Where Are Oil Prices Going With Crisis In The Middle East?

The Libyan Crisis: Where Are Oil Prices Going?

By Marin Katusa, Casey’s Energy Report

The oil picture is always complex, but right now things are about as complicated as they can get.
The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections.

Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change.

Yemen and Bahrain are unsettled, to say the least.

And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria – with Libya inching closer and closer to full revolution status – matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.7 million barrels a day. Libya is Africa’s third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya’s oil supply has been disrupted (one report pegged it at 6%). But Libya’s second largest city, Benghazi, has fallen to protestors, and it is in the country’s east, where the oil fields lie.

With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country’s next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.
The price of oil responded to Libya’s instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. “That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable.”

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted.

Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now – they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up – speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks – Brent and WTI – is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe’s North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world’s oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn’t yet passed US$92. When you add in the fact that no one really knows what’s going on in the world’s fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya’s potential revolution poses a real threat to oil supplies – as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

[Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see theirday in the sun. In the upcoming issue of Casey’s Energy Report, Marin and his team introduce a new standard to – for the first time ever – compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you. Learn more about the future of geothermal and how to profit in this free report.]

Will You Profit From This Forgotten Treasure?

Forgotten Treasure: Unconventional Oil in the Middle East

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.

Unconventional Gas in the middle eastFor 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?

net oil production chart

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.

How To Make Money On Unconventional Gas In The Middle East

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 The Gas

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.]

Oil And Gas Prices, Headed Up?

Where Are Oil and Gas Prices Heading Next?

By Marin Katusa, Chief Energy Strategist, Casey Research

Oil is heading to US$200 per barrel. This isn’t speculation but hard fact. But forewarned is forearmed, and with this price expected within the next five years, investors have plenty of time to position themselves.

We recently have been talking about tools that investors can use to navigate the economic landscape. The gold-to-oil ratio is one such tool, but another popular compass is the oil-to-natural gas ratio.

The oil-to-natural gas ratio relates more to nuances within the energy complex, rather than the gold-to-oil ratio, which relates to monetary values. It’s the WTI Cushing price of crude oil per barrel to the Henry Hub Spot Price for natural gas per million thermal units.
In theory, based on an energy equivalent basis, crude oil and natural gas prices should have a 6-to-1 ratio. Market characteristics, however, have dictated that since 2006, the price of oil follow a pattern of 8-12 times that of natural gas.
As the chart below shows, historically the oil-to-gas ratio from 1990 to 2008 was in the low 9s. This means one barrel of crude oil was equivalent to about 9,000 cubic units (Mcf) of natural gas.

oil-and-gas-ratio

Improved drilling techniques and access to immense shale gas fields across the country have seen a boom in domestic gas production. Nor can gas wells just be shut down willy-nilly. The complexities of a gas well mean that it takes anywhere between three to six months to shut down operations.

And while the number of rigs sprouting up each year is decreasing, natural gas production is on the rise, with many of the shale wells coming online with their sources fresh and untapped.

Thanks to this flood of shale gas, the oil-to-gas ratio has risen to almost 17 on average. That is, one barrel of oil is now worth 17 Mcf of natural gas (17,000 cubic feet of gas)!

When we defined the oil-to-gas ratio, we used the term “thermal units.” It is interesting, then, that based on thermal units, one barrel of oil produces as much energy as roughly 6 Mcf of natural gas.

So from a financial perspective, the oil-to-gas ratio is very different than in terms of energy.

Some companies and analysts use this disparity to their advantage, using the 6 instead of the 17 value to come up with the “barrels of oil equivalent” conversion for the value of gas. That’s a fudge factor of 2.8!

It’s an accounting mechanism that’s been turned into a completely legal but very shady promotion mechanism, one we watch for carefully.

It’s worth knowing that things can change very rapidly in the natural gas market. We do believe, though, that the current trend will continue for years to come, with the oil-to-natural-gas ratio ranging between 15 and 20.

For long-term investors, the oil-to-gas ratio is indicative of a paradigm shift in the markets. It is yet another tool in our collection of crystal balls for the economy and, if read correctly, is a great way to add some valuable holdings to a portfolio.

(Fortunately, you don’t need a crystal ball to profit from energy. All you really need is a subscription to Casey’s Energy Report, which you can try for three months, risk-free, by clicking here now.)

How To Avoid Losing Money On Energy Stocks

This interview with Marin Katusa explains why some energy stocks will lose you money even when you know the company has a large deposit of oil, gas or coal.

You need to know more than if they own resources or have drilled into the motherload.

Marin knows how to avoid losing money on energy stocks and how to pick energy stock winners instead.

Casey’s Energy Guru: Today’s Hottest Energy Plays

(Marin Katusa, interviewed by Louis James, Casey Research)

Marin Katusa, an accomplished investment analyst, is the senior editor of Casey’s Energy Opportunities, Casey’s Energy Confidential, and Casey’s Energy Report.

He left a successful teaching career to pursue analyzing and investing in junior resource companies. In addition, he is a regular commentator on BNN and a member of the Vancouver Angel Forum where he and his colleagues evaluate early seed investment opportunities. Marin also manages a portfolio of international real estate projects. Using advanced mathematical skills, he has created a diagnostic resource market tool that analyzes and compares hundreds of investment variables.

Through his own investments, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver.

L: Today, we turn to one of the more interesting – and colorful – characters on our team, Marin Katusa. Marin’s bio neglects to mention that he is also the lead singer of a rock band called Era Flair. Why should investors listen to a guy who wears leather pants and plays an electric guitar? Because he’s a bloody genius, that’s why – and he’s dialed into these markets like no one else. So, Marin, what’s hot and how do you make money on energy today?

