Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Tuesday, April 25, 2006: My
son returned from Dubai with a foreboding sense of imminent disaster. Several
people at his finance conference confided their fears in private. They made
a case for the perfect storm -- all the usual trigger suspects, from terrorism
to oil shortage, from high debt to the weakness of the US dollar. The BIG fear
is the interconnectivity (also called globalization) of the world's economies.
What happens here will affect what happens there. And the whole house comes
I don't buy into it. It seems to me that the interconnectivity is precisely
the reason why a disaster won't happen. (A hiccup is another story.)
The more we buy from China, the more US treasuries overseas governments own,
the more terrorist acts (like yesterday's in Egypt), the more incentive the
world's countries have to work together to protect their own (and hence, others')
Dubai is a special case. No town is growing faster. No town is building more.
Allegedly 20% of the world's building cranes are in Dubai. No place has more
outright off-the-charts speculation. Dubai's stock exchange has already skyrocketed
and then recently cratered.
And the building in Dubai continues. It's
still difficult to find office space or apartments.
I have a funny feeling that if there were an overnight 10% to 20% correction
in U.S. stockmarkets it would be very temporary. There are zillions of investors
like me who will jump in and buy the resulting bargains. We remember what happened
after 9/11. If you'd have bought on the dip, you'd made out subsequently like
In short, there remains a strong case for a hiccup -- and that means some modest
preparation at home -- a little cash money, bottled water, canned food, some
flu masks, medicine, a small generator, a portable radio, etc.
are (or are not) running out of oil. Few
topics cause more emotion today than oil and its future. Yesterday I highlighted
the Economist's Special Report which argued "Why the world is
not about to run out of oil." In some oil circles the piece caused
a furor, with observers rushing to post pieces on various oil blogs (especially
arguing that the Economist was plain out wrong.
My personal view is the argument is largely irrelevant. The facts, which we,
as investors, must deal with are simple:
+ Oil is high.
+ Oil is increasingly expensive to drag out of the ground.
+ Demand is rising strongly. China, India and other places want to live like
+ Political instability in leading oil producing countries will not go away.
It will probably get worse.
+ Oil prices will stay high and likely rise.
+ High oil prices make alternative ways of making energy more viable.
+ Governments are finally latching onto alternative energy (even ours).
+ Hence we need to search out companies likely to benefit.
One of my favorite money managers, Dennis Mykytyn, sent me report by Canaccord
Adams on what they're now calling "The sustainability sector," which
covers everything from windpower to biofuels. Reported Canaccord:
As to which stocks?
Canaccord reported, "Over the quarter, our small UK universe saw good performances
from Ceres Power
sector got off to a quick start this year, with:
+ Chinas renewable energy law coming into effect on 1 January;
+ Californias solar initiative being announced two weeks later;
+ President Bush putting Americas addiction to oil at the
heart of his State of the Union address - although the reality is likely
to be less exciting than the headline;
+ New records for wind power installation in the US and Europe were confirmed;
+ The EU published its biofuels strategy and the UK gave the outline criteria
for a Renewable Fuel Transport Obligation in the budget.
(+82%) following technical updates...Clean Diesel Technologies and Compact Power
also did spectacularly well, although these were from a low base. More consistent
results were achieved by Porvair and QuestAir, as investors started to recognize
the value creation by the respective management teams.
Clearly the name of the today's game is what we've been calling "alternative
energy." Here's an example
It's important to note, Ballard has never earned a nickel. Its losses are huge.
Today, I received an email from Ballard's investor relations lady. It read:
Hi Harry .
to send a quick note to remind you that we're releasing our Q1 results on
Wednesday morning at 5 AM Pacific (we're also holding a conference call at
7 AM that morning. If you're interested in listening in, you can find details
about the call. Click
our CFO, will be available for interviews on Wednesday afternoon from 12:15
PM - 4 PM (Pacific). If you'd like to speak with Dave for a story, please
give me a call and I'll work with you to set something up. My direct line
As you can probably
imagine, I've been getting a lot of calls about our share price over the past
several days, including questions about how things like the price of oil and
President Bush's comments about hydrogen and fuel cell technology this past
weekend are having an impact. I wanted to let you know right up front that
we won't comment specifically on share or market performance, and instead,
will leave that up to the analysts.
