10/28/09 Pittsburgh, Pennsylvania – We should expect a global oil shock by 2012…at the latest. But an oil shock doesn’t have to be completely shocking. Why not beat the rush and get ready for the shock now. You might even make a few dollars in the process.
Our story begins with “Peak Oil” – the belief that conventional production of crude has already peaked, and has already slipped into an irreversible decline. As “Peak Oil” moves from mere theory to indisputable fact, the global economy will face wrenching changes. But the vigilant investor will gain an opportunity to profit along the way.
As I discussed in yesterday’s edition of The Daily Reckoning, oil production seems all-but-certain to decline, despite the huge new discoveries off the coasts of Brazil, Africa and elsewhere. In fact, production is already declining rapidly from some of the world’s largest fields. Mexico’s “Catarell” Field, like a kind of Peak Oil poster child, was producing more than 2 million barrels a day as recently as 2005. But production from this field is plummeting irreversibly toward 500,000 barrels a day, as the chart below illustrates.
The recent discoveries of deep offshore oil will certainly help slow the decline of conventional crude oil production, but theses discoveries will not come on line for many, many years.
But what about alternative energy sources? Won’t they make up for the shortfall of crude oil? No chance. Alternative energies might offset a tiny sliver of falling crude oil production. But solar panels can’t lift a fully loaded Boeing 777 off a runway…nor even lift an empty Piper Cub.
So what about the many sources of “unconventional” oil and gas? Won’t these compensate for declining production from conventional sources? The short answer is no.
Geologist Art Berman, for example, offers a decidedly negative view of the latest “big thing” – obtaining large volumes of natural gas from “tight shales.” In a comprehensive review of production and flow rates from several thousand wells drilled in the past decade in the Barnett Shale of Texas, Mr. Berman presents a gloomy forecast.
Looking at a large sampling of Barnett wells, the overall data reveal that initial gas flows decline rapidly. With some wells, the drop-off is as much as 70% in the first year, with further declines of 20% in the second year.
This hardly dovetails with the happy talk about how “shale gas” will supply US energy requirements for the next several decades, if not a couple of centuries. It appears that most Barnett wells are short-term money losers, with a few prolific wells carrying the bulk of capital expenditure.
According to Mr. Berman, the picture is not much better in other shale plays, such as the Fayetteville and Haynesville shales. And similar gloomy data are just now starting to come in on the embryonic gas play in the giant Marcellus formation of Pennsylvania.
But this bad news does need to be ALL bad. As the world’s mature and aging oil fields slip into an irreversible decline, production from the world’s new offshore discoveries will become increasingly important.
Therefore, forward-looking investors can begin TODAY to make selective investments in those sectors of the oil industry that will flourish during the coming oil shock. I am particularly fond of the “deepwater” sector…and have been urging my subscribers for several months to focus on the companies that facilitate deepwater oil production.
Marcio Mello, the former “explorationist” from Petrobras and now independent petroleum consultant, electrified the Denver meeting of the Association for the Study of Peak Oil & Gas (ASPO) with his analysis of several high-profile deepwater discoveries.
In a riveting talk that lasted well over an hour, Marcio detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin. If Marcio’s estimates are correct, Brazil may be the location of nearly 200 billion barrels of additional petroleum resources. That’s well within the range of current resource estimates for Saudi Arabia.
For good measure, Marcio described the petroleum potential of offshore West Africa — another 130 billion barrels — as well as the Congo region, with 50 billion barrels or more.
Finally, Marcio described the “unknown potential of the US back yard, the Gulf of Mexico (GOM).” Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana. He showed early work he performed on a number of GOM areas, including the site of BP’s (BP: NYSE) recent billion-plus barrel find at the Tiber site.
If his analyses of the South American, African and GOM petroleum systems are correct, the world has access to much more conventional oil than people previously believed. But accessing and producing this oil will require a trillion-dollar level of offshore, deepwater investment. It’s a 30- to 50-year project.
“Deepwater” will be a BIG business.
Some of the companies that are well-positioned for the deepwater era of crude oil production include Petrobras, Repsol (REP: NYSE), BP (BP: NYSE) and StatoilHydro (STO: NYSE). I am also a fan of subsea equipment builders like Cameron Intl. (CAM: NYSE) and FMC Technologies (FTI: NYSE), plus service companies like Halliburton (HAL: NYSE) and Baker Hughes (BHI: NYSE).
These are a few of my favorite long-term plays for the long-term era of deep-water development.
Regards,
Byron King,
for The Daily Reckoning
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Great article. Timely and relevant to both traders and economists.
Don’t get sucked in by this peak oil fraud. I posted a comment yesterday, but need to amplify today. I’m beginning to loose faith in Daily Reckoning over support of this fraud. Just look at the Saudi Ghawar field, the largest in the world. In 1975 Exxon, Mobil, Chevron, & Texaco estimated that the ultimate recovery would be 60 billion barrels (55 billion barrels had been recovered at that time ie only 5 billion to go in 1975). By 2004 the Saudis put the figure at 185 billion barrels recoverable and the figure seems to keep rising (see http://ww.simonsco-intl.com). Don’t get sucked in by the peak oil fraud. It will bankrupt you.
And how about pine resin-based fuels and lubricants then? Not commercially viable yet, I know, but at least they’re being actively researched ATM…
Well Byron, I guess you’ve never heard of peak wood ? Peak Wood was the time when production of timber to be used for fuel and construction was at it’s highest. This occurred more than 150 years ago. At one stage more than half of Europe was covered in forest. What happened at Peak Wood? Well nothing. Industry and people that previously used wood simply switched to burning other fuels such as coal or kerosene. The point being is that ALL resources are finite. So when production declines in one resource they simply switch to an alternative.
With effectivelly (not literally) limitless supplies of natural gas, coal, uranium. Who really cares that peak oil will be here or has past or is already here? Consumers/industries will adapt. The only people that need to be fearful is oil producers. Peak Oil, bring it on!
I am confused….
How about Geothermal energy?
BMW
A good fuel needs to be abundant, cheap, and easily transportable. Most alternative fuels don’t qualify. And they also have problems: windmills kill birds, coal pollutes, hydrogen has to come from some other hydrocarbon or else be generated by using water and electricity (which itself must come from some source).
The Bible says (Ezekiel 38 & 39) that many armies will invade the Middle East at a time after the Jews are gathered to Israel from many nations. The armies will be after something valuable. Could it be oil?