Chart of the Week: Can Russia Stay #1

Friday, September 9th, 2011

Siberia’s western oil fields have been a mainstay of Russia’s economic growth for decades, but the world’s largest producer of oil is now looking elsewhere in its country to replenish its stagnating supplies. Western Siberia’s oil fields have historically proven to be fertile hunting grounds for Russian oil companies, producing nearly 70 percent of the country’s exported oil.

But according to a recent report from Merrill Lynch, most of Western Siberia’s oil fields are considered brownfields—regions where roughly 75 percent of fields have been exploited. The firm says oil and gas firms must now consider the “big picture” to maintain long-term sustainable growth of their natural resources. East Siberia is home to the country’s best greenfield prospects—sites that remained untouched—and are Russia’s “next big hope,” Merrill Lynch says.

Merrill Lynch analysts say East Siberia has remained untouched by development due to its “harsh climate, remote location and lack of infrastructure.” But with noticeable declines on the western front, the Russian government is encouraging exploration in this region and others, including: East Siberia, the Baltic Sea and the northern fields of Vola-Urals and Timan-Pechora. These locations are expected to play a large part in Russia’s long-term promise to supply Europe and Asia with oil and gas.

The Russian government relies heavily on oil exports for tax revenue from oil and gas companies, which currently account for more than 50 percent of the consolidated budget. Recently, the Russian government has reversed its burdensome tax code and now offers tax incentives to “spur production, sustain output and coax more production out of stagnating Russian fields,” Reuters says.

One of Russia’s largest state-owned oil companies, Rosneft, is largely benefiting from these tax breaks to fund and explore new greenfields projects in East Siberia. With tax incentives in hand, the company is using innovative technology and new drilling techniques to dig deeper wells in cold climates, to unlock estimated reserves of three billion barrels of oil and 180 billion cubic meters of gas. Rosneft reported recovering nearly 92 million barrels of crude oil in East Siberia last year, according to the report.

CSI analysts say pairing these types of tax incentives with new discoveries will become vital to sustaining Russian’s oil output in the future. While the region still has a ways to go to compete with its western counterpart, Merrill Lynch predicts the region could account for 80 percent of growth and 15 percent of total oil output by 2018.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of June 30, 2011: Rosneft.

Tags: Baltic Sea, Consolidated Budget, Crude Oil, East Siberia, Harsh Climate, Hunting Grounds, Infrastructure, Mainstay, Merrill Lynch, Oil And Gas Companies, Oil Exports, Oil Fields, Reuters, Russian Fields, Russian Government, Russian Oil Companies, Sustainable Growth, Tax Incentives, Timan, Urals, Western Oil, Western Siberia
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Welcome, “Peak Oil”

Monday, January 31st, 2011

The article below is a guest contribution by Puru Saxena of Puru Saxena Wealth Management in Hong Kong, courtesy of The Daily Reckoning.

The day of reckoning is approaching and the world does not have a contingency plan.

The truth is that the world’s output of conventional crude oil peaked in 2005 and global oil exports are also past their prime. Furthermore, the unconventional sources (tar sands, heavy sour crude, ethanol, natural gas liquids, bio-fuels and shale) are struggling to keep up with the ongoing depletion in the world’s largest oil fields. Therefore, it is probable that the world’s current production of total liquids is at or near maximum capacity.

Veteran clients and subscribers will recall that we have been extremely concerned about ‘Peak Oil’. However, for many years, ours was one of the lone voices in the dark. It is interesting to observe that up until 2007, various government sponsored energy agencies were extremely optimistic about their oil production forecasts. In fact, before it commissioned its first field by field analysis in 2008, the IEA used to claim that the world could easily produce over 110 million barrels of total liquids per day! Ironically, other agencies such as CERA and the EIA were even more liberal with their oil production projections and ‘Peak Oil’ was dismissed as a lunacy.

