World will struggle to meet oil demand Investment key to meeting demand

[JohnHare]

Hi all, two related articles in the Financial Times on October 29th that play well with some of the top two criteria we use for investing in Edmonton, AB

They are:
* significant capital investment for new/expanding projects, read oil sands and JOBS, all which will lead to
* strong migration/in-migration which will drive the demand for residential properties.

I have highlighted some of the sections that I find important and will certainly be tweaking my presentation to highlight such.

I have also fired these articles off to a couple of my key Joint Venture investors who have invested with me in Edmonton....just another touch point to let them know that I continue to be on top of their investment and to provide them with a certain level of comfort during these turbulent times.

Cheers

John Hare, CFO
Right Side Realty Corp

 

[Savard]

Good article. But it is just a "newspaper article". As many of us who have delt with the media -it is rare they get a story right even when you spoon feed them the article- I would not use a newspaper to garner any REAL economic fundatmentals.
If one is concerned or scared about future demand than I strongly suggest reading 1000 Barrells a Second- http://www.1000barrels.com/
The writer - Peter Tertzakian is the Chief energy economist and Director of ARC Financial Corporation based in Calgary, one of the world’s leading energy investment firms - an economist and historian by passion-

it looks at the history of energy and how society converted from whale oil, coal and onto electricty and oil and how we just cannot get off oil and gas in a short period as the infrasture just cannot be converted in a short period of time.
Peter Tertzakian`s job would be to present economic data to people and firms that want to place BILLIONS of dollars. (sort of like a Don Campbell but his clients are dealing with many more zeros in their investment decisions).
Anyway- read the book and you will be ok with Alberta (and shut off your TV -it will only scare you into selling something you will regret)

 

[DonCampbell]

Hi John,

I read this in London last week while meeting with bankers, small business owners etc. And the response from them is `thank goodness that Alberta is a port in the economic storm.` And that was without prompting.

They say that Canadians are lucky to be investing her in Canada as their long term outlook starts to place Canada as one of the Top 3 economies (for growth) (not including the exploding regions of India and China).

Some of these comments came directly from their Risk Management teams. Oil is not the only thing (although it is a huge part).

They repeated what I have been saying for the last 6 months that then next 18 months are going to be filled with volatility, opportunity, transition. They are back to focusing on fundamentals, rather than exotic investments.

Which brings up a very good observation: The international investment banks ALSO got caught up in the `Get Rich Quick` mentality (of course on a bigger scale than those `get rich` seminars), and now they are paying the price (as are the taxpayers). They are going back to fundamentals - in other words back to focusing on what REIN Members have been focusing on for 15 years. Yes, fundamentals don`t have the same `excitement` and `instant gratification` that `get rich quick` promises, but WOW what a difference it makes in the real world.

Let`s hope that those `chasing` get rich quick (be it corporations, banks or seminar junkies) learn a big lesson by observing what eventually happens when fundamentals and proven systems are ignored.

 

[Thomas Beyer]

QUOTE (JohnHare @ Oct 30 2008, 12:56 PM) Hi all, two related articles in the Financial Times on October 29th that play well with some of the top two criteria we use for investing in Edmonton, AB

They are:
* significant capital investment for new/expanding projects, read oil sands and JOBS, all which will lead to
* strong migration/in-migration which will drive the demand for residential properties.

I have highlighted some of the sections that I find important and will certainly be tweaking my presentation to highlight such.

I have also fired these articles off to a couple of my key Joint Venture investors who have invested with me in Edmonton....just another touch point to let them know that I continue to be on top of their investment and to provide them with a certain level of comfort during these turbulent times.

Cheers

John Hare, CFO
Right Side Realty Corpyes, but keep in mind that oil may hover around $60 to $80 for a while as US, Asian and developing world demand is weak for a while .. and bank money much tighter .. thus some of those large oil and gas projects will get delayed or stretched out ..

