Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Tuesday, March 15, 2005: Oil.
Do we have plenty? Or are we running out? No area is so riddled with myth and
misunderstanding. Yesterday Saudi Arabia said OPEC should increase production
by 2% to meet rising world demand and to stem recent price rises. But many observers
think there isn't even 2% spare and that the 2% is a Saudi statistical fiddle.
I started reading. First, some quotes.
rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
-- Old Saudi saying.
anybody really believe that ANY oil producer is pumping less than they are capable
of at $55 per barrel?" -- Chat room.
"Most OPEC members are producing as much oil as they can."
-- Wall Street Journal.
"Oil prices have doubled since 2001, but oil companies have increased
their budgets for exploration only slightly."
"Where once there were seven major oil companies, now there are four.
Oil companies now increase their reserve holdings by mergers and acquisitions,
not new oil finds."
"U.S. refineries are working close to capacity, yet no new refineries
have been constructed since 1976."
Now to the most
letter from oil exploration insider
I work for
a major international oil company, in the exploration area. Peak oil is a fact
we are all on the back side of the bell curve.
is true, it might be better to term it the Cheap-Oil Peak. The US/UK/Western
Europe are the entities primarily responsible for using up most of the oil prior
to the mid-1980s. Around that point, Asia and China got into the mix.
As their economies heated up more oil was used. This trend is still in
the link to that Beware of the Peakoil Agenda, which I probably
shouldnt have done. The ignorance of most of the world about what we do
in oil exploration is amazing. Even the DOE has no idea how or what we really
do they are academics, and exist in their own government-funded bubble.
world can resist pulling the trigger on our debt, and we can resist pissing
them all off in unison, we just might be OK for another 10 years, basically
rolling along as-is but with higher oil/gas prices. We do have some
untapped resources here, but there are some facts that most people do not understand
with respect to the exploration industry.
1) We are drilling
rig limited we are at full capacity world wide in the offshore rig market,
and even the small number of new drilling rigs they are building will not improve
that appreciably. No drilling contractor is going to build rigs rapidly ever
again not after the disaster of cheap oil in the late 70s
and 80s. Assuming oil jumped to $100/bbl tomorrow, little in our
industry would change, because the drilling infrastructure has been cannibalized
for 20 years
..we are already drilling as fast as we can!
2) We are personnel
limited in 1982 there were 1.6 million Americans working in the Oil &
Gas sector, and today there are roughly 500,000. Imagine the hue and cry from
any other industry at a job loss of well over 70% nationally!! The average age
of people like me is 45 years old or older, with a great many facing retirement
in the next 10 years. The age bracket between 30 and 45 is basically empty
who enters a consolidating, shrinking field intentionally? We simply do not
have the available manpower to ramp-up in response to any stimulus - we are
currently each doing the work of 2 or more people as we exist today!!
3) The notion
that we are sitting on capped wells of oil or gas is utterly ludicrous.
We simply do not drill and sit on reserves they must be produced to pay
for the enormous expenditures we have in drilling them, or shareholders would
evaporate as our bottom lines became nonexistent. Wells are drilled based on
the estimated oil price 6-12 months ahead, and that estimate is very bearish
due to what happened in the 1980s oil bust. Oil and gas actually move
through rock sitting on capped wells must have been invented
by some environmental nut-basket, because there is no business or geological
sense to it, and smart people follow the money.
4) We are finished
with most of the second tier exploration domestically. What we have
left in the ground is either uneconomical due to depth, temperature, technology
or other. Other includes those wonderful people who
NEVER want to see a drilling rig anywhere near them (NIMBY) or in their view.
Thus we have been essentially frozen out of the west coast, the
east coast, all of Florida and the Arctic frontier. If we were turned
loose on all this acreage, it would require well over 36 months for the
first drop to get to market. We must find it, delineate it, build a producing
structure, and then ship it in states or areas that have no oil transportation
or drilling support infrastructure!
5) Many people
foolishly believe that higher prices will make the oil as valuable as gold is
today. What they fail to realize is this: as liquid energy (oil) prices rise,
all associated prices rise! Even if oil sells for $100/bbl, everything built
with this $100/bbl oil will experience the same price increases, and likely
more. This includes all plastics, steel, transportation and chemicals! We are
currently bypassing the drilling of certain wells right now because the cost
to get them out of the ground cannot be recovered. If our material costs (what
we buy or rent to actually build an oil or gas well) rise with oil prices, many
fields will never be produced, as it will always be uneconomical due to the
small size of the oil trap.
6) For the
most part, the biggest fields have been discovered world wide. What remains
is technologically prohibitive (water depth, downhole temperature or sheer depth
of the deposit). We are all fighting for the scraps as things exist today, with
the exception of the African coast. There, we are fighting for our lives as
well as oil. I have personally been shot at during overseas stints, and once
held hostage by guerillas as they blew up our rig while we watched. We are not
a bunch of sissy-boys in this industry, but we also have wives and children.
