After all, the economies in both China and India are apparently continuing to grow at a fairly rapid pace, and those countries’ demand for transportation and other forms of energy are thus likely to keep pace. For some minerals, the period of high prices from 2005 to 2008 has produced a surplus. But no such effect has been seen in the oil market, as large new discoveries are hard to find.

If we’ve learned anything in the last few years, it’s that political risk is very important in oil investments. It’s not just a question of outright nationalization – as is true in Venezuela. Other greedy countries, like Nigeria, boosted the royalties payable when oil prices were high, and have shown little willingness to reduce them again now that they have declined.

Hence, it’s once again time to look at investments in the one important energy source whose friendliness to the United States and decent quality of governance can be assured.

I’m speaking, of course, about Canada.

Canadian oil-and-gas investments are attractive for three reasons.

• Canada’s political stability makes it a buffer against turmoil from less-stable oil sources.
• The country’s conventional oil-and-gas sources add substantial capacity at reasonable prices to U.S. domestic oil production; these sources are profitable at almost any plausible oil price.
• And Canada’s tar sands in the Athabasca region represent a potential source of oil, with approximately 1.6 trillion barrels of theoretically recoverable reserves. That’s potentially larger than the Middle East, but with two major problems: The cost of production is high and the environmental impact could be substantial.

That last point – and the two major problems it identifies – is key. At low oil prices, both factors make tar sands problematic; it is politically more difficult to overcome environmentalist objections if secure oil sources do not appear a priority. However, at high prices, environmentalist problems go away, although they may add to extraction costs. However, if prices escalate rapidly, extraction costs also tend to escalate, so oil-shale-producers reaped less of a bonanza than they might have in 2007-2008.

Now that oil prices have stabilized, the cost increase has slowed, so that (for example) Suncor Energy Inc.’s (NYSE: SU) tar-sands-production costs in this year’s first quarter rose only 6% from the previous year, hitting $28 per barrel. Since oil prices are currently around $58 a barrel, that leaves plenty of profit margin.

The Canadian oil business is still rather more entrepreneurial than the international majors – Calgary is that kind of place. I remember an instance when I was working as a banker back in the 1980s. I’d spent the weekend in New York with my girlfriend, and then turned up for a scheduled Monday lunch with some oilmen at the Ranchmen’s Club. Not thinking, I’d ordered my normal urban cocktail, an Apricot Sour. This was quite rightly treated with great derision, and I was firmly presented with a bullshot (vodka and beef bouillon) – in a pint beer mug!  Got the deal, I’m proud to say, but was pretty worthless for the rest of the day.

The message: Investing in Calgary oil is a little like dining at the Ranchmen’s Club; you have to have certain qualities of fortitude and stamina!

Canadian oil companies you might look at include the following (when looking at earnings, the first quarter of 2009 is a good guide; 2008 is all over the place because of the bizarre behavior of oil prices):

Canadian Natural Resources Ltd. (NYSE: CNQ): Primarily a conventional oil producer, this company’s operations are centered on Western Canada, the North Sea and offshore West Africa (Gabon), though it is also building an oil sands plant north of Fort McMurray, Alberta. It is trading at about 14 times earnings when you strip out misguided risk management, and about 80% above book value. It’s over-leveraged, too. Conclusion: A decent company, but pricey.

EnCana Corp. (NYSE: ECA): North America’s largest natural gas producer and conventional oil producer, with operations in Western Canada, offshore Nova Scotia and the Western United States. It is a leader in oil recovery through steam-assisted natural drainage. Based on first-quarter earnings, its Price/Earnings (P/E) ratio is about 9, and its Price/Book (P/B) ratio is about 1.7. It has only moderate leverage. Conclusion: This one looks like a decent value; it even pays a semi-respectable dividend, yielding 2.8%.

Imperial Oil Ltd. (NYSE: IMO): Majority-owned by ExxonMobil Corp. (NYSE: XOM). Even though it’s now headquartered in Calgary, Imperial is the least Calgary-ish of Canada’s oil majors. It owns 25% of Syncrude Canada Ltd., the oldest tar sands project, and also explores for and produces conventional oil in Western Canada and in the offshore Atlantic provinces. Imperial also refines and markets petroleum, owning a chain of service stations and convenience stores, and produces petrochemicals. It experienced a sharp drop in first-quarter earnings, its P/E based on the lower first-quarter results is about 40, with the stock trading at four times book value. Conclusion: Overpriced.