Thereafter, in November 2008, the IEA released its World Energy Outlook 2010 report, which contained a thorough analysis of the world’s 800 largest oil fields. In this study, the IEA admitted (for the first time) that most of the world’s largest oil fields are depleting at a rapid clip and serious capital spending is essential to avoid an energy crunch in 2020. Although this report was a step in the right direction, in our view, the IEA was still painting an unrealistic picture.

Fortunately, it has taken the IEA only two years to realise its mistake and its latest World Energy Outlook 2010 report presents a far more realistic scenario. According to its latest study, the IEA now expects global total liquids production to increase to just 96 million barrels per day by 2035! Bearing in mind the fact that the world currently produces 88 million barrels of total liquids per day, the IEA is now essentially implying that output will only increase by 9% over the next 25 years!

It is notable that in 2009, the IEA stressed the importance of oil for economic growth and concluded that 106 million barrels per day will be required by 2030; representing an increase of approximately 18 million barrels per day above current output. Interestingly, in last year’s report, the IEA predicted that global production will peak at only 96 million barrels per day in 2035! So, within the course of a single year, the energy watchdog for the developed world lowered its production estimate by 10 million barrels per day!

To complicate matters further, the IEA’s latest forecast of 96 million barrels per day of peak production depends on the assumption of finding an extra 900 billion barrels of oil over the next 25 years! However, given the fact that over the recent past, we have managed to discover only 10 billion barrels of oil each year, we cannot help but take the IEA’s rosy forecast with a pinch of salt. Call us skeptics, but at the current rate of discovery, it will take us 90 years to discover 900 billion barrels of oil. Yet, the IEA somehow believes that this task can be accomplished by 2035!

The chart below is taken from the IEA’s World Energy Outlook 2010 report and it does a good job of capturing the sorry state of affairs. As you can see, the IEA now expects the output from the currently producing fields (dark blue area on the chart) to drop from approximately 70 million barrels per day to only 16 million barrels per day by 2035. Furthermore, the IEA also believes that 60% of oil production in 2035 will come from oil fields not yet found (light blue area on the chart) or developed (grey area on the chart)! Once again, call us skeptics, but we do not believe that oil fields yet to be found or developed will somehow succeed in offsetting the ongoing depletion.

It is our contention that the world will struggle to produce more than 91-92 million barrels of total liquids per day and global demand will collide with available supply. Of course, we do not know the exact timing of this event but if global consumption continues to grow by 1.5% per annum, we will get there within the next 2-3 years.

Needless to say, when aggregate demand hits available supply, the price of oil will rise sharply. More importantly, if demand continues to increase in the developed world, there will be a permanent shortage of crude and governments will probably end up rationing petroleum. Furthermore, it is our firm belief that ultimately, oil will only be used for its highest uses (agriculture and aviation).

If history is any guide, the price of oil will not rise in a straight line and the secular uptrend will be punctuated by severe economic recessions. After all, the cure for a high oil price is a high oil price! At some point during the course of this business cycle, as the price of oil continues to rise, it will (once again) cause economic pain for the overstretched citizens of the developed world. When that happens, consumption will slow down and we will experience demand destruction in some parts of the world.

In our view, the next economic recession will be caused by yet another spike in the price of oil and during the next business slowdown, crude will get whacked again. This is the reason why we will liquidate all our energy related investments prior to the onset of the next economic recession.

Turning to the current situation, the price of oil is trading around US$90 per barrel and during the course of this business cycle, we expect it to surpass its previous record of US$147 per barrel.

In addition to crude oil, we are also optimistic about the prospects of uranium. As you may know, various nations are scrambling to build new nuclear reactors and this is good news for uranium (raw material used for a nuclear reaction).

As the world approaches ‘Peak Oil’ and crude is conserved, demand for electricity will surge. Either that or the world will go back to horse drawn carriages, which we seriously doubt! Furthermore, given the environmental damage associated with burning poor quality coal, the world will turn to nuclear energy to meets its energy needs. Therefore, worldwide consumption of uranium will appreciate over the following years and this will exert enormous pressure on mined supply.

