Deep-Water Oil Won't Cure Peak Oil

So there I was the other day, walking through the waiting area of a local hospital. I looked over at a glowing television set. I saw a silver flying saucer. The caption at the bottom of the screen stated, helpfully, “Flying Saucer Over Colorado.”

We’re Not Alone…

Thank GOD! I thought to myself. They’re here!

My mind raced. We’re not alone in the galaxy. The aliens have arrived. They’re going to save us. Kind of like at the end of Star Trek: First Contact.

My mental gears kept turning. Unless they’re here to destroy us with death rays, like in The War of the Worlds. And then eat us, like in The Thing. All while they take our oil, gold, rare earths, tungsten, cobalt, vanadium and other good stuff. Like in Independence Day.

I wondered if an alien would leap out from the floating disk and say, “Take me to your leader?” Hmmm… But would some trigger-happy National Guardsman pull a Kent State and shoot him, like in The Day the Earth Stood Still?

Oh, man. We don’t want to get pushed around by the aliens, of course. But if somebody shoots the alien, it’ll make for trouble. We’ll have an interplanetary crisis on which hinges the fate of humanity.

Hmmm… If somebody shoots the alien, my advice is to sell your stocks. Go to cash, pronto. Meanwhile, you’d definitely be glad you bought gold — and TOOK DELIVERY! See? I told you so. When you buy gold, take delivery.

It’s All About Ratings

I pondered the cosmic implications for, oh… all of about half a second. Then I listened to the television announcer in the background. He described how an errant balloon was drifting over Colorado with a little boy onboard. Damn, I thought. No aliens. Just a bad imitation of The Wizard of Oz.

Then the milk of human kindness began its slow IV drip into my veins. For as much as I’d have preferred real aliens landing to take over (c’mon, could they be worse than the current crop of commissars?), I worried about the little boy.

I figured that yes, maybe it was happening like the TV drones were saying — although TV drones often lie like rugs. A wayward balloon? A little boy? OK, it might be real. If so, then it’s high drama, literally. Stranger things have happened. Remember the OJ slow-speed chase in the white Ford Bronco, through Los Angeles, down Interstate 405, back in 1994? Historic, no?

Yep, maybe some little tyke climbed into a gondola. I’d hate to have the kid fall to his death from a balloon. In living color. On the 42-inch flat-screen TV with awesome resolution. Of course, the TV news vultures would be all over the story. Live at Five. I can only imagine the headline in Variety: “Kid Falls, Ratings Soar.” That’s showbiz, right?

Except, as you surely know by now — unless you’ve been living on Mars or something — there was no little boy on the flying saucer. It was just some guy trying to do a publicity stunt. It was all a hoax.

Not a Hoax — We’re in Trouble

I’ll tell you about something that was drifting over Colorado last week, and it’s NOT a hoax. It’s Peak Oil. I attended the 2009 international conference of the Association for the Study of Peak Oil and Gas (ASPO), out in Denver. Here’s the long and short of it. We’re in trouble. With a capital “T,” and that rhymes with “P,” and that stands for Peak Oil.

Last week, I told you about how Marcio Mello, one of the explorationists that discovered the offshore Tupi oil field of Brazil, gave ASPO a spellbinding stemwinder of a keynote talk about the newly discovered oil resources of the Brazilian pre-salt play. It was a great talk. I believe Marcio. Not only do I believe him, but I’m choosing investment ideas based on his research. Marcio has changed the thinking within the world oil exploration community. Marcio is a player. He’s a game changer.

But let’s get real about this. Sure, there’s a LOT more oil out there. As in, “out there,” 150 miles and more offshore, in 8,000 feet of water and deeper, beneath 20,000 feet of rock and salt. You see the problem, right?

Yes, that offshore resource is out there, and it’s super hard to extract. This is not the “easy oil” of the good old days. (Just kidding. It’s never been easy.)

But we’re looking ahead. And that’s why we’re invested in the future of deep-water oil, plus subsea equipment builders and service companies. These are long-term plays, for a long-term process of deep-water development.

