. Volatility damages both consumers and producers.”

Big Oil executives said it is doubtful the looming U.K.-based meeting would result in any substantial new initiatives, but added that it would discuss “whether the current arrangements [in the oil market] remain appropriate,” The Financial Times reported. “The question of position limits does not seem to have the same level of priority (in Europe) as it does in the United States,” Deutsche Bank AG (NYSE: DB) Chief Energy Economist Adam Sieminski told the FT.

Source: Global Slowdown and Plunging Profits Have ‘Big Oil’ Companies Searching for Ways to Rebound

Oil Companies Still Making Piles of Money

Investment U Editor — Fri, 31 Jul 2009 17:11:47 +0000

It’s not without some sort of satisfaction that many consumers react to the news that earning reports from oil companies have been dismal. After all, these companies have been making money off us hand over fist for quite some time.

Of course that doesn’t mean that they aren’t still making money.

Exxon Mobil (NYSE: XOM) reported that profit dropped 66% last quarter. Although it still made $3.95 billion, it’s just not making money hand over fist like last year.

In a eerily similar report, Royal Dutch Shell ADR (NYSE: RDS.A) said that it’s profit dropped 67% to $3.82 billion. ConocoPhillips (NYSE: COP) fared even worse, with profits plummeting 76% to $1.3 billion.

Hard times indeed in the petroleum industry.

This all comes on the heels of a volatile market in oil prices, regulators considering limits on oil speculation, and oil stockpiles fluctuating.

The real reason oil supplies have been moving so much is the contango situation that caused millions of barrels of oil to be stored offshore in tankers. As the capacity has opened up some of this oil is migrating ashore – but not much.

This is skewing the supply numbers up and down depending upon the pricing and motivations of the sellers.

Oil is opening up at almost $67 a barrel today, and it’s easy to see how supply and demand pressures will keep that fluctuating for a good deal into the future.

Source: Oil Companies Still Making Piles of Money

The Great Shift of 2009

Ian Mathias — Sat, 11 Jul 2009 00:00:16 +0000

Every once in a while, we stumble upon a chart or table that says it all…

Here’s one hot off the press:

Oh my, where do we begin? This beast calls for bullet points:

Obviously, Wal-Mart (NYSE:WMT) is no longer No. 1. That title now goes to Royal Dutch Shell (NYSE:RDS.A). The American consumer is out, and a global oil conglomerate is in… ’nuff said
There’s a clear sea change in American business. AIG, Lehman and Bear Stearns fell off the list from 2008-2009. Nike (NYSE:NKE), Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) moved up
The world is increasingly less Amero-centric. An American company is not No. 1 for the first time in over a decade. In the whole list for 2009, 140 companies are American, the lowest number on record
The world is increasingly more Sino-centric. Look at China National Petroleum and Sinopec (NYSE:SHI). Both Chinese companies are by far the biggest movers up from 2008-2009. Sinopec, an oil and gas company, also marks China’s first foray into Fortunes’ top 10. China now has 37 companies in the list of 500, its largest presence ever
Oil is still where it’s at. In spite of all the price drama over the last year, seven of the top 10 firms are oil companies
In the face of the worst global economic environment of our lifetimes, the world’s biggest companies are still making lots of money. The 2008 top 25 pulled in $4.88 trillion in revenue. This year, they made $5.38 trillion
And freakin’ GE… what a black box. The world’s producer of everything was one of very few companies to retain the same position from 2008-2009. And despite the infamous GE Capital, the finance arm that apparently threatened to torpedo the whole company, GE ended up increasing revenues by nearly $7 billion. Hmmm…

Source: The Great Shift of 2009

Investment News Briefs Tuesday, June 30, 2009

Money Morning Staff — Tue, 30 Jun 2009 15:00:56 +0000

Madoff Gets 150 Years; Pipeline Operators to Combine; Jobs Returns to Work at Apple; GM, Toyota Cut Ties on Auto Plant; U.S. Moves Closer to Solar Energy; Oil Rises to More Than $71; China Stops Stockpiling Metal

A federal judge gave no leniency to convicted Ponzi schemer Bernie Madoff yesterday (Monday), sentencing him to 150 years in prison. U.S. District Judge Denny Chin described Madoff’s crime as “extraordinarily evil” and said that it was “not merely a bloodless crime that takes place on paper but one that takes a staggering human toll.” As a part of his sentence, the 71-year-old Madoff was ordered to forfeit a total of $170.8 billion which represents the total proceeds of and property involved in certain of his crimes.