Marin: First, you have to realize that the energy sector is different from the metals and mining you focus on, Louis. Anywhere in the world, the copper you mine is just copper, and the gold you refine is gold. But take coal as an example. It’s not just coal – there are many different types: premium metallurgical coal; semi-hard coking coal; semi-soft coking coal; and even among the thermal coals – the cheap stuff you burn to make electricity – there are different categories that produce different amounts of ash, among other variables.
So, just because you have a coal deposit, that doesn’t mean you have a buyer who can use your coal.

L: Ah. Someone may have a power station nearby, but it’s not designed to burn the specific kind of coal you have… And the power station that can use it is too far away to make it economic to ship the coal there?

Marin: Exactly. Copper costs dollars per pound, but coal costs dollars per ton, so if you don’t have cheap rail nearby, or a user on site, you got nothin’. There are similar constraints on the natural gas business. You can’t just study the commodities, you have to study the markets from top to bottom, and often that means understanding the local users and forecasting their probable demand.

L: Even oil isn’t just one thing, right?

Marin: Right. There’s heavy and light, and refineries designed to process one type cannot handle the other. Proximity to pipelines and shipping is important too. So you really have to understand the characteristics of each type of each energy commodity, the logistics of getting these commodities to market, and the various end users’ differing needs.

L: A quick aside – are you looking at thorium plays? There seems to be some buzz on the street these days about thorium.

Marin: We’ve been following the thorium markets for five years now, and there is some buzz going around, so we’re working on a special report on the subject that should be out soon.

L: Can you give us a sneak preview?

Marin: It’s even more like what I was saying about the coal markets than uranium. You have to know who your end user is going to be. There was a Bloomberg article recently that suggested that the Obama administration could switch from uranium to thorium. But it’s not so easy; they are not the same thing, and there are trillions of dollars of infrastructure that would have to be changed over. Who’s the end user who’s ready to use your thorium? You have to know, or you have no project, whatever today’s price per pound might be.

L: Okay. So how do you make money across such diverse subsectors of the energy market?

Marin: By being very careful. Not only do you have a lot of homework to do–

L: When you were a professor, were you one of the ones who gave kids a lot of homework?

Marin: Hey, I didn’t make the markets this way, I’m just telling you what you have to do if you want to make money in them. And you can’t just let yourself get swept away by whatever the flavor of the day is, be it thorium, or coal, or what-have-you.

In fact, starting a few months ago, I was on BNN, telling viewers that certain coal companies that were currently very much in favor were overpriced.

Now, I do like coal, in the right company with the right market. The U.S. currently gets 50% of its power from coal-fired plants, so companies with deposits that can feed those plants are very interesting. But some of those metallurgical coal companies – they produce coal for making steel – were trading at over 25 x earnings. They were good companies, but that P/E implies an expectation of doubled production, or a three-fold increase in earnings, and that would be very difficult to deliver in short order.

L: Those are pretty high expectations.

Marin: The market really likes energy commodities right now. Money is flowing and wants to land in stocks of companies that are doing the right things. But I said to stay away from these stocks, even though the companies were good companies, because the market was simply overvaluing them. And in the last few months, they’ve corrected 40%.

L: Good call.

Marin: The show’s host knows me, so he knew I wasn’t just looking for things to stay away from. He asked what my top pick at the time was, and I answered Cline Mining (T.CMK) but said that I hadn’t done my due diligence on the ground yet. Unfortunately, the stock shot up 80% after I mentioned it, so we didn’t end up recommending it. That just goes to show you how bullish the markets really want to be right now.

If there’s any kind of good reason to expect a stock to do well, it’ll take off. So, I’ve narrowed things down to “best of breed” within each sector – that’s all I’m interested in right now. I think I’ve got such picks staked out in geothermal power, coal, and uranium. That’s what we’re going to be focusing on over the next two months in Casey’s Energy Report, especially in coal.

L: If you were right about those specific companies correcting, and they dropped 40%, did you make money shorting them?

Marin: Someone else might have, but not us. We don’t recommend shorting in the newsletter – it’s for retail investors, many of whom are not prepared to make short trades, nor to deal with the extra risks associated with them. When you short, you have to be right about more than which way a stock is headed; you have to time it right. If you make the right call, but your timing is off…

L: You still lose money.

Marin: Right.

L: So, there’s no one sector of the overall energy market that really floats your boat these days; it’s all about picking the gems out from the gravel?

Marin: Yes, that’s what I’m focusing on, not just for the newsletters, but for the funds I manage as well. I believe that if you invest in “best of sector” companies, you’ll be rewarded very handsomely, come what may in volatility along the way.

L: Can you give us an example? Or would that be giving too much away?

Marin: No problem. In the geothermal sector, there’s one stock I think is almost a textbook example of a great energy speculation. I’ve been out to inspect their operations in the field, I’ve met with management numerous times over the years, and now I’m making a big, big investment in it. The company is Nevada Geothermal Power (V.NGP, OB.NGLPF).

L: I remember covering them before we split the energy newsletter from the metals newsletter. It was always a good story, but the stock never seemed to take off. Why do you think it will now?

Marin: They’ve spent the last ten years building their plant – the largest geothermal plant built in the U.S. in the last ten years, and in Nevada, 25 years. They get tax credits for green energy and have power purchase agreements (PPAs) in place that give the project quantifiable value. This thing is so undervalued now, even by Graham & Dodd type analysis. It should be trading at about 94 cents a share, just for the existing assets and cash, but it’s trading around 50 cents. It could almost double, and you’d still get all the company’s exploration upside for free.

