It's All About Energy

Dear Wealth Daily reader:

Before I get into today’s Wealth Daily letter, I want to quote Bill O’Grady, who is an energy futures analyst at A.G. Edwards. He recently spoke at the Illinois Oil & Gas Association’s annual convention.

According to his report:

A decline in OPEC’s production capacity and a rapid increase in demand have combined to make recent oil price increases permanent.

In a speech before the Illinois Oil & Gas Association’s annual convention, Bill O’Grady said signs suggest current oil production can’t meet expected future demand.

O’Grady presented research estimating that the world needs to find another 40 million barrels of oil a day, on top of what it’s currently producing, to meet demand in 2010.

"That seems highly unlikely," he said. "We’ve got a problem on our hands."

You can say that again. Please re-read "another 40 million barrels of oil a day."

Question: Where are those 40 million barrels of oil going to come from? It’s not all doom and gloom, especially if you’ve been rotating into energy stocks.

NASDAQ’s Five-Year Anniversary

This week marks an important five-year anniversary in the markets. Unless the NASDAQ rallies 3000 points in the next three days, this Thursday, it will have gone exactly five years without making a record high.

The same goes for the Dow and the S&P 500.

However, the same can’t be said for energy. Here’s a chart of the American Stock Exchange Oil Index.

To say that energy is in a bull market is an understatement.

And as Wealth Daily has been saying for months, it’s only going to get worse for gas consumers, and better for investors in energy stocks.

Just today, China is acknowledging the new energy paradigm, defending itself saying "don’t blame us for high oil prices."

Right.

In a report released today, China said it intends to set up a special task force to handle energy issues as its top economic planner painted a dire picture of the nation’s desperate power shortages.

The government has decided to establish a "national leading group" to oversee the country’s sprawling energy industry, the China Daily reported on its website.

"Saving energy should top the agenda of the government’s leading office," Minister of Water Resources Wang Shucheng told the newspaper, highlighting how the economy has recently veered dangerously close to running out of fuel.

Ma Kai, the head of the National Development and Reform Commission, told journalists that China was under great pressure to moderate growth in order to eradicate energy bottlenecks.

"We must keep economic growth within a reasonable range, that is a range which the energy and natural resources can keep up with," he said.

Economic growth in China reached an eight-year high of 9.5% in 2004, with the unwelcome side effect that two thirds of the country’s provinces reported energy shortages.

As a result, the price at the pump is surging higher.

Are you getting scared yet?

Gasoline hit a record high average price across the nation of $1.93, according to the Energy Department.

The price of gas is expected to go higher in the coming days.

With the petroleum industry pumping just barely enough fuel to keep the world’s economic engine humming, a buying frenzy on oil markets is setting the stage for sharply higher oil and gasoline prices.

Crude oil futures traded above $53 a barrel last Friday, and analysts said the global supply tightness is likely to persist through 2005, due to an economic expansion that, so far, appears only moderately slower than the year before.

But for many drivers, it soon will be difficult to find any gas stations across America selling regular unleaded for less than $2 a gallon. That’s because gasoline prices on futures markets have soared 20% in the past week alone.

And then comes this doomsday prophecy:

"I have already heard from gasoline retailers that new shipments are costing them a dime more (per gallon)," said Peter Beutel, president of Cameron Hanover Inc. of New Canaan, Conn., a provider of petroleum market analysis. "By next week prices will be 10-15 cents higher at the pump in many places."

"I believe oil prices and the economy are on a collision course and that it’s only a matter of time," Beutel added.

Again, we’re on an energy path to no man’s land.

Global daily demand is expected to exceed 84 million barrels a day in 2005.

The amount of extra output that could immediately be brought onto the market in the event of a supply disruption only amounts to about 1% of that total, according to several analysts. As a result, markets are frequently jolted by news of possible threats to production, whether it’s a pipeline explosion in Iraq or a labor strike brewing in oil-rich Nigeria.

While global economic growth is expected to cool in 2005, the United States and China alone will still need an additional 900,000 barrels of oil per day to meet rising energy demand, compared with the extra 1.4 million barrels a day consumed in 2004.

So, what should be your investment strategy?

Well, as Mike Schaefer has been saying all along, oil and gas companies – especially unconventional O&G companies in North America – are going to be red-hot commodities.

In fact, my colleague, the Phantom Trader, just returned from a business meeting in Dallas.

Guess what? There’s an energy revolution occurring in Texas.

According to the Phantom Trader, Dallas has again become a hot spot for oilmen looking to make legendary fortunes. He told me this morning how some of the best five-star restaurants in Dallas were booked-up for three months straight.

You see, with the tight global oil supplies, young companies are now returning to abandoned oil wells in Texas, looking to extract oil from old wells that, years ago, were considered uneconomical to produce.

But with oil above $50 a barrel, it’s suddenly extremely profitable to go after new oil in old wells.

However, money will be made in other energy ventures besides "new oil in old wells."

For months we’ve been telling you about gas-to- liquids technology. Well, with oil peaking globally, GTL technology promises to alleviate the crunch.

Our top GTL stock just made a fresh 52-week high today at $12.47, for a gain of 78% in the Pure Energy portfolio.

This article from last week explains why we’re so bullish on the technology and the stock:

Qatar Leads the Green Gas-To-Liquids Fuel Drive

by Meena S Janardhan

DUBAI, Mar 3 (IPS) – With about 15 percent of the world’s proven gas reserves, Qatar, now, has taken the lead global role in pioneering ‘gas-to-liquids’ (GTL) projects. Clean ‘green’ diesel will be one of the main products from these GTL projects and it is expected to be the preferred choice of environmentally conscious governments in the future.