I can tell you is that Ballard is committed to building a strong delivery
culture and we are focused on the execution of our strategy. We are managing
our business with a priority on maintaining a fuel cell focus; building presence
in near term Japanese residential cogeneration and fuel cell forklift markets;
strengthening leadership in automotive market; working with lead customers
and partners to build those markets; maintaining fuel cell technology leadership;
and continuing our focus on strong fiscal discipline.
As far as Bush's
visit to the California Fuel Cell Partnership on April 22, President Bush
talked specifically about the important role fuel cells and hydrogen play
in Americas energy future. As weve said before, for automotive
fuel cells to make a significant entrée into the market, government
support is essential and, the fact that this administration fully supports
this (as demonstrated by the passing of last year's Energy Bill) is encouraging
Economist is wrong. I excerpted the following from the lead posting
on TheOilDrum.com. Glance through it. It adds weight to my conclusion that oil
is staying high and will go higher:
... There are
several ways to address the issues of the article (you will have to wait a
bit for discussion of the author's book since I only ordered it on Friday),
but it appears to me that a primary criticism has to lie in the misunderstanding
that the author appears to have about the role of technology and the slow
speed with which things happen. I am not going to argue the point that there
is still a lot of oil lying around. Yes there is, and even when we have depleted
a field, we are leaving perhaps 60% or more of the original oil in place.
And yes, given enough money and time we can even get that oil out.
Nor am I going
to argue, at present about the longer-term existence of large volumes of oil.
Rather, I would argue that the problem that we have is of getting an adequate
supply of oil, each year, to meet the demand that there will be for the oil
in that year. Under the current methods of production, and against an
increasing level of demand it is becoming more difficult to produce enough
oil to meet that demand. There are two major reasons for this, neither of
which is properly recognized in the Economist article.
The first, and
most critical issue, is the one that we call depletion. When an oil well is
first put into production, the oil flows into the well due to the pressure
difference between the fluid in the rock, and the fluid in the well. If there
is no difference in pressure, then no oil flows, and the greater the difference
in pressure, then the higher the oil flow rate. As the oil flows out of the
well, however, it reduces the pressure in the fluid. (Simple, crude experiment
- get a bottle of soda water, shake it up and stand it in the sink. Open the
top. The gas pressure will drive some of the water out of the bottle, but
after a short while the pressures are equal and more than half the water is
still in the bottle. )
This basic knowledge has been around for a long time, and it has been recognized
that it gets harder to get the oil out, and that it flows more slowly, as
the volume of oil that is left in the rock around the well goes down. (And
generally a single well can only, realistically drain the rock out to a certain
distance from its location). Historically that number has been considered
to that the well will deplete (or reduce production) by about 5% every year,
from its peak level.
But this has
recently changed, and the change has both merits that the Economist understands,
and pitfalls that they don't appear to have heard of. The change comes about
with the increasing practice of pumping water into the ground under the oil
layer, so that as the oil flows out, water is pumped in to replace it, and
the driving pressure remains the same. This extends the life that the well
has at the higher pumping rate, but it has two downsides. The first is that
it is very hard to control how the water flows up through the rock toward
the well. And if the well is in the wrong geological conditions, then the
water can get to the well before all the oil is removed, and production is
To solve this
problem, and also to increase flow rate, there has been a move towards a second
innovation, where the oilwells, that used to be vertical, now curve over and
run horizontally along and through the oil-bearing rock. They can also now
be built so that instead of just a single well bore running through the rock,
the drill is backed and re-run so that the well has a number of small offshoots
from the main well as it goes through the rock. This is known as maximum reservoir
contact or "bottle-brush" drilling. If can increase the volume flow
from an individual well from a few hundred barrels a day to up to 10,000 bd.
I borrowed this
slide from one of Matt Simmons presentations.
it is not increasing the actual oil volume in the ground, nor in many cases,
is in giving much more total volume of oil from the field than might have
been obtained conventionally (Matt Simmons would argue that it might give
less). Thus the first effect is that it shortens the life of the field. The
second, and this has only been appreciated in the past decade, is that it
also means that when the oil now starts to deplete, it drops at a much faster
rate. Examples from Oman and the North Sea have shown that the number is now
in the range around 15% rather than 5%, and thus fields that were expected
to retain a long life in decline are now showing that instead it will be brutally
The second critical
issue that the Economist is not able to properly understand relates to the
historic nature of oilfield discovery and development. Generally the larger
fields in a region are found first. They are also, obviously, usually the
first to be developed and produced, and as they deplete, the production moves
on to exploit the next largest (of which there are more) and as these deplete
so smaller fields are exploited, of which a greater number must be found and
produced to maintain or increase overall production each year.