L: Sounds like a gem to me.

Marin: It is – it’s the only geothermal company we own in our fund. Do you remember the Casey conference last September, in Denver, when Ross Beaty was plugging his geothermal company, Magma Energy (T.MXY), and I said that it was a great company, but that it was overvalued at the C$2.00 price range it was trading at, at the time?

L: I remember. You had Ross and Rick Rule and Bob Bishop and Lukas Lundin there.

Marin: Yep. I told the audience to be patient and they’d be able to buy the stock under C$1.50, and they all said I was wrong, that the company was adding value and heading higher, but it did drop below C$1.50.

L: It’s close to a buck now, Canadian.

Marin: Right – so people need to be cautious. You can’t rush in, even when the story is great and has someone as phenomenally successful as Ross Beaty behind it. There are lots of fund managers out there who get paid based on realized gains, which means they get in and get out very quickly. Those are big positions, so this can put selling pressure on even the best stories. If you’re patient and really do your due diligence to determine what price it makes sense to buy at, and then wait for the market to come to you, you’ll do well.

L: Sounds good. But what would you say to our readers who’ve been seeing Doug calling for The Greater Depression and all our other bearish calls on the economy, and who agree with our analysis, but who’ve seen energy commodities decline when the economy slows down? They might be reluctant to invest in energy now, and how could anyone who thinks the global economy’s in trouble blame them?

Marin: Generally speaking, that caution is bang on target. Oil in particular is ripe for correction, as there are huge speculative positions in that market.

L: What do you mean?

Marin: Right now, in the U.S., China, and in certain countries in Europe, supplies are at all-time highs. Production is still going great, the pipelines are running at capacity, and not only are the onshore storage facilities running at capacity, the offshore tankers and such are as well. There’s even something Dr. Bustin and I discovered that we call the “invisible U.S. gas supply.”

L: How’s that?

Marin: Because of the way the new fracking technology works, there are thousands of wells that are basically being used as storage facilities. These resources don’t need to be put into production when they are tapped – they can be brought online in just a couple of days, so the companies can sit on them until they need them. It’s like a giant natural storage facility.

Meanwhile, all these funds looking for good investments have figured out that oil is one of them – and it is, but they’ve driven the prices higher than the supply and demand justify. We’ve calculated that the current price of a barrel of oil includes about $15 to $20 due to speculation alone.

L: So, the price of oil could drop by that much in a day or two, if the winds changed and these speculators decided to exit the market?

Marin: Yes. Think about what happened in the aftermath of the Deepwater Horizon disaster in the Gulf of Mexico. There went 25% of the U.S.’s domestic oil supply – boom, offline in a day. Now, normally, you’d expect to see the price of oil to increase, right? The supply drops, so the price rises. Basic economics. But it didn’t – it corrected almost 20% in that week. That tells me there were a lot of speculators in the field, and they panicked and got out. There’s just no other reason for the price to drop when supply became constrained.

L: So… How do you pick oil companies in such an environment?

Marin: We use $45 oil. If a company can’t make solid profits at $45 a barrel, we stay away. There are a lot of companies making good net-backs – the difference between their cost of production and the realized price per barrel – at $80 oil, but those margins dwindle, or turn negative, at lower prices. So, to see the true strength and value of an oil company, we use a much lower oil price. We’ve done very well in the newsletter, even on the bigger companies, using $45 oil as our yardstick for best of sector.

L: And if there is a big correction in the energy sector, you average down?

Marin: Right. The need for energy isn’t going away, and profitable companies on sale will make for spectacular investments at that time. For example, our oil-sands pick is definitely the best of sector. It’s not only the lowest-cost producer in the sector – oil sands being the largest source of unconventional oil in the world right now – but it has excellent growth potential. But we recommended waiting for a correction, telling subscribers to buy only under a certain price.

L: I imagine the company loved that.

Marin: We get a lot of heat for our “buy under” recommendations, just as you do, but we don’t work for the companies, we work for our subscribers. And in this case, we had to wait four months for our price guidance to be met, but the market did come to us, and our subscribers got in at much lower prices. That’s the beauty of it – it really works.
I like to tell investors that if they feel like they’ve missed the boat, they’ve missed the boat. You don’t buy a ticket after the boat’s left shore, you wait for the next one.

L: [Laughs] If you miss the boat, there’s no point in jumping; you’ll just get wet.

Marin: [Laughs] That’s right. You’ll just drown.

L: Anything new and exciting in the business?

Marin: I think tapping into new sources of unconventional oil and gas will continue spreading, especially into India and Asia. You know, we were the first research team to write about European shale gas. That’s become a big story now, but we beat the Merrill Lynches of the world to it. I think we’ll see more of that. Closer to home, depending on how the elections go in the U.S., I think American geothermal plays could become very hot.

I see a big consolidation coming in the geothermal sector. There are big players here, multi-billion-dollar companies, but they’re all private. You can’t play that way, but you can buy the up-and-coming companies they are likely to take over, like NGP and the others we follow.

Just remember to be very careful. These are speculative markets – the only money you should have in them is your high-risk money. And when you see solid gains, take profits and reduce your risk. To stay in this game, you need to recover your initial capital and add to it as you go, not risk it on dangerous “double or nothing” type bets.

L: Understood. Well, thanks a lot – some great insight into how to play the energy sector in today’s market environment.

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No one knows the energy sector better than Marin… and his cautious approach to high-risk/high-reward junior stocks has made exceptional gains for his subscribers, up to 100%… 300%… even 1,000% returns within 12-24 months. Try Casey’s Energy Report today risk-free, for 3 full months with 100% money-back guarantee. Click here for more.

