the quest for oil

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    THE QUEST FOR OIL
    By John Myers

    Oil is the largest single traded commodity in the world. It
    supplies about 95% of all transportation fuels and 40% of
    the world's commercial energy. It also provides feedstock
    for thousands of manufactured products and is critical for
    food production.

    While global consumption has continued to rise steadily,
    worldwide oil discoveries have declined progressively since
    the 1960s. The challenge for oil producers is that each
    year, the world consumes more than three times the amount
    of oil that is discovered.

    "The time has come for a rational response to the
    inescapable reality that oil is finite and available
    supplies will soon be insufficient to satisfy growing
    demand," writes Dr. Colin J. Campbell, a petroleum
    geologist at the London-based Oil Depletion Analysis
    Centre.

    A growing number of analysts predict that global oil
    production will peak within the coming decade and then
    start to decline, leading to higher energy prices with
    major economic consequences.

    Big Oil acknowledges the increasing difficulties of finding
    new sources of petroleum to replenish reserves. In an
    effort to reverse this trend, petroleum companies are
    turning to technology. The oil service industry is
    providing the instruments to locate previously undiscovered
    reserves and the tools to glean existing reserves from
    abandoned wells.

    Since petroleum technology and service companies hold the
    keys to the world's remaining oil reserves, that puts them at
    the top of the investment chain, in my opinion. And just as it
    was in software 20 years ago, picking the eventual winners
    will lead to incredible investment fortunes.

    Moreover, the petroleum industry, and the companies that
    service it, have the full weight and support of the federal
    government [for what it's worth... ]. Early in his
    presidency, George W. Bush announced that one of his
    administration's priorities was to provide the nation with
    secure energy supplies. The president insisted that part of
    his strategy was to maximize North American production.

    Washington's Oil Doctrine was announced in a May 2001
    National Energy Policy report. The report concluded:
    "America must build strong relationships with energy-
    producing nations in our own hemisphere, improving the
    outlook for trade, investment, and reliable supplies... As
    a result, the United States will rely increasingly on
    imports of both natural gas and oil from Canada."

    Big Oil has admitted that finding large oil pools has
    become a major problem. One remedy that has worked at the
    corporate level has been a rash of takeovers. In May 2001,
    Conoco announced that its Canadian unit would buy Gulf
    Canada Resources for $4.33 billion; in August of the same
    year, El Paso Energy acquired Canadian-based Velvet
    Exploration Ltd. for $228 million. These are just two
    acquisitions in a string of Canadian petroleum companies
    that fell into U.S. hands.

    But although buying reserves might look good on a balance
    sheet, it doesn't add a drop of new oil to the world's
    reserve base. The only way to do that is through
    exploration. After years of falling exploration budgets,
    oil companies are once again aggressively searching out new
    reserves.

    According to a 2003 survey, Canada will set the global pace
    for exploration and development spending this year. The
    money will be fueled by U.S. majors and independents
    shifting capital to Canadian activities, says investment
    banker Friedman, Billings, Ramsey & Co. Inc. The Virginia-
    based firm projects U.S. exploration and development
    spending will edge up by a mere 0.2% to $32.08 billion,
    while Canadian spending will race ahead by 12% to $11.9
    billion.

    Oil exploration companies are fulfilling Friedman & Co.'s
    prediction. The total U.S. count of working rigs at the end
    of June was 1,067 - up from 838 units that were working in
    June 2002. Renewed exploration is even more remarkable in Canada,
    where 337 rotary rigs were working at the end of June compared to
    210 in June 2002.

    The petroleum industry is more optimistic about its chances
    of finding new oil and gas than Washington is. I will get
    to why Big Oil has high hopes in a minute. But first let's
    look at the energy quagmire that our federal government has
    gotten us into.

    In June, Energy Secretary Spencer Abraham called for more
    conservation and fuel-switching by utilities. His concern
    is over low gas inventories and high summer demand,
    limiting storage injections ahead of next winter. In a
    letter to 30 U.S. lawmakers, Abraham wrote that in the
    Department of Energy's view, there are only 'limited
    opportunities' to boost supplies over the next 12-18
    months.

    Of course, the federal government has good reason to fret
    about oil. The Middle East, home to two-thirds of the
    world's oil reserves, remains a tangled mess with America
    taking pot shots from the world press while our GIs are
    taking rifle fire from irate Iraqis.

    Baghdad fell to U.S. forces in early April. Since then,
    efforts to restart Iraq's oil industry have been delayed by
    looting, sabotage and technical problems. According to The
    Wall Street Journal, "Continued attacks threaten to set
    back U.S. efforts to pacify Iraq's restive populace. Long
    lines are again a common sight at Baghdad gas stations,
    with drivers waiting hours to fill up at prices still
    higher than before the war."

    In June, two Iraqi oil pipelines exploded - merely the
    latest violence that has occurred in an occupied, but not
    yet conquered, country. The first explosion shut down a key
    fuel pipeline 150 kilometers west of Baghdad. The second
    pipeline carried crude oil to Syria.

    Saudi Arabia, the world's oil kingpin, holding one-third of
    the world's conventional reserves, has also been
    experiencing unprecedented terrorism.

    The Saudi Ras Tanura oil terminal, the largest in the
    world, used to be a stop on sightseeing tours. But today,
    the facility that processes 4.5 million barrels per day -
    or half of the oil that the kingdom produces - is
    surrounded by elite security troops. The tightened security
    follows a string of attacks by extremists in the country,
    including a June gun battle between al Qaeda and police in
    the holy city of Mecca.

    But blanket security may be an impossible proposition in
    this desert nation where oil is almost as plentiful as
    water. A retired oil engineer who spent 30 years working in
    Saudi Arabia told me that there are many choke points
    inside the country where a bomb could disrupt the flow of
    Saudi oil.

    Al Qaeda understands that petroleum is America's Achilles'
    heel. In June U.S. intelligence warned that al Qaeda may be
    targeting petroleum facilities and pipelines in Texas.
    Ironically, an attack on Texas would do less strategic harm
    to the United States than an attack on Saudi Arabia.

    As of this past April, the United States imported a record
    12.3 million barrels per day (mb/d), almost 6% more oil
    than it was importing in April 2002. Meanwhile, U.S. oil
    production continued to slide down the slippery slope of
    decay. Our nation is producing 5.8 mb/d of oil, down from
    the 1970 peak when America produced 11.3 mb/d. Over the
    past few years, U.S. production has declined at a rate of
    4% per year.

    Yet new technologies promise not only the discovery of new oil
    and gas fields but also the ability to extract new
    hydrocarbons from abandoned oil fields. Just how important
    is this endeavor? A study completed in 1995 showed that in
    the United States from 1983 to 1992, about 85%, or 20
    billion barrels, of proved oil reserves were from old fields.

    To recover old oil and discover new oil, the petroleum
    industry has armed itself with a bevy of new technologies.
    The big oil companies are betting that they can reverse the
    decline of America's petroleum production and boost
    Canada's production. If they are successful, the companies
    that deliver effective oil service technologies will
    generate windfall profits.


    Good investing,

    John Myers
    for The Daily Reckoning

    Editor's note: John Myers - son of the great goldbug C.V.
    Myers - has been helping readers earn surprisingly
    lucrative returns in stocks largely unknown to Wall
    Street's wunderkinder since his early 20s. Our man on the
    scene in Calgary, John has his fingers on the pulse of
    natural resource profits - including oil, gas, energy and
    gold. For more details on John's analysis of the post-war
    state of energy - as well as a clue to his recommendations
 
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