The World's Next "Gold Rush"

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The Daily Reckoning | Saturday, March 30, 2013 A long awaited celebration for one of your Daily Reckoning editors... Readers weigh-in on cash, inflation and Fed stupidity... Plus, all this week’s reckonings archived for you to peruse at your leisure... --------------------------------------------------------------- Oil’s Final Frontier One of the last great oil opportunities of its kind is taking place right now... And it has nothing to do with the Marcellus, Eagle Ford or Bakken shale oil fields. In fact, this “oil kitchen” isn’t even on the same continent... This oil reserve contains a potential 7.4 billion barrels of oil -- and the company that holds the rights to it is drilling as we speak. When word of what they’re doing hits the front-page news, investors could flock to this opportunity. Timing is everything... click here. Greg Kadajski, checking today from Baltimore, Maryland... You may have noticed our ubiquitous presence in The Daily Reckoning this week. For that we sincerely apologize. You see, we’ve been filling in a bit for our good friend, and fellow Daily Reckoning editor, Joel Bowman, who this weekend is finally walking down the aisle with his lovely fiancée. Unfortunately we were unable to make the trek down to Argentina for the ceremony, so we’ll simply raise a glass and remotely toast the happy couple from our little station in Baltimore. Of course, as we mentioned earlier this week, the world continues to spin without our regard, and so too must we continue to reckon with it. So without further rambling, we’ll hand the reins of this weekend’s reckoning over to our friend Matt Insley, who has this week’s featured essay. Enjoy! [NB. This column originally appeared in these pages on Thursday, March 28, 2013.] The Daily Reckoning Presents: “Over the past few months, momentum for the offshore oil industry has been gaining. Spending on subsea equipment is expected to grow to a record $13.9 billion this year — a 66% jump from last year’s total, Quest Offshore Resources reports.” Read on... Cash in on 2013’s Offshore “Gold Rush” By Matt Insley There’s an offshore “gold rush” happening right in front of our eyes. In fact, if you add up all the bullion that’s been added to central banks over the past two years, the total pales in comparison to this offshore prize. We’re talking hundreds of billions of dollars here. And my friend, it’s just the beginning — over the long run, we’re talking trillions! Today I want to give you an inside look at this offshore “gold rush” — along with the best ways to play it. As you’ll see, the normal mining cast and crew — Barrick, Goldcorp, Kinross — aren’t the winners in this game. Before we continue, though, allow me to come clean that I’m not talking about precious metal plays at all. Instead, I want to share with you what our intrepid in-house geologist Byron King calls an offshore “gold rush”... of oil. Indeed, the hunt for the world’s next big black-gold treasure is on. Only in the next 12 months, the hunt for massive oil paydays is heading out to sea — in a big way. “Fortunes will be made,” Byron says. And the way I see it, those fortunes are going to come sooner than most people think — starting right now in 2013. Over the past few months, momentum for the offshore oil industry has been gaining. Spending on subsea equipment is expected to grow to a record $13.9 billion this year — a 66% jump from last year’s total, Quest Offshore Resources reports. You and I both know that you don’t throw $14 billion/yr onto a wall and hope it sticks (heh, unless you’re Ben Bernanke or Tim Geithner). In other words, there’s a lot of smart money betting that the offshore oil industry is about to boom — this year... right friggin’ now! 2013: The Year of the Offshore Gold Rush! This year is a standout — an anomaly — and mark my words, now’s the time to cash in on this offshore oil rush. But before we go even a minute further I need to clear the air around the offshore oil industry. Indeed, when most people here the term “offshore oil” or think about drilling in the open ocean they immediately flashback to BP’s Gulf of Mexico disaster. I’ll be the first to say that what happened in spring of 2010 was an unbelievable tragedy that took the lives of 11 rig workers. Since the BP blowout, though, the industry has become stronger than ever. In fact, what I’m about to share with you will prove that beyond any reasonable doubt. We’re seeing more oil-spill protection, more hi-tech equipment, more know-how, better containment and clean-up systems and, assuredly, more chances to play this booming industry. Fact is, the whole offshore scenario is playing out just as we’ve predicted... First, let’s back up. In recent years, I’ve written about America’s (onshore) energy renaissance. In the most unexpected of events, America is bustling with oil and gas development. And where most analysts believed that we’d be importing stuff like natural gas and oil — we’re actually on track to EXPORT natural gas and higher volumes of petroleum products. Ah, how the times have changed! America is getting a fortuitous boost at a time when it needs it most. Oil and gas wells are flowing, pipelines and railroad terminals are bustling and raw wealth is flowing from underneath American soil. (The same