Nexen Inc. (NYSE: NXY): The former Canadian arm of Occidental Petroleum Corp. (NYSE: OXY), it owns 7% of Syncrude and another (Long Lake) start-up tar sands project, and has oil producing operations in Yemen, the North Sea, the Gulf of Mexico, Colombia and offshore West Africa. Its P/E is about 20 based on first-quarter results and it is very over-leveraged. Conclusion: Given the non-Canada risk, not very attractive.

Suncor Energy Inc. (NYSE: SU): A major tar sands play, Suncor has now agreed to merge with Petro Canada (NYSE: PCZ), a deal that’s expected to close in the third quarter. Suncor also produces natural gas in Western Canada and operates refineries. Petro Canada has tar sands, natural gas, pipeline and retail operations. It is priced at about 30 times annualized first-quarter operating earnings, but oil prices are up about $10 since then (which should boost its earnings), and its tar sands production is ramping up. Conclusion: At 2.3 times book value, with a respectable balance sheet, it’s a decent bet on oil’s growth sector.

Talisman Energy Inc. (NYSE: TLM): The former BP Canada (NYSE ADR: BP), it was spun off in 1992, grew through acquisitions, and now has a diversified portfolio of holdings. It’s active in Western Canada, the Western United States, the United Kingdom (including a wind-farm operation), Norway, Colombia, Peru, Algeria, Tunisia, Indonesia, Malaysia, Vietnam, Australia and Qatar. It has sold $2.5 billion worth of operations to raise cash. Talisman has a P/E ratio of about 8, based on its first quarter, or 11, based on continuing operations in that quarter. It has a P/B ratio of about 1.4, and only moderate leverage. Conclusion: An iffy company in terms of quality, but cheap, and is thus worth a look.

Source: The Six Ways to Play Canada’s Oil Sector

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4.201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, byclicking here .]

Money Map editor Horacio Marquez says the financial meltdown is dragging down shares of even the strongest companies; but short-term volatility aside, these firms will rebound sharply. This means plenty of contrarian bargains.

Horacio says oil-and-gas company Suncor Energy (NYSE:SU) is a good example. It’s expanding production in the Canadian tar sands. And a strong cash flow and low leverage ratios make for a healthy balance sheet.

This from Money Morning:

On July 21, when oil was trading at some $125 a barrel and in an apparent freefall, I issued a scaled “Buy” on Chevron Corp. (NYSE:CVX). I based this call on the stock’s ultra-low valuation and the company’s business model, which would enable it to keep posting strong profits even at lower margins.

Despite the huge market sell-off – and a whipsaw market for oil that saw prices fall to as low as $90 a barrel before rebounding recently – Chevron’s stock has outperformed both the broader stock market and its oil-sector peers. At Friday’s closing price of $86.95, Chevron’s shares already are up 2.0% from that July 23 recommendation.

With the much-needed opening of offshore drilling in the continental United States, Chevron is positioned uniquely to thrive – as are its shareholders. As I noted back in July, it wasn’t “a question of if, but when” to invest in Chevron.

I bring this analysis to your attention in light of a reader’s question about Suncor Energy Inc. (NYSE:SU), where similar investment logic applies, despite major differences in the companies and in the risk-reward equations of their shares.

Suncor Energy has risen as high as $74.28 earlier this year, before falling to its three-year strong-resistance level of about $39 a share recently (the shares closed Friday at $45.37, down $1.82, or 3.86%, each).

The company disappointed investors in the first half and guided production lower for the second half, telling investors that it faced a much-harsher winter, as well as some operational problems that were subsequently remedied. A new problem – an issue with a processing unit will not affect production, but will lower the product mix quality for a few weeks – only added to investor wariness.

Take these company-specific problems, and add in the panicky markets, the massive liquidation of commodity and commodity-related positions by investment and commercial banks due to their own financial problems, and the impact of that generalized financial stress on global growth expectations, and you can see that Suncor’s stock appears to be heavily distressed relative to the company’s underlying fundamentals.