West African production will never increase appreciably until their governments
achieve stability. In other words, West Africa cannot help us in the foreseeable
for the number bunch to crunch: The average offshore rig cost $24,000 per day
to rent in 2003, and today the same 30 year-old-rig costs $40,000 per day to
rent due to rig availability. Yes, most of our rigs are 30 or more years old
would you rent a cabin on a 30 year-old cruise ship? Yet this is what
we drill oil wells with in the new millennium
times the average 45 days to drill a second tier oil or gas well,
you get $1,800,000 just for renting the drilling rig! No other mining industry
or industry I know of has such tremendous up-front costs. The average price
for a typical offshore well is around 3.7-4 million dollars. A production platform
to bring the oil to is easily in excess of $10 million
prices will escalate with energy costs!
It is not a
question of if peak oil has occurred it has! The better question
might be when are the crows coming home to roost? When will we begin
to actually experience the shortages and the rising prices? I think we might
make a decade, if everybody plays nice across the world. But when has that ever
happened when something got scarce?
to get that off my chest. I have been maligned and spit on by too many people
who drive cars and use electricity, and then bitch about prices or claim some
kind of Big Oil Conspiracy
. I can tell you that the collective
consensus within my business will be let the bastards freeze in the dark
when the big wail arises.
This letter was
originally published by George Ure on his site www.UrbanSurvival.com.
I asked George yesterday how confident he was in the author of the letter. His
I am very confident in the writer hes a drilling consultant with
one of the companies in Houston. I consider his numbers above reproach.
This chart is
from today's Wall Street Journal:
As every reader
of this column knows, I believe oil will rise much higher in price. Why?
Huge new demand from China and India, along with little possible early rise
in production, and few energy substitution alternatives. Two more quotes from
my reading yesterday:
of U.S. Lower 48 oil production since the 1970 peak strongly suggests that oil
prices and advancing technology had little impact on the
further oil exploration, there are commercial options for increasing world oil
supply and for the production of substitute liquid fuels: 1) Improved Oil Recovery
(IOR) can marginally increase production from existing reservoirs; one of the
largest of the IOR opportunities is Enhanced Oil Recovery (EOR), which can help
moderate oil production declines from reservoirs that are past their peak production:
2) Heavy oil / oil sands represents a large resource of lower grade oils, now
primarily produced in Canada and Venezuela; those resources are capable of significant
production increases;. 3) Coal liquefaction is a well established technique
for producing clean substitute fuels from the worlds abundant coal reserves;
and finally, 4) Clean substitute fuels can be produced from remotely located
natural gas, but exploitation must compete with the worlds growing demand
for liquefied natural gas. However, world-scale contributions from these options
will require 10-20 years of accelerated effort.
As I read more on oil yesterday, I kept running across a fellow called Matthew
R. Simmons, Chairman of Simmons & Co. International (SCI), an energy banker.
According to the Simmons web site (click
here), the firm has acted as financial advisor in nearly $62.8 billion
of transactions, including 385 mergers and acquisitions worth $49.3 billion,
and has served as co-manager on more than $10.2 billion in public debt and equity
offerings. It seems Simmons is knowledgeable.
Simmons is very concerned that existing oil and gas reserves may prove insufficient
to meet future demand and therefore precipitate an energy crisis that would
severely disrupt the American way of life (e.g. the suburbs, travel, etc.).
He believes exploration and reporting practices of the Oil and Gas industry
tend to obscure, rather clarify the the extent of reserves and quality of oil
fields. Choice Simmons quotes:
of 'trust me' is baloney."
need a Plan B, it would sure be nice to know that with a little bit of advance
situation of Natural gas in the United States] is simply awful; we're in decline...
We don't have any solution."
There are two
large Simmons reports worth skimming. click
here and click
On March 3, I
wrote that oil was going to $62 short-term. I still believe that. Long-term
it will go even higher. Several readers own oil futures. This is good. Several
readers own Hummers and other gas guzzlers. This is bad.
TriPath Imaging is speaking. Paul R. Sohmer,
M.D., its Chairman, President and Chief Executive Officer, will speak at the
SG Cowen & Co. 25th Annual Health Care Conference on Thursday, March 17,
2005 at 9:40 am in Boston, Massachusetts. An audio web cast of the presentation
will be available live online via TriPath Imagings website at www.tripathimaging.com
and will be archived for replay for at least two weeks. I continue to like this
do remember anniversaries
Woman awakes during the night to find her husband not in their bed. She puts
on her robe and goes looking for him. She finds him sitting at the kitchen table
with a hot cup of coffee in front of him. He is staring at the wall.
She watches as
he wiped a tear from his eye and takes a sip of his coffee.
matter, dear?" she whispers as she steps into the room.
The husband looks
up from his coffee. "Do you remember 20 years ago when we were dating,
and you were only 16?"
The wife is touched
to tears thinking that her husband is so caring and sensitive.
"Yes I do,"
The husband paused.
"Do you remember when your father caught us in the back seat of my car
"Yes, I remember,"
said the wife.
The husband continued. "Do you remember when he shoved the shotgun in my
face and said, 'Either you marry my daughter, or I will send you to jail for
that too," she replied softly.
He wiped another
tear from his cheek and said... "I would have gotten out today."
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
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