The Rude Awakening
The North Slope, Alaska
Friday, June 22, 2007 ------------------------- - Oil stocks gush while crude oozes,
- A multi-billion-barrel reserve and why it lays untouched,
- A couple of field trip pictures from Alaska and more…
------------------------- Eric Fry, reporting from a few thousands miles south of the Alaska Pipeline… After a brief, one-day selloff on Wednesday, oil stocks came charging back yesterday. At first blush, the strength of the indefatigable oil stock sector would seem to fly in the face of logic. Oil stocks are gushing higher, even though crude oil is merely gurgling. Stocks like ExxonMobil (NYSE: XOM) and Schlumberger (NYSE: SLB) - giants of the oil patch - have soared more than 50% over the last twelve months, even though the price of crude oil has actually declined over the same timeframe. What does this monumental divergence portend? We wish we knew. A few weeks back, in the May 25th edition of the Rude Awakening ("Weather Roulette"), we suggested, "Over the long term, most oil exploration and oil services stocks deserve to be darlings. But even so, we never like to see oil stocks soaring when oil and gas prices are not. It just doesn't feel right…like polyester underwear. When oil stocks soar well above the prices of oil and gas, they are usually soaring off a cliff…So let's call oil stocks long-term valuable, but near-term dangerous…and a bit volatile." Since offering this observation (for no charge whatsoever, we might add), most oil stocks have continued to outpace the price gains of crude oil itself. Perhaps we are dead wrong to distrust the recent oil stock rally. Perhaps oil stocks are rallying because they are looking ahead - far, far ahead - to the days when oil exploration costs will increase exponentially, while global oil demand surges. Perhaps oil stocks are rallying because they "see" a future of sharply rising oil prices - a future where billion-dollar engineering marvels like the Alaska Pipeline become the minimum ante in the high-stakes game of global oil exploration. To gain a better understanding of this pricey and challenging future, Byron King, editor of Outstanding Investments, takes a glimpse at the past of oil exploration in Alaska. But even if you don't care about oil…or oil stocks…check out Byron's pretty pictures from his recent trip to the North Slope of Alaska… -- Energy & Scarcity Investor Free Offer Two Weeks Left -- Here's Why You'll Get Our Newest $995 Investment Research Service Completely Free… It took us nearly two years of careful preparation. But we're putting the final touches on what should turn out to be one of our best performing stock research services over the next few years. It's called the Energy & Scarcity Investor and it'll cost at least $995 per year when we launch it in the next couple of months. But since you're a valued Agora Financial member, you can receive it 100% FREE. You have just two weeks left to take advantage of this offer. Click here to read on: Energy & Scarcity Investor ----------------------------------------------------------- T.A.P.S. to Cheap Oil
By Byron King The Alaska Pipeline turned 30 this week! On June 20, 1977, the engineering marvel began pumping crude oil from the North Slope of Alaska to the port of Valdez. But every day of safe Pipeline operation is, in its own way, a "new story." If you doubt that, just recall what happened last August when BP had to close the Pipeline due to corrosion issues in parts of the Prudhoe Bay gathering system. Oil prices immediately spiked by up to $3 per barrel. So the Alaska Pipeline does not just move oil, it moves markets. And any other pipeline that gets built in the far North will be an equivalent, if not greater undertaking. So let's start by using the Alaska Pipeline for comparisons. 
That decade between 1967 and 1977, between the Prudhoe Bay discovery well and the first operation of the Alaska Pipeline and the Trans Alaska Pipeline System (TAPS), was a time and era that still resonates. The Pipeline planners and builders of the 1970s made many decisions that dictate where things are today, and where things can go from here. The very existence of the Pipeline had a significant impact on energy price and availability during the past three decades. And the location and configuration of the Pipeline means that some energy options are open to us in the future, while other energy options are not.Pipeline 101 Here are some basic facts, some "Pipeline 101" if you will. The Alaska Pipeline is a 48-inch internal-diameter string of steel pipe, about 800-miles long. Simply to fill the Pipeline with oil, so that the pumps can work, it requires slightly in excess of 9 million barrels of oil, or what is called "line fill." That line fill is about 42% of total U.S. oil consumption for a single day! TAPS is one of the largest pipeline systems in the world. It stretches from Prudhoe Bay on Alaska's North Slope, through rugged and stunningly beautiful terrain, to Valdez on the Pacific coast in the south of Alaska, the northernmost ice-free port in North America. In making this journey, much of it through almost unspoiled wilderness, the Alaska Pipeline crosses three major
