Judging from the wide range of emails from readers over the last few weeks, it appears that you fall into one of several camps when it comes to record oil prices.
Some of you focus solely on how the U.S. dollar is in a downward spiral. Earlier, the dollar plunged to a new low against the euro.
Others, however, insist that we’ve run out of cheap oil. Oil producers are struggling just to keep production flat. But they’re not just having trouble finding new reserves, they also need to make up for natural decline rates (even with a low 4.5% decline, the world still needs to find an extra 4 million barrels per day each year).
That’s easier said than done, though…
Take Russia for example. Russia recently announced their oil production last month declined by 1.3%. And their troubles are far from over. Russia may have to spend at least $1 trillion over the next 20 years just to maintain their current production of 10 million barrels per day.
I could almost accept the stagnant oil production if demand wasn’t running wild. Although the Energy Information Agency (EIA) expects U.S. demand to decline by 85,000 barrels per day, it’s not our consumption levels that worry me. Last month, Chinese imports in March increased 25% (which comes out to 4.1 million barrels per day) compared to a year ago.
Even though your opinions may differ from those of your fellow readers, there is a patch of common ground most of you stand on-oil at $114 a barrel is opening up an unprecedented investment opportunity.
And to be honest, that’s exactly how I feel.
You see, it doesn’t matter if our demand falls slightly. If countries like China and India continue to grow at these rates, there’ll be less oil available to import.
That’s why I’m not surprised the U.S. is starting to depend more on Canadian imports. Don’t believe me? Just take a look our imports since 2003. Our oil imports from Saudi Arabia fell 16.6% while imports from Canada grew over 17%.
And right now, there’s a quiet war raging between two Canadian provinces. This war, however, is being fought with barrels, not bombs.
Canada’s Secret War for Oil
If you were to mention Canadian oil production, I’ll confess that the first thing that came to mind would be Alberta.
Can you blame me?
Think about it for a minute…
Alberta currently produces about 1.9 million barrels of oil per day. That figure also includes the massive oil sands deposits. If we only consider conventional oil sources, Alberta is still on top of the charts, producing over 500,000 barrels per day.
That might not be true for very long.
Last October, however, Alberta dropped a bomb on oil companies. Royalties were hiked up about 20%. The new royalty terms came right after a review panel released their royalty report. The first sentence in their executive summary was enough: “Albertans do not receive their fair share from energy development.” Oil companies were left bitter, and several threatened to cut spending in their Alberta projects.
Fortunately for them, Saskatchewan has become a solution to their royalty woes.
Investing in Canadian Oil Stocks
Saskatchewan isn’t too far behind Albert when it comes down to conventional oil. The province pumps out about 425,000 barrels a day.
And trust me, Saskatchewan is looking to capitalize on the Alberta’s disgruntled oil companies. In fact, Saskatchewan’s energy minister has repeatedly said the province has no plans raise royalties.
With a good chunk of the Williston Basin in southeastern Saskatchewan, oil companies in Alberta can see the grass is greener on the other side of the fence. That’s why we’re not surprised a record $200 million was spent at auctions for oil and gas rights in 2007. Naturally, two-thirds of that was spent on bids in the southern part of the province.
Not to be outdone, Alberta fired back last week. The government released two new royalty programs aimed at promoting oil and gas development in the province.
Incentives are being offered to companies that drill wells over 2,000 meters deep. The five-year program allows companies to offset $1 million or up to 12 months of royalties.
Although the new royalty programs will not come into effect until 2009, one of the interesting parts is that the royalty breaks do not rely on drilling success.
In other words, oil companies would still get credit if the well turns out to be dry.
Personally, I think investors are getting the best of both worlds as the two provinces vie for attention. And I know for a fact that the majority of my readers have been playing both sides through Canadian oil investments.
The key is their success so far has been finding strong companies that are expanding their operations into southeastern Saskatchewan without abandoning their Alberta projects.
I’d take a look at TriStar Oil and Gas (TSX: TOG). This company is actively drilling in both southern and central Alberta. During 2007, TriStar was able to expand its land positions by 74%. As you can see, the move turned out quite well for shares over the last six months:
Of course, having 100% success rate on their Bakken horizontal wells in the fourth quarter of 2007 doesn’t hurt either.
Until next time,
P.S. Don’t think you’ve missed out on all the action. The $20 Trillion Report was created so investors could take advantage of these emerging oil plays. Two of their 2008 plays in particular have a strong stake in both the Alberta and Saskatchewan oil boom. The first is already up 34% while the second has gained over 38%. Perhaps it’s time you joined us at the $20 Trillion Report.