At the time of writing, the price of uranium has climbed to US$61.5 per pound and it is probable that it will at least double from this level. In the previous cycle, the price of uranium peaked around US$140 per pound and we will not be surprised to see that level exceeded within the next 2-3 years. Such a bullish scenario for uranium is great news for the unhedged uranium mining companies and a modest exposure to these stocks seems like a reasonable bet.

In summary, given the reality of ‘Peak Oil’ and our bullish bias, we have allocated approximately 30% of our clients’ capital to those assets which will benefit from the looming energy crunch. At present, we have exposure to upstream oil companies, integrated energy giants, oil services firms, renewable energy stocks, uranium and electric car/rechargeable battery manufacturers. It is our contention that these businesses will prosper over the following years, thereby rewarding our investors.

Source: Puru Saxena, The Daily Reckoning, January 29, 2011.

Tags: Bio Fuels, Contingency Plan, Conventional Crude Oil, Daily Reckoning, energy, Energy Agencies, Energy Crunch, Global Oil, Lone Voices, Natural Gas Liquids, Oil Fields, Oil Sands, Peak Oil, Production Forecasts, Rapid Clip, Realistic Scenario, Saxena, Step In The Right Direction, Tar Sands, Unconventional Sources, Voices In The Dark, World Energy Outlook
Posted in Energy & Natural Resources, Markets, Oil and Gas, Outlook | 1 Comment »

The Next Afghan Battlefield is Oil (Moors)

Wednesday, August 18th, 2010

This article is a guest contribution by Dr. Kent Moors, The Oil and Energy Investor.

After a long period of speculation, the Ministry of Mines in Kabul finally acknowledged the extent of newly discovered oil fields in northern Afghanistan. According to the ministry, there are about 1.8 billion barrels.

But the geological studies won’t be completed until January, and thus far, the U.S. Geological Survey (USGS) is not committing to a volume of extractable oil beyond one billion barrels.

No matter.

Whether it is the one billion the USGS now claims or the some two billion the same agency suggested a few years ago, this is big news for the war-torn country.

One of the prevailing assumptions has pointed to the lack of economic prospects as a major impediment against post-war reconstruction in Afghanistan. The oil finds, therefore, may be just the ticket to begin some discussions of political stability … or to tear the country apart.

Only Foreign Companies Can Develop This $1 Trillion Field

Afghanistan has other deposits, primarily in the south, in the Amu Darya River basin on the joint Uzbek, Tajik, Afghan border. That one has an estimated 1.6 billion barrels of oil equivalent. And given the known development on the other side of the Uzbek border, it has prospects for some hefty recovery volume.

That earlier discovery is primarily gas. This new discovery in the north is basically oil, with some associated gas thrown in for good measure. In short, Kabul is looking at the possibility of diversified hydrocarbons production and the likelihood of exporting both. The daily domestic demand will remain well below 150,000 barrels of oil equivalent, meaning the vast amount of production will be heading to the international market.

The ministry has already announced that both major deposits will be put up for tender – Amu Darya is still on track for early next year, while plans for the northern discovery are expected to be announced in a few months.

The tenders are obvious. Only foreign companies can develop these fields. Afghanistan has no domestic oil sector, no local equipment or suppliers, and great need for infrastructure development to reach the finds. That means there will be some heavy front-loaded development expenses from the necessary construction of roads, power lines, communications, and locations for employees, equipment, and supplies.

To add to the interest, the country has also discovered other significant natural resource deposits. These include iron ore, lithium, and copper. Despite the rising instability, both the Afghan and U.S. governments regard the finds as decisive in reducing the nation’s reliance on foreign economic assistance.

Thus far, foreign companies have begun operations only at the large Aynak copper mine south of Kabul. China’s largest integrated copper producer, Jiangxi Copper (OTC:JIXAY), along with Shanghai Exchange-traded China Metallurgical Group (SHA:600030), began development there in 2007. To date, this project remains the only significant foreign investment.