Also, a likely democratic sweep of presidency, upper and lower house in the US will lead to less free trade, higher US taxes and a weaker economy .. so don`t be too bullish on oil infrastructure spending in the short term (next 2-3 years) .. of course oil demand will go up and as such, its price .. and thus, related spending !

Certainly Alberta is MUCH better positioned than most provinces or US states given its surplus, no debt, immigration, average population age, and low tax regime !

 

[gwasser]

When investing, you must look long term! Short term is tomorrow or the next six months to year and half. Medium term is 2 to 5 years and long term is 5-15 years. You may say, "But I am already 50, so I am going to retire in 5 years and need income, there is no long term for me!"

My response: "Bollocks". If you`re 50, statistically you will live beyond the age of 80 if not 90. What is your life going to look like, if at 50 you feel it is already over? Make sure you have enough cash to live for the next year or two. The rest is for long term investing being it real estate or stocks or bonds or whatever. See your world this way and you will realize that especially now life is full of opportunity. In fact there is so much opportunity, it is tough to decide what opportunity to grab.

That is where long term goals come in. You need long term goals to help decide which opportunity is right for you - even when you`re 70!

And like anything, everything hinges on cashflow, cashflow and... cashflow! Cashflow makes you live in comfort now and lets you participate in new opportunities not only now but also tomorrow. It keeps you from being forced to sell prematurely and gives you piece of mind. In the stockmarket, investments with good (not excessive) dividends and low price/book value tradionally not only provide cashflow, they also perform best over the long term. And remember, it is not only important to buy a good property or stock; you also have to buy it at the right price.

What am I doing these days? I am buying in small amounts adding to the good companies I already own. I have also been adding to my real estate - earlier this year. So there is plenty on my plate. Oh, I do make mistakes and those I sell but that is very little. The only reason an investment does deserve to be sold is when it is extremely overvalued or when the story (i.e. the fundamentals) no longer holds. Buy good investments and the fundamentals will hold. Do your own homework and you find plenty of opportunity.

Hang on, don`t give up and drown in the maelstrom of daily details.

BTW the 1000 barrels per second book is great. Another I highly recommend is the new book on Warren Buffet - The Snowball by Alice Schroeder. Finally for a great introduction on reading corporate financial statements (for beginners): Warren Buffet and the Interpretation of Financial Statements by Mary Buffett & David Clark. My motto: There is always more (to learn).

 

[Savard]

Thomas, I agree with your pro-Alberta statement, except for the low tax.
Ed`s Royalty tax grab has made AB less attractive for new exploration compared to BC and Sask. This will send new projects to BC and Sask. Ed has not yet felt any politcial heat from this ill conceived royalty review.

 

[Thomas Beyer]

QUOTE (Savard @ Oct 31 2008, 02:13 PM) Thomas, I agree with your pro-Alberta statement, except for the low tax.
Ed`s Royalty tax grab has made AB less attractive for new exploration compared to BC and Sask. This will send new projects to BC and Sask. Ed has not yet felt any politcial heat from this ill conceived royalty review.personally I think AB`s royalties are VERY adequat, possibly still too low .. and BC and SK will follow .. given all the environmental destruction (who pays for that ?) and free water consumption the oil and gas industry has it very good here !

Keep in mind that the oil does not belong to the oil companies. It belongs to Albertan`s. And they get barely 50% of its value. I think Ed is on the right track .. and slowing down oilsands and oil refineries makes a lot of sense. The economy was nuts here from 2003-07 .. a healthy 4-5% unemployment and 3-6% GDP growth as opposed to 8-10% growth makes a lot more sense .. long term .. and short-term ! Where is the problem ? Plumbers can`t make $90/h anymore ? They have to charge $45 only ? no more 12 cylinder pickup truck ? only 8 cylinders ? a 2BR in Canmore actually below $500,000 ? Where is the problem with the oil and gas royalties ?

 

[ZanderRobertson]

Thanks everyone for this great thread.

John, fantastic article, thanks for starting this thread.

Gottfried, Thomas, and Don, thanks for your insightful comments. I regularly enjoy reading your posts.

