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.
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.
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.
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.
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.
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