CANADIAN OILPATCH /
I might of posted this before. I originally posted it at another location.
Traffic is getting heavy and I'm finding it difficult to dodge the cars.
It might be a good repeat anyways.
Where oh where is the big money going. The following article, courtesy of
Fortune Magazine, may be an indicator.
YOUR LAST BIG PLAY IN OIL
Remember when obscene oil profits were all that anybody talked about?
Some serious billionaires are betting that it will happen again.
TIMES of momentous change almost always translate somehow into glorious investment opportunities. Think of the real estate and retailing fortunes made in the postwar migration to California or of the seemingly bottomless wealth pit created by today's computerization of society. Next: oil. That's right. Oil.
Why in the world would we say such a thing? A simple but compelling theory backs this belief: Led by China (population 1.2 billion), the Third World's appetite for petroleum is increasing at a furious rate, and as consumerism reaches full frenzy around the globe, that increase is likely to go exponential. By the year 2000, demand will likely have soared from today's 70 million barrels per day to more than 77 million, enough to perhaps raise the price per barrel to $30. Not so much further out, by the year 2010 demand may be 95 million barrels, which could push up the price even more as oil producers scramble to feed ever busier gas pumps around the globe.
Along with this increase in price and demand will come a serious strain on the traditional system of supply. Even if it opens all the faucets, the 12-nation cartel known as OPEC has less oil to spare than many think. Some big non-OPEC reserves, including Prudhoe Bay, are declining, and others, like the North Sea, soon will begin to sputter as well. That's the theory, and of course, not everyone agrees with it. There are those--the American Petroleum Institute among them--who believe we will always have enough oil. One relatively new scientific theory even holds that many underground reservoirs are replenishing themselves from previously unknown reserves below.
Maybe so. But already a good bit of smart money has picked up the scent of what it believes to be a coming oil bonanza, buying into some oil companies and acquiring others, grabbing title to proven reserves around the world, and moving into any number of related investments. This oil play is not a closed club (see table "Oil Stocks to Buy Now"); small investors can buy in anytime they want, via integrated multinationals, independents, or oil field service outfits.
What makes The theory most believable are the credentials of those subscribing to it. The handful of wealthy investors currently leading the way into what may be the last major oil play for years to come includes some who have made previous killings in the oil fields and are now returning. Among them:
Philip Anschutz, 55, the secretive Denver billionaire, has spent $45 million for 40% of oil and gas producer Forest Oil, which itself is buying oil reserves, onshore and offshore, as it shifts its emphasis away from gas. Anschutz is getting further into oil by way of the August sale of Southern Pacific, of which he owned 32%, to Union Pacific. If that deal goes through as expected, part of his booty will be 5.7% of Union Pacific's profitable oil and gas exploration and production subsidiary, which is being spun off. Anschutz declined to talk to FORTUNE.
Marvin Davis, 70, the famous wildcatter turned movie producer, has spent the past two years or so buying oil leases in Louisiana, Texas, and Oklahoma. He boasts that he has been able to pick them up for "a very insignificant amount of money." A source close to Davis says one of these leases has been found to contain oil and gas reserves worth about $1 billion. Davis is also proud of paying only $650,000 for various seismic data that he, in his typical braggadocio, says is worth $250 million. Now he is on a global prowl to buy foreign oil fields. "We're going into Argentina, we're going into Russia, and we're going into Egypt," he says. "And we're going after it pretty fast, too." Davis would not put a dollar cap on his investments. But he repeats the mantra of The Theory: "You don't have to be a cockeyed genius to see this coming."
Carl Icahn, 59, former owner of TWA and an Eighties raider who targeted Phillips Petroleum, among others, is buying into a number of small oil and gas companies. Among his investments: 10% stakes in National Energy, Alexander Energy, and Panaco, which add up to a total of $12.8 million. Icahn could win even before oil prices take off, since National has launched takeover bids for the other two companies. Beyond the fact that these stocks are cheap, he says, "they're especially so if the oil and gas prices go up."
