March 2009

George’s Strategy Investment Newsletter

More Proof of Peak Oil – Inadvertently

March 2009 Volume II Issue 3

I had to laugh when I picked up my latest issue of National Geographic. In it was a well written article on Alberta, Canada’s oil sands extraction operation. Although written from a decidedly environmentalist slant, the article was quite informative, especially for those who may not understand what a complicated and expensive undertaking it is to get even one barrel of synthetic oil produced. But, hidden beneath the descriptions of the hazards of open-pit mining was an underlying message that may escape those not clued in on the concept of Peak Oil: Oil is getting harder and harder to come by. The era of cheap and easy oil is over, and from here on out, it’s going to be more difficult to get.

“The fact that we’re willing to move four tons of earth for a single barrel really shows that the world is running out of easy oil.” Simon Dyer, Pembina Institute, quoted in March ’09 issue of National Geographic.

Okay…now, I know that the authors had an ulterior motive here…the real focus of National Geographic’s article is to point out the impact that Alberta’s oil sands operations are having on the boreal forests and possibly on the communities in the area. But Simon Dyer makes a very valid point. Why would anyone be willing to go through the extreme effort that it takes to dig so deep into the earth, bring the bitumen up and process it? Why? Because it’s the only viable option left, that’s why. But, in order to understand my point, you need to understand the effort. So for the uninitiated, here is a brief overview:

Oil Sands 101

The oil sands deposits located in Canada’s Alberta province cover an area roughly the size of North Carolina. There are estimated to be 170 billion barrels of recoverable oil available making Canada’s total oil reserves the second largest in the world after Saudi Arabia’s.

Identifying that the potential for 170 billion barrels of oil is there is one thing, getting it out and getting it refined or upgraded is another. And folks, this isn’t Texas or Saudi Arabia. We are not talking about drilling a well and having the oil come bubbling or bursting out of the ground. Here, the oil is mixed primarily with sand to form a thick, heavy, viscous material that by nature resists flow, and is the reason the oil sands are often referred to as tar sands. The heavy material is referred to as bitumen, and must be extracted and upgraded before it can even be called oil. In the Athabasca Region of Alberta where most of these oil sands deposits are located, there are two types of extraction processes being utilized. The first is surface mining, which was the primary target of the National Geographic article. This obviously is the most expensive, the most intrusive, and the most visually impactful of the mining efforts. The National Geographic article makes the claim that “Nowhere on Earth is more earth being moved these days than in the Athabasca Valley,” which demonstrates the lengths that companies have had to go to in order to produce even one barrel of oil. To extract each barrel of oil from a surface mine the forest must be cleared, an average of two tons of peat and dirt that lie above the oil sands layer must be removed, and then two tons of the bitumen-laced sand itself must be removed. Then, several barrels of water must be heated to strip the bitumen from the sand before it can be upgraded to the synthetic crude oil that is ultimately produced. The second method is called in-situ – which by definition means “not having been moved, or still in place.” Here, where the bitumen sands are too deep to be reached through surface mining, new technologies have allowed for the injection of steam to heat the sands and reduce the bitumen viscosity so that it can be pumped out like conventional crude oil. This type has a much less dramatic effect on the surface environment, but it does use tremendous amounts of natural gas to produce the steam that is injected into the subterranean deposits.

The Point is Made

In both cases, obviously,
it is much, much more difficult to get the oil out of the ground and
into the pipeline to be utilized. In Alberta $50 billion dollars have
been spent on infrastructure construction over the past decade, including
$20 billion dollars in 2008 alone. When oil was selling at $140 a barrel
these increased costs were not seen as a problem, but with the economic
downturn any future expansion has pretty much come to a halt.
Production continues, though, and can only go up from here as the price
of oil begins its ascent back to where it should be.

This brings me back
to my initial assertion that the “between-the-lines” point of the
National Geographic article is that Peak Oil has forced oil companies
to resort to much more expensive and intensive methods to feed the world’s
thirst for oil. According to M. King Hubbert’s theory, Peak Oil has
been achieved when a society considers greatly advanced mining efforts
to recover its needed oil. I think we’ve proved his point, but I’m
pretty sure that’s not what National Geographic intended to do!

Below is a YouTube
clip of M. King Hubbert speaking about world oil depletion and explaining
the concept of peak oil.

Peak
Oil = Opportunity

But now, how does this
affect us as investors? Well, for one, we still have the benefit of
my old favorites, the Trusts. You know how I feel about the “get paid
while you wait” theory! With Peak Oil being proven more and more every
day, I still love the Canadian oil and gas trusts that pay return of
capital on tax free cash flow while we wait patiently for the price
of oil to catch up with the reality of supply and demand. And folks,
trust me, it WILL catch up eventually.

Our recent recommendation,
Pearl Explorations and Production Ltd., is concentrated in all aspects
of the heavy oil play, although they do not pay a return at this time.
But trust me, John Festival is a smart guy. He’ll find the “Sweet
Spots” where the oil will still flow with some minimal intervention,
just like he did with Black Rock and Seal, so obviously Pearl is a great
opportunity, in my opinion.

