by Marin Katusa, Casey Energy Report

A rancorous debate over TransCanada Corp.’s (T.TRP) proposed Keystone XL Pipeline has given rise to two uncomfortable prospects: If the US$7 billion project is not built, Alberta’s oil sands will become landlocked, at least for a while, and the United States will lose access to one of its few reliable, friendly sources of oil.

Keystone XL is a proposed pipeline that would run from Edmonton—the hub of Canada’s massive oil sands—through Montana, South Dakota, Nebraska, Kansas, Oklahoma, and Texas, to Houston. The line is critical to ensure a continued, smooth ramp-up in oil sands production, because producers need to send the heavy bitumen extracted from the sands to refineries able to handle that kind of crude. Since refineries in the Midwest are reaching their heavy-oil capacity, it needs to go to the Gulf Coast.

Keystone XL is also critical for U.S. oil security – the U.S. is the world’s biggest importer of oil and, as we recently outlined in the Casey Energy Report, almost half of its oil comes from unstable, unfriendly, or declining producers (think Nigeria, Venezuela, Saudi Arabia, and the like). Canadian oil sands may be an environmental controversy, but in terms of U.S. energy security they are a lone bright spot. Denying Keystone XL equates to denying the U.S. its only significant friendly, stable, and growing source of oil.

The pipelines that currently carry bitumen from the oil sands to refineries in the Midwest will reach maximum capacity in as little as four years. At that point, oil sands producers would be stuck with growing volumes of oil and waiting for other transportation options to materialize. Those options would take several years to develop, even if efforts begin now.

The Keystone XL pipeline is so important that most in the oil patch haven’t even considered the possibility that it will not happen. Indeed, companies have already signed up to fill most of its capacity. Yet the pipeline has fomented heavy debate in the U.S., pitting legislator against legislator and one government department against another. Opponents say the project threatens key water resources, increases U.S. ties to hydrocarbons, and supports the environmentally destructive oil sands. Supporters say the pipeline would create tens of thousands of jobs and potentially lower oil prices in the U.S. because of ensured access to oil supplies from a stable, local source.

The oil sands hold 171.3 billion barrels of oil in reserve. For context, Saudi Arabia’s reserves stand at 264.2 billion barrels. The enormity of the oil sands resource has raised the stakes for both sides in the pipeline debate and placed undue importance on the outcome.

The decision lies with the State Department, because the pipeline crosses international borders. Secretary of State Hillary Clinton is expected to announce her decision before the end of the year. The department already issued a preliminary environmental impact assessment, which seems generally supportive of the project. For example, the State Department concluded that if Keystone XL is not built, oil sands production will be diverted to other markets (such as China), and the refineries in Texas will continue to process bitumen apace from offshore platforms. As such, the pipeline would not increase production of greenhouse gases.

The U.S. Environmental Protection Agency (EPA) does not agree. In a letter to the State Department this week, the EPA argued that the project poses serious environmental risks and that the State Department’s environmental review process was seriously flawed.

The EPA also laid out six specific demands for the State Department’s review, including: extending the cumulative greenhouse gas emissions impact assessment from 20 years to the pipeline’s 50-year lifespan; collaborating with the Department of Energy to assess the need for the pipeline and how it fits into President Obama’s goal to reduce U.S. oil imports; and analyzing other reasonable routes for the pipeline that avoid ecologically fragile areas (such as Nebraska’s Ogallala Aquifer and Sand Hills region). Other concerns include potential impacts to groundwater in the event of a spill and high pollution from refineries along the Gulf Coast that would process the bitumen.

Environmentalists are openly using the project as a proxy for their general opposition to oil sands development. Since environmentalists have framed the debate in that sense, Clinton’s decision will have ramifications far beyond the pipeline: It will set the tone for the U.S.’s perspective on the oil sands. But even though environmentalists would celebrate a Keystone denial, their method may be moot, because denying TransCanada approval for Keystone XL would only hinder oil sands development for a few years.

The thing is, if there is no Keystone XL, Canada will find other ways to export oil from its vast oil sands. And if the United States doesn’t want the oil, other markets will.

The U.S. is Canada’s next-door neighbor and the world’s largest importer of oil, so it is the most logical market for oil sands bitumen; it currently buys almost every drop that Canada exports. If Keystone XL does not become a reality, oil producers in Canada have several alternatives for reaching the U.S. One option is to ship by rail. Last fall, Altex Energy, in a joint venture with Canadian National Railway (CN), started shipping small amounts of oil sands crude along CN’s tracks all the way to the Gulf of Mexico. Transporting by rail avoids billions of dollars of infrastructure costs, avoids the need for any regulatory review, and eliminates the need to dilute the crude with chemicals to make it flow more easily. The drawback: It is considerably more expensive than pipeline transport.

There are also other pipelines available, such as the Trans Mountain pipeline that transports crude from the oil sands to Canada’s Pacific Coast. There, it can be loaded onto ships and taken to distant refineries. That pipeline is near capacity, but owner Kinder Morgan is considering an expansion. Another Canadian company, Enbridge, is proposing a new line from the sands to the northern British Columbia port of Kitimat.

If the U.S. says “no” to Keystone XL, watch for the Chinese to step up in support of these proposed pipelines, since oil transported to West Coast could easily be shipped across the Pacific to the world’s second largest oil importer.

