“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

Source: Energy, Brazil, Gold: What More Could You Want?

What Are These Oil Sands?

Back in Pleistocene time, the glaciers covered much of northern Alberta.  In places, there was a mile of ice.  During some of the warmer periods, there was a lot of melting.  On occasion, and in some places, there were giant, glacial-dammed lakes.

Every now and again, these glacial dams would break, sending massive volumes of water downstream, wiping away pretty much everything along the way.  Well, it turns out that in this scoured-out area that included much of the rock covering some lower Cretaceous deposits of oil.  Or rather, it was “oil” that had long ago lost the volatile components.  The stuff is properly called bitumen.

Thus we have an area in northern Alberta that’s about the size of New York State.  That area holds near 1.4 trillion barrels of bitumen resource.  To be sure, not all of it is recoverable.  In terms of recoverable “reserves,” there are only (ahem…) about 175 billion barrels, or over eight times the total of U.S. oil reserves.

Of those 175 billion barrels, about 20% are near enough to the surface to strip mine.  That’s within about 250 feet or so.  Any deeper, and the cost-benefit calculation dictates that you have to recover it via a well-and-pumping process.  Still, that makes for about 35 billion barrels of bitumen that could be extracted by mining.  (About 1.5 times total U.S. oil reserves.)  The actual, mineable area is about the size of Rhode Island.

The Heart of Oil Sands Country

All of which gets me back to why I was in Fort McMurray.  This is the heart of oil sands country.

Near 200 years ago, early explorers noticed gooey oil seeping out of the banks along the Athabaska River.  On warm days, with direct sunshine, the stuff actually flows.  Mostly, it has the consistency of peanut butter.  Unless it’s cold up here – which happens a lot – and it’s hard as a rock.

Needless to say, people talked about these “oil sands” for a lot of years.  Then in the 1960s, some people within Canadian industry and the Alberta government began to do something about it.  They decided to develop them.  It’s a long, long story.

Here’s the Short Version

The short version of the story is that large-scale oil sands development began in the 1970s.  It took gigantic levels of capital investment, like tens of billions of dollars.  That’s not pocket change.  So a group of lease-owners got together and pooled their capital to form Syncrude Canada, a joint venture.  First mining started in 1978.

Thing is, the way Syncrude operates it’s not really “mining.”  It’s landscape architecture.  Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle.

So for much of the 1970s, Syncrude performed baseline environmental studies and data-gathering.  Then they started digging in 1978.  At first, the pit looked like a moonscape of open pit mining.

The process is fairly straightforward.  Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.)  The loaders haul the rock to a crusher.  The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building.

The Syncrude operation washes the bitumen off the sand using naphtha.  Then they separate the bitumen, recover the naphtha for reuse, take the clean sand (and it’s clean), and replace it in a previously-mined pit.

The process uses a lot of water, but not as much as the horror-stories you might hear about “draining the rivers” of northern Canada.  Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like, “all the natural gas of northern Canada.”)  Pretty much everything about the operation is built with co-generation in mind, so they continuously recover the heat at each stage.  That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, then it may take five or more years to fill it back up with sand during the restoration process.  Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although they have some artistic license with the contours.  They cover the land with the original topsoil, that’s been in cold storage (northern Alberta… it’s cold up here for 10 months of the year).  Then they replant trees, and that’s saying something because the growing season is under two months.  It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.

Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day.  They take the 8-API bitumen and upgrade it to oil that’s competitive with West Texas Light.  Then they deliver it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur-free (refiners like that).  In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the Step-Pyramid at Suqqhara, Egypt.  And along the way, Syncrude sells the sulfur to the chemical industry.

I visited a former Syncrude mine, about 3.5 miles square and formerly about 200 feet deep.  Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.  For the cynics out there, I’d say that it’s not some environmental Potemkin Village because you can’t fake a replanted forest of 25-year old trees.  You can’t fake a 300-bison herd.  Not on a former mine site 3.5 miles square.

Bottom line is that this is an immense operation.  Syncrude employs 5,000 people, plus 2,000 contractors.  Paychecks are north of $100,000 per year.  Every oil sands job supports 3 local jobs, 6 provincial and 9 others across North America (especially at Caterpillar, where they build those giant, 400-ton loaders).

In the coming weeks I’m going to delve deep into North American oil sands operations and any companies that may be set to profit. Oil sands are nothing new, but now may be the perfect time to scoop up shares of a small player or two…

Regards,
Byron W. King

Source: The Oil Sands in Alberta, Canada