wealth explosion can’t be felt in locales like Europe or China, that’s for sure.) Here’s the kicker... As this unexpected boom evolved and money began to fill the coffers of the big oil companies involved — Exxon, Chevron, Statoil, Marathon, Hess, Shell and more! — a lot of that money went right back into exploration and development budgets. More and more of that money is flowing directly into global offshore development. You’ve got to understand that the US has “more” onshore oil and gas than it ever expected, but when you put our domestic shale boom in perspective of the global oil scene, you’ll realize that the boost in supply is peanuts (around 1% of global output). That’s exactly why big oil companies are making big bets offshore — they’re digging for black gold in the world’s deep-water basins! “Just five years ago, we didn’t have the technology to find oil or even gain access that deep,” Byron King tells us. “Now we do. And suddenly, a few bold explorers are coming across huge, untapped resources.” So while the US enjoys a solid boost from onshore oil and gas development, this year’s big play in the energy market is offshore. Here’s a full excerpt from Byron: No Longer Just Trackless, Wave-Tossed Ocean Today, deep water is a key focus of the international majors. The energy industry has new geological models and better geophysical technology and data. There have been vast improvements in signal processing and data crunching. And we are living through a time of absolutely revolutionary advances in drilling capability. What used to be just trackless, wave-tossed ocean is now prime oil patch real estate. It follows that today we are seeing phenomenal success rates for exploration with super-high-output wells. Some of the world’s most significant new discoveries are coming from deep water, such as offshore Brazil. You probably heard about the 8 billion-barrel Tupi field that Petrobras found last year offshore Brazil. That’s only scratching the surface. Almost every month or so, you see another report of remarkable new finds in the deep waters offshore Brazil. The reports come from the Brazilian state- owned company Petrobras, as well as from the likes of giant Exxon Mobil and major independents like Hess. But the deep-water energy provinces are not restricted to Brazil. You also see significant investment in the Gulf of Mexico, off West Africa, in the Mediterranean, in the North Sea and in the Asia- Pacific region, and eventually, you’ll see it in the Arctic. And it’s big oil! Close to home, some of the newest deep-water fields in the Gulf of Mexico are scheduled to produce nearly 250,000 barrels of oil per day when they reach peak output. It’s safe to say that there’s much, much more coming from the deep water of the world. To put Byron’s comments in perspective, think of it this way... The Bakken oil formation in North Dakota — one of the great shale oil plays in America — will have “good” wells that produce 500 barrels of oil per day. Sure, that’s a lot of unexpected oil for the US, but compared with hundreds of thousands of barrels per day from an oil-rich offshore field, it’s like comparing a swimming pool to one of the Great Lakes. The big oil players know that the real windfall opportunities lay hundreds of miles offshore. Heck, just this week we saw news from Chevron. The company’s latest oil strike in the Gulf of Mexico sits 190 miles off the coast of Louisiana in 6,000 feet of water. But they’re keeping the exploration numbers close to the hip — and still running full steam ahead. Also, this week, the French oil giant Total announced it is, essentially, looking for all hands on deck — seeking to hire drilling supervisors with any deep-water experience. Total has an “ambitious” deep-water exploration program commencing over the next five years, according to their deputy vice president of drilling. Indeed, this whole global play is just coming together now. “Big Oil” Isn’t the Only Way to Play This Rush To be sure, it’s not just Big Oil that’ll be cashing in from this trend. Sure, we’ll see a nice bump in share price for each exploration well that pays off for Exxon, Chevron or Hess — but some of the higher gains will come from other offshore players. The “picks and shovels,” or in this case the “pipes and valves,” will certainly do well. After all, working on a drill plan 6,000-10,000 feet below the surface involves a lot of hi-tech precision. In this arena, as Byron King’s readers know well, you can look at companies like FMC Technologies (FTI), Cameron International (CAM) or Oceaneering International (OII). These companies are to the offshore industry what NASA was to the space program. When Big Oil needs a part that “has to work” in the harsh underwater environment, they pick up the phone and call the names above — and later down the road, they cut ‘em a big check. Do you need a valve that can work at 10,000 feet? How about a safety shut-off system that can’t fail? Or in the case of a needed fix, how about an underwater ROV (remotely operated vehicle)? These “pipe and valve” plays are the go-to guys for these types of underwater technologies, and in the coming years, look for a solid tail wind for their shares. In the meantime, keep an eye to the sea. This year will prove to be the liftoff point for increased offshore activity — and the investment opportunities that