There is political support for these projects, bolstered by a national election in Canada that reelected a Conservative Party government. The Conservatives’ traditional power base is in Alberta—home of the oil sands—and the party supports oil sands development whole-heartedly. New pipeline capacity is so important to the government that Alberta Energy Minister Ron Liepert thinks it needs national, and even international, consideration.

“If there was something that kept me up at night, it would be the fear that before too long we’re going to be landlocked in bitumen,” he said. “We’re not going to be an energy superpower if we can’t get the oil out of Alberta.” At a meeting in July, Mr. Liepert plans to urge his federal and provincial counterparts to adopt an energy strategy that makes the development of crude oil export pipelines a matter of national importance. He also will urge Canada’s federal government to approach Obama’s administration about a continental energy pact, committing the U.S. to providing market access to Canadian oil in exchange for security of supply.

So where do we stand? The State Department’s next step is to release a final environmental impact statement. That will start a 90-day countdown, during which other federal agencies—including the EPA—can weigh in on the project. While all of this is going on, five senators from Nebraska are asking Hillary Clinton to delay her decision until May 2012, to give Nebraska time to beef up its oil pipeline regulations.

Once the comment period is over, Clinton will make her decision based on whether the cross-border pipeline is in the national interest. However, the EPA can appeal that decision to President Obama if the State Department does not address its concerns. As such, the fight—which has already dragged on for two and a half years—could still last for some time. But at the end of the day, it seems the heated battle over Keystone XL may be little more than a symbolic clash of ideology—albeit one that threatens America’s only solid supply of friendly oil and one that would delay oil sands developments only for a few years. Oil makes the world go ‘round, and the denial of one pipeline is not going to stop oil sands development.

As we mentioned earlier, the Casey Research energy team just completed an in-depth investigation of who supplies the U.S. with its oil; we concluded that U.S. supplies are very much at risk. More than 40% of the country’s oil comes from suppliers with declining outputs or those that we classified as At Risk or Unfriendly, because their relationships with the U.S. are rocky or because the countries themselves are inherently unstable. (If you are interested in our report, consider subscribing to the Casey Energy Report, which is the main outlet for our energy market research.)

Canada is a lone, bright light in the U.S. oil-supply picture. The Keystone XL pipeline is an important part of that picture. A decision to deny the pipeline would represent a serious threat to America’s energy security… and a boon to China, which would gladly build infrastructure and buy up Canada’s oil sands production.

[Oil sands development is just one of several emerging energy technologies. Do you know which stocks are best poised for profit in this sector? The Casey Energy Report will keep you apprised of developments to maximize your investment. For just a few days, you can get it for $397 off the retail price. Try it risk-free for 3 months, with money-back guarantee.]

by Marin Katusa, Casey’s Energy Report

As the conventional and cheap oil and gas start to dry up in the Middle East… a bigger, even better opportunity seeks to replace it.

For many who aren’t familiar with the region, the Middle East comes across as an updated version of Lawrence’s Arabia, only with lots of oil. But this mosaic of cultures isn’t made up of only Arabs or Muslims, and most Middle East countries are neither awash with heavily armed, rather excitable citizenry… nor with black gold, which is what we’re interested in. Twenty-three countries comprise the Arab League, but only Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), and Iran are major oil producers.

No matter; with the exception of Kurdistan in northern Iraq, none of the oil heavies are currently open to us investors anyway. We’re digging for other finds, with three basic criteria. We’re looking for countries in the Middle East that: 

• Have potential for unconventional production, such as oil shales
• Have incentive to develop it, and
• Are either net importers of oil or soon will be.

Why? In short, conventional production is in decline, but demand for oil isn’t. That means the state-owned oil companies and large companies operating in the region either need to find new fields and basins or apply new technology to get more out of established ones. Or both, of course. Nowhere is this reality more critical than in the Middle East, the world’s most important oil region, where oil production is the lifeblood of governments.

Our analysis, gleaned from data and on-the-ground experience alike, points to investment opportunities in new, unconventional technology and resources. Exploration costs will likely be lower, as companies aren’t starting from scratch. And in what we see as early days in the national drives for energy security, it makes sense to look close around your own turf.

We believe that blue-sky potential lurks in companies operating in the Middle East with expertise in unconventional production, access to good source rock, and management that can marry the two.

The Proving Grounds

It’s still early in the game, which can mean both good (high returns) and bad (high uncertainty) for investors. We believe the potential upside of unconventional development in the Middle East is just too big to ignore, however. So what we’ve done, is track down and lay out the most likely go-to countries for those explorers with the right stuff.

The following chart will narrow further the countries that meet the three criteria we outlined above. That is, who’s “in the red” when it comes to oil?

 

We see here that six countries currently rely on imports for their crude oil: Egypt, Cyprus, Lebanon, Jordan, Israel, Turkey.
In addition, two countries appear on their way to becoming net importers of oil: Syria and Yemen.

Egypt

Outlook: The oil and gas industry are an essential sector in Egypt’s economy, and the country’s reserves convey its potential to become a significant producer. In 2009, Egypt produced 678,300 of barrels of oil per day, while consuming 683,000 barrels per day. Egypt has traditionally been a net producer, but production peaked in 1993 and has been in decline. Combine that with its increase in domestic consumption, and Egypt is now a net oil importer.

Consequently, the Egyptian government has reversed its previously much harsher fiscal regimes and now actively encourages the exploration of domestic oil, which has resulted in an industry dominated by foreign players. 

Natural gas, on the other hand, has tripled in production in recent years due to some major discoveries. Thus Egypt is a net producer here, and more important in the broad picture, a source for European natural gas. European countries are usually eager to decrease their reliance on Gazprom, the state-controlled gas giant from Russia.