It is only when
these two critical factors are considered that the underlying weakness of
the current world oil situation can be understood. The Saudi Oil Ministry
has admitted to a depletion rate of around 800,000 bd/year, Iran to about
400,000 b/d, to name but two.
If you are going
to match that depletion and increase production you have to drill more oil
wells. And this is where the second catch comes in, because the new wells
will not, in general, be as productive as the old ones, so you have to
drill more of them. So now some of us start doing mathematics and multiplying
number of rigs x wells per rig x production per well and getting numbers for
the new production, to match both depletion and increase, that a country can
achieve in a year. We also look at the volumes of new production that are
planned by the companies (and Chris Skrebowski's list is looking to be more
comprehensive now than that of CERA). Bear in mind that horizontal wells take
longer to drill than verticals, so you can't get as many of them in a year,
and if you are drilling with water injection then you have to drill the water
injection holes as well.
And also (and this is where the USGS may have slipped a bit) as fields age,
so the success rate in finding new fields goes down, and a greater number
of wells have to be drilled to give the same number that find a productive
volume. This is why a number of us at this site have an interest in exactly
how many rigs are really out there producing. For example the new development
at Kurais, which will produce 1.2 mbd has been projected to need 400 wells
(at 3,000 bd/well), and at 6 wells/rig/year this will take 20 rigs three and
a half years.
all that as background, it is not unreasonable to assume a number for the
depletion of existing wells that lies around 5%, but for which there are legitimate
reasons to argue could also be around 8% (As Schlumberger, for example, has
At the lower level world production from existing wells is falling at around
4.2 mbd/year; at 8% it is falling at 6.7 mbd/year. Thus, over the next 5 years,
just to sustain production, we have to find between 21 and 33 mbd of oil.
When CERA says that we are going to find 15 mbd in that time frame, you can
understand why the question of the depletion rates that are assumed become
of critical concern. And since this is going to cause some debate, let me
give one of those quiet coughs, and point out that those who say that depletion
rates have been overestimated were those who were also saying that the UK
would be self-sufficient in oil and gas until 2010. (And that North Slope
depletion had stopped). The recent comment that Saudi Arabia tries to hold
depletion to 2% through increased in-field drilling and new discoveries is
not exactly a boost of confidence to that argument.
the [Economist] article also has no apparent understanding of how long it
takes to develop a field. Nor of some of the geo-political problems that have
been covered in posts and comments at this site. The comment
This does not recognize
the dramatic drops in production that have already occurred in both the North
Sea and North Slope, and implies you should believe that they are still at peak
levels, it also seems to suggest that there are great gains in production to
the world to be expected of Russia and the Middle East. As has been noted in
several posts and comments here, those statements cannot be justified by the
It is true
that the big firms are struggling to replace reserves. But that does not
mean the world is running out of oil, just that they do not have access
to the vast deposits of cheap and easy oil that are left in Russia and members
of the Organisation of Petroleum Exporting Countries (OPEC). And as the
great fields of the North Sea and Alaska mature, non-OPEC oil production
will probably peak by 2010 or 2015. That is soon--but it says nothing of
what really matters, which is the global picture.
Thus when the
article goes on to
It fails to
recognize that some parts of Ghawar have peaked some years ago, as has overall
production from the field. Further that the concern is that, with increasing
numbers of wells in the field being "bottle brush", that when the
decline comes it will, in fact, be the same 15% or more that we are now also
anticipating for Cantarell, and that we see in the North Sea and saw in Yibal.
The length of time that it will take to develop new fields is finite, and
that is the critical value of the CERA and Skrebowski lists, because in the
immediate short term these are the only new projects that can be anticipated
within this decade. Even if 200 billion were found on the border (and if you
look at a map there are known fields up there already) it will still take
years to develop and bring them into production.
