Aramco Insider: Oil Structural Ceiling Reached

Production curve as predicted by depletion analysts

Many speculators, myself included, love to analyze Peak Oil or the plateauing and decline of global oil production. The problem however, with determining global Peak Oil has long been convoluted due to the inherent elusively of Saudi Arabia. Unlike the publicly traded oil conglomerates such as Exxon Mobil(XOM), BP plc(BP) or Total(TOT), Saudi Aramco isn't bound by full disclosure. Since Saudi Arabia has the world's largest proven reserves and Saudi Aramco is the world's largest oil producer, the theoretical peaking of Saudi Arabia could indicate the world’s peak.

For those unfamiliar with Peak Oil, it is the inevitable peaking of any given oil well, or the point of maximum production and subsequent decline. This theory was first presented in 1956 by an American geophysist, Marrion King Hubbert. His theory was initially scoffed at, but has since received notoriety as he accurately predicted the United States' 1970 peak.

Despite King's genius, experts are still divided on the validity of a global peak. Some argue that improved technology and greater exploration can prevent it, but the undeniable fact remains that the world's most technologically advanced nation, the United States has been unable to prevent it's own peak. With this premises it seems unlikely that the less developed world will be exempt from a similar fate. Still other, more optimistic critics argue that oil is somehow a renewable resource.

This week during an interview, former head of exploration and production at Saudi Aramco, Sadad al-Huseini disclosed that, "oil production had reached a structural ceiling and that the technical floor for the oil price will rise by $12 annually for the next 4 to 5 years as new fields become increasingly costly to exploit." According to al-Huseini, "the technical floor - the basic cost of producing oil excluding factors such as geopolitical risk and hedge fund speculation - is currently about $70 per barrel, meaning the minimum oil price could hit $106 in 2010 and $130 by 2012. Actual crude prices, including financial market factors, could be as much as $125 by as early as 2010."

This disclosure by Sadad al-Huseini is important for many reasons. First, it marks a rare instance of blatancy from a Saudi oil insider. Second, it presents additional validity to the theory of global Peak Oil. Finally, this omission aligns with other renown advocates like Matthew Simmons. With Peak Oil, hindsight truly is 20/20. We won't know our actual peak until we see it in the rear view mirror...



Listen to the interview with Sadad al-Huseini

(Problems noted with Quick Time)

After a Hiatus, the Diesel Commuter is Back

2006 Jetta TDI

No longer are the Prius and it's eco friendly associates the only fuel-efficient vehicles on America's streets and interstates. Long a major staple of European transportation, the compact diesel commuter is making inroads to a highway near you. Traditionally, diesels have been synonymous with large trunks and smelly, noisy Mercedes Benz. Unlike most stereotypes, this association has proven remarkably accurate. When fuel prices soared in the past, automobiles such as the Volkswagen Rabbit, and General Motors's(GM) Oldsmobile and ever iconic Cadillac models, were seen efficiently cruising commuters to and from their destinations. While these relics are now largely retired and or scraped, there is a new breed of quiet, super efficient, cleaner burning diesels emerging.

Volkswagen(VOW.DE), a trendsetter and respected innovator of diesel technology, has seen great success with its highly acclaimed Turbo Diesel Injected(TDI) engine. Originally appearing in 1989, within the Audi 100, this reliable and fuel-efficient engine recreated the idea of a diesel commuter car. Furthermore, it destroys the negative connotations and stereotypes associated with diesels of the past. I should note here, that I am writing from real world experience, as I personally own one of these cleaner burning TDIs.

Unfortunately, these stylish, spacious and fuel-efficient vehicles have been discontinued until 2008 due to tightening emission standards. Currently, only 45 states have approved the sale of these vehicles, but VW has announced that the TDI will return in 2008; freshly minted with improved emission and compliant with all 50 states’ requirements.