The Future Of Coal – Who Is Buying It Now?

Bill Clinton locked away Utah’s vast store of clean burning coal (to benefit a supporter with alternative supply?) (while sitting across the state line), yet complains about the environment and pushes “green” everything (which benefits Al Gore, of course).

All Presidents since Nixon promise to make us less dependent on foreign oil, yet the Energy Department has done nothing of the sort.

America has coal, in abundance, although it is not as good for the environment as Nuclear for sure. And nuclear, well, there was that 3 mile island thing a while back which made for good NIMBY (not in my back yard) fodder.

Yet coal will not go away.

What is the future for coal and who is buying it now? Marin Katusa from Casey Research will tell us.

China and India: Still Hungry for Coal

By Marin Katusa, Chief Energy Strategist, Casey ResearchOne can only hope that the “Don’t shoot the messenger” adage is still popular in the international community.

UK-based consultants M&C Energy Group have become the latest to join the chorus of voices asking the international community to increase the pressure on China and India to switch to cleaner energy sources.

As far as energy analyst David Hunter is concerned, it is the Western businesses that are carrying the financial burden of reducing carbon emissions. China and India, on the other hand, are benefitting from much cheaper energy, and their companies don’t have to bear the costs of reversing the effects of global warming.

Mr Hunter, however, should steel himself for disappointing news. Industry experts are expecting anything but a cut in coal demand for the foreseeable future.

By their analysis, global coal demand – already at a record high – will remain strong even as the recession cuts down on oil and gas use. And the numbers are certainly matching up to these expectations.

India’s coal demand is expected to reach 653 million tonnes this fiscal year, with only 572 million tonnes expected to be produced in the country. The China National Coal Association expects demand to grow by 4-6% in 2010 and the coal consumption to expand to roughly 3.4 billion tonnes.

And with power-starved economies to feed and millions of people to lift out of poverty, neither country is going to take kindly to any interference with its energy agenda.

There are two different types of coal – in fact two different types of demand – when it comes to the coal market. Though they can’t be considered to be totally separate, the criticism levied against these two Asian tigers becomes somewhat blunted when we take this angle.

The first is for thermal coal, the cheapest and most popular way for emerging economies to produce electricity. Almost 75% of China’s electricity comes from coal-fired plants, but this picture is rapidly changing.

Irritated by the “world’s biggest energy consumer” sticker, Beijing is investing heavily – US$736 billion – into clean energy investment plans. The aim: increase the non-fossil fuel supply component to 15% of the total primary energy demand by 2020. So really, Mr Hunter’s desire for a less coal-intensive China might just come true. As for India, it never likes to be too far behind its Asian rival.

The second demand is for metallurgical, or coking, coal. This is what China and India really need – good-quality metallurgical coal, something that North America has in plenty. And this demand is not going away anytime soon.

For a strong economy, one needs strong infrastructure. For strong infrastructure, one needs steel. Steel is the backbone of an economy, and it is metallurgical coal that is used to produce the heat in 90% of the world’s steel production process. And for as long as the economy continues to blaze, it is metallurgical coal imports that will be stoking the furnace.

The heyday of the coal market is far from over. We’ve called coal the invisible bull market before; today it’s very much at the forefront of the market, and it isn’t going away. Coal suppliers know as well which side their bread is buttered. While traditional markets in Europe continue to struggle with their debt crises, China and India will be only too happy to race on ahead and pick up the slack.

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No one knows energy better than Marin Katusa, Casey’s chief energy strategist and senior editor of Casey’s Energy Report. One of his previous coal picks jumped by 80%, handing subscribers handsome profits. Who will be the coal winner in 2011? Find out with a risk-free, 3-month trial with 100% money-back guarantee.

Make Money On Uranium Investing Again?

Saskatchewan: A Gold Mine for Uranium

By Marin Katusa, Casey’s Energy Report

Mining is a risky business and accidents happen. But when your mine is the world’s largest uranium deposit, fourth largest copper deposit, and fifth largest gold deposit, an accident can cost a little bit more than the average. Something BHP Billiton found out after the shaft accident at its flagship Olympic Dam mine located 560 kilometers north of Adelaide, South Australia.

In October of last year, a breakdown of one of two haulage systems saw a loaded iron skip plummeting to the bottom of the 800-meter-deep main shaft. It caused enough damage to the inside of the shaft, and to the gears and the wheels that bring the ore to the surface, that it took nine months to repair.

So much does it actually cost when production is halted at a mine that’s clearly won the geological lottery?

BHP Billiton revealed on July 21 that annual copper production was down 11% in 2010, uranium production off by 43%, and gold production was 19% below the normal. The amount of material mined in fiscal 2010 was 5.3 million tonnes, down 9.8 million tonnes from last year.

The mine has, according to the company, returned to full production now. There is however, the small problem of contracts.
One of BHP’s largest clients is China, the country whose energy appetite just can’t get enough. The country that will be buying up to 5,000 metric tonnes of uranium this year.

The Olympic Dam mine produces 7% of the world’s uranium, production that was affected by the shutdown. While production is getting back on track today, the feeling in the BHP boardroom is one of unease.

The reason: the rise in the number of new nuclear power stations coming online in the next few years, along with all the contracts that need to be fulfilled. Expansion plans are in the works already. BHP is looking to massively increase the size of the mine and has handed in a 4,000-page environmental impact statement (EIS) draft to the Australian government.