Egypt has a developed network of pipelines to export its natural gas to Southern European and eastern Mediterranean countries. It also sends liquefied natural gas (LNG) to Europe, Asia, and the Americas. 

However, as natural gas represents over 80% of Egypt’s source of electricity, the government has slowed plans for export expansion to ensure all domestic demands will be met before any further moves.

Cyprus

Outlook: Cyprus has no oil or gas production currently, and so must import all it needs. However, an oil deposit has been found recently in the seabed between Cyprus and Egypt. An oil licensing round took place in 2007, when 11 blocks were offered to potential investors.

This first round took place against a backdrop of opposition from the Turkish government. As a result of this territorial dispute, companies chose not to bid, and as of now, only Noble Corporation has a production-sharing agreement (PSA) with the Cyprian government.

In May 2010, Cyprus announced it was close to commencing a second oil licensing round for several offshore blocks. It’s again under Turkish protest. Turkey has even warned Lebanon and Egypt against working out a deal with Cyprus for oil exploration.

Lebanon

Outlook: Lebanon also has neither oil or gas production at this time. However, Cyprus has signed lineation agreements with Lebanon and Egypt to exploit large hydrocarbon reserves that cross borders offshore, as we mentioned above, and hope to begin exploration by 2012.

And according to Lebanon’s parliament speaker, Nabih Berri, gas reserves found off the coast of Israel are located in Lebanon’s territorial waters as well. These fields, however, may run into developmental difficulties as Israel and Lebanon to this day still dispute their maritime borders, leaving large fields such as Leviathan and Tamar in a state of limbo.

Jordan

Outlook: Large corporations have been eyeing the unconventional potential in Jordan for quite some time, but were put off due to both political as well as economic reasons. However, with advancements in oil shale technology and a gradual shift towards liberalization by the Jordanian government, which has long been envious of the hydrocarbon wealth of its neighbors, Jordan’s government has established plans to liberate the oil market in the next five years. If that happens, it will be a first for investors since 1958. Under the National Energy Strategy’s initial phase, four companies will be offered 25% of the kingdom’s reserves. The remaining 75% will remain under the control of the state-owned Petroleum Refinery Company (JPRC) until full liberalization.

This development will pave the way to exploit Jordan’s oil shale resources. Oil shale deposits underlie more than 60% of the Kingdom of Jordan and have enormous potential. The World Energy Council estimates Jordan’s oil shale reserves at approximately 40 to 60 billion tons, making it the second richest state after Canada in rock oil reserves.

Furthermore, the oil shale quality is very high compared with the oil shale in the United States. Jordan has recently signed a deal with Shell Oil to extract oil shale in the central part of the country. First commercial quantities are expected by 2020, with an estimated amount of 50,000 barrels of oil per day.

Modest natural gas reserves were discovered in 1987, and the Risha field near the Iraq border produces approximately 30 million cubic feet of gas per day. However, production is pretty flat and looks to stay that way. That means imports.

Israel

Outlook: Israel relies on importing resources to meet the majority of its energy needs. It boasts no major reserves, and thus oil production is minimal. However, as we said above, Israel has found substantial natural gas reserves located in Mediterranean deep water. This discovery has prompted increased exploration off Israel’s coastline, not to mention increased territorial disputes.

The U.S. Geological Survey reports that Israel’s offshore reserves could hold 122 trillion cubic feet of recoverable gas. That makes it one of the world’s richest deposits.

As a result of this discovery, Lebanon has rushed through approval of a law that outlines the guidelines of surveying, exploring, and producing of gas. The legislation also calls for a sovereign wealth fund to manage the potential revenues.

Nevertheless, Lebanon is still three to four years behind the Israelis, as it still must secure investors, select bidders, and begin exploration work. Israel is already well on its way.

Turkey

Outlook: Although Turkey has both oil and natural gas reserves, the country is a net importer for both resources. It may become energy independent as new oil and natural gas reserves have been discovered off the coast of the Black Sea, Eastern Thrace, the Gulf of Iskenderun, and in the regions near the borders of Syria and Iraq.

Due to its location, Turkey is vital in energy transportation between major oil-producing areas, in the Middle East and the Caspian Sea, and consumer markets in Europe. In 2009, the pipeline network in Turkey covered over 3,636 kilometers for crude oil and 10,630 kilometers for natural gas.

One of the pipelines, the Baku-Tbilisi-Ceyhan, is the second largest oil pipeline in the world. It’s responsible for delivering crude oil from the Caspian Sea to the port of Ceyhan on Turkey’s coast. From Ceyhan, the crude oil is distributed to oil tankers, which will further transport it to the world’s markets.

Another pipeline, Nabucco, is in the planning stages. It is expected to provide European markets with natural gas from the Caspian Sea basin.

Syria

Outlook: Compared with some of its neighbors, Syria’s oil and gas production is fairly unassuming. On the other hand, Syria is the only significant producing country in the Eastern Mediterranean region. Oil production had declined, then flattened out for several years before new fields were discovered. They’re expected to bump up future production.

Syria’s known oil reserves are located mainly near the Iraq border and along the Euphrates River, while some smaller fields are located in the central part of the country. Upstream production is controlled by the state-owned Syrian Petroleum Company (SPC). The main foreign consortium which is currently producing is Al-Furate Petroleum, a joint venture made up of SOC (50%), Shell Oil (32%), and a collection of other companies.