The Engine

The primary reason consumers have chosen diesels over the standard gasoline engine is due to superior fuel economy. Case in point, my 2006 TDI Jetta(manual) achieves 40 and 50 mpg compared to the 21 and 29 mpg attained by VW's 2.0L gasoline counterpart. This is achieved by two methods. First, the inherent British Thermal Unit(BTU) content of diesel is much greater than that of gasoline. Essentially, this means there is more energy content per unit measured. Secondly, diesel combust fuel in a much different manner. Unlike gasoline, diesel engines compress air within their cylinders. Once the point of maximum pressure is achieved, fuel is injected and instantly combusts with the highly compressed air. Since these engines are higher pressure systems, they must be built to endure the additional stress. This is the reason we are still privy to 30-year-old VW rabbits and seemingly paleolithic diesel Mercedes Benz.

Emissions

Like all hydrocarbon combustors, these contemporary diesels produce carbon dioxide and associated smog creating pollutants. However, due to the superior fuel economy inherent to these diesels, on a direct mile-to-mile comparison they emit much less carbon dioxide. If this is true, then why are existing diesels only permitted to be sold in 45 of the 50 states?

As diesel burns it creates particulate matter(PM) such as soot and aerosols as well as nitrogen oxides(NOx), which cause the formation of ozone and other fine particles. Due to stringent EPA emission regulations(PDF) from the 1980s, the tolerable level of these byproducts has greatly decrease and it set to decrease further again with 2007-2010 legislation. The dynamic however changes if diesel commuters use biodiesel in their engines. According to the National Renewable Energy Laboratory(PDF), use of B100(100% biodiesel) cuts NOx by 10% and PM by 48%. Furthermore, diesel engines and their superior fuel efficiency contribute fractionally to carbon dioxide, the major gas attributed to global warming.

The Industry

Unfortunately for General Motors(GM) and Ford(F), it appears as though the US automakers are once again behind the curve. According to CNN, neither Ford nor GM have plans to sell SUV or diesel passenger cars again in the US. The companies claim, the endeavor "wouldn't be cost-effective, because existing diesel cars sold in Europe aren't sold within the US and the current US market is too small for additional development." As for the rest of the industry, everyone from Honda, Volkswagen, Mercedes Benz to BMW are either selling or planning on selling diesel passenger cars and SUVs. Even the often-marginalized Korean auto firm Hyundai has plans to introduce an SUV to the US by 2010.

For GM this inability to adapt is all to reminiscent of its hybrid debacle. Since 2003, Toyota's(TM) Prius has set record year over year sales. At the same time, GM continued to endorse it's higher margin vehicles such as trucks and Hummers. Now, 7 years since the first Prius rolled off the lot, GM finally has its own hybrid lineup. Unfortunately for GM, their plans to introduce hybrids might be futile because while marketing my say 'hybrid', consumers may hear 'Prius'. GM's plan to avoid the diesel car market could prove to be yet another disappointing milestone in this manufacturer's withering legacy. We will have to wait to see if and when GM responds its competitors inevitable success within this new market. The moral of this story? Recognize a shifting paradigm before it drives over you.

Disclosure: The author has no position in any of the aforementioned companies.

Microvision's Seemingly Obvious Collaborator

Today MVIS, a company I have covered before, announced another development agreement with yet another undisclosed Asian consumer electronics manufacturer. Under this agreement, MVIS and it's manufacturing partner "will integrate the PicoP^TM display engine into fully functional stand-alone projector prototypes." These projector prototypes will then be targeted to consumer electronics companies for "private labeling and distribution for mobile applications including mobile phones and other devices."

What is different regarding this announcement however, is the seemingly blatant verbiage contained within the press release. According to the release, the manufacture is "one of the world’s largest consumer electronics manufacturer of mobile phones, digital cameras and personal media players." By market share the five largest manufacturers of cell phones are as follows: Nokia, Motorola, Samsung, SonyEricsson and LG, with the last three being Asian manufacturers. Of these three, all manufacture and distribute personal media players. However, of the three only two manufacture digital cameras, leaving two possible candidates: SonyEricsson and Samsung. Technically speaking, LG does sell digital cameras, but none that exist independent of a host mobile phone. Due to the press releases’ attention to three distinct categories: mobile phones, personal media players and digital cameras, LG's technicality as a digital camera manufacturer seems to exclude it from the group.