mountain ranges and 1,000 rivers and streams, including the mile-wide Yukon River. The Pipeline also crosses earthquake zones, including the massive Denali Fault which is, in its own way, comparable in size, depth, power and scope to California's San Andreas Fault System. Since commencing operation in 1977, TAPS has successfully transported over 15 billion barrels of oil to Valdez, including about 12 billion barrels extracted from Prudhoe Bay and 3 billion barrels extracted from other fields in the North Slope region. At its peak of operations in 1987 and 1988, the Pipeline was carrying about 2.2 million barrels of oil per day. But currently, due to depletion of the North Slope oilfields, the Alaska Pipeline carries about 775,000 barrels of oil per day from Prudhoe Bay, south to Valdez. There at Valdez, the oil is loaded aboard tankers and transported to refineries in the U.S. Everything about the TAPS construction effort turned into a big number. The initial, late-1960s estimate of $800 million became, ultimately and ten years later, $8 billion for the Pipeline and another $3 billion for related infrastructure, and those are 1970s-era dollars, before interest and amortization. Just to commence construction, the Haul Road and Pipeline required obtaining 515 federal permits, and 832 state permits. Before beginning construction, about 330 archaeological sites were investigated or excavated. Along the pipeline route, 14 airstrips were constructed to facilitate ferrying personnel and materiel. There were 29 working "construction camps," in which personnel were housed during a grueling industrial effort that proceeded year-round, including working during the cold and dark of the pre-global warming Arctic winter. At the peak of construction, the Pipeline camps were home to over 60,000 workers and support personnel, sort of a "skinny city" located along a north-south axis across Alaska. Each section of Pipeline sits on a steel skid, with a Teflon pad at the bottom. In case of thermal expansion or contraction, or if there is permafrost heave due to changing temperatures, or in the event of seismic activity, the bottom of the Teflon pad slides along the top of the steel support and protects the integrity of the Pipeline. For example, during a recent earthquake along the Denali Fault with magnitude of 7.2 on the Richter scale, the Teflon padding worked as designed. The Pipeline moved in excess of 40 feet laterally on its skids (well, to be precise the Earth moved more than 40 feet laterally and the Pipeline sort of stayed where it was, per Newton's Law of Inertia), but there was no damage whatsoever to the Pipeline or its structural integrity. 
So as you can certainly discern, building the Alaska Pipeline was a monumental technological feat, and its daily operation is a remarkable effort. So what if we had to do it all over again? One gas field, for example, called Thompson's Point and located east of Prudhoe Bay, was discovered by Exxon more than 25 years ago. But it contains what is called "wet gas," meaning that the gas holds high concentrations of natural gas liquids. So in order to extract anything from this field, Exxon would be required to lift out the natural gas, separate the liquids, and then re-inject the dry gas for lack of alternative to moving it to market. So far, absent a more extensive infrastructure for gathering gas and liquids, and for moving hydrocarbon products back and forth across the tundra, it has been uneconomic for Exxon to make the necessary investments. And there are more vast oil and gas plays beneath the North Slope. West of Prudhoe Bay lies the "National Petroleum Reserve - Alaska" (NPRA). NPRA may hold many trillions of cubic feet of natural gas, as well as multi-billions of barrels of oil reserves. And to the west of NPRA lies the Chukchi Sea, again with similar multi-billion barrel, and multi-trillion cubic feet of hydrocarbon resource potential. But we are dealing with the Arctic, not with the U.S. mid-continent. Where is the infrastructure to move any product to market from most of the North Slope and adjacent waters? There is none, which makes for quite a problem. How do the distant, scarcely-accessible resources of Alaska fit into the North American energy scheme? Will U.S. (and of course, Canadian) consumers simply turn down the thermostats and enjoy the cold when they experience natural gas shortages in winters to come? I doubt it, and that is why we are coming to the time when new "Northern Pipelines" are being discussed. In the abstract, it all sounds so eminently do-able, to place slender veins into the hydrocarbon-bearing areas of Alaska and to carry away the natural gas riches of the Arctic. But it would not be easy and it would not be cheap. Therefore, as investors in resource stocks, can we afford to ignore that certainty that the next barrel of oil that the world consumes will cost more to produce than the last barrel? Can we afford to ignore the plentiful investment opportunities that will accrue from this simple reality? Joel's Note: There is little doubt that readily available energy resources are becoming increasingly scarce. Gone are the days of gushing geysers in your backyard…unless your back yard is located amongst the most interminable tundra of the Arctic…or the bloodbath of Nigeria…or beyond the threshold of a maniacal dictator's borders. This retraction of easy supply will, for those with the right knowledge, lead to mammoth investment opportunities. That's why Byron King, resident geologist and peak oil enthusiast, has developed the Energy & Scarcity Investor service. At around a thousand bucks a year, this is sure to be one of our leading investment services of the coming decade. For the next two weeks only, you can secure a subscription for free too. All the details are here: Energy & Scarcity Investor Free Offer* *Offer Valid Until July 5 Only | 