Contracts have been awarded to Shell, in 2008, and TOTAL, earlier this year, for exploration at greater depths in existing oil fields in the Euphrates and central areas. Offshore exploration came up dry in 2007, but recently there’s been renewed interest. The SPC has commenced plans to issue tenders for the offshore blocks in the future.

Syria is also strategically important as a transit hub and will provide a larger role with the ongoing plans for pipeline network expansions in the area.

As for gas, new fields are expected to ensure that Syria’s domestic demands are met after several years of decline in production. About 35% of natural gas production is reinjected into oilfields for enhanced oil recovery techniques, with the remainder going mostly to generate electricity and for domestic use. By the end of 2010, Syria expects to double its natural gas production.

Yemen

Outlook: Like Egypt, Yemen is a strategic hub for oil shipping. More than 3.7 million barrels of oil pass daily through shipping lanes off its coast. The alternative is a very costly trip around the southern tip of Africa, so governments and oil companies are anxious to avoid any disruptions.

Hydrocarbons currently account for approximately 25% of Yemen’s GDP and over 70% of government revenues. Accordingly, the government is actively seeking to increase foreign capital in this sector.

Barring significant change, however, its harsh fiscal regime is strangling exploration. Yemen is currently a net producer of oil, but it won’t be for much longer at this rate. Production is currently limited to two major sedimentary basins, but another 10 basins are believed to hold oil reserves.

A number of companies are interested in the area of Yemen’s border with Saudi Arabia, though activity has been very limited due to a combination of limited infrastructure and continued security concerns. An initial licensing round in 2007 for offshore exploration also stirred interest, but the rise of Somali pirate activity in the Gulf of Aden has more or less put the kibosh on that. A fourth round of bidding was postponed in August 2009 because of the pirates and the exorbitant insurance rates that companies would need to pay to operate in the region.

Up until 2009, all natural gas produced was reinjected to provide enhanced oil recovery. Natural gas export only became viable when a milestone agreement was signed in 2005 with Korea Gas Corp. Yemen also signed an agreement Swiss GDF Suez Company and TOTAL. All three contracts run for 20 years.

Yemen’s first liquefied natural gas (LNG) plant, located on the port of Balhaf on the Gulf of Aden, went online in October 2009. Yemen has the ability to export over 200 million cubic feet of LNG per year, and much of the future investment into Yemen is expected to be used in the natural gas infrastructure.

What It All Means

So the question is, what do we have and, more importantly, how can we make money?

When investing in the Middle East, there’s evaluating infrastructure, fiscal policies, and, perhaps most important of all, Middle East politics.

Much of the Middle East is well developed, particularly around urban centers. But many places where a company would be looking for unconventional oil are a ways off the beaten track, and that means additional infrastructure. A prominent example is Kurdistan, where billions of dollars’ worth of infrastructure upgrades are needed to turn the region into prolific oil-producing center. A junior company alone could not possibly have the connections to build such infrastructure. Countries such as Yemen and Oman have similar stumbling blocks to investment and development. The Catch-22 is that these places are precisely where the remaining “elephant deposits” could be hiding.

Behind the scenes in the Middle East is always politics, much of it nuanced and layered by generations of history and family ties.

It takes a management team that has been in the arena before and knows the intricacies of the particular area of interest. A good security detail may be a must in some places as well.

Lastly, the fiscal systems in the Middle East are relatively tough compared with the rest of the world, and in some countries, such as Saudi Arabia, there are very few, if any, opportunities for foreign companies to even come in and share the wealth.

Countries with the highest petroleum shortfalls tend to have the lowest government take. But that’s relative. Any company that operates in the area needs to remember the Middle East holds the dubious record of the highest number of “two-stars” (80-90% government take) and “one-stars” (90%+ government take) in the world, leaving contractors with very little with which to recuperate their costs and justify their investments. Southern Iraq and Kuwait can even reach 95%+.

Who’s Got It

Nevertheless, opportunities are definitely available for those looking for them. Some are conventional, but the big upside that we see in the Middle East is in its unconventional potential. Reconnaissance and seismic data for the region are readily available due to decades of exploration in the area, saving companies millions, if not billions of dollars that would have been needed to do the same work. There are also a good number of pipelines here that, where geography and geology meet, can convey a premium to any unconventional oil production. As several countries begin to look for the oil shale opportunities, the unconventional story has the potential to be the biggest boom in the energy market in decades.

[Month after month, Marin and his energy team analyze the global energy markets to find the best small-cap companies that provide vast upside potential. And with oil prices shooting up again, returns could easily match – or even surpass – the 400% and 818% gains subscribers made within the past year. Try Casey’s Energy Report now for 3 months with full money-back guarantee… details here.]

Now that we have “Silly Season” behind us, it’s time to get serious about trading

In today’s video we are looking at crude oil. This market has been a disappointment to a lot of traders as has remained in a broad trading range for the past 18 months.

The current trading range will eventually be broken and the market will move in the direction of the breakout. While our long-term indicator, the monthly “Trade Triangle” continues to be positive, short-term “Trade Triangles” are indicating weakness. With a score of -60 for February crude oil, we expect that this market will be range bound in the short term.

One of the indicators we discussed in an earlier video is in an oversold condition, indicating a potential rally from current levels could be at hand. That being said we would wait for some other combination of indicators to confirm that a move is underway.

For the past 18 months the best way to trade crude oil has been with the use of an oscillator indicator. The one we’re looking at in today’s video clearly shows you where the lows and highs are coming in and indicates a potential market bounce from current levels.

