Fossil Fuels - Energy and Capital

Coal Investments Set to Soar, Part 2

In Part 1 of this article, we reviewed the rising demand, falling production, falling imports, and consequent shortages of coal in China.

This week, we'll consider the export side of China coal, prices, and some ways to invest in the China coal crisis.

China's Falling Coal Exports

As of June, with prices at stratospheric levels, China's coal exports had grown 84 percent over the previous year, to 6.99 million tons. (Bear in mind that this was happening even as blackouts enveloped the country.) But then as international prices fell in early July, exports fell by a third from June volumes.

Now, with thousands of factories temporarily shuttered for a lack of grid power, there is an enormous amount of pent-up demand for coal.

So much demand, apparently, that China is not only planning to increase both production and imports, but also to further curb coal exports deliberately.

China announced two weeks ago that it would impose an export tax of 10 percent on thermal coal, and raise the export tax on coke to 40 percent. It also raised taxes on coking coal.

"The move will greatly reduce exports on the spot market. Besides the term contracts, there will be very little exports," said Judy Zhu, an analyst at Standard Chartered Bank in Shanghai.

Since China exports over half of the world's coke, and since coke and coking coal are essential elements in making steel, we should expect higher prices worldwide for both the fuels and for steel.

Rising Prices

As international coal prices shot up this year, US coal prices tripled too, in a hockey-stick pattern that by now should be all too familiar. This chart from the EIA tells the story plainly:

Historical Average Weekly Coal Commodity Spot Prices (Dollars per Short Ton), Business Week Ended August 22, 2008. Source: Energy Information Administration

As Asian production and consumption of coal fell, its local suppliers suffered. The loss of Chinese coal exports indirectly translated to higher demand for US coal, driving its price skyward.

Flagging output from foreign producers and record prices have called more of Appalachia's coal to buyers on the continent and in Asia, as we shall see in a moment.

In turn, this created more demand for coal from Wyoming's coal-rich Powder River basin. Despite high transportation costs, even coal from the Powder River is now making its way to buyers in Europe and Asia.

I hasten to point out that since coal accounts for about 50 percent of US power generation, our grid prices are bound to follow coal upward. Dozens of utilities across the nation have recently announced price hikes of up to 30 percent, and I expect that many others will soon follow suit.

It could be a very expensive winter for those who rely on electricity for heating this year...

US: The Coal Exporter of Last Resort

With Chinese and Indian coal exports down sharply this year, one would normally expect major eastern exporters like Australia and Russia to fill the gap. But severe flooding in Australian mines and power shortages in South Africa have cut sharply into their exports. As of August 14, some 29 ships were reported to be waiting to load at Australia's biggest coal export harbor in Newcastle.

Russia cannot make up the export shortfall either. On August 7, Deputy Prime Minister Sergei Ivanov told Russian coal exporters to prioritize domestic needs over exports, because coal stocks at Russian power plants are extremely low, and hydropower reserves are lower than they have been for decades due to low rainfall. Nor are there sufficient rail cars to move coal for both domestic supply and exports. To avoid power outages, Russian state rail monopoly RZhD halved the number of rail cars used to export coal from the Kuzbass in Siberia.

Likewise, Reuters reported two weeks ago that coal exports from Vietnam, a key supplier to China, are likely to drop by a third this year due to cyclone damage to three out of four cargo-loading facilities at its largest coal hub in the northern Quang Ninh province. In addition, Vietnam is cutting back on fossil fuel exports in order to ensure sufficient supplies for its own industries.

The loss of Vietnamese coal exports caused the price of Australian steam coal, an Asian benchmark, to rise to $163.90/ton after five straight weeks of declines from a record $195/ton in early July.

Indonesian coal exports have also been reduced. On August 12, six coal miners were ordered to stop exporting because their prices were too low, and police stopped output from a mine in Borneo claiming that the operator lacked a forestry permit. To my ears, this sounds like a Russian approach to resource nationalization, using legal technicalities to tamp down exports.

Like a cascade of dominoes, China's renewed appetite for coal has now made the US the coal exporter of last resort for the entire world. And since the US holds the world's largest coal reserves, that situation may never be reversed.

Stifel Nicolaus analyst Paul Forward expects U.S. coal exports to jump a full 39 percent this year, to 82 million tons.

Consider Alpha Natural Resources (NYSE: ANR), the largest US exporter of coking coal, with 22 percent of the domestic coal export market. Since the beginning of this year, the stock shot up 200 percent!

US Coal Stocks Are Now Cheap Investments

Fortunately for smart investors like us, the news hasn't quite yet sunk in on the Street.

The stocks of most US coal producers have declined 40 percent or more from their July highs, and are now testing support levels last seen in April when they broke through the previous resistance level set in January.

By comparison, for those interested in investing in Chinese coal, China's coal producers have corrected even more:

My read of the charts suggests that coal stocks may have bounced off a classic double-bottom last Friday, making coal ripe for another charge upward. The shares have already gained 9-10 percent since then.

For investments in coal, I like Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI), but for those who prefer to play a basket of shares, the coal ETF (NYSE: KOL) works too.

I'm not the only one who sees a boom time ahead for companies like Peabody. Analyst David Khani of Friedman Billings Ramsey believes the stock will more than double in a year, largely due to foreign markets which account for more than half of Peabody's profits. He believes that demand will outpace supply for at least another two years, and that prices could double again next year.

The domestic outlook is bullish too, with some 30 new coal-burning power plants under construction in the US.

Takeover Targets

Aside from the strong market fundamentals for the black stuff, there is another angle that makes coal a promising sector right now, and that's mergers and acquisitions.

Billionaire Wilbur Ross, chairman of the International Coal Group, told Bloomberg that he anticipated "an unprecedented amount of both domestic and cross-border mergers and acquisitions" in the coal sector, as China seeks to secure enough energy to keep its economy going.

The reason is simple: Compared to China's top coal company, the top U.S. coal producers are hugely undervalued, at $2.11 a ton for Peabody Energy Corp (NYSE: BTU) vs. $15.52 for China Shenhua Energy Co.

With a huge store of US debt on its balance sheet, the dollar still dragging the bottom, and an insatiable need for more energy, China is on an aggressive campaign to secure energy supplies from the US by hook or by crook.

According to the New York Times, 9 out of 10 unsolicited hostile bids launched by Chinese firms on foreign targets since 2005 were focused on natural resources. The Asian nation has recently made several hostile bids for foreign steel makers.

Likewise, smaller coal companies are takeover targets for larger companies with better operational efficiencies.

Rail Benefits Too

There is another investing angle on the China coal crisis that we must not forget: the railroads. Norfolk Southern (NYSE: NSC), one of the industry's largest coal shippers, stands to benefit handsomely, as do Burlington Northern Santa Fe (NYSE: BNI) and Canadian Pacific Railway (NYSE: CP).

Although the rail sector got hit along with everything else in the June-July selloff, shares have recovered to May levels or better, and look ready to make another run up now.

On the whole, I see no direction but up for coal prices and coal stocks, and the profits will come quickly. This looks like an excellent entry point for the group.

Now, don't get me wrong. I am deeply concerned about carbon emissions, and it gives me no joy to announce a new boom for King Coal. In time, I am hopeful and confident that carbon emissions will come with a price, and coal producers and coal-burning power plants will have to pass those costs on to the consumer, which will ultimately benefit renewable energy.

The transition will take a long time though, because you don't just put up thousands of wind turbines and solar arrays and miles of transmission lines overnight. Nor will the billions in capital committed to coal production and distribution and coal-fired power plants just get up and walk away.

If you have an agnostic approach to investing, coal is a clear investment winner for the near to medium term.