Suncor is a riskier – yet potentially much more profitable – stock play than Chevron. Suncor Energy is a pioneer in that it is the second-largest operation exploiting the oil sands in Northern Alberta, Canada.  The Athabasca Oil Sands is the world’s largest petroleum resource, with some 175 billion barrels of crude-oil reserves.  That operation poses major challenges because of the harsh winters, the terrain, unpredictable contents of sulfur, and the fact that major scale extraction of the bitumen mineral and later extraction of oil demands technologies that are relatively new and in constant development.

To these factors, add in the recent major volatility in the price of oil and you get the picture:  Suncor represents an extremely promising stock with a huge potential upside – albeit one that‘s subject to the unpredictable vagaries of both the oil markets and the Canadian climate and some operational challenges.

What about the upside?  We should see major production increases and a lower cost of production per barrel.  Suncor has just launched a major expansion in its production capacity.  Sitting on a 9 billion barrel reservoir, the company is about $7 billion into its $20.6 billion expansion/modernization project, and will be investing between $7 billion and $8 billion a year in 2009 and 2010.  By 2012, Suncor will have boosted production from the current level of 300,000 barrels a day (and 350,000 barrels a day in the year’s second half) to some 500,000 barrels a day. As production ramps up, the company’s average cost per barrel will drop significantly – from the current cash cost of $30 to $31 to as little as $27.

At these low production prices, and with global demand for oil so tight, barring a major global recession, the risk of a profitability reversal is slim to none. And a worldwide recession of that magnitude just isn’t in the cards – even with the U.S. credit markets still under assault.

Truth be told, what we actually see happening is that the price of oil, having stabilized at these lower levels for awhile, will rise again and go through the past peak on its way to new record highs. If that happens – and it appears that this reversal is already under way – the actual risk will be borne by investors who aren’t invested in oil- and other energy-related stocks.

The risks to this upside are mainly unforeseen operational and climatic events, and commodity and labor inflation, which might push up the costs of Suncor’s new expansion projects.  The company’s low leverage ratios and very strong cash flow ensures easy financing, even in these market conditions. The company has been able to manage each one of these challenges very well, given its long operating history, market leadership and sheer size.  This industry leadership imbues Suncor with a competitive advantage, since its proprietary technologies, in constant development, makes them more efficient.

In addition, Suncor has resisted the temptation of acquiring refiners in order to expand upon its partial vertical integration.  Its disciplined acquisition philosophy requires patience for refining margins to keep dropping in order to achieve a lower entry point in any future refinery purchases.

By investing in Suncor today, you are buying into this admittedly volatile stock at a level similar to March 2006, when oil was trading at about $60 a barrel and Suncor’s production capability was but a fraction of its output today. For this “gift” of a bargain-priced stock, we can thank the implosion of the U.S. financial sector and the resulting disarray in the credit markets, which over-penalizes companies with even minor earnings disappointments, or internal project delays. While Suncor’s turnaround won’t be immediate, the magnitude of the ultimate rebound makes this stock a very attractive buy at these valuations – especially given the massive expected increase in production, in oil prices globally, and in the company’s cost-efficiency gains.

Action to Take: Buy Suncor Energy Inc. (NYSE: SU).

Source: Buy, Sell or Hold: Suncor Energy Inc.

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”

The efforts to turn Canada’s tar sands and Colorado’s oil shale into energy are really just efforts to speed up what would happen naturally over time. But we don’t have time. So we throw excess energy at the problem, trying to cook shale in situ or use huge quantities of natural gas to increase oil production via the tar sands. We don’t have much excess energy, either.

Both processes use tremendous amounts of energy for a small net energy yield (energy returned on energy invested, or EROEI). Yet free solar income rains down on the planet each day. The sun is eight-minute energy! We simply don’t have an industrial system built to run off the modest amounts of energy we can convert from sunlight. We need a new system or a way to convert a higher percentage of sunlight into usable energy.

It’s not the sort of thing you design on your kitchen table. It’s the sort of thing that evolves out of necessity and experimentation. Its evolution obeys the same basic laws that govern the evolution of species… variation, mutation, adaptation. Australia has a wide variety of clever and well-managed companies working on different aspects of the problem.

But in the big picture, we think human beings are pretty good at adapting when they have to. The alternative is non-survival, which also goes by the name of death. True, civilisations seem to go through a life cycle of their own. And perhaps this oil-based one is past its prime. People are quarrelsome and stupid. We may not adapt our way out of this problem before it overwhelms us. But it would be unnatural not to try.

