Energy The Defining Issue
James J Puplava President of PFS Group: Strategic Wealth Builders
Casey Research Gold & Resource Summit 2 October 2010, Carlsbad, California
©PFS Group, 2010 PFS GROUP: THREE COMPANIES SHARING THE SAME VISION
Puplava Financial Services, Inc Registered Investment Advisor Puplava Securities, Inc Broker/Dealer Member FINRA/SIPC Financial Sense® Investor Education
Investment Advisory Services offered through Puplava Financial Services, Inc, Registered Investment Advisor. Securities offered through Puplava Securities, Inc, member FINRA/SIPC. Accounts are carried by National Financial Services LLC, member FINRA/SIPC. Puplava Securities, Inc is a wholly owned subsidiary of Puplava Financial Services, Inc. This presentation contains confidential or privileged material. Any use of this information by anyone other than a client of Puplava Securities, Inc is prohibited. If you have received this presentation in error please destroy all copies that are in your possession.
At PFS Group, we are committed to providing exceptional asset management and educational resources that help investors build, maintain and preserve their wealth.
Post Office Box 503147 · San Diego, CA 92150-3147 10809 Thornmint Road 2nd Floor · San Diego, CA 92127-2403 (888) 486-3939 Toll Free · (858) 487-3939 Tel · (858) 487-3969 Fax www.puplava.com | www.financialsense.com LEGAL NOTICES
Forward-looking statements do not relate strictly to historical or current facts. This presentation may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements as to future operating results and plans that involve risks and uncertainties. We use words such as “expects”, “anticipates”, “believes”, “estimates”, the negative of these terms and similar expressions to identify forward looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the companies or events discussed to differ materially from any future results, performance or achievements expressed or implied by those projected in the forward- looking statements for any reason. LEGAL NOTICES
PFS Group strives for accuracy in its reading of the market, the market environment, and individual stocks’ potential, please be aware and be informed that all statements and assertions made in this presentation are merely the opinions and beliefs (albeit well-researched) of the PFS Group staff and should be evaluated as such. The Perfect Energy Storm
Rising Demand Tighter Supply Infrastructure Decay Developing world Depletion Aging fleet China Lack of discoveries Aging workforce India Restricted access Old infrastructure OPEC Underinvestment The Decline of World Oil Production & Its Possible Impact
World oil production at or near maximum
When decline begins, shortages will develop & increase each year until mitigation kicks in
Oil prices will escalate and economic damage will increase
Severe problems will create opportunities August 2009 “Global Oil Depletion” UK Energy Research Centre February 2010 “The Oil Crunch” UK ITPOES February 2010 “The JOE 2010” United States Joint Forces Command 10 mbd shortfall by 2015 February 2010 “Forecasting World Crude Oil Production...” Professors at Kuwait University World oil production peak March 2010 “The Status of Conventional World Oil Reserves” Oxford University June 2010 “Sustainable Energy Security” Chatham House/Lloyd’s of London August 2010 Drastic oil crisis German military think tank study World Maximum Oil Production Forecasts