Pipeline operator Enterprise Products Partners L.P. (NYSE: EPD) will buy Teppco Partners L.P. (NYSE: TPP) for $3.3 billion, forming the biggest U.S. energy partnership, Bloomberg News reported. Teppco shareholders will get 1.24 units of Enterprise for each one they own, making the deal worth 15% more than when the initial offer was made in March. Enterprise will see the benefits of the takeover starting next year and will net a minimum of $20 million in cost savings, according to Enterprise Chief Executive Officer Michael Creel.

Apple Inc. (Nasdaq: AAPL) Chief Executive Officer Steve Jobs returned to work as promised following a near six-month leave of absence in which he received a liver transplant. Initially, Jobs will spend a few days a week at Apple’s Cupertino, Calif. Headquarters and work the other days from home. Investors will be reassured that Jobs is back, Collins Steward Ashok Kumar told Reuters. “In many ways he’s irreplaceable,” Kumar said. “Having him back brings the halo back to the company.” Apple shares closed at $141.97 yesterday (Monday), down 0.33%.

General Motors Corp. (OTC: GMGMQ) cut its ties to a northern California auto plant it operated with Toyota Motor Corp. (NYSE ADR: TM) since 1983, Reuters reported. The move puts into question the fate of more than 4,000 jobs at the plant that was once seen as a ground-breaking experiment in bringing production efficiencies pioneered in Japan to a U.S. workforce. “While we respect this decision by GM, the economic and business environment surrounding Toyota is also extremely severe, and so this decision by GM makes the situation even more difficult for Toyota,” Toyota said in a statement. The soon-to-be defunct Pontiac Vibe, Toyota Corolla and Matrix are manufactured at the facility.

The U.S. Interior Department yesterday (Monday) designated roughly 670,000 acres of land as potential areas for solar energy production with the hope it will speed up the development of renewable energy resources on federal lands. “This environmentally sensitive plan will identify appropriate Interior-managed lands that have excellent solar energy potential and limited conflicts with wildlife, other natural resources or land users,” Interior Secretary Ken Salazar said in a statement. The 24 areas on the land could generate nearly 100,000 megawatts of solar electricity, the DOI said. President Barack Obama has allocated $150 billion to renewable energy investment over the next 10 years.

Oil for August delivery rose to $2.33 to settle at $71.49 a barrel after China said it would increase oil reserves and Nigerian militants partly shut down an offshore oil platform that belongs toRoyal Dutch Shell plc (ADR NYSE: RDS.A, RDS.B), The Associated Press reports. China plans on increasing its strategic crude oil reserves by 60%, providing the market with some long-term support according to Alaron Trading Corp. analyst Phil Flynn.

The Chinese government has stopped its metal stockpiling program, a top official told state-run Caijing Magazine. China has so far amassed 590,000 metric tons of aluminum, 159,000 tons of zinc and 235,000 tons of copper. The news could push down prices of metal in the near-term, though a stimulus-driven revival in demand could limit the fall, the report said.

Source: Investment News Briefs Tuesday, June 30, 2009

Crude Pushes Higher

Doug Casey — Fri, 26 Jun 2009 19:56:38 +0000

In the energy market on Thursday, crude for August delivery was higher, closing at $70.23/barrel, up $1.56. July reformulated gasoline rose 5.58 cents, to $1.8983/gallon.
“It seems oil is rallying with stocks,” said Zachary Oxman, managing director at TrendMax Futures. “There are no major supply demand issues present.”

However, traders were also reacting to the weaker-than-expected inventory report from Wednesday, and to further violence in Nigeria.

The Movement for the Emancipation of the Niger Delta, or MEND, claimed responsibility yesterday for a predawn attack against Royal Dutch Shell (NYSE:RDS.A/RDS.B) facilities, calling it a warning to Russia not to invest in the African country’s oil and gas industry, according to Dow Jones Newswires.

The attack on the Bille-Krakama pipeline, which feeds the key Bonny export terminal in southern Rivers State, was carried out to coincide with a visit to Nigeria by Russian President Dmitry Medvedevk, MEND reportedly said.

