The Real Reason for the BP Blowout

Blame Peak Oil

By
Thursday, January 13th, 2011

The presidential commission report on the BP blowout disaster in the Gulf of Mexico is now out.

The commission's final report says the blowout and subsequent spill were not the result of the mistakes of a single company...

Instead, the commission makes the case that the spill happened due to a combination of failures by all the companies and contractors drilling the Macondo well — as well as the government regulators who should have been overseeing them.

Say what they will, we all know the real reason for the disaster: all of the easy-to-reach oil has already been found and is being produced.

In our ever-increasing search for cheap energy, companies must go farther, drill deeper, and take on more risk.

The real culprit for the spill: Peak Oil

The backhanded moratorium for drilling in the Gulf of Mexico — coupled with President Obama's desire for higher oil prices — means the price of oil will go up.

This price increase will ensure exploration companies go farther afield and to greater depths.

At the end of the whaling era in the 1880s, whaling ships went on five-year voyages in an attempt to secure the last of oil used to light cities like New York and Paris.

Artificial scarcity, increasing demand, and higher prices mean a heightened risk/reward relationship — and this means massive profits for those who strike oil and for those that invest in the companies that do.

Oil at two-year high

oil high
As I write this, the price of oil is breaking out to a new two-year high. Today it is trading at $91.66 a barrel.

Oil is up due to speculation that global growth will continue to expand, pushing the need for all commodities.

You can no longer explain the commodity super-cycle in terms of hedge fund speculation; this is real demand pushing against limited resources.

Furthermore, short-term price action is being driven by larger-than-expected decline in U.S. inventories, in addition to a leak in the Alaskan pipeline.

The Energy Department reported this week that oil inventories showed a decline of 2.2 million barrels for the week ended Jan. 7th. The Street was looking for a decline of around 300,000 barrels.

If you toss in the decline of all global currencies due to massive currency expansion, it's not hard to surmise that oil will likely hit $100-$110 a barrel — or even higher by the summer driving season.

Sarbanes-Oxley Act

Ever since the Sarbanes-Oxley Act of 2002, which put increased regulation on companies wishing to list on U.S. markets, most up-and-coming resource companies have listed in London.

I point this out not because it's yet another example of unintended consequences of too much red tape (which it is); but because that's where the money is being made.

The big winners last year

Last year, fourteen of the top fifteen best returning stocks traded in London were in natural resources. A third of those were in oil.

Those wildcatters who went to the far reaches of the planet like Namibia or Mongolia, into unsavory political environments or desolate, uninhabitable places like the North Sea, made vast returns in 2010.

Companies like Xcite (XEL.L) and Nautical Petroleum (NPE.L) more than doubled. Most investors would be thrilled with a double...

But other companies like Encore Oil (EO.L) went from 7 pence to 140 pence. Chariot Oil & Gas (CHAR.L) went from 25 pence to 232 pence in a year.

The Mongolian play I recommended to readers went from 18.5 pence to 190 pence last year.

The biggest resource play in London was Parkmead Group (PMG.L), which climbed 2,713% in only three months.

pmg

Parkmead is little more than an office and some stationary. The spike was due to an improving balance sheet and the news that Tom Cross, founder of Dana Petroleum, was named executive chairman.

Mr. Cross recently sold Dana to Korean National Oil for 1.7 billion pounds.

Clearly, there is money to be made in the wildcatters...

Next month, I am planning to attend a resource conference in Uganda — one of the last big untapped oil places in the world. 

One find by Tullow estimates 2.5 billion barrels. And there is more out there... 

China's CNOOC is in a joint venture with Tullow Oil and Total SA to build a pipeline to take oil out of the Lake Albertine Rift Basin with production starting in 2012. The companies will invest $10 billion in infrastructure.

China recently agreed to build a $350 toll road from the capital to the airport.

I am looking at a $0.60 company that has land adjacent to the CNOOC property and could be worth a fortune. 

I'll let you know when I get back...

In the meantime, check out this undervalued company that hit oil three times last year and is set to start drilling again as soon as the snow melts. They have upward of 614 million barrels of oil and are sitting on the border with China.

Good hunting,


chris sig

Christian DeHaemer
Editor, Energy & Capital


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