Gary’s Note:
What’s specific gravity got to do with it? Byron King tells us why it
matters when we’re talking about oil. The heavy, hard to get stuff is
starting to look really good. Enjoy. And send your questions and comments to
gary@whiskeyandgunpowder.com.
|
Heavy Oil Starts Looking a Lot More
Enticing |
By Byron King
June 3, 2009
Pittsburgh, Pennsylvania, U.S.A.
When most
people think of oil, they think of light, sweet crude that comes up out of
little holes in the ground. You describe oil by its API gravity. For
example, oil like Brent crude or West Texas Intermediate has an API gravity
of 38-40. The oil that Col. Drake pulled from the ground at Titusville, Pa.,
in 1859 had API gravity near 60. These types of oil are relatively easy to
pump from a reservoir, lift to the surface and transport via pipeline to the
refinery.
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The Shift to
Heavy Oil, with an “Energy Microsoft” at the Forefront
But a
significant portion of the world’s oil is much lower quality than the light,
sweet stuff. Indeed, most oil that’s found in nature is a heavy, viscous
hydrocarbon with the consistency of cold molasses. This heavy oil — defined
as API gravity 22.3 or less — is difficult and costly to produce and refine.
That’s why people have pumped and burned the light, sweet oil for the past
150 years. Throughout its history, the oil industry has usually bypassed the
heavier oil fractions. Why go to the trouble and expense, right?
But now
conventional oil resources are drying up. The reasons have to do with
geology, politics, macroeconomics and the investment cycle. Boiled down,
it’s the Peak Oil argument, which focuses on the worldwide decline in output
of light, easy-to-get oil. And Peak Oil is a serious matter. As light oil
gets scarce, however, a lot of new heavy oil plays are coming out of the
industrial shadows.
Indeed, with
the breakout of heavy oil into the marketplace, the world energy business is
about to change dramatically. It’s kind of like what we saw with the
computer revolution that began about 30 years ago. Big, heavy mainframes
gave way to small-scale, distributed and personalized computing power. At
the heart of the revolution was the operating system, much of which wound up
coming from Microsoft.
Today, the
energy industry is on the cusp of a revolution equally profound. And in the
forefront of that change is the company that I’ll describe in this issue of
Energy and Scarcity Investor. This visionary firm is sort of an
“Energy Microsoft.”
How Much Heavy
Oil is Out There? A Lot!
First, let’s
define a few terms and look at some numbers. According to oil service giant
Schlumberger, only about 30% of the total world oil resource is the
conventional, light, sweet crude (technically, API gravity 22.3 and above).
Heavy oil (API 22.3 and below), by comparison, makes up about 15% of the
world’s oil resource. Extra-heavy oil (API gravity less than 10) makes up
25% of the world’s oil resource. And nearly 30% of the world’s oil resource
is in the form of tar sands and bitumen (with API gravities in the low
single digits — it doesn’t flow at all).
Schlumberger
estimates that there are between 6-9 TRILLION barrels of heavy oil in the
world. Big numbers, right? Especially since the current total world demand
for oil is in the range of 30 billion barrels per year. With heavy oils,
we’re talking about 200-300 years’ worth of potential supply. (That’s at
current rates of use. If we can get it all. Which we can’t. So it won’t
happen. But it illustrates the point.)
Where is all
of this heavy oil? Here are the nations with the largest estimated deposits:
This list goes
on to include other nations with significant heavy oil deposits, such as
Brazil, Saudi Arabia and Indonesia. Further down the list of countries
holding sizeable heavy oil resources are Australia, South Africa, Nigeria,
Libya, Argentina, Peru and Vietnam.
So you can see
that heavy oil (and extra-heavy oil, tar sand and bitumen) is a vast and
underutilized energy resource. Of course, keep in mind that nowhere near all
of this resource is recoverable under even the best scenarios. But the point
is that heavy oils, of all types, constitute immense energy potential — many
decades worth of supply. And it’s all but certain that, as conventional oil
becomes scarcer and more expensive to extract, the world’s energy industry
will turn to heavy oils. It’s already happening.
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Early and
Current Efforts with Heavy Oil
Looking back in
history, people and nations used heavy oils when necessity demanded. During
World War II, Italy supplied its military (and the military of Germany) with
oil products from a modest-sized heavy oil deposit in Albania. The Soviets,
desperate for oil products, utilized several heavy oil deposits in
south-central Russia. The Japanese exploited heavy oil deposits in Japan,
Indochina and Indonesia.