Source: A Hank and a Hurricane Affect the Oil Price

None of the measures announced yesterday will have an effect for a decade or more. This makes them virtually irrelevant.

However, the plans gave us a succinct snapshot of the difficult quest for new reserves… so I would like to take a look at them further.

The mains points of the plan concern development of the Colorado oil shales, the lifting of a ban on US offshore drilling, and the opening up the Arctic National Wildlife Refuge (ANWR) in Alaska.

First let’s consider the Colorado oil shales.

There’s not enough water, stupid

Tar sands are going to be a major oil resource in the economy of the 21st century… but massive amounts of investment are needed before they will be productive.

There are two major factors that limit the development of oil shales; water and energy. Water is a major problem in Colorado.

Processing oil sands requires an astounding five barrels of water to create one barrel of oil and the Colorado River basin is already seeing significant water stress.

Such a massive use of water in one of the hottest states in the US is likely to have disastrous consequences for people living in the area.

The south west US is in its eighth-consecutive year of drought. Fears are growing that Cities served by the river, such as Las Vegas, will experience a water crisis sooner rather than later.

The process of extracting oil is also very energy intensive. Massive energy requirements mean massive expense.

Because of the investment required and the lack of water in the area, I don’t expect any significant extraction from here for at least a decade… if at all.

Canadian oil sands (TSE:COS.UN) are a much better bet. They are larger and Canada is not short of water or gas to power the process.

There’s not enough rigs, stupid

The ban on offshore drilling was also lifted, but there are no offshore rigs available to do the drilling.

As I explained last week, most of the world’s existing drill ships are booked solid for the next five years.

This has caused hire rates for new rigs to go through the roof. In the Gulf of Mexico, new rigs day rates have reached about $600,000, compared with $150,000 in 2002.

There is very little chance that new finds off the coast of the US will hit the pumps in the next decade because of this.

There’s not much oil, stupid

Then we come to the Alaskan Arctic.

The US Energy Information Administration (EIA) recently released a study on ANWR reserves.

If the Arctic was opened for drilling this year, its base-case sees production starting in 2018. There is only a four-month window for operations each year in the Arctic and there is a shortage of specialised rigs.

But when you look at the figures, there isn’t that much oil there anyway.

The largest field in ANWR contains 1.4bn barrels of oil.

Daily oil consumption in the US was almost 20.7m barrels in 2007. This means that the largest field only contains enough oil to last for 67 days… and that’s if they can remove all the oil from the field.

Traditional methods allow for the recovery of about 20%-40% from oil field. New technology means enhanced oil recovery techniques up to 60% of an oil field’s oil can be extracted.

At a 60% extraction rate, there will be enough oil to quench the US’s thirst for just 40 days at today’s rate of consumption.

This is a conservative figure because I expect consumption will increase as the US population grows.

The other fields are smaller.

Two of them are estimated to contain 700m barrels of oil and four additional fields each with 360 million barrels of oil.

At a 60% extraction rate, this would give a further 80 days of oil, making a total of just 120 days worth of energy for the country.

When look at that way, it’s not very impressive, is it?

So George Bush’s plans are unlikely to have any significant impact on the oil price or America’s quest for energy independence.

To discover how to play the buoyant oil price click here.

Regards,

Garry White
Editor
Smart Commodities UK

Source: Why George Bush’s Useless Plan Is Great News for Your Oil Investments

There are two major options on the table to increase supply: Canada’s oil sands and Arctic reserves.

Canada has massive oil reserves in Alberta’s oil sands. Companies are already mining 1.3m barrels a day of heavy crude oil from the sands. But they expect to spend another £50bn to more than double production to 3.5m barrels by 2011. But a huge amount of energy is neederd to get extract the oil. This from Britain’s The Guardian newspaper:

[...] the greater energy needed to produce a barrel of oil from the sands means three times more greenhouse gas emissions than producing a barrel of conventional oil. The greater energy is needed because the oil has to be dug out and then separated from the sand, and because it is low grade it has to be heavily refined. Tars sands mining “is the fastest growing source of greenhouse emissions in Canada”, Dyer adds.