Gottfried, I agree that "Snowball" is a fantastic book. Warren Buffett is truly someone worthy of emulation with regards to investing. I personally love this Buffett quote: "Our favourite holding period is forever."

Thomas, I always appreciate your level-headed, yet ultimately optimistic outlook on investing for the LONG term.

Don, your positive outlook on these threads and especially during "What`s Behind the Curtain" every month keeps more than a few of us on an even keel.

As a rookie investor I would certainly be scared to death right now if not for this kind of leadership and reading books like "Snowball".

Best Regards,
Zander

 

[TommyK]

QUOTE (thomasbeyer2000 @ Oct 31 2008, 06:07 PM) personally I think AB`s royalties are VERY adequat, possibly still too low .. and BC and SK will follow .. given all the environmental destruction (hwo pays for that ?) and free water consumption the oil and gas industry has it very good here !

Keep in mind that the oil does not belong to the oil companies. It belongs to Albertan`s. And they get barely 50% of its value. I think Ed is on the right track .. and slowing down oilsands and oil refineries makes a lot of sense. The economy was nuts here from 93-97 .. a healthy 4-5% unemployment and 356% as opposed to 8-10% growth makes a lot more sense .. long term .. and short-term ! Where is the problem ? Plumbers can`t make $90/h anymore ? They have to charge $45 only ? no more 12 cylinder pickup truck ? only 8 cylinders ? a 2BR in Canmore actually below $500,000 ? Where is the problem with the oil and gas royalties ?
I love Thomas` comments. It always blows my mind to know how much the trades in Fort Mac are getting paid.

Ridiculously for someone who just graduated from high school with one year of apprenticeship.. making anywhere between 80-100K?

When I was working in a bank, my branch manager who has been with the bank over a decade, was only making 80K plus bonuses and benefits!!!

 

[Thomas Beyer]

QUOTE (TommyK @ Nov 1 2008, 01:25 AM) I love Thomas` comments. It always blows my mind to know how much the trades in Fort Mac are getting paid.

Ridiculously for someone who just graduated from high school with one year of apprenticeship.. making anywhere between 80-100K?

When I was working in a bank, my branch manager who has been with the bank over a decade, was only making 80K plus bonuses and benefits!!!indeed .. I call it "re-calibration back to normal" .. and in "normal" markets you can make a ton of money in real estate .. and yes, it is a bit more work than in the 2000`s boom years and it will take a wee bit longer .. but if you don`t overpay, upgrade prudently, keep an eye on expenses, market prudently for investor money and quality tenants, and hold with some cash-flow for 5 or more years (better: a decade or 3 ..) you will be filthy rich beyond any of your stock market invested or free truck spending peers !

 

[Jack]

QUOTE Where is the problem ? Plumbers can`t make $90/h anymore ? They have to charge $45 only ? no more 12 cylinder pickup truck ? only 8 cylinders ? a 2BR in Canmore actually below $500,000 ? Where is the problem with the oil and gas royalties ?The problem with the O&G royalties is that it`s just another cost that these companies have to take into account when analyzing the prospects of a project. It makes the required price of oil higher, which adds risk. Sure, they`re insignificant if the WTI price is around $100 - but - what if oil`s to come down? It was only in 2005 that the price of oil first exceeded the $40/bbl mark. 2005! That`s all of three years ago. In July of this year, the average WTI price was 10 times the 2005 average. Ten-times growth in only three years? Sounds like definite "bubble" potential to me...

What does this all mean? Well, what drove the insane two-year Alberta boom which began in 2005? People. And what drove people to move here? Jobs. And what created the jobs? The O&G industry (largely). If oil finds its foundation around the $50/bbl mark, this province is likely in for a significant correction. Jobs will be cut, salaries will be driven down, gold rushers in Fort Mac will decide that they want to go back home to be with their families, and real estate values will drop. In fact, this is already happening; the initial 44,000 construction position requirement forecast for Fort Mac has been revised down to 26,000, a 41% decline. Pretty steep cut, and it happened pretty fast. All that`s needed is for a few companies to slow down production/investment (something Petro Canada & Suncor have already done), and the province`s sensitivity to the O&G industry becomes pretty evident.