Until next time,

Chris

P.S. This is the sort of early warning that gives investors a shot at the best profits. To discover our very best picks in energy, subscribe to the 20 Trillion Report.

Domestic Crude Oil Production

It's only a matter of time.

That was my answer the last time I was asked whether the ban on offshore drilling would be lifted. Granted, crude prices at the time were moving past $140 per barrel. We all know what came next. Prices dropped sharply, as low as $112.88 per barrel last week.

This morning, I was asked the same question. Since oil prices are no longer in record territory, has my answer changed?

Not a chance.

Can you blame me? Just take a look at the hole we've dug for ourselves. On a global scale, fossil fuels still make up approximately 86% of the world's energy supply. Although U.S. demand has fallen off recently, the fact is we still consume roughly one quarter of the world's 85 million barrels/day production.

Our massive thirst for oil, however, isn't the scary part.

According to the EIA, the U.S. imported about 10 million barrels of crude oil per day in June. Even though Canada is still our single largest source for crude oil, over 55% of our crude imports were from OPEC.

Naturally, OPEC's interest is in higher oil prices. That makes perfect sense, considering the oil cartel controls about 40% of the world's oil production. I also wouldn't count on the organization to sit idle, twiddling their thumbs. When OPEC gets together in Vienna on September 9, the group only has two options: either maintain or cut current production.

If we listen to OPEC's numbers, the oil markets are oversupplied by a million barrels per day. In order to defend higher oil prices, OPEC hawks have already started to call for a cut in production.

Reducing foreign oil imports is no longer a question for the U.S., it's a necessity.

In other words, the U.S. will be looking to boost its domestic oil production.

Opening Up Domestic Crude Oil Production

Unfortunately, there's no quick fix to the problem.

The last time we talked about drilling ANWR, the question wasn't whether it would ever become open for drillers. We know it will, eventually. The problem, however, is the amount of time it will take producers to reach a significant amount of production.

The Energy Information Administration has reported the U.S. won't see production until 2018. Even then, production would reach a peak of only 780,000 barrels per day in 2027.

Over the last few months, people have been in the dark as to why it would take such a long time to see ANWR production. In fact, I've been told that ANWR oil could be flowing within two years.

Here's how the EIA breaks down the production timeline in their Analysis of Crude Oil Production in the Arctic National Wildlife Refuge:

2 to 3 years to obtain leases, including the development of a U.S. Bureau of Land Management (BLM) leasing program, which includes approval of an Environmental Impact Statement, the collection and analysis of seismic data, and the auction and award of leases.
Another 2 to 3 years to drill a single exploratory well. Exploratory wells are slower to drill because geophysical data are collected during drilling, e.g., rock cores and well logs. Typically, Alaska North Slope exploration wells take two full winter seasons to reach the desired depth.
1 to 2 years to develop a production development plan and obtain BLM approval for that plan, if a commercial reservoir is discovered. Considerably more time could be required if the discovered oil reservoir is very deep, is filled with heavy oil, or is highly faulted. The petroleum company might have to collect more seismic data or drill delineation wells to confirm that the deposit is commercial.
Finally, 3 to 4 years to construct the feeder pipelines; to fabricate oil separation and treatment plants, and transport them up from the lower-48 States to the North Slope by ocean barge; construct drilling pads; drill to depth; and complete the wells.

That 10-year timeline wouldn't even begin until the Congressional ban is lifted. As you can see, the idea of seeing production in two years is not only unlikely, it's laughable.

We can see the same problem with the latest push to open up the Outer Continental Shelf.

Although it would it will take years for initial production, we're told that opening the OCS would mean an immediate relief for gasoline prices. Sadly, that's not the case since production from offshore drilling would only make up 1.4% of our demand in 2025.

Drilling in both these areas will happen, whether we like it or not. Until the restrictions are lifted, however, there are much better opportunities to focus on. Next week, I'll show you one of the few places where domestic oil production is actually growing.

Until next time,

Keith Kohl

P.S. Just because a company is located in a hot play doesn't automatically make it a winner. In fact, one of the fundamental parts of a drilling company is its production. Many of my Energy and Capital readers are playing one of the most active drillers in the Bakken right now. If you're interested in joining them, feel free to check out the $20 Trillion Report.

Coal Stocks Set to Soar, Part 1

Old King Coal is about to be a much merrier old soul.

After a stunning 60 percent gain for the sector in the first half of the year, and then a correction almost all the way back down, my research suggests that we're about to see another breathtaking run for the group.

Curiously, it seems to have much to do with the Olympics.

As was widely discussed in the press, China severely cut its use of fossil fuels, particularly coal, right around June in an all-out effort to clean up the air for the Olympics.

What has not been discussed much at all are the global implications of that cutback on the energy markets, and how the resurgence of Chinese energy consumption after the games spells higher prices for grid power and many other commodities...and profits for coal investors.

This week, I take a methodical look at China and coal, and what it means for the US.

Demand

With coal powering 80 percent of its electricity supply, China is both the world's largest coal producer and its largest coal consumer.

China's demand for coal rose 9 percent last year. This year, the Coal Sales and Transportation Association of China anticipates that the nation's requirements will rise another 5.3 percent, to 2.76 billion tons. (By comparison, US consumption of coal last year was less than half that, at 1.1 billion tons, according to the EIA's July 25 Quarterly Coal Report.)

The reason is simple: About two-thirds of global coal consumption is used to fuel electric power plants, and most of the rest is used to make steel and cement.

China's manufacturing base is of course utterly dependent on electricity demand to run its factories and assembly plants. It is also the world's top producer of steel, with more than double the output of the entire EU, the number-two producer by tonnage.

With China's economic growth rate still running at about 10 percent per year, and India right behind, it's no wonder the US Department of Energy estimates that 70 percent of the increase in global coal demand over the next two decades will come from China and India.

Neither country can satisfy its needs with domestic coal production anymore, and both have slashed exports this year in order to ensure they'll have enough for themselves. (My longtime readers will instantly recognize this as another example of the "Export Land Model.")

As the temporary damper on production and consumption for the Olympics comes to an end, and full demand is restored, it's entirely possible that China may become a net coal importer within the next year.

Production

China capitalized on coal's run up earlier in the year in a big way, and was a net exporter for the first seven months of the year. Their profits were excellent: China Business News reported that as of July 4, the global price was more than $54 per ton higher than the domestic price, which is controlled by the state.

But then, to clear the air for the Olympics, China curtailed its coal production by restricting consumption, and limiting the supply of explosives used in coal mining.

According to the National Bureau of Statistics, coal output in July fell 8 percent from June, to 220 million tons. (I should note that very recent statistics of any kind on Chinese coal are rare and hard to come by if you don't read Chinese, and even if you do, their reliability is completely unverifiable. But we use what we can get.)

But the big picture is even clearer.

Five years ago, China sported an 83 million metric ton trade surplus in coal. Last year, that dropped to a mere 2 million, effectively taking 12 percent of the global trade in coal off the market.

Imports

Coal inventories have been chronically low this year in China. A massive heat wave in the early summer had caused its coal consumption to soar, and the supply just wasn't able to keep up.

"After aligning the current stocks figure for comparison purpose, they were only two-thirds of last year's highest level," said Li Xinfang of the State Grid, the country's chief grid operator.

Then came the Olympics, and the kibosh on coal.

China's coal imports fell 36 percent from May to June, and June imports were down 32 percent year over year:

Type of Coal Imported	Change June ‘07-‘08

Anthracite	-51.13%
Coking Coal	-7.41%
Coke and Semi-coke	-53.59%
Non-coking Bituminous Coal	-10.91%
Total	-32.11%

Source: China General Administration of Customs

We'll get out the outlook for imports in a moment.