Pickens, T Boone (oil & gas investor) 2005 Deffeyes, Kenneth (retired professor and retired Shell Oil geologist) 2005 Bakhtiari, Samsam, d. (Iranian National Oil Co planner) 2005 Westervelt, ET et al (US Army Corps of Engineers) At hand Simmons, Matthew, d. (oil expert & businessman) Very soon Bentley, Roger W (professor & energy analyst) Around 2010 Campbell, Colin (retired oil company geologist) 2010–2011 Skrebowski, Chris (editor of Petroleum Review) 2010–2011 Pang, Xiongqi (China University of Petroleum) Around 2012 Meling, LM (Statoil geologist) A challenge around 2012 Volvo Trucks Within a decade De Margerie, Christophe (CEO of Total) Within a decade Al-Husseini, Sadad (retired Saudi Aramco executive) 2015 Merrill Lynch (brokerage, financial) Around 2015 West, J Robinson (founder & CEO PFC Energy) 2015–2020 Maxwell, Charles T (senior energy analyst, Weeden & Co) Around 2020 or earlier Wood Mackenzie (energy consulting) Tight balance by 2020 Cambridge Energy Research Associates (CERA) After 2030 US Energy Information Association (EIA) After 2030 International Energy Agency (IEA) After 2030 ExxonMobil No sign of peaking
Modified from Drs Roger H Bezdek & Robert L Hirsch, “The Peaking of World Oil Production: Implications, Opportunities & Pitfalls,” briefing for presidential candidate organizations, January 2008, p 16 2005: Tipping Point
Peaking of World Oil Production Impacts, mitigation & risk management Robert Hirsch, Roger Bezdek, Robert Wendling
May Twilight in the Desert The Coming Saudi Oil Shock and the World Economy Matthew R. Simmons
May Conventional oil peaks @ 74.3 MBD
June Oil Shockwave: oil crisis simulation
Aug/Sep Katrina/Rita Three Possible Peak Oil Outcomes
1. Production at maximum capacity No new oil fields can be found 2. Production at/near maximum capacity Large, easily accessible fields will be brought onstream 3. Large new oil field discoveries -Not easily accessed -Difficult to extract OECD vs Non-OECD Oil Demand Growth
2009: China world’s largest energy consumer -US held title for 100 years
2009: China world’s largest car market -13.6 million sales
Developing world demand soon surpass OECD demand; driving force determining energy demand Debunking Peak Demand
Per Capita Crude Oil Consumption GDP Annual Growth Percent per Year Selected OECD Countries 1980–2010 2000–2008 (real); projections to 2010
Data source: EIA, IMF; chart from “Debunking Peak Demand,” Data source: IMF; chart from “The Oil Crunch,” UK ITPOES, Petroleum Review, June 2010, p 40, figure 1 p 36, fibure 6.2 Europe/Japan demand @ $70 oil US demand @ $75 oil Oil field service capacity: deepwater tight China entering own period of rapid motorization Japan 5x, South Korea 4x No sign demand tapering prior to recession Demand in OECD fell because of price China will simply “bid away” oil currently consumed by advanced economies Oil Production Is Different
+ Existing production + New additions - Depletion ------= Current production rate
Source: Roger Bezdek,Robert L Hirsch, & Robert Wendling, “Peaking of World Oil Production: Impacts, Mitigation & Risk Management,” 2005, p 3 Petroleum Review: Mega Projects
Annual gross new Year of project OPEC projects Non-OPEC projects Total projects capacity to be Annual net new capacity to completion completed completed completed brought on stream be brought on stream 2009 26 24 50 8.2 Mb/d 2.2 Mb/d 2010 14 25 39 5.7 Mb/d 2.1 Mb/d 2011 6 17 23 3.2 Mb/d 0.2 Mb/d 2012 24 18 42 3.4Mb/d -0.2 Mb/d 2013 14 25 39 4.4 Mb/d 0.3 Mb/d 2014 15 6 21 4.2 Mb/d 0.2 Mb/d 2015 4 6 10 2.4 Mb/d -1.2 Mb/d
Source: Peak Oil Consulting; table in “The Oil Crunch,” UK ITPOES, February 2010, p 19, table 3.1 Oil Discoveries Peaked 1960s
Fields Daily Decade Discovered Production Pre-1900s 17 129 Total 1900s 29 1,083 1910s 18 4,343 1920s 49 193,063 1930s 78 135,267 1940s 134 381,963 1950s 349 4,129,034 1960s 519 6,168,579 1970s 743 5,898,110 1980s 856 2,706,643 1990s 510 3,488,182 Total 2000s 65 146,911 Grand Total 3,367 23,253,308
Excludes Russia, Saudi Arabia, Iran, Kuwait, UAE, Iraq Source: ASPO Newsletter No 91, July 2008, p2 The Status of Conventional World Oil Reserves
OGJ, Jan 2009 WO-Yearend 2007 IEA WEO 2008 BPSR 2009 Independent authors Existing 1,342 b 1,184 b 1,241 b 1,258 b 903 b estimates Amended 882 b 892 b 830 b 903 b 872 b estimates
"The Status of Conventional World Oil Reserves— Hype or Cause for Concern?” The Smith School of Enterprise and the Environment (Oxford University) March 2010 The Rate of Production Are We at the Peak? Global Oil Production 1920–2008