We expect that after such a long period of sideways action, almost 18 months, that the crude oil market will come alive and present some great trading opportunities in Q1 and Q2.

As always our video’s are free to watch and there are no registration requirements.

All the best to you,
Adam Hewison
President of INO.com
Co-founder of MarketClub

There’s no question about it, 2010 has been pretty difficult for most traders in the crude oil market. This year has produced no discernible, lasting trends in this market. The trends it has produced have lasted little more than just 3 or 4 weeks at best.

So what’s ahead for this market?

In today’s short video we examine the fact that crude oil briefly traded over $90 a barrel before falling back. So what made the crude oil market reverse course and fall back? Was it selling, was it profit taking, a technical point, or something else?We are examining crude oil in detail using a tool that we think is very appropriate for this type of market at the moment.

We have not discussed this technical indicator in any of our previous videos and I think when you see how it works and how you can use it your own trading, you will be pretty impressed.

We still look at our “Trade Triangles” of course, but “Trade Triangles” tend to work best with markets that eventually get into big trends and that’s really where you make your money.

If you have a few minutes and you’d like to learn about this new/old technical indicator that has generally been overlooked by many traders, you will find this video very interesting. This 30 year old indicator has proven to be very effective in this year’s crude oil market so you don’t want to miss this video.

As always our videos are free to watch and there are no registration requirements.

All the best,
Adam Hewison
President of INO.com
Co-founder of MarketClub

By Marin Katusa, Chief Energy Strategist, Casey’s Energy Opportunities

The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution.

June saw the 2010 launch of IEA’s biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world’s energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.

As far as the IEA is concerned, this is probably a very important moment to start looking at alternative energy sources. If we, as a collective group of consumers, continue on the business-as-usual path, the scenario for 2050 is looking grim.

This baseline scenario sees carbon emissions rising by 130%, with power generation accounting for 44% of total global emissions in 2050. Oil demand will be up by 70% – that’s five times the oil production in Saudi Arabia today. I’ll leave you to imagine what this means from an energy security perspective.

The other scenario offered by the publication, known as BLUE Map, is the “target” scenario. It assumes that all carbon emissions will be reduced by 50% by 2050 and suggests the least costly way to get there. This 50% reduction, the IEA insists, is the absolute minimum, should we want to keep climate change within the more acceptable 2-3 degree change.

The main focus of this scenario is, of course, weaning the world off fossil fuels. Carbon intensity of energy use would have fallen by 64% by 2050. Demand for coal would drop by 36%, gas by 12%, and oil demand by 4%. Renewable energy would be providing a hefty 40% of primary energy supply and 48% of the electricity generated. As for cars, 80% will be electric, hybrid, or hydrogen-fueled.

And while the world is expected to reduce emissions by 50% by 2050 in the BLUE scenario, it is the OECD that will bear the real burden. Non-OECD countries can get away with just a 50% reduction; OECD countries are looking at cutting 70-80% of their 2007 emissions. This would mean that the electricity sector for these 32 countries would have be “almost completely decarbonized” by 2050.

A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario

So what needs to be done to make this work? Well, gird your loins – the “top priority” will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.

But there’s also some exciting news. The revolution is already under way.

On a global scale, total investment into technology and its deployment between now and 2050 would be about US$45 trillion – 1.1% of average annual global GDP over the period. The good news is, that investment has already begun all around the world.

Even as China grudgingly accepts the mantle of the biggest energy consumer, investment dollars are being poured into renewable energy research. China has already surpassed the United States as the largest producer of clean energy, whether it be hydro, wind, solar, or nuclear.

Germany, Europe’s powerhouse, is lining up renewable energy to compete with nuclear. Currently getting 10% of its energy from renewable energy, Germany’s renewable numbers for 2020 are projected at 38.6% electricity, 15.5% heating and cooling, and 13.2% of the transport sector.

And in the United States, the Obama Administration has been pushing for, and encouraging, clean energy research and development since it came into power. On display are a variety of subsidies and loans guaranteed to tempt even the most conservative producer. Whether it’s the 30% cash up-front that the government is willing to give renewable energy projects or the vast amounts of cash injections into various energy technologies programs, renewable energy is set to take off in America.

For those investment portfolios that have taken a hit from the BP and Enbridge oil disasters, the IEA report is only going to spur up greater interest in the renewables game. Knowing which companies are enjoying political favor from Washington to Berlin and are at the receiving end of substantial grants is a sure-fire way to repair the damage.

—

Find out which renewable energy company – poised to take a moon shot – is Marin’s personal favorite right now. Read more here.

By Doug Hornig, Senior Editor, Casey Research
Media coverage of the oil spill’s effect on the Gulf focusing on tourist income lost by the waterfront towns – with footage of empty beaches, restaurants and T-shirt shops – dominates the news. Interviews with devastated business owners are heart rending. But they always end with references to somehow hanging on until “things get back to normal.”

Trouble is, things are not going to “normalize.” Not for the Panhandle of Florida, and probably not for the rest of the state, either.

Projections suggest that Florida can expect oil all along its west coast, and possibly throughout the Keys and up the east coast as well. Yet even before BP’s well began spewing crude, pressures within the state’s economy were building. It was an explosive situation awaiting a match.

Oily beaches and dying wildlife are likely that match.