Earlier this year, a U.S. Department of Defense estimate put the potential natural resource largesse at more than $1 trillion. While I continue to have some questions about the methodology used in that study (these guys are military, after all, not economic planners), I do agree that the proceeds will be considerable.

On the other hand, the increasingly serious security concerns may push back any revenue realization by several years.

Nonetheless, the new oil find will be developed and it will have a positive impact on the Afghan market…

Early Indicators of Profits

There are two aspects of the initial phase that will tell us what is likely to happen and in which sequence these activities will unfold.

The first is the tender process and the companies lining up to participate. This will tell us who will be coming in and which secondary providers (of everything from field services and supply, on one end, to processing, storage, and transport on the other) will benefit. Operating companies – those who will compete for the tenders – generally favor certain secondary providers in each category.

Early indications are that Chinese majors Sinopec (NYSE:SHI) and China National Petroleum Corp. (available only through thinly traded CNPC Hong Kong Ltd.; OTC:CNPXF) will be energetically pursuing bids, with some interest likely from Indian majors. I expect a consolidated bid here from Oil India (BY:533106), GAIL (BY:532155), ONGC Videsh (the foreign drilling unit of state-owned Oil and Natural Gas Corp.), and Indian Oil Corp. (BY:530965). That would reflect the same consortium that was bidding recently to pick up the BP (NYSE:BP) Vietnamese offshore projects.

Still unknown is the level of interest among U.S.- and European-based operators. Moving forward, security is obviously an important concern. And Chinese and Indian companies have traditionally had a higher tolerance for these problems than have Western companies.

The second aspect involves the requirements for early front-end engineering and design (FEED); engineering, procurement, and construction (EPC); and related planning.

Here, there is a greater likelihood of Western, in general, and U.S., in particular, involvement. The Chinese would prefer to provide all aspects of a development project, but they may not have the opportunity in this case, especially in light of the political environment.

As it happens, I came back from San Diego Saturday, following a few days of addressing and meeting with major American engineering companies. There are several developments on Iraqi, Kurdish, and Afghan hydrocarbon projects that are coming. These plays will occur well before the required early field services (seismic study, exploration, data analysis, test wells).

Given the more direct U.S. market accessibility for individual investors to the shares of these companies, your move is almost certainly going to come here first.

Kent Moors

Copyright (c) Dr. Kent Moors, The Oil and Energy Investor

Tags: Afghan Border, Amu Darya River, China, Economic Prospects, Geological Studies, Good Measure, Hydrocarbons, Impediment, India, Kabul, Moors, Natural Gas, New Discovery, Northern Afghanistan, oil, Oil Equivalent, Oil Fields, One Billion, Political Stability, Post War, River Basin, U S Geological Survey, Uzbek, War Reconstruction
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Oil: Higher Prices Lead to Lower Prices?

Saturday, June 14th, 2008

Will higher prices for crude oil lead to lower prices? The debate rages on in these days of oil north of $135.

Rob Fraim ‘s recent report (Mid-Atlantic Securities, Inc.) is worth serious consideration as he has a good track record in this sphere, and secondly, his is a common-sense approach. It comes our way courtesy of Investment Postcards Blog, one of the finest on international investing.The paragraphs below are extracts from his excellent report.

I have for quite a lengthy period of time – going back several years – been bullish on energy markets and energy-related stocks. And fortunately this has been a decent call.

So now what? Last week a $10+ jump in the price of crude in one day. Visions of $200 oil dancing in their heads. Articles in the media about $15 gasoline, outcries about speculators driving up the price of oil, and the inevitable somewhat late-to-the-party recommendations to pile into the energy sector now.

Spoiler Alert: I’m going to suggest lightening up positions a bit in the energy sector. Sorry for ruining the suspense, but you’re busy, I’m wordy, and you were probably going to skip to the end anyway.