Of the two remaining contenders, SonyEricsson and Samsung, only one of these companies has a prominent link and conjoined video referencing MVIS technology on their website, thus identifying the more likely suitor: SonyEricsson. With respect to the connections listed above, it would seem as though this current non-disclosure contract isn't quite as secretive as it is made out to be. More importantly however, is the significance of a development agreement with SonyEricsson or any of the aforementioned companies. Given that this most recent partnership is with one of the worlds largest consumer electronics manufacturers, it not only provide further credibility for Microvision's technology, but it also accelerates the commercialization of Microvision's PicoP.

Disclosure: The author owns shares and call options in MVIS.

Sizing Up the Next Generation of Aviation

Boeing 787 vs. Airbus A380

This week marks the advent of a very important milestone for Airbus, as it signifies the delivery of its very first A380 jumbo jet to Singapore Airlines. Loaded with over 80,000 gallons of fuel, an estimated range of 8000 nautical miles and a potential passenger capacity of 800, the A380 could theoretically average 80 mpg per person, assuming maximum capacity. Compared to the 45 mpg my 2006 TDI Volkswagen achieves transportating me to and from work, the A380 seems to reign supreme with regards to fuel efficiency. For the accomplished executives at Airbus, this statistic appears to be a chief selling point for the behemoth flying craft. While Airbus' latest achievement most certainty replaces rival Boeing's(BA) 747, does it really accomplish anything more than retire an already obsolete aircraft?

Problems

For Airbus, developing the A380 has been a tumultuous journey. For starters, this initial delivery is a casual two years behind scheduled. While the engineering complexities of this undertaking surpass my intellectual capabilities, Airbus's problems seem more deeply rooted than pure technical issues. During the past two years, the European aerospace manufacturer has cycled through 5 CEOs and has plans to eliminate 10,000 jobs over the next four years. The complications and subsequent delays have literally cost the firm billions of dollars in lost revenue. FedEx has canceled an order for 10 A380's and instead chose Boeing's(BA) smaller 777. Two additional firms, Virgin and UPS have also placed their orders on hold until at least 2013. Even with this first successful delivery, CEO Thomas Enders concluded that, "Increasing A380 production to meet demand remains Airbus' greatest challenge for the next years."

For BA, Airbus' problems have been a godsend as the 787 Dreamliner has a 5-year lead ahead of Airbus' A350 XWB, which has succumb to multiple redesigns and subsequent delays. To put it in perspective, BA has 50 customers for its 787 compared to a the 16 for Airbus' superjumbo. While BA does have the lead over Airbus it is however not devoid of set backs as the company recently disclosed a 6 month delay for the first delivery of its 787.

Where the A380 fails, the Dreamliner shines. Unlike the massive A380, the nimble 787 is capable of landing in nearly every major city. This allows for direct flights and avoids the hassle of hub transfers. Boeing's craft is also highly fuel efficient. With an estimated range of 3,050 nautical miles, a 33, 500 gallon fuel tank and a passenger capacity of 330, the 787 is calculated to achieve 20% greater fuel economy compared to similar size aircrafts. Boeing achieved this superior efficiency through the use of new materials, next generation engines and increased electrification, according to the Green Car Congress.

Does It Really Matter?

Even if Airbus is able to deliver to its existing customers how many additional orders can it realistically obtain? Does the demand exist for a football stadium capable of flying from New York to London? With oil trading in the high $85 per barrel range, and jet fuel commanding the highest variable cost per flight, airliners might be forced to choose fuel efficacy and functionality over luxury in order to remain competitive.