follow! Keep your boots muddy, Matt Insley for The Daily Reckoning This is what happens when Hollywood meets Wall Street... Even though it reads like a script from a Clint Eastwood movie – an action adventure story if ever there was one – it could very well be your ticket to explosive short and long-term gains. Because it’s a story about dirty money, espionage and American subterfuge. It’s about counterfeit drugs, international intrigue and deceit. It involves the Department of Defense, our military might... and a congress-authorized sting operation... It’s about Senators John McCain, Carl Levin and the hearings they conducted... It’s about a company that has already, in one swift stroke, become our nation’s avenging angel, and potentially one of the greatest wealth-building machines of our time. And it’s about... well, why don’t you just read the whole story here for yourself. ALSO THIS WEEK in The Daily Reckoning... “What Can’t Go On, Won’t” By Patrick Cox We can project what’s going to happen as a result of current and past fiscal foolishness. Attempts to raise taxes further will lead to lower, not greater, revenues. The cost of borrowing will go up, curtailing debt growth and forcing spending cuts. In Gold, Not Cyprus, We Trust By Frank Holmes I believe poorly thought out government policies hurt the formation of capital and destroy people’s trust in paper money. Leaders may have good intentions, but some of their actions show disrespect for private property and individualism... This only reemphasizes gold as an important asset class. A Reason to Trust Central Banks? By Jeff Clark Bloomberg claimed that Russia has been a bigger buyer of gold over the past decade than China — by a full 25%. Based on data about gold imports through Hong Kong and the fact that, for the most part, Chinese production doesn’t leave the country, it seemed to me that this could not be right. Nothing “Hyper” About US Inflation By Steve Hanke Hyperinflation begins when a country experiences an inflation rate of greater than 50% percent per month — which comes out to about 13,000% per year. Although it experienced elevated inflation around the time of the Revolution and the Civil War, the United States has never passed this magic mark. Bet Against Big Pharma Twenty years ago, Big Pharma put all their eggs in one basket – a basket that ended in failure... Now, a group of pioneering scientists stand ready to usher in the next big medical breakthrough. Learn more about their groundbreaking discovery... Click Here. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, Richard E. writes in with some compelling evidence for the existence of inflation... You’ve noted in the past that official inflation measures are fudged. Here’s one I’ve noted for some time — every time I log into Amazon it tells me about $US price increases in my shopping cart. This morning there are ten items and seven have increased in price over the last week. But don’t worry about inflation, there’s nothing to see here. Next up, Reckoner Wayne writes in with a sad and important lesson... Changing citizen attitudes about government has about the same chance as getting people to stop smoking. All known methods for cessation of smoking have a common characteristic — they don’t make you feel good. In 1990 I had double bypass heart surgery (I never smoked). In recovery my surgeon came to visit. He told me I was a very unusual patient. He said he had started the hospital’s heart surgery unit 10 years earlier. In the interim, they had performed 5,000 open heart surgeries and he could count on one hand the number of non-smokers he had seen come thru their program. A year ago I related that story to a friend of mine who was a heavy smoker. He paid no heed to it. A month ago we buried him. As he lay dying of renal failure the doctors told his wife that they could not operate because his lungs were in such bad shape that no anesthesiologist in the country would touch him. They moved him to a hospice care facility where he lingered for 2 more days before dying. Unless we find something that makes Joe Citizen feel good about changing his government I am afraid we are doomed to suffer terribly before anything worthwhile happens. Maybe a $10 loaf of bread will alter his thinking. Maybe China forcing the gold standard will do it. And finally, Kevin M. writes in to discuss the ironic behavior of our Federal Reserve... Cash on the sidelines is cheap insurance against another crash. In 2008 even Caterpillar and McDonald’s got cash from the Fed. And with interest rates so low, the penalty of holding cash is small. Ironic that Bernanke wants companies to spend more cash, yet he has created the conditions that cause the hoarding of cash — low interest rates and fear of another crash. And as a small business I, too, am working entirely on liquidation. I am shedding assets and shrinking my employee base. I will not go through another crash where the crony banks and public corporations are “saved” while the rest of us are stripped to the bone “to save the system”. If you don’t borrow you cannot go broke. Has Bernanke got any idea of what goes on in the real world? I think not. --- If you have anything you’d like to reckon with, feel free to email us at the address below, and as always, enjoy your weekend. 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