 

[wealthyboomer]

QUOTE (Jack @ Nov 1 2008, 04:21 PM) The problem with the O&G royalties is that it`s just another cost that these companies have to take into account when analyzing the prospects of a project. It makes the required price of oil higher, which adds risk. Sure, they`re insignificant if the WTI price is around $100 - but - what if oil`s to come down? It was only in 2005 that the price of oil first exceeded the $40/bbl mark. 2005! That`s all of three years ago. In July of this year, the average WTI price was 10 times the 2005 average. Ten-times growth in only three years? Sounds like definite "bubble" potential to me...

What does this all mean? Well, what drove the insane two-year Alberta boom which began in 2005? People. And what drove people to move here? Jobs. And what created the jobs? The O&G industry (largely). If oil finds its foundation around the $50/bbl mark, this province is likely in for a significant correction. Jobs will be cut, salaries will be driven down, gold rushers in Fort Mac will decide that they want to go back home to be with their families, and real estate values will drop. In fact, this is already happening; the initial 44,000 construction position requirement forecast for Fort Mac has been revised down to 26,000, a 41% decline. Pretty steep cut, and it happened pretty fast. All that`s needed is for a few companies to slow down production/investment (something Petro Canada & Suncor have already done), and the province`s sensitivity to the O&G industry becomes pretty evident.what drove the insane two-year Alberta boom which began in 2005? CHEAP, EASY CREDIT!!

What has brought the Oil Price DOWN? This is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody to raise cash to meet margin calls. The current falling price of oil has little to do with the real supply and demand fundamentals. It’s simply a function of the markets being in near-total disarray.

 

[Thomas Beyer]

QUOTE (Jack @ Nov 1 2008, 05:21 PM) The problem with the O&G royalties is that it`s just another cost that these companies have to take into account when analyzing the prospects of a project. It makes the required price of oil higher, which adds risk. Sure, they`re insignificant if the WTI price is around $100 ...my understanding of the oil royalties is that they are oil price sensitive, i.e. the % of royalty is higher if oil is higher !

So, at $55 to $75/bbl .. which is where oil will likely be for a year or 2 .. then higher .. what does this mean specifically for royalties compared to the old scheme ?

 

[gwasser]

QUOTE (thomasbeyer2000 @ Nov 1 2008, 07:15 PM) my understanding of the oil royalties is that they are oil price sensitive, i.e. the % of royalty is higher if oil is higher !

So, at $55 to $75/bbl .. which is where oil will likely be for a year or 2 .. then higher .. what does this mean specifically for royalties compared to the old scheme ?+++++++++++++++++++++++++++++++++++++++

Yes Oil and Gas royalties are linked to market pricing (starting in 2009). Tar sand plants were only marginally hit by the royalty review. A tar sand royalty increase to 5% prior to payout and 45% + oil price adjustment after payout was accepted without much industry moaning. It will take a while until many of those mega projects and their expansions are paid out. So, you don`t hear much complaining from the tar sand mines. Syncrude and Suncor, who in an older sweetheart deal were exempted, have still not reached agreement with the Stelmach government about how they will be affected.

The change in gas royalties was quite different. The royalty review was intended to adjust mostly the oil royalties. Instead, they did a draconian job on the gas industry which was already in the dumpster (gas prices have been pretty low over the last 3 or so years). It is also the gas industry that was Alberta`s goose laying the golden royalty eggs (if you don`t include the job creation of the tar sand mines). So Stelmach who tried to increase royaltie revenue by 2 billion or so per year lost nearly three billion per year in gas investments and now that Alberta`s gas production is declining and prices remain low, royalty revenue is actually decreasing. Talk about `unintended consequences`.