The sticking point is, they’re going to have to go deeper, and it’s going to get a lot more expensive. The Australian government isn’t going to turn away from the opportunity to tax this goldmine either. And if the problems of additional cost aren’t enough, the rail system in Australia can’t handle moving that much ore at all times, so tack on some more delays.

Unsurprisingly, BHP is out scouting the market for some good deals on uranium. Top on their list is Saskatchewan, Canada.

Why Canada Is 45 Times Better Than the U.S.

The uranium deposits in Saskatchewan aren’t just significantly large; they’re also the highest-quality uranium known on the planet. The ore mined at MacArthur River has an average ore grade of 21% – average ore grades are given as a percentage of uranium oxide in the ore.

Just to compare, the uranium found in the U.S. is usually around 0.4 – 0.5%. That makes the Athabasca Basin uranium 45 times higher-grade.

The uranium deposit at MacArthur River can be visualized as a few school busses parked within a school football field. It might sound small, but in uranium-speak, that deposit’s big! It’s big because the grades are incredible in the Athabasca Basin. And that makes it huge financially.

Canada also ensures that the uranium it sells is used solely for electricity generation at nuclear power plants. The end use is very strictly enforced through an assortment of international non-proliferation treaties and Canadian export restrictions.
In fact, uranium on a per-tonne basis is worth more than gold if you’re in the Athabasca Basin. Given current uranium spot prices, it can fetch a staggering US$13,500 per tonne. That’s unheard of!

BHP Takes a Whole Building in Saskatoon

After meeting with many uranium executives, one can’t help but notice the large BHP building off 3rd Avenue while walking around Saskatoon. It’s not just the potash and diamonds that BHP cares about in Saskatchewan. The quantity of uranium underneath the Athabasca Basin is almost beyond reckoning. It can provide substantial wealth to the right company and the right investor.

If BHP decides to enter the uranium sector in Saskatchewan, which companies are on their short list?

That’s exactly what I was finding out while wandering the prairies.

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If you want to know which juniors are the most likely to be taken over by uranium-hungry BHP, you’ll find out soon in Casey’s Energy Report. After Marin has done his due diligence, he’ll emerge with a few hand-picked small-cap companies that show the greatest potential to provide investors with handsome returns. Take your 3-month risk-free trial now and get in early when Marin gives the starter shot. Learn more here.

Secret To Making Money With Energy Stocks

The Secret to Finding Winning Energy Stocks

By Marin Katusa, Chief Investment Strategist, Casey Research Energy TeamAs the world hesitantly emerges from recession, the one question that seems to be on the lips of investors everywhere is: what’s next? As the tragedy continues to unfold in the Gulf of Mexico, with no fix in sight, market attention has suddenly shifted to the energy sector after years of neglect. Pundits and would-be energy experts are a dime a dozen. Speculation about oversold or underbought oil abounds.

But the real profits in energy won’t be made anywhere near the Gulf and have little to do with going long or short on BP or Transocean.

They’ll come from being the first to arrive on the newest scene, getting there before the crowds do. The current economic climate has opened up doors to some exciting opportunities around the world. Discovering which of these is going to be the next big winner, however, can be quite the challenge.

A question that our subscribers ask us time and again is, “What is your secret to consistently picking winning stocks?” As seasoned resource investors, our answer today is the same one that company founder Doug Casey has been giving for decades. It’s what he calls the “8 Ps” of resource stock evaluation.

The 8 Ps are: People, Projects, Paper, Promotion, Push, Phinancing, Politics and Price. They form the basis of the job interview that any Casey stock recommendation must go through as part of the due diligence we perform.

These criteria let us look beyond a few numbers, deep into the real fundamentals of a company. But even before we turn our attention to individual companies to select the few gems that we include in our newsletter, we concentrate our efforts on finding the niche in the energy market that is about to explode. Then we can sort out who is most likely to exploit that niche.
We’ve traveled the world, and we believe we’ve found the most promising area for oil exploration.

East Africa: Oil and the Elephant

Africa might be the final frontier, the last place left on Earth where elephant deposits – very large oil and gas reserves – remain to be found. This makes Africa a central piece in the world energy matrix, and the area is getting some major attention.
When oil and Africa are mentioned in the same sentence, thoughts automatically jump to oil rigs dotting the landscapes of Nigeria and Libya. But the ship has sailed for West and North Africa – their oil fields are either producing or about to come online. Anyone looking at buying into the energy mammoths operating there will find it just too dear.
The last oil elephants are in fact thousands of miles away, in East Africa. Yet it remains, for the most part, a blank slate. If we graph oil production on the continent, the picture looks like this:

East Africa has been largely ignored since early drills, almost 50 years ago, came up dry. But then Irish oil giant Tullow discovered over 2 million barrels under the waters of Lake Albert, Uganda, in 2009, and the region suddenly shot into the limelight.
Now some of the biggest players in the field are jostling each other to get in on the action. France’s Total SA, China’s CNOOC (China National Offshore Oil Corp), and Ireland’s Tullow are only three of the energy titans wooing governments and smaller companies. Just days ago, on June 2, Afren bought out Canada’s Black Marlin Energy, in a US$100M deal that gives the formerly West Africa-focused British producer a significant foothold in the east.
But East Africa is anything but a cakewalk. Poor governance, limited rule of law, and a severe lack of transportation infrastructure are just some of the problems that companies looking to do business there are facing.
Additionally, unlike West and Northern Africa, which have a complex network of pipelines, East Africa has only two. With the Lake Albert discovery, another pipeline is being built by some of the major companies in the region, but it won’t be operational until 2011.
Violence is also a serious threat. Quite a few militant groups are active in the region, attacking oil rigs and pipelines, kidnapping foreign oil workers. And the operations of pirates in the Gulf of Aden are well documented.
Nor is political stability a given. Mogadishu, in Somalia, still remains a no-go zone. Parts of Ethiopia are plagued by rebel insurgencies, and the country is at war with Eritrea. Even Kenya, a model of governance by African standards, has simmering ethnic and political grievances that could erupt at any time.
In short, the threats to both body and business often impede a firm’s ability to function, let alone continue exploration and production in the region.