As I mentioned before, at capacity the A380 boost considerable fuel efficacy, but will carriers really attempt to pile 800 economy passengers into one vessel? And if so, how will already condensed economy passengers react to the multiple plane changes required to get them to their final destination? In Singapore's case, the airline equipped their A380 with 399 economy seats, 60 business class and 12 suites. With these numbers the A380's impressive estimated fuel economy drops significantly to 47 mpg per person. This reduction in fuel economy will most certainly have to be recouped with ticket premiums. According to the AP, the going rate for the inaugural Singapore to Sydney luxury suite will cost around $7,160 per ticket, which is a 20-35% premium over standard business class.

The world has seen its share of aviation giants long before the advent of this superjumbo. From the three story, 6-engine Dornier Do-X, to Howard Hughes' infamous 1947 "Spruce Goose", the world has hyped and eventually retired the majority of these flying leviathans. Only BA's 747 was capable of transcending the curse of these flying titans, but even the illustrious 747 has seen its career slowly dissolve, to make way for more fuel efficient replacements like 777. At this point, only time will predict if Airbus' A380 will survive the stigma these flying giants.




Disclosure: The author has no position in any of the aforementioned companies.

Update GST

Added additional shares to our GST holdings today at $1.60.

Natural Gas Gaining Momentum

NG daily time frame

Natural gas continues to gain traction today following a gap through the 200 DMA several days prior. Concerning our junior natural gas driller GST, the stock as well seems to have broken out of its month long basing period. Todays 10% movement represents a >10 than fold volume surge. This move isn't quite that startling with all the conspicuous accumulation by institutional investors during the last quarter.

GST daily time frame

Update GST

I added more GST today at $1.45.

BP - Big Potential?

Oil and gas giant BP plc.(BP) is staged to release 3rd quarter earnings on October 23rd. As previously disclosed by the company's freshly instated CEO, Tony Hayward, earnings should be nothing short of dreadful. Furthermore, Hayward reiterate that BP's results would be the worst financial performance since the 1992-1993 time frame. To many this should come as odd since crude oil continues to hit new highs, but for BP, making money in the arena of $80 oil isn't quite so easy. BP has endured a slew of mismanagement and financial problems ranging from tightening
margins, falling natural gas prices, overlapping management, refinery explosions and environmental issues. Making matters worse were the politically distasteful homosexual meanderings of ousted CEO Lord Browne.

To investors, the end result is a company severally lagging its peers. Amongst all of this turmoil however, could be a remarkable buying opportunity. With 'dreadful' earnings to be released shortly, and fresh management at the helm, A BP turn around could be as close as next year for this conglomerate. This is of course subject to change if the faltering giant is unable to deliver its newly purposed restructuring plan.

Underperformance

A significant portion of BP's troubles have been associated with delays regarding two of its largest projects. BP's largest project, the Thunder Horse is currently the worlds largest semi-submursed oil rig. Originally delivered in 2004, this $1 billion rig sustained marked damages during the 2005 hurricane season as well as recurrent equipment malfunctions. The result was a mega project with costly delays. Unfortunately for BP, at peak production this facility is targeted to produce 250,000 barrels of oil per day(bpd) and 200 million cubic feet of natural gas on a daily basis. According to the company's latest estimates, Thunder Horse should regain production near the end of 2008.

BP's Atlantis is yet another massive project inflicted with project delays and seemingly all to common technical difficulties. Until the completion of Thunder Horse, this 200,000 bpd project will command the title of largest oil producer in the Gulf of Mexico. The Atlantis is set for commercial production starting December of this fiscal 2007. Upon completion, these two facilities should add significantly to BP's production capacity and in theory contribute directly to the top line. BP controls 56 and 75 percent of the Atlantis and Thunder Horse projects, respectively.

Toppled Thunder Horse 2005

Image Problems

Of all the integrate oil giants, from ExxonMobil to Chevron, BP is the least in touch with its roots. After all this is the very same oil company who shockingly renamed the company Beyond Petroleum. While my inner environmentalist enjoys this in theory, BP has had its share of egregious safety and environmental violations. Yet another problem is the striking resemblance between two of BP's most recent snafus.