Another option is to try for the Arctic’s untapped resources. But Byron King says the US will have its work cut out to keep up with Russia…

I told you so. While the U.S. dawdles, hems and haws over offshore drilling, the Russians are committed to developing the Arctic.

And the Russians are going to do it. They will conquer the resources of the Arctic, just as their Czarist forebears gained control for Russia over Central Asia in the 18th and 19th Centuries. (Fortuitously for the U.S., the Russians “sold” Alaska to the U.S. in 1867 for a mere $7.2 million.)

The Russians are now shaping events in the Arctic in their own, characteristic way.

At a recent meeting with top oil executives, Russian Prime Minister Vladimir Putin said Russia’s declining oil production meant the industry was at a “critical juncture.” Putin proposed to cut taxes and slash bureaucracy to encourage new oil development in Arctic regions.

The Russians are leveraging two key advantages right now.

1. They have money to devote to building the best Arctic explorations systems that the human mind can devise.

2. They have some of the best human minds in the world, focused on this task.

The reports are that the secret city of Severodvinsk is the home to the next generation of Arctic drilling exploration platform.

One giant platform measures 413 x 413 feet, well over the size of an 3 football fields.

The constructors are Sevmash, the short-hand name for Severodvinsk Machine Building Co.

Sevmash has long experience in powerful oceanic vessels. Sevmash built many of the immense, double-hulled nuclear submarines for the former Soviet navy. The yard still builds submarines for the Russian navy.

These impressive ships include the gigantic, all-but-indestrictible Typhoon and Oscar-class vessels.

The only Oscar ever to sink was the Russian submarine Kursk, destroyed in August 2000 by an internal explosion when the warheads of almost all the torpedoes in one compartment cooked-off due to an onboard fire. After a massive effort, the Russians recovered the ruined Kursk and brought the vessel to drydock.

Based on media reports and other information released by the Russian navy, Western analysts were astounded at the strength of construction of the vessel.

Now this same level of naval architecture is being applied to developing futuristic offshore drilling systems for Arctic applications.

According to Russian Member-of-Parliament Artur Chilingrov, “The Arctic zone is a guarantee of Russia’s economic power. Oil, gas, gold, diamonds and phosphates — it’s all there. … We need to find new oil fields … We need to go offshore.”

Source: Russian Oil Exploration — And Why The US Will Be Playing Catch-up

This piece is taken from The Growth Stock Wire. It’s in the form of a questions and answers session. But it’s well worth the read if you’re interested in the ins and outs of shale oil.

The Commodity Investor

Matt Badiali

Q: I’ve read some articles on shale gas. What is the big deal with this stuff? – H.B.A: Shale is the world’s most common rock, formed from mud and clay deposited at the bottoms of lakes and ocean basins. Shale looks like the slate you see in chalkboards or on roofs, (slate is actually shale that was “cooked” in the earth).

Clay and mud are tiny -– much smaller than sand. So it’s hard to tap shale deposits. (See the next question, about the Bakken Shale, for more details.)

Some shale is full of old plants and animals. These shales become the source rocks for oil and natural gas. In the past, it didn’t make sense to drill shale for either oil or gas. Shale presented technical challenges that were beyond most of the industry. However, that began to change in 1990, when oil-service giant Schlumberger began focusing its attention on the natural gas in shale.

The company estimates that shale contains 500 billion to 780 billion thousand cubic feet (MCF). We consume about 23 billion MCF per year, so that’s about 20 to 34 years worth of natural gas. Today, one MCF sells for more than $13. So the reward is in the trillions of dollars.

The Barnett Shale became the proving ground for shale technologies. Barnett is in the Fort Worth Basin of Texas, which underlies the entire region west of the city of Fort Worth. The Barnett Shale holds between 25 billion and 250 billion MCF.

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I’m not targeting companies that are just Barnett players for investment. However, I am interested in companies that learned how to drill the Barnett and are now leasing land in the many new shale regions.

Investors can take a look at companies operating in the Huron Shale in southern Ohio, the Fayetteville Shale in Arkansas, and the Ootla in Canada.

Q: Why can’t we pump all the oil out of the Bakken Shale? – D.S.

A: The Bakken Shale, the granddaddy of the shale oil fields, underlies northeastern Montana and western North Dakota. A recent government report put the amount of oil in the Bakken Shale between 200 billion and 400 billion barrels: enough to eliminate our oil imports for at least 45 years.

