And I have regretted it ever since.
If we were cruising through southern Saskatchewan today, our arrival in Fort McMurray would have been delayed by several weeks, at the very least. At the time, however, we put thirty straight hours and more than 1700 miles of road behind us. Our eyes were fixed on the Alberta oil sands.
By the time I awoke, we were well past Saskatoon.
Fortunately, the way back proved better. It was stunning to watch the rigs that dotted the Saskatchewan landscape.
Last week, I mentioned there was another way to play the Bakken. Many of you already knew where I was headed. That's why I was pretty surprised when several readers wrote-in, asking questions about the 'other side of the Bakken'. They were still in the dark when I mentioned that the formation stretched into Saskatchewan.
Well, it's only fair we open that door for them, right?
The Other Side of the Bakken
Although we've been talking about the potential of the Bakken oil formation for a while now at Energy and Capital, I'd wager most of you started focusing your attention on the area when the USGS reported last year that the Bakken held up to 4.3 billion barrels of recoverable oil.
That was a significant increase over 151 million barrels in 1995.
At the time, oil prices were well under their record highs, and companies were scrambling to grab land. And although the Bakken was good news for U.S. domestic production (which peaked three decades ago, as you know), it wasn't the only option open to investors.
Approximately one-quarter of the Bakken formation is in southern Saskatchewan and holds up to 1.3 billion barrels. I know it's easy to get lost in the huge numbers. Sure, it would be great if Bakken production reached 20 million barrels per day, but that simply won't happen. If Saudi Arabia, OPEC's leading producer, were pumping as much as it could, it would barely be over half that amount.
Throughout this economic downturn, Canada has remained our largest source of oil. While the Saudis shipped us a little over one million barrels every day in January, Canada sent over 2.5 million bbls/day.
Think about that for a moment.
If you remember from last week, we're going to be forced to make up the oil lost from Mexican imports over the next several years.
Can you tell me the last time you heard about public outrage from Canadian oil? Now compare that to how many times you've read about ending our addiction to Middle Eastern oil.
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Drilling the Canadian Bakken
It's no surprise that drilling in the U.S. has taken a hit. And although last week's U.S. rotary rig count was up by a whopping 4 rigs, that's 43% lower than a year ago. Furthermore, you also need to remember that only 224 of those rigs (approximately 21%) are drilling for oil. The rest are going after natural gas.
Rig counts are understandably lower. After all, oil prices aren't exactly in triple digits nowadays.
Drilling activity in Saskatchewan, however, is a bit more optimistic. Saskatchewan is only expecting a 25% drop in the number of wells drilled in 2009.
If oil prices can remain above $50 per barrel, I think we're going to see even better results in Saskatchewan's side of the Bakken. The reason is simple enough, many of the producers see $50 per barrel as economical for their Bakken wells.
The Canadian Bakken Vs. the Alberta Oil Sands
This is how one of my readers phrased a recent comment sent to me:
"When it comes down to it, I can't help but lean toward Saskatchewan. Until oil prices push higher (past $80 per barrel in some cases), the oil sands are going to keep getting hit hard."
But don't think Alberta won't pull through this. If the oil sands producers can survive oil prices under $20 per barrel, they will certainly weather this storm. You see, only 20% of the bitumen in Alberta can be mined at the surface. That's means a large amount of the oils sands production will involve in-situ recovery techniques, which can get expensive for producers.
Investing in the Canadian Bakken
There's no doubt about the growing importance the Bakken will have in future North American production. In fact, it's one of the areas where production will actually increase. This includes both the U.S. and Canadian side.
There are several ways for investors to take advantage of the Bakken. If the latest buyout of Reece Energy taught us anything, it's that many of the smaller players could get swallowed up in a heartbeat. In order to keep production numbers up, those trusts are always looking for ways to keep their attractive distributions steady. Ignoring some of the quality Canadian energy trusts would be a mistake.
Even if the Canadian trusts give you pause, there are still a number of smaller producers with strong production rates and the land to back it up.
Until next time,
Keith Kohl
P.S. It's not easy to find the right plays during this recession. I know that many of those Bakken plays have already started coming back, especially now that oil prices are trading steady. In fact, one of those plays has already jumped 30% in the last three weeks alone! If you're interested in playing both the U.S. and Saskatchewan side of the Bakken, I would suggest checking out the $20 Trillion Report.
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A. An oil supply crunch soon after 2010 is highly unlikely. Because demand is unlikely to increase from 86 MMBD in 2008 to 95 MMBD in 2012. That would be nearly 10 MMBD in 4 years (in fact in 3 since it is likely to fall again in 2009).
Where would that demand come from? Non-OECD countries! Even the IEA does not see much new demand growth from developed countries.
But if affluent consumers in developing countries are increasing their efficiency (less SUV's and muscle cars etc.) how come do we expect consumers in Africa, India, China and the like to suddenly grow demand at 3% + per year? Especially if oil costs more than it has cost historically? Developing countries will develop not via big SUV's and muscle cars - but will jump the S-curve straight to small, affordable and efficient transport.
That is if their economies grow fast enough to pull a significant portion of their populations out of poverty.
For this to happen, developing countries need the affluent consumers to continue spending. But if credit is tighter and exports dry up...and oil and energy costs a fortune - the world economy will grow nowhere near the high 4.5% you mention.
In fact there is a proven link - high oil prices and strong economic growth have never co-existed for more than 3 years in a row! Check it out. Every 4th year, something gives.
So if we do reach $140/bbl oil again soon (fuelled by profit seeking rather than fair value) - we are almost certain to come right down to $30-$40 again, in the aftermath of yet another greed-induced recession.
Your advertisement for 500% gains should come with a warning advising people that they are certain to lose it all - because if profit seeking pushes prices up again - fundamental economics of supply and demand will certainly pull them right down again. A roller coaster that will only stop when the world has learned - as Betty commented - that life is not all about profit. And profit tends to be a zero-sum game, we cannot all profit at the same time. If we are not printing money - we need some serious losers for us to make gains of 500%.
The winners may be investors.
The victims may be in some poor village rural China/India/Zimbabwe - who suddenly cannot afford to buy kerosene to cook food.
But the real losers may be the same investors - when suddenly even affluent people cannot afford to buy cars etc. - since the sheer force of demand contraction from the world's poor not buying goods anymore - drops prices and the value of assets as if their falling down a cliff.
Then we hear bank bail outs, automaker bail out etc. If oil reaches $140 again soon - I will not be surprised if we hear Shell, BP and Exxon Mobil crying bail-out in the aftermath that follows.
Oil is an endangered species. Given its environmental offensiveness - it cannot afford to be expensive. Raise the price too high - the oil age may end before we expect.