Source: Crude Pushes Higher

Crude Falls

Doug Casey — Tue, 23 Jun 2009 20:30:51 +0000

In the energy market on Monday, crude for July delivery plummeted on its last day as the front-month contract, closing at $66.93/barrel, down $2.62. July reformulated gasoline dropped 6.47 cents, to $1.8597/gallon.
Like other commodities, crude was hit hard by the World Bank forecast. And contracts’ last days are often more volatile.

“Last week’s drop in gasoline prices is also having an impact [on crude],” said Kevin Kerr, president of Kerr Trading International. “If we see the dollar be able to hold support here, we may see oil prices weaken further, [but] of course the opposite is true should the dollar fall apart.”

This could be the beginning of the pullback many have been calling for, for quite some time. “The outlook remains challenging in light of weak demand and high spare production capacity,” wrote analysts at Credit Suisse.

On the supply front, over the weekend Nigerian rebels from the Movement for the Emancipation of the Niger Delta claimed they staged three attacks against facilities of Royal Dutch Shell (NYSE:RDS.A/RDS.B). However, a Shell spokesman confirmed only two attacks and said that production was not seriously affected.

Source: Crude Falls

Brazil’s National Commitment to Energy – Bankrolled by China

Byron King — Fri, 12 Jun 2009 20:27:38 +0000

Brazil is making a national commitment to develop energy resources located far offshore in the South Atlantic. Indeed, no nation has ever advanced such an ambitious plan for long-term comprehensive offshore development. And it’s being bankrolled by China.

Much of Brazil’s South Atlantic development will require drilling wells in waters up to two miles deep, through four-five miles of rock beneath the seabed. The prize at the end will be oil deposits with reserves estimated in the tens of billions of barrels. With access to this offshore bounty, Brazil expects to take its place among the first ranks of energy-producing nations in the world.

Brazil’s state-controlled national oil company (NOC), Petroleo Brasileiro SA (NYSE:PBR) plans to spend over $175 billion in the next five years just on offshore development. The immense investment involves buying and building dozens of new drill ships and seagoing platforms, along with many dozens more support and servicing vessels. Petrobras will lay thousands of miles of pipelines on the seafloor, connecting massive complexes of subsea equipment that will sit atop hundreds of oil wells.

To finance much of this development, Brazil has turned to China. With the active support of the Chinese government, many Chinese banks are lining up to extend loans to Brazil’s energy sector. Right now, there is an agreement for a Chinese consortium to lend Petrobras $10 billion. In exchange, Petrobras will eventually ship 200,000 barrels of oil per day to Chinese refineries. There are more such long-term finance supply deals in the works.

The Chinese government has established strategic guidelines for its national firms. That is, the Chinese government has set goals for Chinese firms to supply China’s long-term needs for energy and other natural resources. The Chinese are looking well ahead into the rest of this century, and even into the 22nd century. They want to ensure their future access to a diverse global supply chain, as well as win entrée into resource-rich regions of the world for Chinese industries and support firms.

Why are the Chinese receiving such a warm welcome in Brazil? According to Sergio Gabrielli, CEO of Petrobras, “The U.S. has a problem. There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese.”

In other words, there is a new geopolitics of oil at work. In the olden days, it would have been large international oil companies (IOCs) like Exxon Mobil (NYSE:XOM), Shell (NYSE:RDS.A / RDS.B) and BP walking into a room to meet with the Brazilians. The IOCs were the only game in town. They controlled the financing and the technology for large developments.

But today, the biggest deals begin with a political understanding at the top, hammered out between the highest levels of the respective governments. This top-down political deal making cuts out the IOCs, except where they have technical expertise that can be hired on a contract basis.

In essence, we are witnessing the end of the post-World War II economic construct of the world’s financial system. That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, “Nature abhors a vacuum.”

Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects. See Brazil, Exhibit 1.

China’s Rare Earths Monopoly – All But Insurmountable

China’s support for Brazilian energy development is not the only angle that the Chinese government is pursuing for its future gain. China’s large reserves of foreign exchange, as well as its national strategic focus, has enabled incomparable – even insurmountable – progress for the Middle Kingdom to corner the world supply of substances called rare earths. Here’s the production chart for the past half century. Obviously, something is going on here.

Now that we’ve seen this chart, the questions arise: What are rare earths? And why are they important?

Rare earths are the 15 elements within the lanthanide series of the periodic table, plus the elements yttrium and scandium. The best known are lanthanum, cerium, neodymium, praseodymium, gadolinium, europium and samarium.