However, the report also says we can only recover about 3 billion to 4 billion barrels of that oil with current technology. That’s a terrible recovery rate… around 1% or 2%.

The problem with the Bakken Shale – and with many of the shale deposits around the world – is “permeability.”

Some reservoirs are like a glass of grape juice and ice cubes. You stick in a straw and suck up the juice around the ice cubes. That’s a permeable reservoir.

However, some reservoirs are like clusters of grapes. You know there’s a lot of juice in there, you just can’t get it out. You have to stick the straw in each grape, suck a little, and then move to the next one. That’s an impermeable reservoir.

Impermeability is one of the problems facing by companies working in the Bakken Shale and other “unconventional” oil fields. You need a way to put the straw through as many grapes as possible.

It took a long time for oil companies to realize that drilling straight down wasn’t the best way to do that. The solution is directional drilling. In directional drilling, the well is drilled at an angle using a computer to help guide the drill bit.

I visited a well in south Texas where the bit went down deeper than a mile, then turned west and drilled horizontally for more than a mile. I was amazed… Here was this thick steel drill casing, steered by an engineer in a truck miles away. Now nearly all the big drilling and service companies, like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), offer steerable drilling in three dimensions.

In 1990, only about 40 rigs, or 6% of all the rigs in the U.S., were drilling horizontally. As of last month (according to the Department of Energy), 519 rigs, or 28% of the total, were drilling horizontally.

That makes it much easier for oil companies to get more out of their shale deposits. And as this technology advances, I think more of Bakken’s “grapes” will yield oil.

Some excellent companies are drilling in Bakken, including XTO Energy (XTO). But while XTO is adding reserves, you’re going to have to pay up for the growth these days. I told readers of the S&A Oil Report about the company last July, and we’re up 41% so far.

Good investing,

Matt

Source: The Commodity Investor Q&A

As long as there are abundant local supplies of rice, countries are happy, eager in fact, to export excess production in order to generate foreign exchange. But as soon as local consumption exceeds locally available production, then all hell breaks loose and the next thing you know countries are banning exports, a move that has already been undertaken by Vietnam and a number of other countries.

In that scenario, price eventually no longer becomes a factor in the availability of the commodity. Vietnam, for example, is not going to let its people starve just because higher global prices would allow it to earn an extra $10 a bag of rice.

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How Much Oil Is There Really?

We’ve heard some whoppers before, but this one might take the cake. We’ve been told by oil producing countries in the Middle East so pretty gaudy numbers when it comes to oil production. But what if those countries can’t produce that much oil?

Well the answer is shocking and should alarm every investor out there. Click here to find out for yourself…

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And so in the face of the prospect of any serious shortage of an important resource — energy being maybe the most important — export markets freeze up and the price begins to be set at the margin, literally based on a global competition for the dwindling supplies that manage to leak out around the edges.

“People are crazy not to be focusing on the oil export situation,” Dr. Brown told me.

Of course, the question of energy alternatives is a big topic and one which needs a far more extensive discussion than space allows for here.

Will viable alternatives be developed to help mitigate a domino collapse of oil exports? Absolutely. Of those alternatives, nuclear, solar and heavy oil seem to hold the greatest promise.

But the sheer scope of the problem — with the world now consuming the energy equivalent of one billion barrels of oil every five days — assures that we are probably decades away from a real solution.

In the words of Jeffrey Brown…

“If you look at the situation in terms of presidential terms, looking at fossil fuels plus nuclear the world burned through the equivalent of 10 percent of all oil ever consumed in Bush’s first four-year term. And, in our model, we’re going to burn 10 percent of all remaining conventional crude in the second four years of Bush’s term.

“That is the equivalent of around 25 billion barrels a year. So that’s 100 billion barrels every four years, and we’ve burned 1,000 billion barrels. It gets interesting when you consider that current estimates are that we’ve only got 1,000 billion barrels of conventional crude remaining. I think with natural gas liquids, we’ve got a little bit more. But of the conventional crude oil, we’ve got 1,000 billion remaining. Which then begs the question, how fast can we bring on the tar sands and everything else?”

Grasping for straws, I asked Jeff about an article I had read recently about the Bakken oil shale reserves around North Dakota.