I’m not suggesting a complete exit – since I still believe that we will have reasonably high energy prices for the foreseeable future and that energy companies will be strong and profitable. However, I also believe that the oil market in particular has gotten a little goofy and frothy and that we are due for a meaningful pullback in crude – which is likely to impact the psychology and pricing for other energy markets as well. We all know how it is when the “hot money” gets out of a sector and how much volatility that can create.

Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a better than average chance that we are going to revisit $100-ish and stabilize there for a while.

This being the case I am suggesting that reaping some profits and reducing energy positions a bit might be a wise move – at least on a trading basis. Keep a core holding for the long-term, but lighten up. Sell some stuff. Write some covered calls. Hedge a bit. Maintain the core but trade with part of your energy investments. Do something other than get whipsawed.

Why? A combination of fundamental, anecdotal, and emotional factors actually. (I might also throw in technical, psychological, sociological, zoological, anatomical, and astrological if I get really cranked up.)

Here are a few of the reasons why I am reaching this conclusion.

There are some indications that demand is actually beginning to fall – somewhat in the same way that it did in 1979 and 1980 when gas pump pain reduced gasoline use by 5% and 6% respectively.

Miles traveled in the US are down – off 4.3% in March. In the last week of May – with Memorial Day weekend – gas buying was down 3.9% from the previous year. Why the declines?

Consumers are adjusting their driving and consumption habits. There is a real switch toward smaller, more energy-efficient cars and away from trucks and SUVs. In May of this year 4-cylinder cars made up 45% of sales versus just 30% in 2005.

Anecdotally, transportation companies are adjusting as well. We had a conversation with a trucking company recently and they spoke of measures that they have put in place to reduce fuel consumption. They are using monitoring and tracking systems and technology to enforce the 55 mph limit on their drivers – instead of the “unofficial” 65 mph or so that was the norm before. They are very serious about this and have enacted real driver penalties for non-compliance. Different studies have shown different results, but roughly speaking the difference between 55 mph and 65 mph is about a 10% improvement in fuel economy.

A potentially strengthening US dollar can have a big effect. While we tend to focus on supply-and-demand metrics and speculative forces when talking about oil prices, the simple fact is that a lot of the rise in oil prices has been not about oil inflation, but rather dollar deflation. The greenback has been in a downward spiral for months – courtesy of the credit crisis, problems in the US economy, and the long series of interest rate cuts. Now that rates have likely bottomed and as the US economy comes out of panic/fear mode the odds favor somewhat of a rebound in the dollar.

Jeffrey Saut at Raymond James – a strategist for whom I have the utmost respect – has adopted a more bullish stance on the dollar after years of warning about dollar weakness. If he is right – as I suspect he is – dollar appreciation will bring down crude oil pricing – as the need is also lessened for oil producers to keep prices high on crude, which is their primary greenback denominated export.

Back to the supply and demand issues, we know that real (or perceived) energy consumption in the emerging economies in China and India has taken up all the supply “at the margin”. And it is those last few incremental percentage points of usage data that make the difference between tight markets (rising prices) and looser ones (stable to lower prices.) While the China and India growth stories are real – and will be a continuing factor – there are certain things that speak to a modest lessening of demand.

When government subsidies in many Asian nations disappear by year’s end, demand should slacken. And China, stockpiling supplies for the coming Olympics, will likely shift gears and cut back on its energy purchases by August according to some. Now, today’s report regarding potential demand from China speaks otherwise, but then again I could find another item that would again talk about demand leveling off. It’s always a tug of war of course, but I am getting the feeling that the picture is not nearly as one-sided as has been reported.

Furthermore a slackening economy here in the US should also take a little pressure off of the demand side of the equation.

While not the end-all of supply problems, there has been some modest production growth – largely from Russia. So all in all the supply and demand balance seems to be tipping back in a more favorable direction – at least for now – with some estimates and reports indicating that we have moved from a deficit of 900,000 barrels a day that had to be made up by dipping into reserves, to a global “cushion” of 600,000 barrels a day.