A number of big mutual fund managers seem to see the future in much the same way. For example, Vanguard's Windsor fund, run by legendary John Neff, 64, and the Windsor II fund, managed by James Barrow, 55, have 18% and 16% of their assets in energy, respectively. This is more than double the mutual fund industry's average exposure to this sector. Says Barrow: "Supply and demand are getting pretty tight. We're at the bottom of the cycle for oil."
One of oil's most enthusiastic fans is financier Richard Rainwater, 51, who in the early 1980s helped steer Fort Worth's billionaire Bass family into such treasure troves as Walt Disney. The stock was then stalled and the Basses saw it climb 1,000% in value. Rainwater later started his own business, hit it rich with shrewdly timed investments in real estate and health care, and now is leaping into the black stuff. It's an obvious play, he says. Rising global demand "paints a picture for me that doesn't have any other outcome. The price of oil is going to have to come up."
This conviction has led Rainwater to put 20% of his $800 million net worth into oil and related ventures. He expects to increase that to 25% by year-end and to as much as 40% by the end of 1996. His current investments include a $25 million stake in Santa Fe Energy Resources, a crude producer, and $65 million in Ensco International, a drilling company, as well as stock in foreign producers like Anderson Exploration of Canada and YPF of Argentina. He's also moving into real estate, using his Crescent Real Estate Investors trust to buy office buildings in Houston, Dallas, and Denver, which will thrive as oil prices rise. Rainwater says investors will enjoy a long, happy ride. "I don't think this will be a short-term phenomenon," he says. "The world will be chasing hydrocarbons for the next ten or 20 years."
This chase won't need the starting pistol of a mideast war or another fundamentalist coup, events that have triggered previous run-ups in demand and prices. Our own energy-hungry ways have already set the runners in motion. The industrialized west gulps down 61% of the world's output. Major consumers include Japan, gobbling 9%, and Europe, 18%. And the U.S. continues to consume far more than anywhere else, a profligate 26% of the world's production. Worse, far from abating, the national thirst is increasing. For starters, some 50 million more cars and trucks now cruise U.S. roads than in 1978-- and we're driving 750 million more miles a year than we did before the Ayatollah Khomeini temporarily took the fun out of it. Today, of course, we are seeing the return of gas-guzzlers. Sports vehicles and light trucks, like Ford Explorers and Chrysler Minivans, made up 40% of the nation's vehicle sales in 1994, compared with just 20% back in 1980. This helps explain why the fuel efficiency of vehicles Americans drive has been in decline. Take a peek under the hood of a Ford Explorer 96 Limited. Its 160-horsepower V-6 engine gets just 19 miles per gallon, and that's on the highway.
As energy analyst Charles Ober of T. Rowe Price puts it, "The wave of conservation and substitution is largely over." Even so, in the not-too-distant future the West's spendthrift consumption will begin to look downright paltry as the rest of world starts to soak up crude like a sponge.
Take South Korea as a proxy for how this is likely to play out. Ten years ago, according to Cambridge Energy Research Associates, a Massachusetts forecasting firm, the country consumed 570,000 barrels of oil a day. This year South Koreans will use up 2.1 million, and by decade's end, 2.7 million. Now for a bit of math. Presently, South Korea's annual per capita energy consumption is 16.9 barrels per head. In China and India they use less than a barrel a head, though their usage is up 33% and 50%, respectively, since 1985. Assuming that their per capita consumption rose to that of South Korea, and that their populations increased at currently projected rates, these two countries alone will need a total of 119 million barrels of oil a day. That's almost double the world's entire demand today.