IEA Liquid Fuel Production 2009 85.9 Mb/d
Crude/condensate 73.0 Mb/d (85%) Nat gas liquids 8.4 Mb/d (10%) Other liquids 2.3 Mb/d (3%) Processing gains 2.2 Mb/d (3%)
Source: US DOE, BP Statistical Review of World Energy; chart in “The Oil Crunch,” UK ITPOES, February 2010, p 10, figure 2.2 Top 10 Producing Oil Companies
Aggregated Production for the World’s Ten Largest Quoted Oil Companies
Crude Oil Production by Company Source: Peak Oil Consulting; chart in “The Oil Crunch,” UK ITPOES, February 1H 2010, p 12, figure 2.5 Company 2003 2004 2005 2006 2007 2008 2009 ExxonMobil 2.51 2.57 2.52 2.68 2.61 2.43 2.38
Shell 2.39 2.25 2.09 2.03 1.82 1.73 1.67
BP 2.12 2.53 2.56 2.47 2.41 2.43 2.53
Chevron 1.81 1.71 1.67 1.73 1.76 1.65 1.87
ConocoPhillips 1.02 0.90 0.91 1.13 1.03 0.94 0.86
Total 9.85 9.96 9.75 10.04 9.63 9.18 9.31 In millions of barrels/day. Source: Congressional Research Service; table from “The Rise of the NOC Continues,” Petroleum Review, July 2010, p 37, table 4 Cost of Extraction
For a Range of Sources, Comparison of Extraction Costs ($/b)
ME: Middle East countries. Source: Peak Oil Consulting; chart in “The Oil Crunch,”UK ITPOES, p 12, figure 2.4 The Rise of the National Oil Company
1972 1995 2000 2006
Exxon Corp Saudi Arabian Oil Saudi Aramco Saudi Aramco
Nat’l Iranian Oil Co British Petroleum NIOC NIOC (NIOC) Petróleos de Venezuela Royal Dutch/Shell Pemex Pemex (PDV)
Texaco China National Petroleum PDV PDV
Petróleos Mexicanos Chevron KPC Iraq Nat’l Oil Co (Pemex)
Gulf Oil Royal Dutch/Shell BP ExxonMobil
Kuwait Petroleum Corp Mobil Corp. ExxonMobil Shell (KPC)
Communist Bloc Exxon Corp PetroChina PetroChina
CFP (Total) Libya Nat’l Oil Shell BP
Sonatrach (Algerie) Abu Dhabi Nat’l Oil Sonotrach KPC
Source: extracted from “The Rise of the NOC Continues,” Petroleum Review, July 2010, p 36–37, tables 1 & 2 The Oil Pyramid
1. Difficulty obtaining data
2. Critical importance of major fields
3. Number of old fields 43.5-70 years
4. Lack of data on decline rates
5. Small size of new oil fields
Source: Matthew R. Simmons, “The World’s Giant Oilfields,” 9 Jan 2002, p16 IEA Forecast Decline Rates
Source: IEA, Medium-Term Oil Market Report, July 2008, pg. 42
Revised upward from 4–5% Simmons estimate 8% 3.7 mbd annually from depletion 1.5 mbd to meet growth Must find one USA/Saudia Arabia every two years
Source: IEA, “Key World Energy Statistics,” 2010, pp 10 & 33 The New World Oil Order
Dominance of oil markets moving away from U.S. control Virtual global oil pool shrinking Resource nationalism reducing supply Oil prices headed for $100– $150 a barrel Unless we move quickly, inflationary depression, possible world power confrontation Oil Pricing Pre-1973–1974
Multi-decade fixed contracts Fixed rate contracts made oil embargo possible Yom Kippur War: October 1973 US support for Israel initiates OPEC oil embargo October, 1973–March 1974 US imported 12% oil from Middle East Fixed Contracts Æ Virtual Oil Pool Æ Fixed Contracts North Sea/North Slope: new suppliers US creates spot markets: New York, London Oil futures (paper oil) replaced long-term contracts Oil lost in one market replaced by oil from another market Created global virtual oil pool China/Russia moving global market back to fixed contract
Images from WSU Virtual Motor City Collection (Detroit News) Images numbers 38009, 38014_1, 38014_2 The Next Oil Shock
Rising depletion/ lack of replacement Producers subsidizing/ consuming more of what they produce Reducing size of virtual oil pool; move back to fixed contracts Sustainable Energy Security
We have entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how we will pay for it…
We can expect dramatic changes: prices are likely to rise…oil may reach $200 a barrel…
The bad times have not yet hit…All businesses…need to consider how they, their suppliers and their customers will be affected by energy supplies…
Energy security requires a long-term view and it is the companies who grasp this who will trade on into the second half of this century.