Take unemployment. Statewide, it ballooned from 3% in 2006 to a peak of 12.3% in February 2010. Though it’s backed off, it remains in double-digit territory at 11.2%. ”Officially” – though official numbers understate the problem. Illegal immigrants, some 4.5% of Florida’s population, aren’t counted; the long-term unemployed and aging workers are regularly purged, even if they’re still looking for work.

This in a state already confronted with the worst of the coming healthcare/taxation crunch. It has the second oldest population in the nation, and as its citizens retire, their earnings fall off, causing tax revenues to drop. At the same time, healthcare bills rise, stressing social service budgets.

Florida is ground zero for Baby Boomer demographics. With 600 seniors for every 1,000 workers now, and the number trending inexorably higher, soon every employed person in the state will essentially have to adopt one senior to care for out of his or her paycheck.

Housing? Naturally, rising unemployment amplifies the difficulties of maintaining homeownership. With further negative effects from the oil, we can only expect the situation to worsen. A tsunami of defaults and foreclosures – and bank failures – would not be a surprise.

Florida is mortgaged to the hilt. It ranks second only to California in total securitized non-agency mortgage loans, 10% of the national total. Of those, half are 60 days or more delinquent, or 16% of all such mortgage delinquencies in the country, the highest ratio anywhere.

The state is full of retirees trying to live on modest incomes while hanging on to their homes. Unsurprisingly, this has led to a disproportionate amount of at-risk loans. 85% of the statewide pool is rated Alt-A or Subprime.

Nor has the crash in prices bypassed the Sunshine State. Nationally, fewer than 30% of houses sold for a loss in the past year, compared to nearly 50% in Miami and 65% in Orlando.

Many would-be sellers are clinging to the cliff edge by their fingernails. Overall, 81% of all Florida loans are under water, with the average mark-to-market loan-to-value ratio standing at 138%. Almost 40% of borrowers are crushed beneath debt of more than 150% of the value of their homes.

State government is no better off.

As the oil cuts into employment prospects, tax revenues will nosedive – and even before the blowout, the state was broke. The projected budget shortfall for fiscal year 2011 was $4.7 billion. What it will actually be is anyone’s guess – a bigger number is baked in the cake – but at $4.7 billion, it already represented more than 22% of the FY10 budget.

Both tax hikes and service cuts are political suicide. And desperately raising taxes in a depressed economy tends to decrease revenue, anyway. Yet a balanced budget is mandated by law. Where will the additional money and/or savings come from?

Then there’s Florida’s $113.8 billion public pension fund. It must generate earnings of 7.75% per year to meet its commitments to the nearly one million public employees and retirees who depend on it.

What investment safely yields 7.75% today? Nothing. So the fund’s administrators are asking for permission to try some “riskier” investments. Maybe they’ll succeed. Or maybe they’ll wind up staring down the barrel of a pensioners riot.

Florida’s coming problems are intractable, at best; the least bit of bad luck and they may become utterly irresolvable.

Expect bailouts. Washington will not be able to ignore what happens to this beleaguered state. The federal government will be forced to spend yet more vast sums of money that it doesn’t have, on a recovery that will take years, if it ever happens.

And that makes Florida’s plight a looming horror for us all.

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[Florida is just one small gear in the United States’ broken economic machinery. The Casey Report regularly analyzes where the economy is going and how savvy investors can protect themselves from the inevitable fallout. One of the editors’ favorite investments for 2010 (and beyond) is betting on rising interest rates – a true no-brainer. Read more here.]

By Marin Katusa, Chief Energy Strategist, Casey’s Energy Report

The White House might be gaping in shock that the U.S. federal court overturned the six-month drilling moratorium, but it really isn’t all that surprising. Amid the finger pointing and political posturing, the Obama administration seems to have missed a vital detail – the U.S. oil industry is in a spot of bother.

It’s not just America’s oil supply and energy security that’s in danger after the BP oil spill and the subsequent drilling ban. The Gulf economy is hanging by a thread, and it won’t take much to send it over the edge.

Thousands upon thousands of rig workers were effectively laid off when the 33 rigs operating in the Gulf stopped drilling. The full economic impact of the ban is still unrealized, with the layoffs just starting, but estimates put the figure for lost wages as high as US$330 million per month.

Given the potential economic losses, BP’s US$100 million compensation fund for rig workers starts to look rather paltry. It doesn’t end there either. There’s a domino effect in play as well – each rig job supports up to four additional jobs for cooks, supply-ship operators, and those servicing the industry.

And should the drilling ban become permanent, the consequences could be dire. Just like the towns that died in the Upper Midwest after the demise of the auto plants and steel mills, the entire Gulf Coast – where deepwater drilling is crucial to the economy – could fade away.

All in all, not the best news for a country whose economy can be best described as fragile at the moment.

There’s also the question of America’s energy security. The Gulf accounts for up to 30% of all the oil produced in the country. Should the Gulf be put off limits, that shortfall has to be made up from somewhere. Obama’s renewable energy might be the future, but it’s not up to the challenge of meeting the needs of the present.

And attractive, viable options are far and few in between. Russia may be a friend now, but its tap-twisting history with gas in Europe does not strike up a positive note. The Middle East is hardly America’s best friend, not to mention its royalty structures, which leave much to be desired. And in Venezuela, Hugo Chavez just recently nationalized 11 oil rigs belonging to a U.S. company.

In the end, only two real options are left in the hands of the U.S. – the oil sands of Canada or rethinking the drilling ban
A revised drilling ban would still see higher taxes on each barrel produced and tighter regulations for companies coming to the Gulf. Any lease application would come under intense scrutiny and face higher insurance rates. For smaller companies interested in the Gulf, the rising production costs mean that the death knell has been sounded.

