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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.

"My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel." -- Old Saudi saying.

"Does 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 interesting piece:

A letter from oil exploration insider
by anonymous

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.

While this 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-1980’s. Around that point, Asia and China got into the mix. As their economies heated up – more oil was used. This trend is still in effect.

I followed the link to that “Beware of the Peakoil Agenda”, which I probably shouldn’t 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.

Provided the 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 ‘70’s and ‘80’s. 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 1980’s 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 future.

Some numbers 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…..

Multiply that 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…….and these 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?

Just wanted 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.

Respectfully, (name withheld)

This letter was originally published by George Ure on his site I asked George yesterday how confident he was in the author of the letter. His response:

"Hi Harry,
I am very confident in the writer – he’s 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:

"Analysis of U.S. Lower 48 oil production since the 1970 peak strongly suggests that oil prices and advancing technology had little impact on the
production decline.

"Besides 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 world’s abundant coal reserves; and finally, 4) Clean substitute fuels can be produced from remotely located natural gas, but exploitation must compete with the world’s 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:

"The era of 'trust me' is baloney."

"If we need a Plan B, it would sure be nice to know that with a little bit of advance warning."

"[The 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 here.

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 Imaging’s website at and will be archived for replay for at least two weeks. I continue to like this stock.

Men 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.

"What's the 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," she replies.

The husband paused. "Do you remember when your father caught us in the back seat of my car making love?"

"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 20 years?'"

"I remember that too," she replied softly.

He wiped another tear from his cheek and said... "I would have gotten out today."

Harry Newton

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 click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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