In May of this year a US congressional committee concluded that, "severe pressures for cost-cutting," were the cause of BP's March 2006 Prudhoe Bay spill which leaked nearly 6,500 barrels into the Alaskan wilderness. The event further tainted BP's credibility and cost the giant $250 million in maintenance costs as 16 miles of deteriorating pipeline were replaced.

For BP, this spill came shortly after a 2005 refinery explosion which cost 15 individuals their lives. This event, which BP largely attributes to worker negligence and miscalculations seems all too similar to the Alaskan oil spill, where cost cutting and inappropriate investments lead to the eventual explosion. Chief executive officer of the US Chemical Safety Board informed the US congressional committee that, "virtually all" of the Prudhoe Bay misjudgments correlated strongly to the refinery disaster.

The Aftermath

So where does this leave us? BP's 1-year performance pails in comparison to an industry which has reaped the benefits of increasingly expensive crude oil. Due to BP's missteps during the same period, the conglomerate has largely not participated on the impressive run these producers have enjoyed. If the consensus of expensive oil continues and BP is actually capable of delivering its revised business restructuring, then we could be looking at an undervalued company, when compared to its peers. Judging from the streets reaction to Friday's restructuring plan, BP seems well on its way to amending its current operational issues.

BP 2006-2007 chart

La Niña, a Potential Benefit ?

The NOAA issued a forward guidance earlier this month regarding the development of a mild-moderate La Niña formation occurring in the central Pacific Ocean. La Niñas often occur shortly after a preceding El Niño. This was the case during the 1997-1998 El Niño and again this year as the most current La Niña comes on the coattails of an El Niño which began in the fall of 2006. According to the NOAA, these tropical pacific formations typically last 12-18 months and can accurately be predicted 6 months in advance.

According to the NOAA, El Niño episodes occur roughly every four-to-five years. El Niños are characterized by increased precipitation and warmer-than-normal pacific sea surface temperatures along the equator. These increased temperatures correlate to drier fall and winter conditions in the U.S Pacific Northwest and a wetter-than-normal winters along the Gulf Coast states and in central and south California if the El Niño is particularly strong.

Interestingly, the effects of a La Niña are nearly complete opposites to that of an El Niño. La Niñas equate to wetter conditions in the pacific west and southwest as well as drier winter weather in the Southeast. Additionally, La Niñas typically alter ambient temperatures around the United States. This is defined by above average temperatures throughout the continental states, with the exclusion of the Pacific Northwest, which is expected to experience colder conditions. The intensity of these climate changes correlate to the amplitude of their respective La Ninas/El Niños. Since the NOAA expects a historically weaker formation this year, this could lessen the over all climate impacts felt by the United States. That being said, weather formations and the prediction of their effects are highly variable and subsequent to frequent amendments.

Economic Impacts

The impacts of La Niñas and El Niños on our economy are diverse and dependent on the strength of the correlating formation. As with virtually all economic stimuli there are expected winners and losers. Variations in weather patterns such as increased precipitation in the Northwest could lead to enhanced hydro-electric recovery as previous El Niño/La Niñas have risen reservoirs by as much as 30%. Since hydro-electricity is derived from the potential energy stored in a column of fluid, the greater the stored reserves the greater the potential for energy generation. More importantly, this La Niña could improve the fragile tug-o-war for water in the Corn Belt as agriculture and residential users compete for this scarce resource.

Cēterīs pāribus, this most recent La Niña could prove to be a minor blip on the emerging trend of water scarcity and ever increasing demand. Agricultural needs the precious commodity to grown the food we eat as well as the food we burn. As the ethanol industry continues to grow so does its demand for water; Precious water to nourish the energy intensive crop and wash water to process the ethanol. It is estimated that a 50 million gallon per year facility will require upwards of 300 million gallons annually. Corn harvests and the ethanol producers such as VSE and ADM which depend on them could temporarily benefit if this most recent La Niña can provide the rain that the parched corn belt, desperately requires.

