What does Peak Oil mean for Investors?

The concept of a coming peak and then decline of oil supplies has been ridiculed because those who knew the numbers of how much is in the ground have been able to easily argue that all it takes, is for a higher price to encourage people to either move into substitutes or for explorers to drill for more.

This is right up to a point. But the supplies from the largest fields are flagging now and it is getting harder and harder to find more oil economically. That means that the appetite of investors for risk is being sorely tested. Fewer wells yield a successful outcome and oil companies are becoming more selective where they look. Not enough capital is now available to meet our appetite.

What do I mean by “economically”? The deep water exploration programmes promise a lot but despite the use of 3-D seismic surveys there is no substitute for drilling. With drill ships costing up to $500,000 per day, this can get pretty pricey. So the penalties for failure are high.

Other alternatives are oil sands and shale. These are termed “un-conventional” by the industry.

Shale doesn’t really justify efforts to extract a viable oil derivative until the price gets up over $US70 per barrel. OK, oil has reached that point at $US90+ but the projected market price variations don’t encourage massive amounts to be spent to prove the point. In the USA about $US10 bn has already been spent (some say, wasted) trying to extract and process the kerogen from the shale into oil. Shell Oil has a major project in Colorado attempting just that. But until they complete their trials in 2012 we should probably not regard oil shale as part of the global resource. If they succeed, then available reserves could possibly increase by as much as 2 trillion barrels (from a number of places).

Oil sands are present in both Canada and Venezuela. Depending on who you talk to, these reserves amount to somewhere between 2-3 trillion barrels. But there is a high cost of setting up a capital intensive project and the subsequent costs of extraction. Who would invest in Venezuela?

Some people hold out the hope that enhanced oil recovery techniques – such as using CO2 to pump up reservoir pressures will tip the balance, but while I believe it will have an impact, in relative terms it cannot make up for a world that is consuming more and more each year.

In my book, “Flag KiwiSaver? There is a better way”, I discuss the reasons why I have concluded the where the term “peak” equals “easy”, we have reached peak oil already. This is as much due to escalating demand and energy nationalism, as from shortage of supply. Irrespective, the supply-demand equation means that higher prices are with us to stay, no matter what band oil trades in.

Smart Kiwi investors are now contributing to the development of the Alberta oil sands. What is fantastic for the investor is that technology has advanced to the point where synthetic crude oil can be produced from oil sands at a cost of 18-25 Canadian dollars per barrel. Furthermore there are several projects traded on the Toronto stock exchange where one can have a good measure of confidence that the target can produce for 30-40 years at a constant or increasing rate of output; with no diminution of output when production is ramped up; or, for the need to drill further wells in the hope of finding more. So I rate Canada as a great place to invest in oil and gas.

Canada seems the only place where oil sands are presently viable. Check out my book to see how easy it is to invest and how the returns could alter your lifestyle.

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