Option two is the friendly neighbor to the north, Canada. The country already plays a big role in U.S energy. One in every six barrels of oil consumed daily in the U.S. comes from the oil sands in Alberta, Canada. The oil sands are pretty controversial stuff, however, associated with derelict, broken landscapes and carbon emissions.

But this is an image that’s going to change very soon. The future of oil sands is here: they are cost effective and their face is green. Steam Assisted Gravity Drainage (SAGD) pumps steam into the ground to liquefy the bitumen and stiff crude oil, making it thin enough to be pulled out of the ground. No giant holes or toxic tail-ponds – just two horizontal pipes, one above the other, puffing away efficiently.

That the Gulf spill is a game-changer for the U.S. oil industry is yesterday’s news. For now, it’s about making ends meet. And while we expect the U.S. to shift towards renewable energy, and maybe even rethink its energy use, for now there’s an unmet demand that’s not going anywhere.

As far as an investment portfolio goes, both options bring with them opportunities. If the U.S. federal court allows a somewhat watered-down version of the drilling ban, the long delay means that there’s potential to pick up some great stocks at a cheap price. On the Canadian side of things, there are some well-run companies perfectly combining cash-flow and SAGD technology. The Gulf spill might be Obama’s Waterloo, but for the careful investor, the winds of change could just blow in a fortune.

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Marin Katusa is the editor of Casey’s Energy Report, your single best source for ongoing coverage and profitable recommendations in the energy sector. Learn more here.

By Marin Katusa, Chief Investment Strategist, Energy Division

If you ever happen to eavesdrop on a conversation between energy investors, two words are sure to crop up – China and oil. Usually, they’re used together and usually, it’s about China’s increasing presence on the global oil scene.

It’s a pretty safe bet that, as one of the world’s fastest growing economies, China needs a lot of energy. And with an oil appetite that grows by 7.5% each year, seven times faster than the U.S., the country’s reserves don’t even begin to compare to the consumption.

But fuelling the blistering pace of its economy is China’s number one priority, and it is on a mission to lock down its energy interests all around the world. The emerging powerhouse has often felt that it was the last one onto the energy playing field with a lot of catching up to do.

Today, Chinese national oil companies (NOCs) are setting up shop everywhere from the Middle East all the way to the oil sands of Canada, and they’re open for business. The three NOCs – CNPC/PetroChina, Sinopec and CNOOC Ltd – are slated to produce a record breaking one million barrels daily. That’s Australia’s daily fuel consumption!

It isn’t just their oil production that’s going through the roof. Since 2009, China has committed nearly US$25 billion into corporate and asset acquisitions. China isn’t going it alone either, and fully realizes the importance of forging partnerships with other international oil companies to develop oil fields.

And with Beijing firmly behind them, they’re only doubling their efforts this year. Chinese NOCs accounted for nearly 20% of all global deal values in the first quarter of 2010. This share will only get bigger as the year carries on and energy security continues to dominate the agenda.

Armed with strong finances, an aggressive approach, and implicit government backing, Chinese companies are well placed to spearhead the nation’s mission of diversifying its international energy portfolio. The latest thing to catch their attention: the mysterious oil elephants of East Africa.

Hunting for Elephants: Fortune Favours the Bold

Africa might be the last place left on Earth where elephant deposits – very large oil and gas deposits – remain to be found. But contrary to popular belief, the real money in African oil is not in the West nor the North, but thousands of miles away in East Africa.

It is here that one of the last oil elephants of the world waits. A lack of significant discoveries and long-term instability left the region largely unexplored and ignored for the last 50 years. Until last year, when Irish giant Tullow Oil found over two billion barrels under the waters of Lake Albert, Uganda.

The excitement running through the region’s oil market at the moment is palpable. The first annual Eastern Africa Energy Week held this year in Nairobi, Kenya, was resplendent with the heavyweights and superstars of the oil business; prominent amongst them were delegates from China’s CNOOC, who were out in full force. That they were all there to study strategies, policies and regulation, and the critical issues facing companies in the market shows exactly how seriously they’re taking East Africa.

In a region where the market is populated largely by smaller-cap firms hoping to get in on the ground floor of emerging energy-nations, the takeover potential is enormous. It’s no surprise then that CNOOC is jostling with the big names of oil exploration in Africa – Tullow, Total SA, and Anadarko – to get a slice of what could be an energy goldmine.

But East Africa will be no cakewalk for oil explorers. They will face a multitude of challenges and there is risk by the bucket in each venture. Only those companies with the right project locations and the right people to execute business plans in the difficult working conditions of East Africa will survive to win the jackpot. So pick your portfolio wisely and buckle up for this jungle ride… it’s going to be intense.

[Ed Note: If you aren’t already investing time in understanding the developing opportunities in energy and energy-related investments, you risk missing one of the most important big trend profit opportunities of the next 20 years. Casey Research offers several research services that are dedicated to the sector, including our baseline Casey’s Energy Opportunities. Sign up today and you’ll get 12 issues, including Chief Investment Strategist Marin Katusa’s carefully researched picks, for just $39 a year – just over $3 for each issue. Add to that a 90-day 100% money back guarantee, and it’s a no-brainer. Details here.]

By Marin Katusa, Senior Energy Strategist, Casey’s Energy Report

 Over the next year or two, you will likely find yourself paying a LOT more at the gas pump. Big changes are taking place in the oil industry. With increased global demand and declining supply, easy oil is not so easy anymore.