“They’re talking about somewhere between 200 billion and 500 billion barrels in situ, but the USGS recently came out with a mean estimate of between 2.5 and 4.4 billion barrels recoverable, as an outer limit,” he replied, before continuing.

“In 1966, they said, if Lower 48 ultimately recoverable is 150 billion barrels, then the U.S. would peak in 1966. If the recoverable oil from the Lower 48 ultimately came in at 200 billion barrels, then the U.S. peak would come in 1971. The higher-end estimate probably turned out to more accurate, and the U.S. peaked in 1970. But the point is this; a one-third increase of estimated ultimate recoverable — a total increase of 50 billion barrels — postponed the peak by all of five years.”

The trend for sustained higher energy prices appears solidly in motion. If Brown and the ELM are correct, energy prices will double then double again.

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Even if he is wrong and prices don’t rise geometrically, the global dogfight to replace declining supplies — decidedly exacerbated by the loss of Mexican and maybe Russian exports in the near future — is going to get ugly and expensive.

So, what’s the investment angle? Paradoxically, the larger energy companies are probably a bad bet, because they are forced to replace their depleting reserves, which is getting harder and more expensive to do with each passing day.

It is our contention that, because the solutions to the world’s energy problems are going to involve a variety of energy sources and technologies, you have to build a portfolio that is equally varied.

That assures you are well positioned to profit from the broader trend, while avoiding the risks of being overly exposed to a single sector. (As an example, solar has had a great run, but most solar plays are now overvalued).

The good news is that there are no shortage of high quality energy-related investments available…in coal, heavy oil, LNG, photovoltaics, natural gas consolidators, “run of river” hydroelectric, uranium and small to mid-cap oil companies with the potential for significant near-term gains in reserves or production.

In the final analysis, it comes down to two choices; you can either suffer the consequences of persistent higher energy prices, or use the work Jeffrey Brown has done with the Export Land Model as an early warning and get positioned to profit.

The decision is yours, but don’t wait long to make it.

Regards,
David Galland, Casey Research

Greg’s Endnote: One of the biggest problems when it comes to oil exportation is the refining process. Our current refining capabilities cannot handle the amount of oil needed by the U.S. That means that even if we could produce the amount of oil needed, we wouldn’t be able to refine it ourselves. To help solve this problem, a new breakthrough technology has been developed that could revolutionize the refining process as we know it. Click here for the exciting details…

Source: Midnight Oil

Shares in leading German solar stocks rose substantially on expectations that other big players, including oil groups, are on the prowl in a market that grew to €6.6bn last year and is forecast to top €18bn by 2020.

Germany is by far the world’s biggest solar energy market thanks to its “feed-in” tariffs, which pay a government-guaranteed premium of up to €0.47 a kilowatt hour for power produced by photovoltaic panels. It is expected to continue to grow despite government plans to cut subsidies by 8% or 9% in 2009 and 2010.

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

“As the post-Memorial Day hangover lingers, and $4 per gallon gasoline becomes a national reality, expect more and more daily energy prognostications,” says William Patalon III in Money Morning.

“Goldman Sachs Group Inc. (GS) already is on record for $200-a-barrel oil. As you all know, our own Keith Fitz-Gerald has projected a crude-oil price of $225 a barrel. Do I hear $250? What about $5 a gallon gasoline by July 4th?

“Sometimes, these daily price gyrations take on lives of their own, but at the end of the day, the basic laws of supply and demand always work themselves out.”

There’s a new oil rush going on in Alberta, Canada, says Alex Green in InvestmentU: “Alberta’s oil sands are the largest known reserve of oil on earth containing between 1.7 and 2.5 trillion barrels.”

“For decades, these sands weren’t even considered part of the world’s oil reserves because the oil there wasn’t economically extractable at prevailing prices using then-current technology. But times have changed… And the new gold rush is on.

“Here’s the kicker: Exploration of Alberta’s oil sands is virtually risk-free. You can’t drill a dry hole here. There’s no drilling at all. It’s a mining operation – and the reserves are thoroughly outlined. So what you really need is a company with plenty of machinery, money and manpower to dig it up and process it as quickly as possible.”

Read on here to find out the one undisputed blue-chip play on Alberta’s oil sands.