Coal Shortages

The scaling back of both domestic production and coal imports produced a predictable result in short order: widespread and frequent outages. I have been reading a steady drumbeat of news reports chronicling the blackouts for the last several months.

Approximately half of China's provinces are now rationing electricity, with forced limits on local governments and priority allocation to the Olympic venues.

If you doubt that the Olympics are a big deal in energy terms, consider this: Beijing invested over 20 billion yuan ($2.91 billion) to beef up its grid for the Games. It's a good thing too, because on the first day of the event, peak power demand in Beijing—a city of over 17 million people, just under the population of New York City—jumped 21 percent.

The shortages have been due in part to government-imposed price caps on grid power, which have not kept up with the rising global price of coal. This forced smaller producers to operate at a loss, and so many of them simply stopped running their plants. The large state-owned plants, however, have been compelled to keep the lights on, putting a drain on the national coffers.

According to the China Electricity Council, over a third of the nation's power plants had net losses over the first five months of the year, most of which were coal-fired. The State Grid reported that about 3 percent of the country's coal-fired generation capacity was idled last month, due to a lack of coal.

Regional outages can be even worse. Last month, more than 15 percent of generating capacity was shut down due to a lack of steam coal in Shanxi...China's top coal-producing province. How's that for irony?

This week, the State Grid Corp. announced that power output was down 17 gigwatts from a year earlier in its territory.

In an effort to restore profitability for coal-fired power producers, Beijing announced a 5 percent hike in electricity rates on Tuesday this week.

Even so, according to estimates by BNP Paribas SA, the price of electricity in China is still 30 percent lower than it would be if it properly reflected the current price of coal.

Import Surge Dead Ahead

Now that the Olympics are nearly over, stocks at coal-fired plants are slowly building again. But supplies are still far too low for comfort, and the central government is signaling that it's about to further release its restrictions.

A statement this week by Liu Tienan, vice chairman of the National Development and Reform Commission, encouraged power plants to stockpile coal early this year, before the additional demands of the winter season set in. If coal supplies are not soon increased, he warned, power shortages would worsen.

Last week, China's General Administration of Customs said that coal imports should be increased to bring the grid back up to full power.

And Wang Dexue, China's vice minister of the State Administration of Work Safety, said on August 9 that China will increase production at its larger mines in the second half of this year.

I have no doubt that the minute the last Olympics tourist flies home, China will be going full bore to produce and import coal, particularly steam coal, once again.

In Coal Investments Set to Soar Part 2, we'll explore exactly how that's going to work, and the implications it has for grid power and many other commodities.

And of course, how to profit!

Until next time,

Chris

P.S. This is the sort of early warning that gives investors a shot at the best profits. To discover our very best picks in energy, subscribe to the $20 Trillion Report.

Marcellus Shale Gas

"Are energy prices on the verge of turning around?"

I've been asked this question nearly every day since early July, after oil prices have fallen from over $147 per barrel. And as expected, the cost of natural gas dropped right alongside crude oil.

After reaching as high as $13.75/Mcf, natural gas has tumbled more than 40%.

However, we can't put all the blame on crude oil.

Today, the Energy Information Administration (EIA) released their Short-Term Energy Outlook. According to the report, U.S. domestic natural gas production increased 8% in 2008, yet consumption only grew by 3%.

I hope that growth in production doesn't come as a surprise to my readers.

The fact is that unconventional natural gas basins have been heating up for a long time. I can remember being ridiculed for even hinting at the potential success in the Barnett shale. I believe the exact words were, "The Barnett shale is not the answer. There have been an overabundance of failures in the area and there are much better areas for development."

The success of horizontal drilling in the Barnett formation has made several other shale basins across the U.S. more attractive for producers.

The Marcellus Formation

Without question, one of the hottest unconventional plays in the U.S. is the Marcellus shale formation.

As you may know, the Marcellus formation stretches across New York, Pennsylvania, Ohio, Maryland and West Virginia

Earlier this year, the amount of natural gas reserves came into question by two professors, Terry Engalder and Gary Lash. Six years ago, the USGS had reported the Marcellus shales to have approximately 1.9 trillion cubic feet of "technically recoverable" natural gas.

Dr. Engalder and Dr. Lash have suggested a significantly higher number. Although their high estimate is around 500 trillion cubic feet, their conservative number of 167 trillion cubic feet of natural gas is still a massive amount.

The problem is figuring out how much of that natural gas could be recovered, yet even taking into account a 10% recoverability factor, the conservative number is almost nine times larger than the USGS estimates.

Unfortunately, producing the natural gas in the Marcellus formation can be expensive since a horizontal well can cost triple the amount of a standard vertical well.

Unconventional Profits in Marcellus Gas

Despite the sharp price correction, prices may hit a bottom of $8 Mcf. Unlike oil, producers aren't struggling to meet demand. The question is: at what price level will producers begin to cut production? The end result would be a hike in natural gas prices.

Considering nearly all the major players have taken a beating since July, this could be a perfect opportunity to pick shares at a discount.

For example, take a closer look at Range Resources (NYSE: RRC). With 1.15 million net acres in the Marcellus shale play, Range has already drilled 25 horizontal wells in the play, 22 of which have been completed. Each horizontal shale well in the area is estimated to hold an average of 3-4 bcfe in reserves. Furthermore, production is projected to reach 30 Mmcfe per day during the first quarter of 2009.

Until next time,

Keith Kohl

Energy and Capital

Will Arctic Oil, Natural Gas, MIT, Paris and Pickens Save the Day?

In my past life as a computer programmer, there were two classes of problems that particularly bedeviled me.

The first I called "ghosts," which are problems that don't exist. For example, I'd spend hours trying to find a bug in my code, not realizing that the reason it wasn't working was due to some bug in processes far outside my code. The wrong behavior would mysteriously appear and disappear, like a ghost, when I was running the exact same code.

The second I called "unicorns," which are solutions that don't exist. I'd spend hours or days attempting to devise a solution that ultimately could not work, for reasons that weren't apparent until I actually tried to build it, and realized it was a dead end.

Lately, evaluating our energy policy options has started to feel a lot like programming. It is getting increasingly difficult to determine which options are real, and which aren't, and when, and to what extent.

I have already addressed a few popular ghosts in recent columns, like those evil oil speculators, the non-existent Chinese oil drillers off the coast of Cuba, and the horrible Demmycrats who have stymied offshore drilling.

This week, we'll take a look at a few potential unicorns, and see if they're for real.

Arctic Oil Bonanza!

Two weeks ago, the USGS issued a press release titled "90 Billion Barrels of Oil and 1,670 Trillion Cubic Feet of Natural Gas Assessed in the Arctic," which claimed to be "the first publicly available petroleum resource estimate of the entire area north of the Arctic Circle."

Ever willing to jump at any bit of brightly-colored bait, the press swallowed it hook, line and sinker. "Enough supply to meet current world demand for almost three years," they gushed. "May hold one-fifth of the world's undiscovered, technically recoverable reserves of oil and natural gas," and "the race to claim territorial ownership of the resources already has begun."

Wahoo! Pack up the truck, Jed, we's a-goin' ta the North Pole!

More knowledgeable analysts who know how to dig for the details had quite a different view. When it comes to oil and gas production in the Great White North, my first call is J. David Hughes, a Canadian geoscientist with nearly forty years' experience. In this week's Peak Oil Review, he explicated the new study beautifully.

The real story is much more nuanced. Those of you who have read my book know that oil and gas reserves are estimated according to their probability. An "F95" estimate means that there is a 95% chance of the stated amount being found, and an "F5" estimate means there is only a 5% chance. (Sometimes a "P" is used instead of an "F.")