If it’s so bad there, then why is East Africa one of our top picks for 2010?

There’s an old Chinese saying, “If you don’t go into the tiger’s den, you won’t get the tiger.” As we’ve proved in the past, a high-risk project is by no means an automatic guarantor of failure. After all, this is only picking the sector… if a company sails through the Eight Ps, the potential reward can outweigh the risk.

As an example: When we identified renewable energy as the sector to watch in 2008, our recommendation was a high-risk play. Reservoir Capital, a hydroelectric company, had acquired some viable projects in Serbia, a country with great geology for hydroelectricity.

But how stable was Serbia itself? They had just lost a war, Kosovo’s declaration of independence caused the coalition government of 2008 to collapse over a weekend, and anti-Western radicals seemed poised to win the elections.

It looked grim. Yet we reasoned that no matter which party won, people still would need jobs. In a country starved for power, a company that was already open for business, with good prospects, was miles ahead of the competition. Not to mention that Reservoir had balanced its position by putting its fingers in a couple of mineral deposit pies as well.

A green light for Politics, albeit shaky, meant that Reservoir had successfully passed through the 8 Ps. And sure enough, our high-risk gamble paid off, garnering over 300% in gains for subscribers, as you can see:

Like Serbia, East Africa is certainly an intimidating prospect, but that doesn’t mean investors should stay away. Better technology, higher world oil prices and decreased risk in some of the countries (compared to 20 years ago) have turned the scene on its head.
Realistically, only five other regions remain where an oil elephant may be found, and they all have their problems. The Gulf of Mexico is going to be hit with tighter regulations. Iraq and Iran are crippled by terrible royalty structures. West Africa and Brazil are restricted to the big boys, since new fields are so costly to bring online.

That leaves East Africa.

For the smaller fry in the oil industry, the area represents their best chance to get in on the ground floor and reap potentially huge rewards in the future. For the government players, East African oil can generate much-needed cash, as well as help meet their nations’ rising energy needs. And for the majors, a shiny new market is opening up.

This corner of the world is elephant country in more ways than one. It is, in our opinion, the place to watch in the near future. But not everyone will hit the energy jackpot, of course. In East Africa, as elsewhere, it’s survival of the fittest, and our job is to determine who’s most likely to come out on top.

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Marin is the senior editor of Casey’s Energy Report, focused on discovering outstanding small-cap opportunities in the energy sector, such as the ones mentioned above. And he’s simply the best at it. It’s no coincidence that of 19 recent stock picks, all 19 were winners… a 100% success rate. Learn in this report how you, too, can profit from his expertise and spot-on instincts.

Will Shale Gas Production Save Europe From Gazprom?

The latest buzzword on investors’ lips is shale, and it’s everywhere. Shale gas production is rapidly growing, and the domino effect of unconventional gas development on the global energy market is staggering.
North America has already seen the stampede of companies staking their territories and is now in the next phase: consolidation. However, buying into the American industry giants now, where even a major strike creates only a blip in share price, is like catching a ship that’s left the harbor.

Shale by the Pail: Europe Shakes Its Fist at Russian Hegemony

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

The latest buzzword on investors’ lips is shale, and it’s everywhere. Shale gas production is rapidly growing, and the domino effect of unconventional gas development on the global energy market is staggering.

North America has already seen the stampede of companies staking their territories and is now in the next phase: consolidation. However, buying into the American industry giants now, where even a major strike creates only a blip in share price, is like catching a ship that’s left the harbor.

But at Casey Research, we wouldn’t advise you to despair just yet, because the next big opportunity is just over the horizon. Coming up next – the basins of Europe.

The new techniques in drilling and well completion have transformed this formerly unprofitable source into a gold mine. Add that to the success that shale gas has enjoyed in North America, and you see why shale gas is creating a stir and intrigue throughout Europe.

Possibilities for shale gas production in Europe are endless – the American Association for Petroleum Geologists estimate a total resource of 510 trillion cubic feet (enough to power 27 European countries for over 30 years) of unconventional gas for Western Europe alone – and the rewards for investors in the right place could be huge.

In addition, unlike the United States, where major gas companies started snatching up land and smaller companies as shale gas became more popular, Europe’s shale market is still in its infancy. This puts the junior and smaller companies on the same playing field as the biggest players.

If commercial amounts of gas are found on a junior company’s land, it’s not inconceivable that its share price will multiply by ten. At the very least.

Taking on the Bear

But the main attraction of shale gas in Europe, and what gives it government support across the board, is the increasing urge to break the stranglehold of the Russian gas giant Gazprom. Almost all of Europe is heavily dependent on the state-controlled Gazprom for the majority of their gas supply. Gazprom’s tap-twisting of Ukraine’s prices, through which flows almost 80% of Europe’s gas, has made it clear that Russia has a big stick and it is not afraid to use it.

reliance-on-gazprom-as-a-percentage-of-consumption

With the installation of a pro-Moscow president in Kiev, Europe’s interest in a non-Russian source of gas has escalated, and should a U.S.-style shale phenomenon turn up in Europe, the energy landscape could drastically change.

