"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

The Required Disclosures

The information presented in this blog and its individual articles is provided for informational use only and should not be considered investment advice or an offer for a particular security. The contents reflect the views and opinions of the individual writer as of the date the article was written and do not necessarily represent the views of the individual writer on the current date. They also do not in any way, shape, or form represent the views of the Firm Never-To-Be-Named. Any such views are subject to change at any time based upon market or other conditions and The Great Redoubt and its individual writers disclaim any responsibility to update such views. These views should not be relied on as investment advice, and because investment decisions for any security are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any contributor to The Great Redoubt. Neither The Great Redoubt nor any individual author can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.

Thursday, February 3, 2011

By Popular Demand: Oil Sands

Oil sands are beginning to show up more and more on the radar of investors with an interest in commodities. But what are they?
Wikipedia defines oil sands as: "Bituminous sands - colloquially known as oil sands (and sometimes referred to as tar sands) - are a type of unconventional petroleum deposit. The sands contain naturally occurring mixtures of sand, clay, water, and a dense and extremely viscous form of petroleum technically referred to as bitumen (or colloquially "tar" due to its similar appearance, odour, and colour). Oil sands are found in large amounts in many countries throughout the world, but are found in extremely large quantities in Canada and Venezuela."
Bitumen is, or course, "a mixture of organic liquids that are highly viscous, black, sticky, entirely soluble in carbon disulfide, and composed primarily of highly condensed polycyclic aromatic hydrocarbons".
So that's nice and all. But why do investors care?
Well, because you can process the bitumen out of the bituminous sands. And then you can process the bitumen in similar fashion to crude oil, producing most of the same products that you can get from crude oil (gasoline, plastics, fertilizer, and so forth). The Athabasca oil sands of Canada are already producing about 1.1 million barrels of crude bitumen per day, and some projections estimate that this will be up to 4.4 million barrels by 2020.
There are, of course, some problems with this. Bitumen just does not go "as is" to crude oil refineries. It has to be mined first (unlike crude oil, which you can just pump out once you have the well in place), and this often involves strip mining. It also has to be pre-processed (aka upgraded), which goes through the following stages:
  1. remove water, sand, physical waste, and lighter products
  2. catalytic purification by hydrodemetilisation, hydroesulfurization, and hydrodenitrogenation
  3. hydrogenation through carbon rejection or catalytic hydrocracking.
All of this is expensive, of course. And much more of an energy hog than drilling and pumping. And it can generate anywhere from 10% to 45% more greenhouse gasses than conventional crude oil production. Even a decade ago, this wasn't really worth it.
That was, of course, a decade ago. Rising crude oil prices have made the oil sands much more competitive now. And, from a US perspective, they're also safer sources of crude oil than the Middle East[1]. After all - and let's be serious here - Canada is far less likely to dissolve into civil war than any given nation in the Middle East at this moment.
And why are Canadian oil sands so popular right now? Well, while a lot of countries have oil sands, only Canada and Venezuela have enough oil sands to make them commercially viable at this time. The US could deal with Venezuela[2], but we don't exactly have the best relations with that nation[3]. So Canada it is.
Is any given company that works oil sands a good investment? I'm not going to make a recommendation[4], but here are a few things to keep in mind, however:
  • Producing oil from bituminous sands is expensive. This means that oil sand companies produce less revenue per barrel than traditional oil companies.
  • The expense of producing oil from bituminous sands also means that they are far more vulnerable to fluctuations in the price of crude. If peace suddenly breaks out in the Middle East, or if OPEC decides to reduce its target price for oil (or increase production quotas), this could also have a negative impact on the profits of the oil sand companies.
  • If you have concerns about the environment, production of oil from oil sands makes the production of oil from traditional oil wells look like a green alternative energy.
  • Even if you don't have concerns about the environment, a lot of people do. Some of those people are writing laws. Some of those laws are aimed at capping and/or taxing greenhouse gas emissions. Taxes will cut into revenue, and caps on emissions could reduce production (or require the purchase of additional emissions under a "cap and trade" system, which then cuts into revenue).
So do your homework, and make sure you understand what you're buying and why you're buying it. Don't just buy something because some guy on TV throws a chair and screams "buybuyBUY!" That will most likely end in tears and the color red.
[1] Canada already produces as much crude from their oil sands as flows through the SUMED pipeline on a daily basis.
[2] Currently ruled by President Hugo "I blamed the Haitian earthquake last year on United States scalar weapon tests" Chavez.
[3] "I hereby accuse the North American empire of being the biggest menace to our planet," is one of the nicer things he's had to say about the United States.
[4] So you can put the baseball bats down, Compliance.

No comments:

Post a Comment