Today, the
energy industry has an array of projects that exploit heavy oils. Chevron,
for example, lifts about 80,000 barrels per day of heavy oil from its large
complex (of 8,000 wells!) at Kern River, California. Venezuela’s national
oil company PDVSA produces about 400,000-500,000 barrels of heavy oil per
day from projects in the Orinoco region. Offshore Brazil, Petrobras has a
deep-water project targeted at a string of heavy oil deposits. And BP has
several billion barrels of heavy oil resources located under the Arctic
tundra near the conventional oil fields of Prudhoe Bay, Alaska.
When it comes to
tar sands and bitumen, the massive developments in western Canada offer a
$500 billion example. The Canadian tar sands projects currently yield nearly
two million barrels of oil per day out of bitumen, strip-mined from the
near-surface prairies of Alberta.
Next week, I’ll
be in Denver for the American Association of Petroleum Geologists (AAPG)
convention. I’ve been a member of AAPG for 30 years, and it’s been a source
of great professional education and growth for me. I’ll attend the exhibits
and talks and meet with several energy companies to get the latest insight
into what’s going on out in the field. I’m even scheduled to be a judge on
some of the programs for geothermal and heavy oil. All that, and I’m
visiting with some hard rock miners while I’m in the area.
Naturally, I’ll
look for great investment ideas and keep you posted.
Until we meet
again,
Byron King
P.S.:
So heavy oil may be the wave of the future, but what’s the angle for us?
This is exactly what I address in my newsletter Energy and Scarcity
Investor, along with lots of details on specific oil and energy
companies.
There will be
plenty of profits to come from oil, but there’s another resource that I like
even more! In fact, I just published a special report last Friday — it
contains eight specific ways to cash in over the next few months. BUT... you
need to grab yours today! If you’d like to learn more,
just click here…but keep in mind there are only about 400 copies left.
Always a
pleasure to have Byron at the bar. I would also like to extend a note of
thanks to fellow editor Matt Insley (occasional contributor and Extra Secret
Byron Liason) for helping me get this issue together for you.
Don’t forget!
Byron will be on the Whiskey Bar panel at the Agora Financial Investment
Symposium. We’d love to have you join us.
Just click here to read more.
To your letters!
To the guy that
wrote, “God, I hate you conservatives.”:
He tried to make
the case for progressive taxation to keep the wealthy from getting wealthier
and holding down the masses. If his thesis were correct, there would only be
a handful of super rich, and the rest of us would be scraping the rubbing
off our necks from their boots. How the hell does he think those people
became millionaires? They worked. They were more dedicated, driven, and
probably smarter as well. I am not a millionaire, although twice in my
working life I was. I’m not bitter, confused or looking for a rich
scapegoat. I’m 65, still working (my own business as before) and guess what?
I’m making a go of it in this miserable economy.
Us older folks
have a small advantage. We’ve seen this before, many times, and have pretty
good instincts, along with good advice, (thanks guys) and while everyone was
blinking, we looked elsewhere in the economy. I don’t have it all down pat,
but we must have it at least half-right. I have always made the most
progress during the worst of times. I would tell that loser to get off his
ass, stop writing from bitterness, and get to work!!!!! The tax laws look a
lot different from the top of the heap.
Good point, but
you know that people like he are just going to say that the only reason that
capitalism hasn’t resulted in most of us with fancy boots on our necks is
because of the safeguards put in place by the collectivists. Also for such
people good can only come from the state. To them the scheming mind of the
bureaucrat is better than that of the engineer and the physician.
A reader and
regular correspondent takes issue with my definition of capitalism…
In my opinion,
it is you who has to get your terms straight. Capitalism IS by definition
“heedless, rapacious greed.” Capitalism has no conscience and no master
other than the bottom line and anything that gets in its way, whether that
thing is flesh and blood, a commodity or a natural resource to be exploited
and destroyed, is only useful if it can be consumed by the corporation. You
confuse capitalism with free enterprise “where people are free to pursue the
crime of their own best interest” as you, tongue firmly in cheek, stated.
But I would
maintain that free enterprise is a tenet of a capitalist system, just as
progressive taxation is a manifestation of covetousness and coercion.
This reminds me
of a conversation I had with a progressive acquaintance in my last watering
hole in New York. Whenever the words “exploitation” and “greed” came up,
he’d yell “That’s capitalism!”
I begged to
differ. He — like a lot of folks — just lumped everything he hated about the
world under the rubric of capitalism. “Capitalism” was his personal
shorthand for corporate welfare, the destruction of the rainforests and the
clubbing of baby seals.