Knowing Your Enemy: The Other Side of the Story

That is not to say that there aren’t any challenges facing the companies. The lack of equipment in Europe – 20 fracturing sets vs. 2,000 in North America – is a major obstacle and at millions of dollars each, companies aren’t exactly falling over fracturing sets.

Then there is the chance that the rush for land will lead to overstaking of territories, with more than one company claiming a piece of land. This will invariably lead to quarrels, even legal battles, which would delay exploration and create a mess for companies and shareholders alike. And after all this, no two shale basins are the same, and techniques that work on one may not translate to the other.

So companies looking for shale gas in Europe in largely unexplored regions face significant risks – the initial production rate, its sustainability, and costs of the well are all unknowns… and that’s precisely what makes it so exciting.

What Would You Do With a 670% Return?

Shale gas is the hot topic in Europe today, and we knew this would happen back in 2007. Our subscribers bought one 25-cent stock, then sold it at $1.80, netting a quick gain of almost 700%.

With the huge potential just waiting to be explored, investors need to have their ears on the ground to know about the “me too” companies, the ones that will hit the payload. For now, the watchwords are “oil shale in new markets.”

Casey’s Energy Report has its finger on the pulse of the world’s most exciting energy plays… and its readers are the first to know which companies have the equipment, the management, the property and the expertise needed to make the big returns in oil shale.

At Casey Research, we know the sector better than others, and we know who is strong and who is weak. Don’t miss out on the incredible opportunities that await investors in oil shale – subscribe to Casey’s Energy Report today with a generous three-month, no-risk, money-back guarantee. Details here.

Is Coal A Good Investment Opportunity?

Imagine the price of gold jumping to $1,500 overnight… what would that do to the price of junior mining companies? That’s what just happened to the price of coal – it jumped 38% in one day!

Coal is dirty, it’s dusty, and it sends environmentalists into a tizzy. It’s also the most rapidly growing fuel source in the world, it’s broadly distributed with almost 70 countries having economically recoverable resources, and the energy found in it still exceeds that in all other fossil fuels combined.

Coal made the headlines again with some very tragic mine disasters, but the bottom line is that whether Obama wants to kill coal or not, lots of United States citizens and businesses depend on electricity generated from coal.

Let’s remember too that Bill Clinton locked up some of the cleanest burning coal in the world and made it untouchable for use.

Casey’s Energy Report is one investment newsletter not afraid to tackle a not-so-politically correct topic.

Coal: The Contrarian’s Investment

By Joe Hung, Editor, Casey’s Energy Report

Imagine the price of gold jumping to $1,500 overnight… what would that do to the price of junior mining companies? That’s what just happened to the price of coal – it jumped 38% in one day!

Coal is dirty, it’s dusty, and it sends environmentalists into a tizzy. It’s also the most rapidly growing fuel source in the world, it’s broadly distributed with almost 70 countries having economically recoverable resources, and the energy found in it still exceeds that in all other fossil fuels combined.

Whether you love it or hate it, coal will be playing the most important role in global energy supply over the next 50 years – and it is the focused investor who stands to profit from this.

As far as energy prices go, coal has historically been lower and less volatile than oil and gas. For developing nations, this makes coal a first pick as an energy source, and combined with considerable deposits, it is simply the cheapest and most convenient thing around. This isn’t to say it’s not important for the rest of the world: in the United States, almost 50% of all electricity generated and 90% of the steel production is fired by coal.

electricity generation in the united states

The King’s Coal – Better Than Gold?

Where it gets really interesting is when we look at the demand for thermal coal (coal used to generate electricity) from the emerging Asian markets. With looser environmental concerns, the emissions cap threat that is dogging producers in the United States and, to a lesser extent, Canada, is not quite as real here.

India is seeing rising demand even as coal resources shrink, while China consumes almost half of the world’s production of coal each year. With a rapidly expanding industrial sector that needs constant fueling, and cleaner alternatives still too expensive, China and India are out shopping… and undeveloped coal resources from Mozambique to Canada are the hot items. Which makes the companies holding on to these assets prime targets for takeovers and joint ventures.

Adding the sparkle to this rather lucrative picture is that the European and South American companies that were dependent on Asian coal exports are now looking towards North America for exports.

coal consumption in china by sector

Then there is metallurgical coal. Known more widely as coking coal, it is essential in refining iron ore and the production of steel, and carries none of the environmental stigma that comes with thermal coal. Nor is it as abundant as thermal coal – only a relatively narrow range of coal rank and compositions make good coking coals – and thus demands a much higher price. Any industrialized nation has a high demand for steel, and with housing booms and rapid infrastructure development, Japan, China, India, and Korea (to name a few countries) are desperate seeking to fuel their growing appetite.

Dirty Your Hands for a Clean Profit

With the demand for thermal and coking coals becoming red-hot in the strong Asian markets, the team at Casey’s Energy Report knows coal is the invisible bull market.

In 2009, China’s total coal imports tripled, reaching 125 million tonnes, and last month it signed yet another multi-billion coal supply contract. India’s growing negative coal balance saw a record-breaking 80 million tonnes of coal imported last year – and that number is set to rise for 2010. The global energy market is set, and the profits are there for the taking.

The Casey Research Energy Team has been watching this sector for over two years now, and our subscribers have benefited from a 38% spike in the price of coal in a single day. We know which junior companies combine excellent cash flow with knowledgeable management teams to use an investor’s money best to advance projects. As a subscriber to Casey’s Energy Report, you will receive expert advice on how to play a truly undervalued energy sector… and win. Click here for more.