The only reason that Albertans did not notice the effects of this misguided royalty review was the oil price boom and the incredible stream of new tar sand and steam injection projects in northeastern Alberta. These projects brought enormous amounts of money into our economy. We also had a great real estate market and labor shortage because of the mega projects. This all attracted a lot of newcomers.

I don`t mind the cooling off of our overheated economy as pointed out by Thomas, but I do mind Alberta`s misguided royalty and oil & gas policies. Especially now that we`re cooling off we will feel those effects as a double wammy. EPC companies in Calgary have already started to lay off personnel; several real estate developers have gone into bankruptcy. Let`s hope that things don`t cool off too much.

Being a perennial optimist, I don`t believe Verleger`s $20 per barrel oil forecast. I have seen with my own eyes how difficult it is to find new oil and gas in Alberta and elsewhere in the world. Also I hear stories from people who worked in Saudi Arabia that many of OPEC`s older giant fields are now producing increasing amounts of (salt) water and that they reach their end. OPEC countries are infamous for overstating their reserves so my personal feeling is that Peter Tertzakian`s book is closer to the truth. We probably are not far from a bottom in oil prices and as soon as the economy starts to recover so will oil prices.

The gas pricing recovery is partially a function of the weather. A cold winter certainly will increase demand and prices. Some people claim that the new shale gas plays are supplying ample new production, but I suspect that just like fractured tight gas reservoirs in NW Alberta and NE BC, these wells start producing at high initial rates and then drop off dramatically to much lower but sustainable rates. So gas prices are kind of unpredictable right now. Combined with the new royalty review I suspect gas drilling in Alberta, and production in North America, will decline further, especially when taking the credit crunch into account. The end result is that a few years from now, all of a sudden we will likely be confronted with a lack of supply and a major gas price spike. But as said this is all pretty unpredictable and it is difficult to invest under such a scenario.

Hope this helps.

 

[gwasser]

I came accross this gas supply review which may be of help:

http://www.canada.com/calgaryherald/featur...c0-f068c9a9211e

 

[ChrisDavies]

I had a chance to talk with the mayor of Fort MacMurray two days before the royalty review. I asked if she was concerned about the review, and she said not at all. There`s so much work going on up there that it`s still going to take years for them to catch up in terms of infrastucture, housing and the development of secondary industries.

The possible negative impacts of the royalty review are essentially medium-term and early long-term in my view. The investment and development is hyper-long term. While the royalty program has had an impact, it`s not a crippling effect, and Eddie and most of the rest of the goverment know how important development is. I think Thomas` comment about enviromental costs is very apt.

 

[TommyK]

QUOTE (thomasbeyer2000 @ Nov 1 2008, 09:38 AM) but if you don`t overpay, upgrade prudently, keep an eye on expenses, market prudently for investor money and quality tenants, and hold with some cash-flow for 5 or more years (better: a decade or 3 ..) you will be filthy rich beyond any of your stock market invested or free truck spending peers !
*phew* A decade maybe.. 3 decades? Oh boi.

 

[Thomas Beyer]

QUOTE (TommyK @ Nov 2 2008, 06:24 PM) *phew* A decade maybe.. 3 decades? Oh boi.exactly ... show me any other proven way .. and I am listening !

flipping condos used to work .. not anymore .. pre-sales used to work .. not anymore ..

 

[gwasser]

Energy consumption is just temporarily slowed down and supply is declining or uncertain. So check out this review by Peter Tertzakian in last week`s Herald: http://www.canada.com/calgaryherald/featur...45-606847d383fe

 

[DonCampbell]

What will also increase the problem of supply in the coming decades will be the lack of investment that the currently low Oil price is creating. Some oil companies around the world are holding off on projects until oil gets back up to where it should be (based on supply & demand).

Without the discovery or development of these new source of oil demand will once again start to outstrip supply and price pressure will be felt.

It is also interesting to note that because oil has come down so much, suddenly there isn`t as much coverage of alternative power options. The general populous have become more obsessed with their personal financial situation than the environment. This will cycle back when the economy begins to come out of its current lag.

Yes it is true, the world is all about micro and macro cycles.