Detailed data stating the probabilities is only available on the USGS web site for 7 of the 25 assessment areas included in the Arctic report, which comprise about 32% of the oil and 17% of the natural gas in the whole. For those areas, Hughes calculated that the F95 estimate was 3 billion barrels, the F50 estimate was 11.8 billion, and the F5 estimate was 95.7 billion. Out of that, the USGS reported a "mean" estimate of 28.9 billion! It's not clear what their justification for that claim is, but that amount is clearly well above the F50 estimate.

Hughes cites the "West Greenland - East Canada" assessment as a particularly egregious example of fudging the numbers, where the "mean" estimate given had an actual probability of less than 10%!

Sadly, such shenanigans are common in oil data reporting. It takes a keen eye to sort out fact from fiction.

The real bottom line on the Arctic's resources will not be known until it is drilled. But it doesn't really matter that much. Even if it does turn out to contain three years' worth of oil and 16 years' worth of gas, those numbers are only useful as a rough way of estimating how much is ultimately recoverable. In reality, the production will be hardly noticeable, because it will take many decades to recover, at low flow rates, and it will be the most expensive oil and gas ever produced. And an unknown portion of it, perhaps 25%, might accrue to the U.S.

It might buy us a little more time to adjust to a post-peak world, but by that time I expect the world will either be panicking and disrupting normal commerce in oil and gas, or well on its way to switching over to renewables. Either way, the world's oil and gas markets will be very different from what they are today.

But you wouldn't know it from the breathless reports of "90 billion barrels!" in the press.

A 50% Increase in Natural Gas Reserves!

Next in our cavalcade of chicanery is the new report from the American Clean Skies Foundation, a natural gas industry organization founded by gas producer Chesapeake Energy (CHK).

The report claimed that the US has 2,247 Tcf (trillion cubic feet) of gas reserves in place, a 47% increase over the 1,530 Tcf estimate of 2006. They claimed that current technology and prices make it possible to recover much more gas than previous thought from domestic shales like the Haynesville, Marcellus, Barnett and Bakken formations.

"This study authoritatively refutes head-on the mistaken belief that we do not have sufficient supply," said Denise Bode, president of ACSF.

Again, the press jumped all over it. "Industry report says U.S. natural gas supply abundant," blared Reuters, and the rest of the press gang were quick to assert that the US now has enough gas "to last up to 118 years."

Chesapeake CEO Aubrey McClendon was all over the media in the wake of the announcement, and gave testimony before the House Select Committee on Energy Independence and Global Warming. Chairman Ed Markey asked him if natural gas supplies were adequate to reduce our electricity generation from coal to 35% from its current 50% share. "Today, I say yes," McClendon replied.

A closer look at the numbers reveals a slightly different story. A discussion thread on The Oil Drum pointed out that the 118 year estimate is based on our current production (not consumption) of gas, which is at the rate of about 19 Tcf per year. Our consumption is actually about 4 Tcf higher, at 23 Tcf, reflecting our continued reliance on imported natural gas.

So that 118-year assertion relies on several very questionable assumptions: 1) that we will not increase our current level of natural gas consumption for over 100 years; 2) that we will continue to be able to import about 20% of our current gas supply for over 100 years; 3) that the price of gas will remain near or above its current levels. With natural gas, price is a key determinant in whether or not a given gas deposit is considered "economically and technically recoverable."

If we intend to shift electricity generation toward natural gas and away from coal, then we can already toss out that first assumption.

Now, I don't want to sound too critical of Chesapeake. I think it's a good company and a good investment, and I have owned it and promoted it myself. Nor do I want to appear unduly pessimistic about the potential of the shale plays. After all, we have promoted them vigorously here in the pages of Energy and Capital. I am only trying to put them in a realistic, credible, big picture perspective.

Is there gas in them thar shales? You bet there is. Is it profitable? At today's prices, yes, absolutely, much of it is. But one has to look carefully at the numbers to guess exactly how much, and realize that ultimately, it's not the recoverable total, but the flow rates that really matter.

The same is true, by the way, for the oil potential of the Bakken Formation. Truly, it is an enormous and profitable formation, and the companies we have picked out for the $20 Trillion Report are well positioned to profit from it. But ask yourself: do you really know the difference between the 500 billion barrel and the 4.3 billion barrel estimates usually proffered for it? What's the probability of the 4.3 billion number? Will it bring down US gasoline prices? (If you can't answer those questions, you should probably read up on our past articles on the Bakken and check out the USGS survey reports.)

I hope this finally puts to rest the questions I keep getting along the lines of "But what about the Bakken?"

Boone's Wind Boom!

No doubt by now you have heard about the Pickens Plan, the initiative started by Texas oil billionaire T. Boone Pickens to promote his "bridge" solution to a post-peak oil future.

It's a reasonably straightforward and practical idea: take the 22% of our current electricity supply generated from natural gas, and replace it with wind over 10 years. Then we use the natural gas to run our vehicles, offsetting 38% of our demand for foreign oil. We could generate 22% of our electricity supply from wind with his plan, Pickens claims, and avoiding spending $266 billion a year on foreign oil. (If you haven't watched his presentation, check it out here. It's smart stuff.)

As usual, however, the crucial details remain to be explained. How and when will all those natural gas fired power plants, many of which were built in the last 10 years and are far from the end of their useful, fully amortized lives, be decommissioned? What is the cost and the time-to-market for millions of natural gas powered cars?

As I reported in my recent article on plug-in hybrids, the annual replacement rate for vehicles is slow, at somewhere between 3-6% percent. But that is with a normally functioning economy and a normal supply of cheap fuel and cheap steel, which is not an assumption we can necessarily make for the future.

Nor is the financing picture quite clear. On Larry King's show on Monday night, he claimed that the full $1 trillion cost of the program could be borne by private industry. But critics like Anthony Rubenstein, a sustainability consultant who was the force behind California's Proposition 87 in 2006, has raised questions about the $5 billion bond measure that Pickens has put on the November ballot in California to support his plan by providing incentives and rebates for natural gas vehicles.

There is another important question about the Pickens Plan: How does it square with the assertion that we have "118 years' worth of natural gas?" If we switch over to natural gas for vehicles, I think it's safe to say that we cannot make any of the assumptions that I discussed in the previous section. Our rate of consumption will almost certainly go up. Our natural gas imports are far from certain over the next 100 years, and our recently-built LNG import facilities are suffering badly from poor economics.

Nor can anybody predict what the plan would do to prices. Such a transition would almost certainly raise the price of natural gas to bring it into parity with oil, while at the same time depressing oil prices. Imported oil may continue to be attractively priced in such a scenario, making the possible offset of foreign oil less certain than Pickens claims.

Still, it's a reasonably good idea, and it deserves closer attention. It sure beats the pants off most of the ideas I've seen from Washington lately. But it could be a unicorn, if it's not done right.

MIT Hydrogen Breakthrough!

Finally, we must take a few minutes to take a closer look at the much-ballyhooed "breakthrough" announced by MIT last week, which made headlines like "MIT Scientists Unlock Nirvana of Solar Power Storage" and "'Major discovery' from MIT primed to unleash solar revolution."

The gushing press that issued from the announcement was enough to drown a sane man. "This is a major discovery with enormous implications for the future," enthused one analyst.

So what is this "major discovery?"

Remember when you studied electrolysis in school, hooking up a battery to a couple of probes in a glass of water to make hydrogen and oxygen?

Well, it's like that. Only the MIT design uses a catalyst made of cobalt and phosphate, so theirs is a "catalysis" process instead of a straight electrolysis. The advantages of the design are that it can run at room temperature in regular water, using materials that are abundant and cheap, and that it is apparently more efficient (note: I have not been able to verify these claims).