The Future For Geothermal And How To Invest In Geothermal

A Hot Future for Geothermal

Co-Written by Marin Katusa & Marc Bustin, Editors of Casey’s Energy Report

Capturing energy from the earth’s heat is pretty easy pickin’s for geologically-active areas of the world like Iceland, Indonesia, and Chile. In some locations, hot fluids are so near the earth’s surface that heat from naturally-occurring hot fluids can be directly circulated through buildings for heating. Iceland, in particular, takes advantage of this low-hanging energy fruit.

However, in most areas of the world where geothermal energy is captured, the heat is used to generate electricity.

Conventional Geothermal Energy

Unlike some of the more common alternative energies — hydro, solar, and wind — geothermal is impervious to weather conditions. This independence means it provides excellent base load electricity.

Currently all commercial geothermal electricity is generated by so-called conventional systems, whereby naturally- occurring hot water or steam is accessed at comparatively shallow depths in areas of very high geothermal gradient. Wells are commonly drilled to depths on the order of 2 km. The water or steam they produce is used to spin turbines that in turn generate electricity.

The success and sustainability of a geothermal reservoir in large part depends on managing the reservoir. For a reservoir to be sustained, the natural and induced recharge of fluids must balance the produced fluids. Almost all reservoirs require the produced water to be re-injected in order to maintain reservoir pressure. Because naturally-occurring water and steam are necessary, potential development is generally restricted to areas near volcanic activity.

But the geographic limitations of geothermal energy may be about to change — and create a much rosier picture for the future of geothermal energy.

Enhanced Geothermal Systems (EGS)

Conventional geothermal systems are possible only in relatively limited geographic areas. The real prize in accessing geothermal energy – and at a much larger scale – is through enhanced (or engineered) geothermal systems.

In EGS, hot rocks are artificially fractured, commonly at great depths. Water is injected to contact the hot rocks and then produced back to the surface; the energy captured is used to generate electricity. These are very expensive ventures, with costs in excess of $10 million dollars as a starting point — ten times the cost of a geothermal well. Current EGS projects are still experimental, and most have substantial government backing.

Geothermal Power Plant Diagram

A relatively advanced EGS experimental system is currently underway in Australia. Here, granites producing high heat due to radioactive decay at depths greater than 3 km are seen as viable geothermal reservoirs. In South Australia alone, some 23 companies have filled licenses covering 110,000 sq km where suitable hot granite is believed to exist at accessible depths.

Once such a plant is built, it will be tapped into a virtually limitless supply of energy that’s available without cost, 24/7. Successful implementation of EGS plants will be the break-out technology for geothermal energy.

Is Geothermal Economically Viable?

A workable technology is one thing, and economic viability is something entirely different. As you can see from the chart below, not all energy sources are created equal when it comes to cost per kilowatt-hour.

Alternative Energy Generation Costs

In terms of production cost, geothermal certainly holds its own at 6.5 cents per kilowatt-hour — about the same as wind. Coal and nuclear power are still powering the way ahead with their 4-5 cent/kWh generation costs, but with natural gas at 7 cents and petroleum topping 10, geothermal has already proven itself to be a viable alternative, not only on the economic front but on the environmental front as well.

In terms of current worldwide energy production, geothermal — along with solar — is a drop in the bucket:

Worldwide Alternative Energy Generation 2008

Given the fact that geothermal energy is only a minor player in the worldwide picture for energy, why are we still bothering with it?

Because in terms of economics, geothermal energy trounces solar and wind.

Here’s what we mean:

1. Geothermal energy does not depend on weather. The sun doesn’t shine around the clock or even every day; neither does the wind blow all the time. In contrast, hot rocks are there 24 hours of the day, seven days a week. The predictable amount of electricity makes it easy for geothermal companies to sign long-term energy contracts without worrying as much about underproduction or “wasted” production.

  1. Lower capital costs. Even though solar panels have gotten much cheaper to make, the construction costs of a large solar farm are still extremely high. Recent estimates place the cost of solar energy to be upwards of US$10,000 per kilowatt-hour (kW) whereas wind is around $1,700-$3,000/kW. Geothermal is similar to wind at US$1,600-$2,800/kW depending on location, though due to reasons 1 and 3, geothermal is economically superior to solar and wind. In fact, these numbers put geothermal on par with building a coal plant under the new requirements for carbon capture.

Geothermal capital costs are relatively low for two reasons. First, there’s no need to sequester, or capture and stash, any carbon emissions. This requirement alone can add 40-60% to fossil fuel projects. Second, geothermal power plants enjoy the best of both worlds: they require less land than wind and solar projects, and fewer permits than coal and nuclear because they’re less hazardous.

3. Higher load factor. Utility companies, and anybody buying power from them, have to consider load factor: the difference between nameplate capacity (how much the generator is designed to produce) and actual production. The smaller the difference, the higher the load factor, and the more money the utility will make. For a wind farm, the load factor is generally 30-40%, and even lower for solar farms. In contrast, geothermal power plants can generally operate near 90%, since, as we said before, hot rocks are always available.

On an economic basis, geothermal has a virtually unique advantage among the “green” energies. Its power plants can compete with those fired by coal or natural gas even before any government subsidies. For geothermal operating companies in the United States, the government subsidies that Obama is showering upon the alternative energy sector are pure icing on the cake.

And best of all, geothermal companies are virtually off the radar of most investors. For those keeping an eye on geothermal technology and geothermal companies, a window of great opportunity will open.

This kind of research is typical of Casey’s Energy Report and its research team, led by Marin Katusa. And with a stock pick record of 19 winners in a row — a 100% success rate over 11 months — Marin’s insightful research has made a great deal of money for his subscribers.

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