For one thing,
the nightmare scenario of Ghawar suddenly peaking is not as grim as it first
seems. When it peaks, the whole "super-giant" will not drop from
5m bpd to zero, because it is actually a network of inter-linked fields,
some old and some newer. Experts say a decline would probably be gentler
and prolonged. That would allow, indeed encourage, the Saudis to develop
new fields to replace lost output. Saudi Arabia's oil minister, Ali Naimi,
points to an unexplored area on the Iraqi-Saudi border the size of California,
and argues that such untapped resources could add 200 billion barrels to
his country's tally.
This is already getting way too long but let me throw you a few more bones,
and then I'll quit.
Nope, no price
signals around here that I can see! How about you? Seen much increase in efficiency
so far? Me neither!
of a sharp global peak in production does not withstand scrutiny, either.
CERA's Peter Jackson points out that the price signals that would surely
foreshadow any "peak" would encourage efficiency, promote new
oil discoveries and speed investments in alternatives to oil. That, he reckons,
means the metaphor of a peak is misleading: "The right picture is of
an undulating plateau."
who is going to be developing that technology - can't be DOE they are cutting
budgets, can't be those who know what they're doing, they are all either getting
rich or retiring, and the worldwide shortage of engineers that is developing
means that the new crop will likely go to production rather than research.
a Harvard professor and the former chief economist of the IMF, thinks concerns
about peak oil are greatly overblown: "The oil market is highly developed,
with worldwide trading and long-dated futures going out five to seven years.
As oil production slows, prices will rise up and down the futures curve,
stimulating new technology and conservation. We might be running low on
$20 oil, but for $60 we have adequate oil supplies for decades to come."
But the main hope that he throws to us is alternate fuels.
obsession with the idea of "peak oil", what really matters to
the world economy is not when conventional oil production peaks, but whether
we have enough affordable and convenient fuel from any source to power our
current fleet of cars, buses and airplanes. With that in mind, the
global oil industry is on the verge of a dramatic transformation from a
risky exploration business into a technology-intensive manufacturing business.
And the product that big oil companies will soon be manufacturing, argues
Shell's Mr. Van der Veer, is "greener fossil fuels".
But if the
peak were to come after 2020 or 2030, as the International Energy Agency
and other mainstream forecasters predict, then the rising tide of alternative
fuels will help transform it into a plateau and ease the transition to life
Wonder if he
has any clue as to how much agribusiness will be required to replace 15 mbd
of oil? Many of the techniques he mentions at the end will help towards a
reduction in the size of the problem we are starting to face. Unfortunately
the Kern River produces only 570,000 bd of oil, and now needs 33,000 wells
to do this (with annual drilling of new wells at levels of up to 2,000
men shouldn't take messages:
Read this carefully. There are two puns here. It's brilliant.
does HMO stand for?
A. This is actually a variation of the phrase, "HEY MOE." Its roots
go back to a concept pioneered by Moe of the Three Stooges, who discovered that
a patient could be made to forget the pain in his foot if he was poked hard
enough in the eye.
Q. I just joined
an HMO. How difficult will it be to choose the doctor I want?
A. Just slightly more difficult than choosing your parents. Your insurer will
provide you with a book listing all the doctors in the plan. The doctors basically
fall into two categories: those who are no longer accepting new patients, and
those who will see you but are no longer participating in the plan. But don't
worry, the remaining doctor who is still in the plan and accepting new patients
has an office just a half-day's drive away and a diploma from a third world
Q. Do all diagnostic
procedures require pre-certification?
A. No. Only those you need.
Q. Can I get coverage
for my pre-existing conditions?
A. Certainly, as long as they don't require any treatment.
Q. What happens
if I want to try alternative forms of medicine?
A. You'll need to find alternative forms of payment.
Q. My pharmacy
plan only covers generic drugs, but I need the name brand. I tried the generic
medication, but it gave me a stomach ache. What should I do?
A. Poke yourself in the eye.
Q. What if I'm
away from home and I get sick?
A. You really shouldn't do that.
Q. I think I need
to see a specialist, but my doctor insists he can handle my problem. Can a general
practitioner really perform a heart transplant right in his/her office?
A. Hard to say, but considering that all you're risking is the $20 co-payment,
there's no harm in giving it a shot.
Q. Will health
care be different in the next century?
A. No, and if you call right now, you might get an appointment by then.
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
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