Chart Courtesy of StockCharts.com

With producers’ share
prices being as low as they are now, this is a golden (or maybe “black-gold”)
opportunity to buy in. The Canadian Oil Sands are a vast resource.

Image compliments of
The Pembina Institute

The economic downturn
won’t last forever. Neither will the seriously deflated prices for
oil. When these two turn back around, the profitability of these companies
becomes even more optimistic. But folks, you have to do your homework!
Remember Zapata George’s 5 Rules of Investing. (If you need a primer,
go to the July 2008 edition of this newsletter found in the No Bull
Report section of my site and refresh your memory!)

So, my thanks to the
authors of the National Geographic article on Canada’s oil sands operations.
It was a well written article, really…and as always, the photographs
are breathtaking. But even National Geographic can be accused of telling
only half of the story. As interesting as I found their article, I also
found the rebuttal on the website of the Canadian Association of Petroleum
Producers (CAPP) equally interesting – and with some pretty amazing
photos of their own.

You can check their article out here: http://www.capp.ca/aboutUs/mediaCentre/CAPPCommentary/Pages/NationalGeographic,March2009Issue.aspx

You know, folks, this
isn’t rocket science. It really is all about being informed. If we
all take the time to learn what we need to know before we invest our
money, we all stand a good chance of hanging on to our assets (with
or without the ‘t’) while the economy flounders. I think we’ve
just proved that as well!

Natural Gas…Still
the One!
One of the most promising
developments in the last several years was the process of hydraulic
fracturing that allowed access to oil or gas fields previously determined
too difficult to extract with traditional methods. Many fields were
developed in the U.S. such as the Barnett, Fayetteville, Marcellus,
etc. In 2008 there was even what one might consider a boom in the development
of new fields, especially in the area of the northern Appalachians where
the Marcellus field is located.

Before we get too far,
let’s talk a bit about hydraulic fracturing. In many of the above
mentioned fields, the areas containing the natural gas were formed vertically,
so they were not easily accessed by way of the original bore hole. Hydraulic
fracturing allows horizontal fissures (called “fracs”) to be artificially
created that, through the depositing of prop-pants such as sand or ceramic
beads that keep the fissures open, allow for a horizontal flow of the
asset to the original bore.

Image compliments of
Corridor Resources Inc.

This is a very expensive
process, and when gas was selling at its peak of over $13 last year,
that was not much of a problem. However, with gas selling at just over
$4 now, it has taken the wind completely out of the companies that were
so excited about tapping these new fields. Many of them have withdrawn
their operations altogether, and others have halted their operations
until further notice.

Here’s where the
problem lies, though. If we look closely at the overall makeup of natural
gas production over the past several years we find two very startling
facts. Almost 50% of U.S. natural gas production comes from wells drilled
in the last 3 years. And of that 25% comes from wells drilled in the
last year alone. The fact that natural gas production has kept up with
demand at all is because of the finding, developing and production of
new wells in the last 3 years.

Now, enter into the
equation the credit crisis and it all goes south completely. Last fall
the rig count fell off the cliff. They’re not drilling any holes,
let alone these expensive horizontal multiple frac treatment wells that
run into the millions of dollars per well. That shrinking in production
will be dramatic and with 3 years supplying 50% any continuation in
the drop of the rig count and we’re going to see half of our production
threatened dramatically because the decline from these new wells is
very sharp.

In an article in The
Washington Business Journal it is noted that the companies involved
in these wells know that this is a temporary roadblock and not a permanent
state.

“The plunge
in energy prices will level and climb back up”, said EOG Resources
CEO Mark Papa, speaking at last month’s Deloitte Oil & Gas Conference.
“Worldwide oil supply growth prospects are weak and, within five years,
oil prices will likely be much higher than today.”

So now, we’ve made
another case for natural gas. You know this is my favorite play. This
is just another reason why.
Geothermal: Earth
Heat

Folks, in more than
one of our previous letters we have talked about alternative sources
of energy. I’ve stated that we need to be looking at not just one
or two of them as viable alternatives to oil based energy, but ALL of
them, and NOW! As more and more indicators point to Mr. M. King Hubbert
being right again about Peak Oil, it is more important than ever that
not only governments but average folks like you and me look at what
we can do to save or even create BTUs on our own.

This month I want to
discuss more in depth one of the sources of energy that we have talked
about in the past – Geothermal. We’ve talked about how Iceland uses
it to provide power to the whole country, with more and more countries
leaning on Geothermal worldwide. This time I want to talk about what
Geothermal can do for average Americans, and how we can even implement
it in our own homes. We’ll discuss some of the advantages, and
at the end of the article, I’ll make sure to give you some resources
to find out more on your own.

First, a bit of a primer;
Geothermal or “earth heat” is the energy provided from the heat
of the earth’s interior. It originates at the very core of the earth
where the temperature can be over 9,000 degrees F. This heat makes
its way to the surface in various forms such as magma flowing from a
volcano, but mostly the magma stays below the surface of the earth and
heats up the rocks, which in turn heats up the water around the rocks.
This can sometimes bubble up in the form of hot springs or geysers,
but mostly it also stays below the surface, often collecting in geothermal
reservoirs.