The hydrogen thus produced can be stored and then consumed in a fuel cell to generate electricity, so it opens a path to storing energy without batteries.

Thus, the technology has been billed as a breakthrough for solar, because it could store energy overnight, when the sun isn't shining. But that's really a hyped-up misdirection. It's not about solar, it's about hydrogen.

Unfortunately, the crucial details here are still unexplained. What's the net efficiency of using this catalyst to generate the hydrogen? I was able to turn up one reference stating that it might be 80%, vs. 70% for standard electrolysis, but I wasn't able to verify that by press time. If you have read my article on the hydrogen economy last year, you know that losses in storage reduce the net energy of any fuel cell based system. Finally, the efficiency of the fuel cell stack-typically cited as 50% but variable depending on the conditions-must be taken into account.

Because this is strictly a laboratory development, and has not yet become an application in the real world, we also know nothing about the relative cost of the proposed system.

We do know however, without consulting any numbers, that using solar PV to generate electricity to drive off hydrogen from water, then storing the hydrogen, then using it in a fuel cell stack to make electricity again, will incur far more losses than simply collecting the original solar-generated electricity and storing it in a battery. According to the Second Law of Thermodynamics, every time you convert energy from one form to another, you lose a little, usually in the form of heat.

Without knowing the relative costs of each approach to storing energy, or being able to calculate how many such systems could be built and deployed, and when, it's impossible to say whether the MIT "breakthrough" is even interesting.

We can already deploy regular solar PV systems with battery backup in the field as fast as we can build them, which isn't nearly fast enough. And those systems are simpler, stabler, and have been proved in the field for over 30 years. For applications where more storage is needed than is economical with batteries, there are other technologies also under intensive R&D that might prove more efficient and economical than hydrogen, including thermal systems, flywheels, and hydraulics.

This new approach to the hydrogen fuel cell is unlikely to become commercial for at least another decade, and even then it will still be a more "lossy" approach to energy storage. It may work some day as small residential-sized energy storage system, but leaping from this process to fantasies about hydrogen powered vehicles makes no sense at all, when the efficiency of straight electric vehicles is practically and theoretically much higher.

Professor Daniel Nocera, who led the MIT project, dismissed the obstacles ahead blithely: "The basic science is done," he said, "now it's engineering."

That reminds me of another old saw from my software engineering days. We rolled our eyes when some marketing type breezed in with an impossible-to-build idea, and then dumped it on us with the standard line, "Implementation is left as an exercise for engineering."

Lots of great ideas never made it off the shop floor, because in the real world, they turned out to be impractical or uneconomical. It's far too early to say if this MIT development is a unicorn or not, but I think I see a bump on its forehead.

Paris' Latest Score

On a lighter note, one of the most sensible energy proposals I have heard yet came out of the mouth of the unlikeliest of sources: Paris Hilton. If you're one of the six people who haven't seen it yet, you can watch it here.

If only our political leaders had as much sense as Paris does.

Until next time,

Chris

Canada's Bakken Shale

I'll be the first to admit that whenever a reader and I used talk about Canadian energy, my first thought was about Alberta. More specifically, the Canadian oil sands.

After seeing the operations firsthand, it was too easy to get excited over the three oil sands deposits in Alberta.

Yet if we were to strike up a conversation within the last few months, I'd bet the first thing to come up wouldn't be Alberta. In fact, the last time I mentioned the oil boom in Saskatchewan, our President was in the middle of pleading with the Saudis to raise oil output.

Back then, I also pointed out that the key to lowering our dependence on Saudi oil imports isn't begging them for more. The Saudis aren't even the largest source for U.S. oil imports. That honor goes to Canada. According to Energy Information Administration, the U.S. imported over 2.4 million barrels of oil and products per day in 2007.

So how exactly have things been going for oil, lately?

After retreating from a high of $147.90 per barrel on July 11, 2008, crude prices have slipped about 20%. The latest dip is being attributed to a tropical storm that hit land without any disruptions to oil rigs or refineries, as well as a slowdown in U.S. and European economies. Furthermore, European retail sales have reached a 13-year low.

But I've told my readers many times before, don't hold your breath waiting for cheap oil.

Saskatchewan's Share in the Bakken Shale

I'd wager that the majority of my readers have become familiar with the Bakken formation. Many of those people were able to take advantage of the oil boom and make a tidy profit from several plays in the area.

On the U.S. side of the Bakken play, the real surge took place when the USGS reported the geological formation hods up to 4.3 billion barrels of recoverable oil. Remember, the USGS assessment was referring only to "undiscovered, technically recoverable" oil, which gives us a good idea of the size of this oil pool.

Over on the Canadian side of the Bakken, things are heating up just as quickly as producers rush to grab as much land as possible. Many producers have been moving operations from Alberta.

Production from the Canadian Bakken in 2007 was about 56,000 barrels per day. With the drilling frenzy happening now, I wouldn't be surprised to see that number swell within the next two years.

Interestingly, the question I've been getting from readers hasn't been whether or not to focus on one province or the other, but rather which part of the Saskatchewan oil boom to look at.

Like you, I've been inundated with emails about how the Saskatchewan oil sands are the hottest part of the Saskatchewan boom.

Canadian Oil Investing: Bakken Shale or Oil Sands?

I won't immediately dismiss the oil sands deposits in northwestern Saskatchewan, but there are certainly better opportunities. Production from Canadian oil sands stands at a little more than a million barrels per day (which is still a four-fold increase compared to a decade ago).

Some producers, like Oil Sands Quest, Inc. (AMEX: BQI) are dipping their hands in both oil sands and shale oil in Saskatchewan. Along with energy companies across the board, shares have taken a beating as energy prices slide lower.

One thing that makes the Bakken more attractive to producers is the quality of oil. Unlike the thick bitumen, crude oil from the Bakken is a higher quality than Saudi oil.

If you're looking to play the Saskatchewan side of the Bakken formation, you can't go wrong with Crescent Point energy Trust (TSX: CPG.UN). Despite the latest volatility in oil prices, Crescent Point is still up approximately 34% this year. The Trust is expecting its production to average 36,250 boe/day and generate a record cash flow during 2008. If Crescent can deliver on its forecasts, picking up shares at a discount now could turn a tidy profit.

The last time we talked about the Saskatchewan side of the Bakken formation, I mentioned two other prospective plays. TriStar Oil and Gas (TSE: TOG) and Petrostar Petroleum Corp. (CVE: PEP). Although energy companies have had a rough time lately, TriStar has managed to stay afloat. Petrostar, however, is a different story. Since the beginning of June, shares of Petrostar Petroleum have nearly doubled. The smaller company began drilling in early June. If Petrostar can come out with some positive drill results, I would expect this producer to break higher in the next few months.

On the Road to Saskatchewan

Even though the sun was setting as I raced across Saskatchewan on my whirlwind trip to Alberta, I could still make out the individual drilling rigs dotting the landscape. I can't help feeling a twinge of regret from not spending more time exploring Saskatchewan.

I can feel the same restlessness building. This time, however, I won't make the same mistake twice.

Until next time,

Keith Kohl

P.S. Trust me, finding the right companies when everyone seems to be dropping like flies is extremely difficult. Although the energy correction may not be over just yet, this is a perfect opportunity for investors to pick up some quality stocks at a discount. If you're interested in turning a profit despite the market volatility, I suggest checking out The $20 Trillion Report.

Producing the Bakken Oil Formation

I should have learned my lesson.