Here’s why rare earths are important. They’re used in a wide range of industrial and electronic applications. For many years, large amounts of lanthanum and cerium have been used in petroleum refining, with the result of increasing yields from each barrel of oil by about 10% while extending the life of other expensive catalysts like platinum. And rare earths find their way into myriad other applications, from aerospace super-alloys to rechargeable cell phone batteries.

More recently, large volumes of rare earths (especially neodymium) have gone into magnets. In fact, rare earths are a key component in strong, permanent magnets. It’s not those cute little refrigerator magnets; your computer contains a number of tiny magnets in its hard drive. If there are no permanent magnets, there are no computers. Or DVDs or DVRs or iPods, etc. Say farewell to your wired way of life.

And then there are the giant 1-ton magnets used in large windmill assemblies. Each windmill magnet is about the size of a car engine and uses 560 pounds of neodymium. The implication is that if the U.S. wants to erect windmills to generate electricity, the nation is making a long-term commitment to buy and use unprecedented amounts of neodymium. And there are NO substitutes. For just this one “clean energy” application, large amounts of rare earths – and the ores and mines to produce them – are essential.

There are many other clean-energy applications for rare earths as well, particularly in the now forming electric car industry. Neodymium magnets are key components in electric motors and regenerative braking systems used in hybrid vehicles. Without these magnets, no electric cars will ever roll off an assembly line, let alone whiz down an American highway.

Another significant demand for rare earths will come from large rechargeable batteries for electric cars. Nickel-metal hydride (NiMH) rechargeable batteries, for example, contain cerium and lanthanum in a form called “mischmetal.” And right now, NiMH batteries are the battery of choice for many hybrid vehicles. Overall, a typical hybrid electric vehicle can use about 50 pounds of rare earths – between the rechargeable battery pack, the permanent magnet motor and regenerative braking system. (Plus other tiny magnets for the sound system, power windows, power seats, windshield wipers, etc.)

So clearly, demand for rare earths is set to skyrocket. Just clean energy applications will drive unheralded demand for metals of which most investors – let alone consumers – have never heard.

It’s also important to keep in mind that almost none of the rare earths used in large power systems (like windmills) or electric vehicles (such as with NiMH batteries) are currently being recycled. The long lifetimes of the magnets and batteries, coupled with the lack of recycling technologies and dedicated facilities, means that any increase in supply can only come from new mining.

Another factor is that there appears to be an official Chinese policy to slow down export of rare earths. Chinese exports have decreased by 8% or so each of the past three years. Chinese suppliers have placed foreign customers on allocation, at reduced quantities from years past. The Chinese explain that they have closed mines for environmental reasons. Yet the Chinese also promise adequate supplies of rare earths if foreign users will move their industrial facilities into China.

According to Yoichi Sato, head of the Rare Earths Department of Japan’s Mitsui Industries, China is displaying its long-term strategy toward these critical elements. Mr. Sato believes that China is playing a complex game with the world’s rare earth consumers.

First, China is restricting rare earths exports, to provide its own high-tech industries with the chance to flourish and gain a competitive edge over rivals in Asia, Europe and the U.S. And second, it will force many foreign firms to move their high-tech factories and research centers to China to circumvent quotas. China, to be sure, has a small army of highly capable scientists and engineers who focus on rare earths applications – over 15,000 Ph.D.-level individuals, by one count.

Mitsui’s Mr. Sato believes that China will use its existing monopoly status in rare earths production to crush any competition that emerges. While about 42% of worldwide rare earths resources are outside China, there are NO non-Chinese sites with any significant processing or refining capacity. In the game of rare earths, China holds almost all of the cards.

Mr. Sato has stated, “Many people are looking at establishing alternative refineries and sources outside China, but the investment is not necessarily a sound one because of the threat of price revenge by China. If new projects emerge, as they have recently in Malaysia and Australia, China could just drop its prices and force rivals out of business.”

And as if on cue, in April 2009, Chinese firms used their financial muscle to buy large stakes in potential foreign rivals in Malaysia and Australia.

I hope that you now understand the importance of rare earths to the 21st-century economy of the West, particularly to the energy future of the U.S. I’m following this situation very closely. There ARE some potential investment opportunities in rare earths, but only in very small, thinly capitalized firms.