Dr. Richard Ward CEO Lloyd’s Lloyd’s 360° Risk Insight Sustainable Energy Security: Strategic Risks and Opportunities for Business June 2010 Sustainable Energy Security Summary
1. Prepare for and take advantage of new energy reality = prosperity; failure to do so = catastrophe 2. Can’t rely on low-cost traditional energy sources 3. China and growing Asian economies’ role in global energy security increasingly important 4. We are heading toward a global oil supply crunch and price spike The Impact of Energy Costs on Profits
Operating Margins Company 2005 2006 2007 2008 American Airlines -0.43% 4.70% 4.21% -2.84% (AMR) Delta Airlines -- -- 5.72% 0.50% (DAL) JetBlue Airways 2.82% 5.37% 5.95% 3.22% (JBLU) Southwest Airlines 9.56% 10.28% 8.02% 4.07% (LUV)
Source: Bloomberg The Impact of Energy Costs on Profits
Operating Margins Company 2005 2006 2007 2008 2009 Goldcorp 45.21% 37.67% 27.75% 22.86% 38.31% (GG) Gold Fields Ltd 18.58% 23.07% 24.72% 23.42% 21.41% (GFI) Newmont Mining 24.59% 26.57% 18.55% 22.88% 38.31% (NEM) Randgold Resources 33.74% 29.47% 21.74% 22.43% 26.29% (GOLD)
Source: Bloomberg The Impact of Energy Costs: Solutions
Source: Bloomberg Unhedge your income Hedge your input costs Start converting to alternative energy Source: Robert L Hirsch, “Peak Oil Trainer” Government Mitigation Options
Source: Robert L Hirsch, “Peak Oil Trainer,” p 26 The Perfect Energy Storm Conclusion
Source: Robert L Hirsch, “Peak Oil Trainer, p 18. The Peaking of World Oil Production: Conclusion Just “another energy crisis”? NO! Able to “muddle through”? NO! Plenty of time to address this daunting problem? NO!
WE’VE RUN OUT OF TIME! Transition From Crisis to Opportunity
Horse power per acre Nuclear Solar 300 hp/acre 36 hp/acre
Natural Gas Wind Turbines 287.5 hp/acre 6.4 hp/acre
Oil stripper wells Biomass 150 hp/acre 2.1 hp/acre
Source: Robert Bryce, Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future Transition
Sectors to Avoid Sectors to Invest Consumer discretionary Traditional energy Financials Alternative energy Industrials (select) Materials Technology (select) Rare earth to uranium Healthcare (select) Utilities Consumer staples Defense Precious metals Transition
A pessimist sees the difficulty in every opportunity: an optimist sees the opportunity in every difficulty. —Winston Churchill Recommended Reading
UK Energy Research Centre “Global Oil Depletion: An assessment of the evidence for a near-term peak in global oil production”
UK Industry Taskforce on Peak Oil & Energy Security (ITPOES) “The Oil Crunch: A wake-up call for the UK economy”
United States Joint Forces Command “The JOE (Joint Operating Environment) 2010”
The Smith School of Enterprise and the Environment (Oxford University) “The Status of Conventional World Oil Reserves—Hype or Cause for Concern?”
International Energy Agency “Oil Market Report”
Chatham House-Lloyd's 360° Risk Insight “Sustainable Energy Security: Strategic Risks and Opportunities for Business”
Robert L. Hirsh, Roger H. Bezdek, Robert M. Wendling The Impending World Energy Mess: What it is and what it means to you
Most available at www.financialsense.com/market-focus/energy