Last week, I distinctly remember reading how prices at the pump would inevitably decline. One of the reasons, naturally, was that U.S gasoline demand had fallen about 3.3% year-over-year on a four-week moving average. According to the Energy Information Administration (EIA) U.S. fuel demand has dropped by 19.9 million barrels a day.

I'll admit that those facts gave me hope over the weekend when I took a trip to see a good friend get married. Normally, a trip for me to Philadelphia takes no more than an hour and a half, assuming traffic is normal.

My trip ended up taking over five hours. I expected to pass some horrible accident scene, yet as each grueling mile passed by, I realized there were simply too many drivers.

So much for less driving.

Perhaps I just happened to be on the wrong road at the wrong time, but the bumper-to-bumper traffic, sweltering heat and broken air conditioner would make anybody question whether the U.S. is driving less. Paying roughly 40% more for gas compared to last year doesn't help matters either.

The question is: Will things get any better?

Watching crude prices tumble after reaching a record $147.90 per barrel on July 11, 2008 has caused a number wild predictions. I couldn't help but shake my head as one in particular called for oil to fall below $60 a barrel before the end of the year.

Don't hold your breath waiting for that.

OPEC may have raised their output by 200,000 barrels per day recently, but we can expect the oil markets to remain tight, at least through 2008. There's too many factors stacked against producers. Non-OPEC producers will play a pivotal role in how oil prices will move. Those countries are going to have a difficult time making up the loss from decline rates.

But let's push aside the doom and gloom for a few minutes. The most important thing the U.S. can focus on to alleviate higher oil prices is to lower its addiction to foreign oil. Specifically, I'm talking about crude shipped from the Middle East. I mentioned this problem last week.

Although the U.S. will never completely eliminate its need for oil imports, certainly every barrel will help. Considering the amount of time it'll take to develop some of those resources, we need to start soon.

Investing in the Bakken Boom

Ever since the United States Geological Survey released their assessment on the Bakken formation in North Dakota and Montana, there has been a rush by companies to get their own piece of the action.

The easiest mistake to make is to take a large number of reserves for granted. I've heard people say, "Well, they said there's 4 billion barrels there, so that's going to solve all our problems."

That's not exactly how things work, unfortunately.

Remember, it's not how much oil is sitting in the ground. Rather, the problem comes down to the flow rates.

It's true that producers have been able to advantage of horizontal drilling technology and fracturing techniques to make production profitable. Production, however, comes at a hefty cost in the Bakken, too. Like I mentioned previously, a single well can easily cost more than $5 million dollars.

Investors looking into the area have two ways to play the Bakken formation. No matter who you listen to, don't forget that there is always a degree of risk involved with any oil exploration play. The rewards can certainly be worth it.

Western Standard Energy Corp. (OTC: WSEG), for example, is operating in North Dakota. The company announced they are participating in a drilling partnership to fund operations for two Bakken wells.

Since energy companies across the board have been falling lately, now is a perfect opportunity for investors to pick up some quality shares at a discount.

If you're looking for a less speculative play, take a look into XTO Energy (NYSE: XTO). With a $23.56 billion market cap, XTO isn't exactly a small exploration company trying to hit the big jackpot. The company recently jumped into the Bakken shale after acquiring Headington Oil Company last week. The purchase added 352,000 net acres in the play to XTO's assets.

The U.S. side, however, is only one way to invest in the Bakken. North Dakota and Montana are only part of the Bakken story. Next week, I'll tell you the why Canadian side of the Bakken is starting to heat up, and more importantly, who stands to benefit from the Saskatchewan oil boom.

Until next time,

Keith Kohl

Energy and Capital

P.S. Many of you have already seen the profits that can be made from the Bakken formation, but it wouldn't be fair if I didn't show our new readers where they can find those plays. If you're interested, feel free to check out those solid gains for yourself at The $20 Trillion Report.

The Bakken Oil Field

Over the last few weeks, I've been trying to wrap my head around the recent excitement over our domestic production. Whether the topic of drilling in ANWR or the outer continental shelf came up, people were getting excited.

There are a few problems, however.

For starters, Congress needs to lift their drilling ban. But for argument's sake, let's pretend (no matter how unlikely you find it) the drilling restrictions were lifted by the end of 2008. We still wouldn't see a drop of oil for the next five to ten years. I'm always asked whether or not the government will open up drilling in those two areas.

I believe it's only a matter of time. The reason is simple enough. The biggest challenge for alleviating our oil addiction is to decrease the amount of oil we import. According to the Energy Information Administration (EIA), the U.S. imported 13.4 million barrels of oil per day. I'm pretty sure you wouldn't be surprised to learn that nearly six million barrels per day of those imports came from OPEC producers.

One of the best ways to decrease our dependence on Middle Eastern oil is to develop more of our domestic resources. Ten years to see production just isn't enough.

Fortunately for us, there's an oil boom already happening in North Dakota.

Drilling the Bakken Oil Fields

I'll admit it has been a while since we last talked about the Bakken formation. With approximately 4.3 billion barrels of undiscovered, technically recoverable oil, producers have been scrambling to get acreage in the play.

Even though oil prices fell as low as $125.63 per barrel on Tuesday, it is still well above the $80/bbl necessary to make production worth the effort. Remember, a single well can cost up to $5 million. I don't know anybody that honestly believes oil will ever fall that low again.

In the past, oil prices would peak in July, at the height of the summer driving season. During fall, oil prices would then fall as demand decreased.

In 2007, things were quite different. Oil peaked around $80 per barrel in July. During the fall, we saw oil prices suddenly jump. Prices haven't looked back, either. The question is whether or not we'll have a similar experience in the next few months.

Although it will take a few years to significantly ramp up production, the Bakken isn't just another pipe dream.

An Old Fashioned Oil Boom

Glancing at the EIA's statistics on U.S. crude oil production, you'd be hard pressed to find a state where oil production actually increased. Even then, the growth isn't too impressive.

And then there's North Dakota.

Let's take a quick look at the numbers from the North Dakota Petroleum Council. Last year, oil production in North Dakota increased by 12.8% over the previous year. The 45 million barrels of oil brought in more than $251 million in revenues to the state.

The Bakken represented roughly 16.6% of the state's total production. In 2006, the Bakken only made up about 5.6% of that production. Production from the Bakken formation grew 329% last year.

I wouldn't be so quick to say the boom is over, either. In fact, it's just starting to heat up.

In April, 2008, North Dakota's monthly oil production reached a new height. The state produced 150,578 barrels of oil per day, breaking a 24 year record set in 1984. North Dakota is now the 7^th largest producing state in the U.S.

If production continues to increase (not to mention the decline other top oil-producing states are experiencing), North Dakota could be threatening the move up that list.

Just remember, every barrel we produce lowers the amount we need to import from the Middle East.

Playing the Bakken Field

Three months ago, I gave you some of my favorite Bakken Oil Stocks. Even if we take into account the recent market woes, Continental Resources (NYSE: CLR) is still up 25% since suggested my Energy and Capital readers take a look at the company.

The good part, however, is that this oil boom at the Bakken is far from over. Next week, I'll fill you in on several companies that could double in value by the end of the year.

Until next time,

Keith Kohl

P.S. Due to the record prices you pay at the pump, the U.S. is desperate for a plan of action to solve our energy problems. Experts like Boone Pickens have recently released their ideas on how to ease the situation. Before Boone, however, we've already had an energy plan on the books. It was developed by Chris Nelder and Brian Hicks.

This proposal was released last May, and not only could it avert an economic crisis...but investors stand to make a fortune. You can learn more about their plan here.

Offshore Oil Drilling

It is always good to have a plan.

It's not, however, good to have a bad plan. That was my initial reaction last month when the President gave Congress several steps to reduce gas prices and foreign oil dependence.