Until we meet again,
Byron King

Source: Brazil’s National Commitment to Energy – Bankrolled by China

The Perfect Refinery Penny Play

Jim Nelson — Thu, 21 May 2009 20:35:23 +0000

Last year, oil prices went crazy. In a matter of weeks, oil shot up as high as $147 and came right back down. Today, oil is sneaking back up. The obvious temptation is to try and time it again. The smart money, however, is looking elsewhere to take advantage. We found the perfect penny play to do just that…

Spreading Your Bet Without Losing Any Profits

Instead of outright betting on oil’s price, let’s use the spread between oil and gas. After all, some of the largest companies in the world do this. All the large oil companies (ExxonMobil -NYSE:XOM-, BP, Shell -NYSE:RDS.A-, etc.) do it by owning refineries.

Now, to be fair, most of their profits don’t come from the refinery process. But big money is still out there for the taking. Just take a look at industry leader Valero (NYSE:VLO). Last year, while it may not have been a normal environment for a energy related business, Valero brought in $119 billion in revenue.

Unfortunately, most of the money disappeared because, as a refiner, the company had to purchase the oil to process. Oil hit $147 last year, which certainly put a dent in Valero’s bottom line.

So, the question if oil is rising again, will gas and heating oil follow? And if so, by how much?

Inviting the Mathematicians to the Oil Field

The most important figure in the refinery business is something called the crack spread. Using a West Texas Intermediate (WTI) crude refining model, the ratio is three barrels of crude (cost), two barrels of gasoline (gain), and one barrel of heating oil. That’s written like this: 3-2-1. If you are using OPEC grades, which produce less gasoline, the ratio is 2-1-1.

Until you see where it’s been and where it’s going, all this info is useless. Here’s a frame of reference:

Cracking the Crack Spread

As you can see, it’s been all over the board the last few years. It even went negative at one point last year, which means the refinery loses money on every single barrel of crude it processes.

We expect, over time, that this spread will stay above $7, probably even north of $10 or $12. This is not an exact science. Not only are we guestimating, we’re using a number that is only relevant to refinery investors, not refineries.

You see, every refiner has pays a different price for its oil, and has contracts set months ahead of time for the sale of its gas and heating oil… not to mention the other products that come out of this system (coke, propane, butane, slurry, sulfur, etc.).

So every refinery has its own crack spread number. And that can vary far less than what the above example would have you believe. For instance, do you think that a refiner will take a contract to sell its products at a lower price than its contract to purchase the crude? Absolutely not. So, other than extreme cases, its unique spread will never be negative.

We found a refiner that is doing just fine, and even has a leg up on competition through a unique business pairing.

Unlikely Paring Presents a Lucrative Penny Stock Opportunity

We’re talking about CVR Energy Inc (NYSE: CVI). CVR is a domestic refiner with operations in Coffeyville, Kansas — about 100 miles from Cushing, Oklahoma, which is a major crude oil trading hub.

Its refinery business brought in $4.8 billion last year. That’s quite a bit of business for a penny stock. And that’s not even the most interesting part about this play.

The company has a second segment that accompanies this petroleum business perfectly: nitrogen fertilizer manufacturing. You might not think of these two operations as brother and sister, but I assure you they are.

There are two ways to make nitrogen fertilizer: by using coke or natural gas. Natural gas is the obvious one everyone chooses because it is convenient and easy to transport.

CVR is the exception to this rule. It uses coke from its refinery, which is located right next door to the fertilizer plant. This cuts out one of the major costs of running a fertilizer business, and coke is just a by product of its refinery business.

Both segments have been a bit volatile over the last 12 months. With oil and gas prices spiking mid-summer last year, it caused the company to become much more flexible.

CVR’s refinery business, for example, moved from a complexity of 10.3 to 12.1 last year. A refinery’s complexity is a number that describes its flexibility to maximize yields (getting the most out of every barrel of crude and staying economical). This is a fantastic complexity ratio. It beats Valero’s average, which is the lowest cost refinery business in the country.

When you combine the next-to-no cost of CVR’s fertilizer business with the efficiency of its refinery business, you get one of the most attractive companies in either industry. And right now, it’s a steal for just a little over $8 per share.

You can’t ask for a better way to play America’s two favorite vices: gas and food.

Sincerely,
Jim Nelson

Source: The Perfect Refinery Penny Play