By 2015, GTLs could meet three percent of world diesel demand. A recent study has predicted that demand for middle-distillate GTL fuels will grow to 6.26 million barrels per day (bpd) by 2010.

In a press statement, Abdullah bin Hamad Al Attiyah, Qatar’s second deputy premier and minister of energy and industry, said, ”Within a few years, Qatar will emerge as the world’s largest liquefied natural gas (LNG) exporter, a global hub of GTL products and the largest supplier of petrochemical industries. Our total gas reserves now rank second in the world.”

Qatar produces nearly 18 million tonnes of LNG per year, and its current output is set to more than quadruple to 77 million tonnes per year by 2011. The Arab Gulf nation sees GTL as an option to exploit its vast natural gas reserve potential.

”Qatar has launched an eight-year investment drive in the state-owned Ras Laffan Industrial City, which lies 80 kilometres north of Doha, Qatar’s capital city. The drive is valued at more than 50 billion U.S. dollars,” said Martha Gomes, a Dubai-based oil and gas consultant. ”This programme will consolidate Qatar’s position as the global hub for GTL production and triple its LNG output.”

”Building GTL plants in Qatar could bring in as much GTL as 500 million bpd. GTL products are seen as extremely valuable, especially if oil stays around 40 U.S. dollars a barrel,” she told IPS in an interview.

Qatar has, in fact, commissioned the world’s largest GTL project, which is currently under construction and being built by the oil giant Shell at Ras Laffan.

”This first world-scale project is an important milestone in establishing Qatar as the GTL capital of the world and is supporting the economic development of Qatar,” said Al Attiyah.

While signing the agreement, Royal/Dutch Shell Chairman Philip Watts said in a press statement, ”These are not just any old middle- distillate fuels, but uniquely clean fuels with a vital role in reducing engine emissions and supporting advances in vehicle technology. They are the fuels of the moment, contributing to a sustainable future.”

Shell plans a two-phase development of the Ras Laffan GTL plant. The first phase, producing some 70,000 bpd, will go online sometime in 2008 or 2009. The second phase will be finished less than two years later.

The Qatar plant will, therefore, produce a new range of clean and versatile products which will offer significant environmental and performance benefits. At full capacity, the operation will produce 140,000 bpd of GTL products — primarily transport fuels and naphtha (which is used in producing synthetic natural gas).

GTL technology converts LNG into clear, colourless, biodegradable fuels that can be used in normal diesel engines and can also be blended into conventional diesel fuel. The fuels contain no sulphur, aromatic compounds or metals, producing emissions far lower than conventional fuels. Studies have shown GTL fuels lowering carbon-monoxide and nitrogen-oxide levels by 50 percent, particulate matter by 66 percent, and hydrocarbon emissions by 600 percent.

World gas demand is expected to grow faster than the other energy forms, especially in power generation. In 2000, the demand was 2,442 billion cubic meters (bcm); forecasts suggest that this demand will rise to 3,282 bcm in 2010 and 4,030 bcm in 2020.

Currently, gas constitutes around 24 percent of the total global energy demand, while oil accounts for 40 percent and coal the remaining 26 percent. However, by 2010, natural gas is expected to climb to second place, surpassing coal.

”Around 70 percent of the world gas reserves is far placed from the markets. LNG and GTL are the only real options to place large volumes of the gas into the market,” said Ronnie Thomas, the trading manager of a Dubai-based oil company.

”Next generation GTL will nearly be competitive with next generation LNG. In terms of both investment against gas consumed and investment against energy delivered, next generation GTL plants should have an edge over next generation LNG facilities and offer promise of better returns,” he added.

According to oil and gas consultant Gomes, ultra- clean fuels produced with GTL technology offer the potential for significant cost savings compared to fuels made from crude oil via conventional refining methods.

”For example, at a capital cost of 20,000 dollars per barrel of daily capacity, production of synthetic fuels from GTL would cost approximately 14.35 dollars per barrel, compared to 19.56 dollars per barrel for fuels produced by conventional means – a 26 per cent saving,” she said. ”And this doesn’t include the savings you make in on the environmental side.”

One of the first GTL plants launched by Qatar was a joint venture with Sasol International Ltd of South Africa. The plant produces about 33,000 bpd, comprising approximately 24,000 barrels of GTL diesel, 8000 barrels of GTL naphtha and 1000 barrels liquefied petroleum gas.

Qatar has also signed other GTL projects worth more than 20 billion U.S. dollars and four major proposals are said to be on the negotiating table. A deal for a seven billion U.S. dollar GTL plant has also been signed between Qatar and Exxon Mobil Corporation subsidiary, ExxonMobil Qatar GTL Ltd.

”The large gas reserves in Qatar, Iran, the United Arab Emirates, Russia, Saudi Arabia, Canada and Alaska are awaiting the development of new transport technology to bring their reserves to market,” Gomes pointed out.

She said until recently, there were only two practical ways of transporting natural gas: flow it through a pipeline in gaseous form or chill and transport it as LNG.

”GTL technology chemically converts natural gas into clean-burning liquid products that can be easily shipped to market. Qatar is taking the lead role in the region in promoting this technology and will soon be the leader in this field,” revealed Gomes.



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Until tomorrow,

Brian Hicks