SUCH GROWTH in demand is already well under way. Asia's expanding middle class is increasingly enjoying a lifestyle in which it can raid the fridge, warm up a samosa or two in the microwave, and flick on the TV, which, even if it doesn't use much energy in itself, helps to spread the American energy-hungry lifestyle. After all, those guys do drive gas-guzzlers on Baywatch, the TV show now seen in 103 countries. By the end of the decade, the number of cars, trucks, and other vehicles in China will double, to nearly three million. Foreign automakers are only too happy to usher in the auto age to the world's biggest population. Twelve joint ventures are helping turn out all kinds of wheels, including the boxy Santana, China's most popular car, made by a joint venture with Volkswagen. And this ravenous appetite for cars is piddling compared with the growth of motorbikes, which have been increasing by more than 50% annually since 1991. Although such Japanese bikes as Honda are still the most prized makes, China itself has become the largest motorcycle producer in the world, building more than seven million a year. That number could reach ten million by 2000. "The lesson," says money manager Barrow, "is that once you switch from bicycle to moped, there is no turning back."
Tourists to Tiananmen Square may bemoan the cacophony of motorbike and car horns, but that same traffic din is what beckons oil investors. They also like to hear similar sounds repeated all around the world in cities as far apart as Hanoi, San Salvador, and Timbuktu. Simply put, at current production rates there won't be enough gas to keep all these vehicles running.
For one thing, traditional producers are consuming ever more of their own supplies. This includes members of the OPEC cartel. Indonesia, the easternmost member, now uses up an astonishing 65% of its production, compared with 40% ten years ago. Such countries usually not only forgo exports in favor of domestic sales but also effectively subsidize the refined product at the pump, which encourages consumption. Explains Raymond Plank, CEO of Apache Corp., an independent Houston oil and gas producer operating overseas: "These nations are just plain determined to improve the standards of living of their people. And if the leaders don't enable that to take place," he adds, "they'll be out of there."
And forget about China's producing enough oil of its own from fields like Daqing and Shengli, both in northern China. In fact, the promise held out in the 1980s--that China would become a major exporter--has long faded. Even though production has risen to more than three million barrels a day, demand overtook that two years back, and the gap is growing wider, according to the East-West Center, a Honolulu think tank. The projected shortfall by the year 2005: two million barrels a day.
For China, like all other customers, the big future challenge will be to find suppliers, which will be tough because so many of the sources that everybody counts on today are drying up. Britain's North Sea fields, for example, enjoyed up to ten more years of rich production than anybody expected back when they first opened in 1975, thanks mainly to advances in technology. But the size of the newer fields coming on line is shrinking, and so is their production. Whereas the original 12 fields still yield some 30% of their peak output, the big five that began producing in 1990 have already fallen 18%. Economist Alan Campbell of the Grampian Regional Council, a government agency in Aberdeen, Scotland, predicts that North Sea production will hit a high of 2.7 million barrels a day next year, and then, Campbell predicts, "it turns." Norway's North Sea fields will likely undergo a similar cycle, albeit delayed by some two or three years, partly because they came on line later.
Prudhoe Bay on Alaska's north slope is also fading. The fields there have yielded some nine billion barrels since 1977. Overall Alaska production peaked in 1988 at just over two million barrels a day and is expected to fall to less than half that amount shortly after the turn of the century.
Production in the Gulf of Mexico reached over one million barrels a day in 1971, but has since fallen. So far, various promising leads have yet to correct that course.
WHERE DOES that leave us? As Matt Simmons, president of his own investment bank in Houston, says, "It will be a horrendous footrace to keep pace with even the low estimates of increased demand." A conservative consensus of energy experts predicts that world oil demand will increase by more than 2% annually by the end of the decade. Non-OPEC production will rise by less than 1%. The difference will have to be made up by OPEC, an organization whose original reason for being was to limit production in order to keep the price of oil high. To fill the gap, some OPEC members will have to raid the supplies of oil they have within easy reach, still in the ground but essentially only the turn of a faucet away. And only three cartel members are in a position to do this to any degree: United Arab Emirates, Kuwait, and Saudi Arabia. Most of the others have scrimped on investment and thus have no extra oil. Heavily indebted Iran and Nigeria are barely able to maintain current levels, much less bring on lots of new capacity. Cyrus H. Tahmassebi, chief economist at Ashland Inc., an integrated oil company, figures OPEC nations must spend between $20 billion and $30 billion annually through the year 2000 to maintain current supply and add capacity to meet the growing demand. In fact, they are now estimated to be spending between $5 billion and $6 billion a year.