What was his plan?

Two of the steps involved the developing oil shales and opening up ANWR. Well, you know how we feel about those two. For starters, both will take decades to develop. I've already cautioned readers about how complicated the Colorado oil shales can get. As far as ANWR production is concerned, let's just chalk it up as a case of too little, too late. Due to a lack of infrastructure and development, production from ANWR wouldn't begin for about a decade.

One of the other recommendations was to open up more of the Outer Continental Shelf (OCS). Drilling in the OCS has been restricted by Congress for over two decades.

Drilling the Outer Continental Shelf

This week, President Bush came out swinging.

On Monday, he lifted the presidential ban on offshore oil drilling.

Unfortunately, the move won't have the effect a few believed it would. Naturally, the act alone does nothing more than pressure Congress to lift its own offshore drilling ban. Don't hold your breath if you're waiting for Congress to do the same.

So what was the reason for the President's action?

Are they expecting oil prices to go down tomorrow because a few billion barrels of oil (which will take years to even start production) was opened up? Perhaps they thought that lifting the ban would begin a long-term strategy for energy independence?

The Energy Information Administration (EIA) doesn't exactly agree with those excuses to open up more of the OCS. For their Annual Energy Outlook 2007, the EIA looked at the impacts of increased access to oil and natural gas resources in the Lower 48 federal Outer Continental Shelf. As you would expect, the EIA concluded that more access to the OCS would have a limited impact on our domestic production. It would take nearly five years before production would begin. Sure, someone could point out the billions of barrels of oil companies could add to their reserves, but what good is oil in the ground if you can only produce a small amount of it at a time?

The Only Way to Invest in Offshore Oil Drilling

Even if the Outer Continental Shelf and ANWR aren't opened up for exploration, offshore production is becoming an increasingly important source for crude oil. As onshore fields decline, producers are pushing farther and deeper than ever before.

Most of my Energy and Capital readers know my position. Personally, I only see one opportunity for investing in offshore oil drilling. Let's say an oil company just hit a bullseye with a massive offshore discovery. That may be a reason for excitement, but even though they're sitting on a huge amount of oil, it could take years before that company extracts one drop of oil.

The reason?

The fact is that the company might not be able to secure a drilling rig to pull their precious oil from the ground. I'm not talking about a tight regional market, but rather a global crunch for available rigs. Furthermore, shipbuilders can't keep up with demand. The cost of a ship can run as high as half a billion dollars.

And while we're talking about costs, contracting a rig can cost upwards of $600,000 per day!

For us, oil rig companies are an attractive long-term investment. Many of the rigs out there are backlogged with contracts. Out of all the rig companies that have come across my path, one in particular has been on a roll lately.

Transocean—Go Long on this Offshore Oil Investment

I've mentioned Transocean Inc. (NYSE: RIG) before as a strong long-term investment. Not only is Transocean one of the largest offshore drilling contractors, but also prove that the scarcity of drilling rigs is a reality. Last week, the company was awarded a contract for its drillship Deepwater Pathfinder worth approximately $1.19 billion. That means the five year contract comes out to more than $652,000 per day. Furthermore, the contract isn't set to begin until March, 2010, because the ship is already under contract.

Today, the company extended another set of contracts (worth $3 billion) with Petrobras. Four of Transocean's rigs will be drilling under the new contracts until 2016.

Look, we know that oil prices are going to remain at record levels. There are just too many variables driving crude higher. In fact, the selling we saw during trading today dropped oil prices to as low as $135.96 per barrel was expected. We need to remember that prices just reached a record $147.27 per barrel merely four days ago. Of course we're going to see people taking a profit.

Regardless of your views on peak oil, the chances of oil prices dropping below $100 a barrel seem impossible. Naturally, higher prices will ensure that companies continue to explore and develop unconventional sources (such as deep water drilling).

Until next time,

Keith Kohl

Here's what it comes down to: Even with the full support of the federal government, the problem is that we won't see production from these new offshore leases for at least a few years. Assuming Congress eventually lifts the ban on ANWR drilling, production there wouldn't be available for nearly a decade. If you're interested in finding where some of these old-fashioned oil booms are taking place right now, feel free to learn more about the $20 Trillion Report here.

Haynesville Shale

Another week, another record.

Hopefully by now you've gotten used to seeing record crude prices. As usual, we started to see a sell off after nearly reaching $145.85 a barrel last Thursday. This morning, crude dipped over six dollars a barrel before bouncing back over $141 per barrel this afternoon.

But it's not just oil that's been on my mind.

If your mind has been fixated on "America's Oil Crisis," (I still can't get over the fact that some people believe it's only a problem in the U.S.) perhaps it's time to take a look at natural gas.

It's a good bet that whenever you see oil prices climb higher, natural gas is moving up right alongside it. I know that all we hear about nowadays is how oil prices are out of control, but you might be surprised that natural gas has actually gained more so far in 2008.

Take a look for yourself:

Think about that for a second.

We're approaching Katrina-level natural gas prices without any significant supply disruptions. Can you think of the last time you heard someone say, "I'm not heating my home anymore because natural gas prices are out of control."

I have a feeling we won't be seeing that kind of protest anytime soon.

Unfortunately, we might run into problems as Canadian natural gas production gets into trouble. As you know, Canada is a key part of the North American natural gas market. Production in the Western Canada Sedimentary basin (where Canada gets an overwhelming amount of their natural gas) is in decline.

The good news, however, is that unconventional deposits are becoming much more attractive to companies, especially now that natural gas is trading around $13/Mcf. Areas like the Horn River Basin are starting to get a lot of attention.

The unconventional natural gas boom isn't just restricted to Canada, either. In the U.S., the Barnett Shale is a perfect example of how new technology can heat up unconventional natural gas plays.

The Haynesville Shale

I know it has been a little while since we last talked about Haynesville natural gas. And I can't help but think that was back when oil sold for $129 a barrel, and natural gas was under $11/Mcf.

Located in Louisiana, the Haynesville shale deposit has been under the spotlight recently. Even though the deposit could hold a massive amount natural gas reserves, there's a lot of testing that needs to be done. Regardless, you can be sure that companies are going to go after that natural gas.

And then comes a slight catch, however, because extracting the natural gas isn't as easy as conventional deposits. Producers have to drill over 10,000 feet below ground to extract the natural gas.

If there's so much gas there, how come we're only hearing about it now?

I would assume that the rise in prices has a lot to do with the answer. Back in 2002, we were paying about $2/Mcf for natural gas. The profitability margin has obviously jumped considerably. Even if prices plummeted back to $8/Mcf, the Haynesville shale would still remain an profitable investment.

Some of those producers are worth checking out, too.

Two Stocks To Play in the Haynesville Shale

Of all the players rushing into scooping up acreage in the Haynesville play, there's two in particular that you should check out.

One of the best unconventional natural gas plays is clearly Chesapeake Energy (NYSE: CHK). Not only have they had tremendous success in the Barnett shale, but has gotten a hold of over 500,000 acres in Northwest Louisiana. In other words, these guys have both the experience and the property.

I've seen a few company names get tossed back and forth across the media over the last few months. If you're looking to get into the Haynesville plays, take a look at Petrohawk Energy Corp. (NYSE: HK). Last week, the company announced the completion of its first horizontal well. Despite not having as much acreage as Chesapeake,

Petrohawk still holds approximately 275,000 net acres in the Haynesville and Bossier shales, stretching from Louisiana into eastern Texas. Even though Petrohawk is trading just below their 52-week high, there could be a lot of momentum behind them.