Meanwhile, Brazil is still building the shipyards in which it will build the drill ships and platforms, which will develop the offshore arenas, over many, many years. Again, you see where I’m going with this, right?

Sure, there’s a lot of offshore development going on now. But there’s much, much more that’s going to happen in the coming decades. It HAS to happen. And that’s the problem. It’ll take time. And capital. And many people with critical skills. And some of those critical skills have not yet been developed. And it’s just super complex. By comparison, maybe building a flying saucer is easy.

Peak Oil: We’re There

By every measure, the world’s output of crude oil peaked between 2005 and 2007. Peak Oil? Hey, we’re there.

What do I mean? That’s output of crude oil, as in conventional petroleum that flows or gets pumped out of wells. Yes, the worldwide total output of what we generically call “oil” has risen — slightly — in recent years. But that’s because there are increasing volumes of natural gas liquids (NGLs) in the mix, plus unconventional oil like what the global marketplace obtains from Canada’s oil sands.

Let me focus on NGLs for a moment. In other words, the global energy industry is blowing down the gas caps on older fields. That’s how you get NGLs. That, and spinning the NGLs out of tight gas, like what we see with another recent addition to the OI portfolio.

In a macro sense, it means that the global energy industry is pulling what’s left of the conventional oil out of the early-discovered fields and taking the gas too. When it comes to Peak Oil, we’re there, and in fact, we’re past it.

The future of conventional petroleum output is downhill, even with the future output from the deep-water offshore discoveries. That deep-water oil will sure help, but it won’t power the world of the future the way it powered the world of the past. We live in a different world now.

Thus, the energy future is all about transition to something else. It gives a whole new meaning to that phrase, “Take me to your leader.” Huh? What leader? Most of the world’s policymakers are clueless about this.

More on NGLs, and “Oil Pharmacies”

Let me clarify things some more. NGLs are hydrocarbon fractions that are not methane and ethane. NGLs are present in the high-pressure, high-temperature gas that flows from the ground. But NGLs are not gaseous at surface conditions. After a short time at the surface, NGLs condense out of the gas flow and become liquid. It goes back to Boyle’s Law and the “ideal gas law” in chemistry.

NGLs condense out of natural gas flows, from oil field gas caps and from some tight-gas output like we see in the Marcellus Shale of Pennsylvania. NGLs include things like propane, butane, pentane and other items up the hydrocarbon chain, up to and including high-grade gasoline.

NGLs are nice. But they’re not crude oil. According to Matt Simmons last week in Denver, “There’s no such thing as West Texas Intermediate [WTI] oil anymore.” Mr. Simmons states that places like the pipeline crossroads at Cushing, Okla., are little more than “crude oil pharmacies” anymore.

That is, there are lower and lower flows of conventional oil from the wells of the traditional U.S. oil patch. Thus, operators at Cushing take whatever oil they can obtain from one place, plus whatever oil they can obtain from another place. They mix and match, and blend it all with synthetic crude from Canada. Maybe they add some imported oil juice and then send it down the line as WTI.

Along those lines, Venezuelan economist Carlos Rossi stated to ASPO his analysis of oil trends in the U.S. “You are worried about your foreign oil imports now,” he said. “You in the U.S. import about 65% of your oil today. You don’t like it. But if you follow the clear trends, by 2025, you’ll be importing about 92% of your oil. You’ll like that even less.” No doubt.

On that cheery note, let me quote James Kunstler, who recently summed up the problem, describing “the tragic evolution of an industrial economy into a financial-finagling economy.”

Jim Kunstler’s view is that sooner or later, the citizens will awaken and wonder how the energy situation could get so out of hand, or “stealing of their future,” as he phrases it. “Whatever else one might say about American culture,” adds Kunstler, “it is keenly attuned to a sense of heroes and villains. We take great pride in our ability to blow away the bad guys.”

Maybe those aliens realize this. And that’s why they haven’t shown up yet.

Until we meet again,
Byron King

October 27, 2009

The Daily Reckoning