Here the economics of oil come into play, helping to explain why big investors are ready to stake so much on oil prices. In the past, the Saudis have been able to crank up production to keep oil prices low as a way of building market share. They also have been spending heavily to develop new fields, the "proven reserves" oilmen refer to when describing fields that are at or near the production stage. Some $2.5 billion has gone into the new 500,000-barrel-a-day Shayba oil field in Saudi Arabia. It goes on line in 1999. Yet in the gargantuan mathematics that govern this global balance of supply and demand, what does such a production figure really amount to? In its first year, Shayba's output will provide one-fifth of what is necessary to satisfy the world's additional demand. But as demand rises, that contribution will become proportionately less. We'll need more Shaybas. Moreover, in the absence of a threat from still-embargoed Iraq, and with national debt estimated to be around $70 billion, Saudi Arabia loses much of its reason to hold down prices. Bill White, former U.S. Deputy Secretary of Energy, points out that if the Saudis scaled back production by the relative hair of 700,000 barrels a day, oil prices would immediately gush $5 a barrel. It's hard to imagine tiny Kuwait and the Emirates striking out independently from their powerful neighbor.
Remember, today's oil is not only cheap but, by recent historical standards, absurdly so: Adjusted for inflation, oil hasn't been so cheap since 1973. Today's price levels, by their very nature, can't continue. Says Daniel Yergin, president of Cambridge Energy Research Associates: "People seem to have forgotten that oil prices, like those of all commodities, are cyclical and will go up again."
For his part, Rainwater makes the case that "if we were smart, we would be encouraging OPEC nations to put lots of money in the ground and be signing the kinds of long-term contracts so enough oil would be coming on line in 1999, 2000, 2004. And we would be willing to pay higher prices today to guarantee us access to that oil."
Instead, expect the bulk of oil production activity to be concentrated on other areas around the world. The former members of the Soviet Union are rich in oil, and Russia and Kazakhstan, among others, are net exporters of crude. But production has tumbled sharply. Efforts by foreign companies like Chevron to boost production seem to have foundered largely because of leaking pipelines, decrepit pumps, and other disintegrating infrastructure. A group of international oil companies signed joint ventures to get the oil from fields off Vietnam; so far, those deals have been disappointing. South America has a potential winner in Colombia's Cusiana field, which came on line last year and is expected to help produce 800,000 barrels a day by the year 2000.
Some of the biggest troves lie in far more hostile territory. As a result, the expense of finding and recovering this oil is enormous, even by oil industry standards. Consider the mammoth Hibernia Oil Development project, which rises from the frigid waters of the North Atlantic 195 miles off the jagged coast of Newfoundland--and is expected to suck up capital expenditures totaling $6.2 billion. Below the water line, the entire platform will be encased in 450,000 million tons of reinforced concrete to make it impervious to the icebergs that can weigh in at six million tons. It will have taken a staggering ten years since inception before it hits its peak capacity of 125,000 barrels a day in the year 2000. Throw in operating costs, and the total cost of the project rises to $11.68 billion. Small wonder then that at least one analyst, Frank Knuettel of Prudential Securities, estimates that at current oil prices, the project's partners--Petro-Canada, Mobil, Chevron, and Murphy Oil--would barely break even were it not for a raft of subsidies, incentives, and tax breaks from the Canadian government. Left without such help, the companies would need to get an average of $18.95 a barrel over Hibernia's projected 19-year life span just to recover their investment and cover operating costs. Don't expect to see many more of these projects unless crude prices move significantly higher.
Collecting the oceans of oil contained in other sedimentary basins around the world will be similarly exorbitant. Says Rainwater's partner, energy specialist Ken Hersh, 32: "You're going to have to go into more unexplored areas, more frontier areas, deeper waters, rougher terrain, weaker political systems. You're going to have to go away from the easy shots to tap those reserves."