Until next time,

Keith Kohl

Energy and Capital

P.S. Over the last few years, unconventional oil and gas plays have undoubtedly become a hotbed for investors. It would only be fair if you had the same opportunity to profit in those plays like my other Energy and Capital have. If you're interested in joining them, feel free to check out the $20 Trillion Report.

ANWR Drilling

There's a new game being played in the media.

From what I understand, the rules are easy. Simply pick somebody (other than yourself, of course) to blame for oil prices. Then, you can watch as the blame is bounced around. Unfortunately, there's no way to win the game since the blame goes back and forth repeatedly.

Let's start with OPEC. After all, they do control a significant amount of global oil production. According to them, the speculators are responsible for running the price of oil up.

In the words of the Qatari Minister, "There is no shortage."

That seems to be the daily mantra at OPEC.

They even expect oil prices to reach as high as $170 a barrel in 2008. Anyone else remember when they were comfortable last year when oil prices were an astounding $60 a barrel? Things are so good, Libya is considering a cut in production.

Shell's chief exec, Jeroen Van der Veer, came out swinging lately, saying that speculators aren't to blame. He's finally starting to realize that cheap oil oil is getting scarce, so producers are forced to go farther and deeper than ever before.

But again, there are no clear winners.

Speculators obviously have their part in the price of oil. The amount they play, however, would invite a week-long argument. It's also true that supplies are extremely tight. The fact is that global production has plateaued while demand continues to increase.

You can see where this is leading us, right?

But just because there's a global crunch in the oil markets does not make every oil investment a safe one.

In fact, the last time I was this concerned over one of my reader's investments, it was a few weeks ago. Back then, I was asked a simple question on how I felt about the Colorado Oil Shales.

Several of you were getting excited over the idea that drilling for oil in the Arctic National Wildlife Refuge was inevitable. Normally, I would be the first person to get back the idea of new domestic production.

This time was a bit different.

Drilling ANWR for Oil

In 2006, Alaska's north slope pumped out an average of 724,000 barrels per day. After taking a quick look at the numbers from the Energy Information Administration (EIA), that means production there has dropped about 24% since 2002.

As you probably know, drilling for oil in ANWR isn't allowed. In fact, the Congressional block on drilling ANWR has been renewed every year since it was first enacted in 1982.

Last month, the EIA completed a service report entitled Analysis of Crude Oil Production in the Arctic National Wildlife Refuge.

Remember, we're talking about a good deal of oil. The United States Geological Survey estimated that between 5 and 16 billion barrels of oil can be recovered from ANWR's coastal plain.

Don't let the big numbers grab all your attention, because it's not the total reserves we're interested in, but rather the production rates. Even if we take the EIA's high estimate case, oil production peaks in 2028 at 1.45 million barrels per day.

Let's think about that for a second...

Pretend that everyone opposed to drilling in ANWR suddenly had a change of heart tonight and Congress lifts the ban tomorrow morning. The problem is that the area would still take nearly a decade to develop. That means we wouldn't see production until at least 2018!

There's a few other problems to consider, too.

That extra million barrels per day may not have as much of an impact as you think. U.S. oil production has been falling for the last three decades while our consumption levels have gone through the roof.

ANWR: Too Little Too Late?

Okay, so ANWR may not be our peak oil savior. The good news is that ANWR production would be able to slightly decrease the amount of oil we import. Also consider that we imported about 13.4 million barrels per day last year (5.9 million b/d coming directly from OPEC).

Are we going to eventually open up ANWR to oil producers drillers within the next few years?

Absolutely.

Will production have a significant impact?

Not likely, but every little bit helps.

Until next time,

Keith Kohl

P.S. I know I sound rather skeptical about ANWR drilling. It's true. I also know I'm not alone, either. Furthermore, I know that most of my readers have been profiting from better opportunities for years. And to be honest, it wouldn't be fair if I didn't give you the same chance as my other Energy and Capital readers. If you're interested in finding out more about some of these booming oil plays, I'd recommend checking out the $20 Trillion Report.

Coal Production

"Supply is struggling to meet demand."

At first, I had a flashback to a peak oil argument from the weekend.

How could you blame me? Every time I hear an "expert" talk about how the world is almost out of oil because of the peak oil theory, it's hard not to throw something at the television. I apologize for sounding like a broken record, but how long will it take for these "experts" to realize that peak oil has nothing to do with how much total oil is left? Perhaps one day they'll take the time to understand it's all about how much of that oil we can pull out.

This simple phone conversation, however, had nothing to do with peak oil. The topic was on another fossil fuel-coal. Trust me, coal has been around for a long time. The Chinese have been mining it for fuel roughly 10,000 years ago.

To say that coal prices have been on the move in 2008 would be a gross understatement. If you remember from last week's Energy and Capital, my colleague Chris Nelder showed you how coal prices in the U.S. were exploding. Prices have even doubled in some cases.

There's several reasons for us to get into coal before the end of the year. For me, all it took was the shortfall in global coal production to grab my attention.

Supply versus demand, haven't we heard this story before?

I know, the thought of supply falling short of demand does remind me of peak oil. That may be true for you too, but one thing the oil markets have taught us is that the right moves can become extremely profitable. I'll get to the investment side of coal in just a moment, though.

For now, let's focus on that supply question.

Coal Production

First let's take a look at demand on a global scale. It appears that supply falls short of meeting global demand this year by 25 to 35 million tons. Several officials have also estimated that amount would double to 70 million tons during 2009.

In the U.S., demand is expected to surpass supply by 15 million short tons. Again, we have to think back to last week.

Considering that the chances of a significant production boost are slim, we can expect the coal markets to tighten over the next two years.

With approximately 270 million short tons of recoverable coal reserves (I'm referring to both bituminous and sub-bituminous coal), the U.S. has plenty in the ground. But as you already know, there's a huge difference between having it in the ground and pulling it out.

U.S. production, however, won't be enough to make up the difference. In fact, one of the headlines I read this morning pointed to the struggle that coal producers will have. Nearly 40 million short tons of coal won't be produced due to the stringent environmental regulations and lengthy permit process. Add that to the millions of tons of coal production stopped because of Midwest flooding.

Even though we may see a slight correction in coal prices as new production comes online, I believe we can still remain bullish on coal prices over the next two or three years.

Now, I understand that you're probably not reading my column for your health. Like myself, most of my readers are always asking how they can invest in these tight markets. Even if U.S. production won't be able to make up the demand shortfall, higher coal prices will ensure a decent return on your investment.

Investing in U.S. Coal Production

Although I feel reluctant to give away some of my favorite coal stocks, you can't go wrong with the major players. But as always, remember to never throw your hard earned money away without checking everything out for yourself.

Take a look at some of the big plays, for example. Alpha Natural Resources (NYSE: ANR) focuses their operations in Northern and Central Appalachia. Nearly 90% of their coal reserves have a high Btu content (more than 12,500 Btu per pound of coal). If you had jumped into these guys at the beginning of 2008, you would have made a hefty 188% today.

Another coal player I've seen touted around the block is Consol Energy Inc. (NYSE: CNX). Although coal isn't the only energy source they deal with, Consol is the largest producer of high-Btu bituminous coal in the U.S. and certainly worth your time and effort.

These two plays certainly aren't the only ones worth looking into. In fact, I've had a hard time finding a company that hasn't performed well for investors. Just make sure to do your own due diligence when looking to add a company to your portfolio.

Until next time,

Keith Kohl

Energy and Capital

P.S. Hopefully all of my readers have a firm grasp of what peak oil will mean to the world's energy situation. But many of you have been asking me nonstop about whether they can safely invest in peak oil. The answer, undoubtedly, is yes. I would recommend checking out how peak oil might be our generation's greatest investment opportunity.