Update GST

I initiated a position in Gastar(GST) for $1.49 today. GST is a junior natural gas driller with significant backing from natural gas giant Chesapeake Energy Corp(CHK).

Naturally not Participating

The global commodities boom is something of a wonderment. The fledgling economies of Asia, India, Brazil and Russia continue to feed off of each others prosperity. As these economies grow so does their demand for raw materials such as copper, cement and oil. The result is an incredibly strong demand for resources of the likes, which haven't been seen since the post World War II infrastructure build-out in the United States. Due to this demand, commodities such as gold and oil are nearing multi-decade highs. Inversely, natural gas prices sit at painfully low levels compared to their post Katrina and Rita peaks. This lack of participation beckons me to scout natural gas producers for potential value buys.

These pricing extremes reiterate natural gases' inherent volatility. With natural gas storage at 5-year highs, the rational for price depression becomes transparent. Natural gas prices cannot rally until the supply and demand equation once again becomes skewed. The question is, what could cause natural gas prices to rise?

There are three readily apparent scenarios which could cause natural gas prices to spike: 1)Reduction in output from drillers and producers, 2)Supply shocks for competing commodities and 3)Potential natural gas demand/supply shocks.

Reduction in Supply

Several natural gas producers such as Chesapeake Energy Corp.(CHK) and Questar Corp.(STR) have already announced plans to scale back production as a method of price stabilization. The concern here is that additional production reductions could result in political upheaval. This was seen recently when ill-informed Connecticut Gov. M. Jodi Rell's made accusations that CHK was attempting to manipulate natural gas futures.

CHK's Chairman and CEO Aubrey McClendon succinctly pointed out that, "no US law requires any producer or manufacturer in America to produce a product at a prescribed level, especially if selling such a product could result in the risk of an economic loss." While McClendon is accurate, the likelihood of a significant reduction in natural gas production seems unlikely.


Related Commodity Demand/Supply Shocks

In the United States, the bulk of domestic electricity generation comes from sources such as coal, hydro-electric and nuclear. Since natural gas has a higher relative fuel cost compared to these alternatives, it is often used as the proverbial bench-warmer. During periods of high demand or supply shocks, natural gas based electricity generation is used to recoup differentials brought about by these disruptions. This is primarily due to the intrinsic flexibility of natural gas compared to the alternatives such as coal.

During the 1990s, extensive droughts experienced in the west caused steep declines in hydroelectric generation. As a result, hydroelectric production declined 40% from 1997 to 2001(PDF). This reduction was largely offset by a 30% increase in natural gas generation.

Natural Gas Demand/Supply Shocks

This brings us to my final point. The largest mover of natural gas prices is in fact natural gas demand/supply shocks. During late 2005, Hurricane Katrina and Rita collectively shut down 800 billion cubic feet(Bcf) or natural gas(PDF). To put it into perspective, this is equivalent to nearly 25% of the total annualized natural gas production from the Federal Gulf of Mexico. This supply shock was precisely the reason why natural gas moved from just over $6.00 per million BTU(MMBtu) to $15 (MMBtu).

With September over, the likelihood of a hurricane educed catastrophic occurring this year is rather remote. What could occur however, is a colder than expected winter. While I will refrain from using our friendly, yet remarkably inaccurate weather man as a gage for my speculations, I will point out that natural gas appears fairly undervalued when compared to 5-year trends. This could signify an attractive entry point for such prized natural gas drillers as CHK or XTO Energy(XTO).

Potential Natural Gas Companies

With winter rapidly approaching and natural gas currently underperforming virtually all other commodity classes, I have begun to evaluate several natural gas companies as potential value buys. I will have more on this later, but I wanted to take the time to post some preliminary charts.

CHK Weekly Chart

NGAS Daily Chart

GST Daily Chart

Role Model Needed