From Arabie To The Sands Of Canada

The Daily Reckoning Presents: A DR Guest Essay from resource man John Myers, on the scene in the Athabasca oil fields in way north Canada…

From Arabie To The Sands Of Canada

Northern Alberta, Canada. A security gate. And a construction site that looks like any other.

Workers stand around wearing hard hats and steel-toed boots. On their breaks, they smoke cigarettes and watch the steam rise from their coffee mugs.

But if things turn ugly for America’s oil-rich allies in the Middle East, it may turn out to be one of the most valuable locations in the world.

On a cloudy Canadian afternoon two weeks ago, I paid this site a visit. It sits just outside Fort McMurray, a small and remote Canadian mining town. It doesn’t look like much. But this is the epicenter of the Athabasca Oil Sands, the largest oil shale resource in the world.

In case you’re not familiar with the term, oil shale is essentially a piece of surface rock and sand saturated with oil. Unlike pockets of raw crude that used to shoot up from Texas oil wells, there is no pressure building in a field of oil shale. The oil has already seeped to the surface and collected in pools of molasses-like bitumen.

The Athabasca’s Oil Sands contain an estimated 1.7 trillion to 2.5 trillion barrels of bitumen. From that, an estimated 300-plus billion barrels of oil are recoverable with current technology.

That’s no small cache. The U.S. and Russia combined have less. Even Saudi Arabia reports “only” 200 billion barrels in reserve.

But harvesting processed oil from a shale deposit is dirty work. It requires massive equipment. And up until recently, it’s been too expensive to be considered an alternative to the cheaper, more volatile oil resources we get from the Middle East.But all that has changed. As we were about to find out:

“Each wheel on these trucks has its own electric motor,” said Howard, our tour guide and a retired engineer, “…And wait until you see the shovels. They cost $19 million each.”

He pointed to a 400-ton monstrosity, riding on tires that were each bigger than our full-sized tour van. We couldn’t see the shovels yet. They were busy on site at the Steepbank Mine, where they could rip 100-ton chunks of shale from the earth, to send off for processing.

It only takes a few hours to transform each load into oil. The shovel loads are dumped into the massive trucks. The trucks, in turn, dump everything into crushers. The result is delivered to a primary extraction plant where separation begins.

The bitumen that results is injected with steam. Then it’s diluted with naphtha and piped into a refinery. There, it’s purified and sent off yet again to be processed into diesel, light sweet or sour crude.

One 100-ton load of shale yields about 50 barrels of oil, which is ultimately shipped to markets all over North America via pipelines.

This may be a long way from the days of Dallas and oil- rich Americans. But with pressure mounting in the Middle East – and domestic oil production in America at its lowest level in 40 years – the shale-oil industry could hand resource investors their biggest profit since the 1970s. Especially now that extraction technology has forced processing costs to plummet.

When Suncor began operations in 1967, the cost of producing oil from oil shale stood at more than $30 a barrel. Even at the height of the Yom Kippur War, oil on the open market fetched only $12, making shale oil irrelevant. In 1984, it cost $25 to get a barrel of oil from shale. But the market price per barrel was $15.

Now, however, the metrics have changed. Suncor’s per- barrel extraction costs are down to $10.67 a barrel, thanks entirely to new technology and economies of scale.

With $3.25 billion Canadian in new investment, costs could plunge still further – as low as $9 a barrel.

That’s on par with what it already costs America to tap dwindling resources of conventional crude. It’s also well below the current cost of oil on the open market – at $21.85 as of this writing. And Suncor is prepared.

In 1999, their oil-sands project produced 85,000 b/d in 1999. By the end of 2002, they expect to produce 225,000 to 250,000 b/d – or $5.5 million worth per day – even if oil prices don’t rise a penny.

With Middle East volatility spreading and pressure increasing, oil prices will head upward. Fast. And Suncor’s profit margin will only get wider.

Shell and Syncrude already invest heavily in adjacent properties. In fact, by 2015, Athabasca’s Oil Sands will produce 2.5 million b/d, or 60% of Canada’s total oil production. This creates huge opportunity for shrewd resource investors. How so?

First, unlike oil trapped in underground deposits, oil shale reserves are easily discovered. They seep to the surface. Costly exploration budgets carried by conventional oil producers aren’t part of the equation.

Second, the U.S. market is locked in. George W. Bush has made it clear that the U.S. reliance on Middle East oil will shift to reliance on Athabasca’s Oil Sands.

And third, new technology and economies of scale continue to reduce production costs, making shale-oil

recovery more viable by the day.A mining town as remote as Fort McMurray isn’t the first place you’d expect to see a cameraman from CNN. But is this Canadian hinterland worth watching? From where I stood just two weeks ago – amid massive machinery, the rumbling hum of diesel engines, and towering refinery smokestacks – it certainly seemed so.

John Myers,
October 31, 2001

for The Daily Reckoning

John Myers – son of the great goldbug C.V. Myers – is the editor of Outstanding Investments. Our man on the scene in Calgary, John has his fingers on the pulse of oil and gas industry profits.

*** America’s best and brightest.

*** There was a time when the best and brightest would line up, fresh out of college, resumes in hand… visions of startups and IPOs dancing in their heads… at the pearly gates of Wall Street.

*** Now they just want to be spooks.

*** “Last week,” Maureen Dowd tells us in a NY Times op- ed, “Georgetown University held a job fair. At the booths of the big Wall Street companies and banks, students had little wait. But to talk to a CIA recruiter, the line stretched for over half an hour.”