 Everything is about to get more expensive. From gasoline to anti-freeze, life jackets to golf balls, and eye glasses to fertilizer. There are very few things in the modern world that aren’t made from oil, made by machines dependant on oil, or shipped by vehicles powered by oil.

 The implications, at first glance, appear to be the opposite of good news. In fact, it’s enough to strike panic in the hearts and wallets of the average consumer.

 And that’s exactly why the International Energy Agency just released its annual World Energy Outlook, clearly rejecting the possibility that crude output is now in terminal decline. Their attitude seems to be, what you don’t know won’t hurt you. For now that is.

 The truth however, is beginning to surface, and from an investor’s perspective, the truth can mean money in the bank. Right now, the IEA’s claim that oil production will be ramped up from its current level of 85 million barrels per day to 105 million barrel per day by 2030 is receiving harsh criticism.

The Guardian reports, “The world is much closer to running out of oil than official estimates admit.”

This comes from a whistleblower inside the International Energy Agency who states the fear of triggering panic buying has caused them to intentionally underplay the inevitable shortage.

 Kjell Aleklett, professor of physics at the Uppsala University in Sweden, and co-author of a new report ‘The Peak of the Oil Age’, states “oil production is more likely to be 75m barrels a day by 2030 than the ‘unrealistic’ 105m used by the IEA.”

According to Professor Aleklett’s research, they are making a dangerous and unjustified assumption. One that is dependent upon the oil industry’s ability to ramp up production to levels never before achieved.

Are you beginning to see the opportunity here?

 Whistleblowers and scientists are not the only ones disputing the IEA’s report. The folks who pump oil aren’t buying its rosy scenario either.

• Total SA, the French oil giant, that is making its move into the Alberta oil sands, doesn’t accept the IEA’s optimistic claims. The company runs on the belief that oil production won’t surpass 95 million barrels.
• Former chief executive officer of Canada’s Talisman Energy, Jim Buckee, agrees the IEA prediction is nonsense.
• Sadad al Husseini, energy consultant and the former exploration and production chief of the world’s largest oil company, Saudi Aramco, recently said, “Oil supplies have reached a capacity plateau and will not meet a growth in demand over the next decade.”

 The Globe and Mail recently joined the debate stating, “New [oil] fields, generally smaller, are less productive than old ones – note the virtual freefall in production rates from the North Sea fields, which reached peak output in 2000. Another reason [for the decline] is development pace, or lack thereof. The yet-to-be-developed reserves in the WEO report cover 1,874 fields of various sizes that would have to come into production in the next 20 years.”

That works out to almost eight new fields being brought to production each month. A realistic target? Only time will tell. Even if the oil exists, the next question becomes one of money, and where it will come from in order to keep this pace of development on target.

When you add in professor Aleklett’s conclusion that production will shrink to 75 million barrels per day by 2030 — almost one-third less than the IEA’s figure and 10 million barrels less than current production, it’s easy to see why investors need to take notice.

Shrinking supply and ever-growing global demand are creating the perfect storm for oil prices.

The current price of crude could be the bargain of the century. Understand this and every increase at the pump will give you reason to smile.

If you’re looking for the best way to capitalize on the end of cheap oil, there’s no better time to sign up for my advisory service, Casey’s Energy Report.

Subscribers have been handed 19 consecutive winning stock picks in 11 months. Now you have the opportunity to learn which stocks I believe will profit from the looming oil shortage. For more information  click here.

Editor’s Note:  Over the last few years,  news of world renowned geologist M. King Hubbert’s theory of peak oil theory has circulated widely.  Most have now heard his theory which in a nutshell says, global production of Oil and Natural Gas will decline due to increased difficulty in getting to the Global reserves of  these fossil fuels.  Many have studied the peak oil phenomenon,  trying to confirm (or deny) Hubbert’s timing of the peak.  Oil companies and International Energy Agencies have both confirmed and denied  the case for “Peak Oil” over the years.  But current information from the Energy Information Administration sheds new light on the subject as Doug Hornig of  Casey’s Energy Opportunities shows us in this article.

Washington Capitulates: Peak Oil Is Real

By Doug Hornig, Editor, Casey’s Energy Opportunities

 Each year, generally in May, the Energy Information Administration publishes a less-than-eagerly-anticipated tome called the International Energy Outlook, 250+ pages of mind-numbing text, charts, graphs, and tables.

 No one reads it. The mainstream media ignores it.

 It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the peak oil conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Peak Oil by the Numbers

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

 Same table, ’09:

Production Shrivels = Peak Oil  

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million barrels per day in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million barrels per day (14.2%) from 2006 levels.

 If that isn’t an admission that the era of “Peak Oil” is upon us, what is?

 The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

 Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

 And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

 Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Peak Oil – Widening Gap Between Production and Consumption 

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

 As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

 The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Peak Oil = Pay Up

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that. 

Rising oil prices mean some belt-tightening, but they also offer investment opportunities, in both conventional and unconventional resource companies. In addition, power-generation alternatives such as solar, nuclear, and geothermal will be coming to the fore.

For more info about Casey’s Energy Opportunities

Note-

Discovering the right companies with sound fundamentals and the potential for handsome returns isn’t easy. Unless you are math prodigy Marin Katusa…  Marin discovered a complex mathematical algorithm that helped him become a multimillionaire by the time he was 31. Marin now works with Casey Energy Opportunities. Click here to learn more about his secret system.