Saturday, May 20, 2006

Oil, Gas, Lies and Corruption - Profiting from Unscrupulous Governments


James Winston

May 10th, 2006

Winston Churchill said “truth is so precious that she should be attended by a bodyguard of lies.” When it comes to Saudi Arabia’s oil resources no truer words can reflect how Saudi’s power elite have hidden the truth about their misguided stewardship of our planet’s biggest oil deposits.

In a country where public beheadings are the norm – power, secrecy, control, and image are all important cornerstones to keep the elite royal class in the Kingdom of Saud both perversely rich and oppressively powerful over their subjects. Internationally, their status as an influential powerhouse is still apparent though light is now shining through their veil of lies which they have used to insulate the world concerning the truth of their oil resources.

As investors, the fragile nature of Saudi Arabia’s domestic problems should be enough for most people to buy “insurance” oil and gas stocks. However there’s another major problem brewing in Saudi. For nearly 60 years, Saudi Arabia’s seven largest oilfields have supplied almost all of the country’s production and is the biggest source of the global supply. Today these aging oil fields are becoming problematic despite their political stance that everything is OK in the land of Saud. Those in the oil and gas industry know otherwise.

In Matthew Simmons book, Twilight in the Desert, the author has done an extensive review of technical papers on the Saudi oil and gas fields as published by the Society of Petroleum Engineers.

The papers reveal that Saudi technicians were observing serious signs of aging as far back as 30 years ago. As the years have progressed, today the problems have grown to be acutely complex and require technical sophistication beyond the capabilities of their “in house” expertise.

Though the Saudi’s will tell you they can keep going strong for another 60 years or more, the fragile nature of their oil fields is being exposed along with their big lie.

Hal Hemmerich, President of Transeuro Energy, has had 30 years of international experience in the resource industry and extensive hands on work in the Middle East. He commented that “we all know the most prolific producer on earth is Saudi Arabia but today they are unable to continue to supply the world with energy in the same way. In the old days, they would just punch drill hole after drill hole after drill hole. They would just mud up, with such great pressure down below, they would drive a hole down and produce. They started with conventional drilling because their resource was so strong. But as their resources have started to wane, they now need to re-work these wells.”

Many of the world’s producing nations are now looking at western technology to help keep their dream alive. One of techniques they are looking at employing is the use of underbalanced drilling, a science which was developed and has been used with great success for the last 20 years in North America.

Underbalanced drilling uses a complex package of engineering techniques which basically brings the oil well pressure and the drill bit pressure to a close equilibrium – just enough to allow for a free flow of gas or oil. The idea here is to get away from the older methods of jamming down mud into the hole to prevent a blow out – though this works, it plugs up the flow of gas.

Hemmerich says that newer technology has been used in Oman which has increased their production by multiple times.

Just to keep up the status quo, Saudi is accelerating the number of drills pumping oil and older wells are getting tweaked to increase the production life.

Saudi remains an enigma. “They won’t show you how they calculate their reserves. I don’t know how the world has let them get away with this. They just come out every year and go, here we are. In fact their resource figures haven’t gone down. Everyone knows that if you produce hundreds of millions of barrels your reservoir goes down and your production becomes more difficult.” said Hemmerich.

So as investors, search out “High Technology” energy service companies who are entering the International Markets, like High Arctic Energy Services – I’m sure they will be busy for years to come.

The science of underbalanced drilling is very much needed former Soviet Union (FSU) block countries as well. Early investors who can realize the potential in the FSU can stand to make big profits over the coming years.

Oil and gas fields in the FSU were basically raped and pillaged and left for dead - as easier prey was sought out.

Currently Hemmerich’s company Transeuro has picked up a property in the Ukraine which he feels has huge potential.

Hemmerich commented that “In the old Russian days they would just sweep through areas with rigs and drill, drill, drill. And they had a real high cut off for production. If the well didn’t flow at a high rate, they would shut it off and move on to the next one. And again, technology was non existent, some wells were drilled without the benefit blow out preventers. Talk about running naked.”

According to Hemmerich, the Russians would use a massive amount of heavy mud which would limit the flow and the potential of the resource.

Old Russian data which is on file at the Ukraine department of resources indicates Transeuro’s properties contain some 300 billion cubic feet of gas and another 32 million barrels of oil. It’s like virgin territory but with data. The Russian’s did a lot of 2D seismic and everything is nicely mapped and all the data is available.

The Ukrainians are very motivated to get western expertise. They not only endured Soviet domination and mismanagement of their gas fields – last winter the country was blackmailed by their former masters who cut off the gas to the country. The message was, pay our price and do as we say - or else.

Needless to say, a major mandate for the Yushchenko government is to have energy self sufficiency for his country. To that end Transeuro has cut a 72/28 deal with the Ukrainians to develop their gas fields using underbalanced technologies.

What has been a major problem for the Ukrainians is going to turn out to be a win-win situation as western technology is brought to bear on a high potential resource. And again, investors who can position themselves in these ground floor, high technology re-work programs will be able to capitalize right along with them.

The reality is that oil resources around the world were mismanaged for long term benefits. And because of pride and political prestige, some of the biggest oil producers on the planet continue to deny this reality – oilfields are declining in production. Only now are we beginning to see glimpses of truth from the big OPEC countries that they are recognizing these issues and importing modern technology to extend the life of their reservoirs. But it is inevitable that truth will come out, and it’s companies like High Arctic and Transeuro who will benefit from this. Those who have the capital, technical ability, and connections to access to these fields will profit handsomely in this new high tech era of oil and gas exploration.

James Winston

www.jameswinston.com

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