One simple solution is a return to the kinds of production sharing agreements, common in the 1960s, that call for capital infusions from major oil companies in exchange for a big share of the output. But these often stumble over parochial or nationalist interests. The Kuwaiti Supreme Oil Council, for example, recently nixed the idea of revenue sharing with foreign oil companies. Such resistance is far from one-sided. In August the U.S. State Department vetoed a proposal that would have permitted Conoco to set up a similar deal in Iran.
Such political decisions, along with the prospects of more serious flare-ups, make investors in oil ever more confident that they are on the right track. "History is on our side," says Hersh. "Show me a 15-year period where there wasn't an anomalous event in the Middle East that caused prices to rise."
You'd think that all the evidence of rising demand, depleting supplies, and other danger signals would have set off alarms. But that just hasn't happened. Instead, complacency rules as consumers bask in such benefits of cheap oil as economic growth, low inflation, and more buying power.
EVEN AFTER a real squeeze begins, buyers seldom respond in a measured way. Says Hersh: "It's more like a herd of elephants trying to get through the door at the same time"--in other words, too many consumers, be they oil companies or Sunday motorists, scramble to get their hands on more oil as a buffer against further price increases. Thus everybody tries to top off their inventories. Today, by contrast, the watchword at refineries is "KILL" (Keep Inventory Levels Low), as they seek to protect themselves against price declines and reduce carrying costs.
Rainwater is the first to admit that all investments, especially those like his with long-term horizons, bring with them the chance that something could go very wrong. The question all these big players are asking themselves is this: What could kill demand? Not even global recession, it seems, has the power to do that, if the early 1990s is any guide. During that period, world consumption actually rose. What about a great new discovery, like another Prudhoe Bay? That would have only a fleeting effect, at most. Let Jim Kneser, president of Piedras Petroleum, a private oil and gas advisory firm, sum it all up. "I can count the positives that could hold down oil prices on one hand. But the list of negatives is as long as my arm."
One lingering wild card--Iraq's Saddam Hussein. Says Bill White: "Saddam has surprised everyone with his tenacity. I predict the embargo will last longer than people think." Besides that, the threat of a sudden flood of Iraqi oil is overblown. It could take 18 months to get production up to 75% of where it was before the Gulf war--and even that assumes Saddam will be able to line up investment capital.
Many argue that the world's enormous and growing reserves are more than enough to meet demand without any significant increase in prices. Says a spokesman for the American Petroleum Institute: "With all the reserves in place right now, we have a 50-year supply of oil even if we didn't find another drop." He's missing the point. Future prices depend on how fast and efficiently the industry can bring the oil to customers that want it. Given such uncertainties as the Middle East and the long lead time needed to develop major oil fields, rising prices seem inevitable. Demand chasing supply is every capitalist's dream, provided he or she is the supplier. Or, come to that, the person who has invested in just such a scenario.
End of article
And so on. You may choose to paste this to the scrolling location
since this has been a subject of late. The splurge in oil stocks is really
just beginning ----------- not coming to an end as some has suggested.
Yes, oils have had a good run since the first of the year and there may
be a correction down the road (6 to 9 months out in time), but when one
will look back to this point in time, it will be a small blimp in the charts
which overall will reflect an onward and upward movement of share
price appreciation. For the knowledgeable chartists, review any oil &
gas index from the 80"s and you should find oil & gas has a long way to
go for it's just beginning to break out from the shadows of the basement
level that the industry has been in for the last 10 years. Companies who
have been operating successfully (particularly Canadian) for the past few
years should handsomely reward shareholders. My bottom line is this,
don't get carried away concerning yourselves with short term obstacles,
invest for the longer term and be pleasantly surprised with short term
happenings. The world has a thirst for oil and I don't see a dramtic
change in appetite for at least the next quarter century. Petroleum is
one of the bloodtypes in the life of this world and there's simply no way
of getting around these points. I guess you can catogorize me as an oil
purest. |