I also wonder at what point political ideologies and environmental concerns will crumble to voter dissatisfaction over painful energy prices – possibly opening up drilling in previously “off-limits” areas.

“There is no justification for the current rise in prices,” said Saudi Oil Minister Ali al-Naimi on June 9, 2008, calling for an energy summit between producing and consuming nations. Now to be sure, we can take anything from OPEC nations with a grain of salt, but ultimately it serves the interests of the oil producers for oil prices not to skyrocket too far – since this would encourage serious conservation measures and bring about further political pressure. While excess supply capacity is not huge, Saudi Arabia itself has about 2,000,000 barrels per day in potential production expansion capability.

So with all of that in mind, do I think that we’re going to return to the days of cheap energy and a huge energy price decline – as occurred after the 1980 spike? Hardly. It was easier to increase production back then since oil fields were less mature and exploited. Also there were a lot more energy inefficiencies (in cars, appliances, building materials and techniques) back then than there are now – areas that could be markedly improved easily enough.

No, not cheap energy – just maybe cheaper by a bit. It would not surprise me to see $100 to $105 oil by the end of the year. That probably equates to gasoline in the $3.50-ish area.

Of course the unknown and unknowable regarding crude oil is the geopolitical picture. What if Israel bombs Iran and the Straits of Hormuz are blocked? What about Nigeria? And Hugo Chavez down in Venezuela? And Iraq? Terrorists! Floods! Plagues! Locusts! Well, as we saw last Friday those types of concerns (absent the locusts) have been moving the energy markets. Did anything really happen on Friday – something other than rhetoric – that fundamentally impacted the picture? Not really. It was a speculation and fear-driven spike.

Now I’m not one of these folks who vilifies speculators and blames them for high prices. It’s a free market and speculators actually serve a purpose. But blame it or not, speculation does enter into the pricing picture as speculators vie with actual users of the commodity for a relatively limited pool of sellers. But like ’em or hate ’em, speculators give us our market timing opportunities – to buy when people are selling or sell when most are buying. It just seems to me that more than a little of today’s $136/barrel price tag on oil price has geopolitics/fear/speculation written on it.

Last week I wrote about the (in my view) somewhat silly finger-pointing and ranting about the role of speculators in having driven up the price or energy and noted that ultimately speculators aren’t bigger than the markets and that supply-and-demand always wins out. Speculative moves can last longer and go further than we expect – and no one, me especially, can hope to “top-tick” the market by selling at the very peak. That’s why my recommendation is not a 100% all-or-none exit from energy positions, but instead an attempt to be level-headed and proactive by taking advantage of speculative fever and “ringing the register” on portions of energy exposure.

Source: Rob Fraim,

Mid-Atlantic Securities, Inc, June 10, 2008.

Tags: Ali al-Naimi, Asia, Blog, China, Commodity, Consumption, Credit, Credit Crisis, Crude Oil, crude oil pricing, Dollar, driver, Economy, energy, Energy Consumption, Energy Efficient Cars, energy exposure, energy inefficiencies, Energy Investments, Energy Markets, energy positions, Energy Purchases, energy sector, energy summit, Focus, gas buying, gas pump pain, Grain, high energy prices, huge energy price decline, Hugo Chavez, India, inflation, International, Investment Postcards, Iraq, Islamic Republic of Iran, Israel, jeffrey saut, Markets, Memorial Day, Mid-Atlantic, Mid-Atlantic Securities Inc., naimi, Nigeria, oil, oil dancing, Oil Fields, oil inflation, Oil Market, Oil Minister, oil north, Oil Price, Oil Prices, Oil Producers, Olympics, Organization Of Petroleum Exporting Countries, painful energy prices, Raymond James, risk, Rob Fraim, Russia, Saudi Arabia, Saudi Oil Minister, Strategist, Stuff, Subsidies, Trading, transportation, United States, US Dollar, usd, Venezuela
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