I also recall an
internet poster on one of the sites I troll who maintained that Stalin was a
conservative! But Stalin and his ilk are just the sort of emotionless men of
will who take statism to its logical conclusion of centralized planning,
repression and mass murder.
While we’re at,
let’s note the way the word “liberal” itself has been perverted over the
years…to the point where classical liberals had to go and get themselves a
new moniker (libertarian).
It’s like old
school conservatives and liberty types are being framed.
Hello Barkeep:
Thank you for
all of the shots and target practice. It is interesting to learn in the
latest release that you are a “conservative.” Of course “progressives”
rarely let facts or history confuse things. It may make their heads explode
to learn that libertarian though is most closely aligned with “classic
liberal” philosophy a la Thomas Jefferson. Then again, with all of the
Orwellian doublethink coming from government, Main Stream Media, and schools
(or do I repeat myself?) it is easy to understand the confusion when
presented with new information.
The meddler
states, “The system we have is a very good one except that the top rates
have been lowered too much.” Did the meddler mention when the rates were
lowered too much? I consulted
Wikipedia
and it seems that the progressive tax, in various incarnations, has been
tried repeatedly and still does not seem to please your reader. Perhaps
that is because the system simply does not work? Does anyone notice that
the wealthy tend to remain wealthy even with all of the meddler schemes?
Here is an example of New York state using progressive thinking to drive
another tax paying citizen to relocate.
The phrase “unintended consequences” leaps to mind.
Note: My
favorite part of the Wikipedia entry is “Arguments against the U.S. income
tax.”
James Howard
Kunstler is a not exactly a little ray of sunshine, but the more I learn
from various sources the more I tend to agree with many of his insights. He
discusses the impact of peak oil and I agree that it will be profound.
Another looming crisis is water and how it is used. While W.C. Fields has
some valid points about
water versus whiskey,
water is still valuable.
Thanks again for
all of your mixing and pouring.
You’re welcome!
Thank you for the delightful letter.
Here’s another
missive in regards to yesterday’s conservative-hater (note liberal use of
italics by your editor to indicate hand-clapping):
The writer
claimed that history would back up his claims. This is not so. History is
a record of the accumulation of wealth and power and the abuse of both.
This has nothing to do with progressive or regressive taxation except that,
historically, those who had the power to tax used that power to accumulate
wealth and power and then abused that power. This writer seeks to grant
greater power to the taxing class over the taxed classes in the name of
fairness and egalitarian values.
An egalitarian
society is one where everyone has an equal chance to earn an income, to be
recompensed for their labor and their industry. It follows that this
egalitarian society would also be one where everyone would get to keep their
earnings and use them as they saw fit, not as the taxing class sees fit. If
this were so, then the people, like this writer, who wish to ‘spread the
wealth’ would never get the power to favor some while holding others back;
which is what happens in a society with “progressive” taxation.
There is no way
to make taxes “fair”. Someone would always have to surrender a larger
percentage of their total purchasing power than another who had more money.
When we followed the Constitution and limited taxes to imports we at least
didn’t deprive anyone except the wealthy while we supported domestic
enterprises. In any case taxes only benefit tax collectors or social
parasites who perpetually think that whatever their condition is it must be
someone else’s fault and that no one should have more than anyone else.
I recall a
conversation I had with a college student friend who was just like that
writer. He thought that inheritance taxes should be 100%. Not so he could
have any of it but because he hadn’t gotten any. He had to work to get
through college and resented his fellows because so many of them had parents
who had saved enough money to put their kids through school without any
hardships. He thought the money, earned and saved through a lifetime, or
several lifetimes, should be returned to the government where it came from.
Then there would be enough for everyone to go to college (or, presumably, do
anything else their hearts desired) and we would all be equal. No amount of
evidence could dissuade him. Instead he just got louder, as if shouting
would prove his position against the example of historical proo f. Hope you
find this of some use someday.
Good points and
a wonderful letter, but to many “egalitarian” means the ridiculous notion of
forced equality. There is no such thing as equality of men, merely equality
of treatment before the law.
Thomas Sowell
reminds us that no man is even equal to himself from day to day. Some of us
are smarter, prettier, more fragrant, stronger and faster than others. Some
of us will be luckier in money and in love.
All of us are
going to get different results out of life. No amount of whining, political
envy and redistributive tax law will change that.
Regards,
Gary Gibson
Managing Editor,
Whiskey & Gunpowder