*** Dowd quotes Ed Friedman, 21, a senior at the School for Foreign affairs. “Two years ago,” says young Ed, “Goldman Sachs was the place to be – even people from the School for Foreign Affairs lined up there. People were interested in six-figure salaries and they viewed the CIA as not having much of a purpose.”

*** Alas, this “War on Terrorism” is “not just war, but a just war,” Dowd chides. And “everyone wants to be a part of it, to help,” says Ed.

*** “In wars of choice, [such as Viet Nam],” writes Charles Krauthammer, “losing is an option. The war on terrorism, like World War II, is a war of necessity. Losing is fatal. This is no time for restraint and other niceties. This is the time for righteous might.”

*** Might be righteous. Then again, might not.

*** The Daily Reckoning’s best and brightest, by the by, are MIA. Eric Fry is on his way to the Agora Wealth Symposium in Las Vegas, where he will no doubt mingle with some of you bright DR readers. And Bill…poor Bill…is still lost among the wilds of Bordeaux wine country. (Although, I’m told he too will be finding his way to Vegas very soon.)

*** Thus…the Daily Reckoning is brought to you by Addison and the World’s Greatest Intern, Becky Kramer, fortifying the front line in Paris. Special thanks, too, to John “Jack” Forde.

*** We have a question: If America’s best and brightest are descending from the mezzanine level to covert ops, who’s going to direct the efforts of the Plunge Protection team? Assuming of course, one exists.

*** “…while Lyndon LaRouche and his ilk evidently think the CIA and Trilateralist Commission run the world,” writes Rick Ackerman. “I seriously doubt whether those two institutions combined possess the operational savvy to run a back-alley crap game. Even so, there is reason to believe that the U.S. government may be loosely in cahoots with some top Wall Street firms to ensure that the stock market does not spook investors too badly, or too often.

*** “Now this does not necessarily mean, as some market- watchers now assert matter-of-factly, that there is a Plunge Protection Team which snaps into action whenever some crisis manager monitoring the market’s vital signs on CNBC lifts a red phone at the White House.

*** “To begin with, who could run an operation like that? With the possible exception of former Treasury Secretary Robert Rubin, no Cabinet-level honcho comes to mind who could conceivably be entrusted with such a difficult job. And who actually believes that even Rubin could second-guess the markets any more successfullythan, say, last month’s top-rated guru in Hulbert’sDigest?” Who indeed…?

*** Apparently no one…the Dow got trounced for 147 yesterday on the heels of Monday’s 275 rout… constituting more than a 4% drop since Friday’s close.

*** And “the fall is not over yet,” according to the Prudent Bear’s Lance Lewis. “I find it extremely unlikely and bordering on the impossible that we can unwind the biggest bubble in history and not have some sort of panic, at some point, along the way.”

*** The Dow is now down 15% for the year. The S&P is down 19% and the Nasdaq…while these indexes may not have plunged exactly…they are certainly suffering a slow-motion defeat.

*** The market, say the talking heads, was reacting to a host of bad news – CVS, Enron and MacDonald’s all reporting dastardly details of deeds undone. Just one feature in the latest installment of “The Bad News Review”. Here’s more…

…The Conference Board’s index of consumer confidence plunged to its lowest level since 1994. And “the world’s premier consumer of global output,” Richard Daughty reports, “those stupidly heroic American consumers, have finally charged their credit cards to the max that they can carry. And ta-da! set a new, all-time record of one trillion, six hundred billion dollars.”

…Meanwhile, stock funds recorded the biggest net cash outflow in history in September. Cash outflow totaled over $29 billion, outpacing the previous record of $20 billion set this past March.

…The telecom industry may never repay almost 80% of the $900 billion in debt, “a failure exceeding the savings industry loan collapse,” says Global Crossing CEO Leo Hinery, by way of Bloomberg.

…As reported here yesterday, Argentina’s restructuring of $38 billion in debt is inducing visions of the Thai Baht and the Russian Ruble circa 1998. “In the coming months,” economist David Malpass told Money.com, “we expect broad debt crisis for developing countries withnegative impact on global growth and corporate earnings.[We expect] a drown-out global recession extending through 2002.”

… Merrill Lynch’s Lauren Rich Fine also told Money: “Believe me, September ad revenue decline was one of the worst ever, and October unfortunately will bring more of the same.”

…”Enron dropped 19% to their lowest level since 1992 on Tuesday,” reports Reuters…itself a victim of profligacy, bandwidth gambling and the machinations of a “New Era” chief financial officer. North America’s biggest trader of natural gas and power – and a favorite with the New Era energy crowd – has suffered 10 straight day of losses and shed more than $17 billion in market cap in the past two weeks. Rumor has it, suggests Money.com’s Bethany Maclean, that Enron “might make tasty prey for a major oil company.”

*** “We’re seeing, and will continue to see, consolidation in the petroleum industry,” says John Myers, “as the war on terrorism and increasing strife in the Middle East make things interesting for Canadian and American purveyors of the world’s most widely used energy source.” (More below…)

*** Tomorrow, GDP numbers for Q3 come out. How bad will it be? The world awaits the net result of 9 Fed rate cuts and a fiscal stimulus package worthy of an Arabian prince. “Congress is simultaneously chipping at taxes and spending big money on fiscal stimulus, thus insuring that deficits start to spiral out of control,” writes the Mogambo Guru.

“The economy, absent a genuine miracle of Biblical proportions, will continue to spiral down to a well- deserved depression, brought down by the same force that produced one in the 30’s. Debt. There is no stopping it, because all that humongous debt accrued from forty years of government profligacy is still there.”

Guest essay from “Son of Goldbug” above…

Addison Wiggin