Now, folks have been
tapping into that hot water for many, many years. Before the development
of the technology we have today, people simply used the naturally heated
water for soaking and sometimes for healing, or for cooking and even
staying warm in naturally heated caverns.

But with the technology
and broader knowledge that we have in modern times, we have figured
out how to locate and tap into these underground sources of power to
generate electricity in geothermal power plants that can power entire
communities or for energy saving non-electrical purposes like heating
homes.

Obviously, one of the
best uses for geothermal energy is to generate electricity. In direct
contrast to fossil fuel forms of energy production, geothermal energy
is naturally clean. There are no toxic emissions, and no dangerous byproducts.
Another benefit of electric generating geothermal plants are that they
require less land, and require no dams, open pits, shafts or the potential
for toxic spills. They are also extremely reliable since they are not
as susceptible to inclement weather shutting them down. They sit directly
over their source, and all of the resource is recyclable and renewable
since the water used goes right back into the reservoir to be heated
and used again and again. And probably the biggest benefit for using
geothermally generated electricity is to lessen our dependence on oil.
In the U.S. alone we produce 2700 megawatts of electricity from geothermal
energy annually. That is the same output generated by burning sixty
million barrels of oil each year.

Image: Gretar Ivarsson
- The Nesjavellir Geothermal Power Plant in Iceland

Take a virtual tour
of a geothermal energy plant produced by MidAmerican Energy, owner CalEnergy
Company Inc., Salton Sea geothermal power generation complex in southern
California HERE.

But now let’s bring
it a little closer to home. No, actually, let’s bring it HOME. Geothermal
heat pumps, often called GeoExchange systems, can be used to heat homes
literally everywhere. The earth’s temperature a few feet below the
ground is pretty much constant anywhere you go, (about 45 to 58 degrees
F), while the air outside changes from summer heat to freezing cold
in winter. By utilizing this predictable temperature range, geothermal
heat pumps can be used to heat and cool homes no matter where they are
being used.

The Earth’s natural
heat is collected through a series of pipes called a loop which is installed
below the surface of the ground. Fluid circulating in the loop is warmed
as it circulates through the warmer ground temperature, then concentrated
by an electric pump inside the home and then released into the home.

In the summer, the
process is reversed, and the hot air in the home is circulated through
the cooler ground temperatures and is absorbed by the earth, and the
cooler temperatures remain in the home. GeoExchange systems do the work
that ordinarily requires two appliances, a furnace and an air conditioner.
Using a GeoExchange system can save homeowner money too. Heating and
cooling costs for a typical 2,000-sq.-ft. home can run as low as $1
a day.

Beyond reducing our
dependence on fossil fuels and saving on energy costs, using GeoExchange
systems to heat homes and businesses is beneficial to the environment.
According to www.geoexchange.org:

• …data supplied by the
  U.S. Department of Energy (DOE) Office of Geothermal Technologies states
  that nearly 40% of all U.S. emissions of carbon dioxide (CO2) are the
  result of using energy to heat, cool and provide hot water for buildings.
  This is about the same amount of CO2 contributed by the transportation
  sector.
• A typical 3-ton residential
  GeoExchange system produces an average of about one pound less Carbon
  Dioxide (CO2) per hour of use than a conventional system. To put that
  in perspective, over an average 20-year lifespan, 100,000 units of nominally
  sized residential GeoExchange systems will reduce greenhouse gas emissions
  by almost 1.1 million metric tons of carbon equivalents.
• That would be the equivalent
  of converting about 58,700 cars to zero-emission vehicles, or planting
  more than 120,000 acres of trees.
• And the waste heat removed
  from the home’s interior during the cooling season can be used to provide
  virtually free hot water-resulting in a total savings in hot water costs
  of about 30% annually, and lowering emissions even further.

And if all of that
weren’t enough, now we have tax advantages. Americans can now take
advantage of the Residential Energy Efficient Property Credit, which
includes a $2000 tax credit for Energy Star geothermal heat pumps placed
into service in 2008. (IRS form5695)

Now folks, I know not
everyone is going to run out today and install a GeoExchange system
in your home. All I’m asking is that you do your homework. Investigate
the possibilities and make up your own mind. My job is to just give
you a little information to get you started. Since I’ve done that…it
seems my job is done!

(A few resources to
get you started: http://geothermal.id.doe.gov, http://www.geothermal.org, http://www.geoexchange.org , among others. Google “Geothermal Power”
and start reading! )

Monthly Market Updates

This is our monthly
technical update. We take a little different approach than we do for
our weekly updates, however we will do them in approximately in the
same order.

We’ll look at the
stock market in general first. We use the S&P
500 as our gauge. The low was
set in the early part of this month. We’ve accelerated for a number
of days with a lovely candlestick chart pattern. We’re just immediately
below the 50-day moving average. It appears as though it wants to cross
it, and we would then be in a certified bear market rally of intermediate
proportions.

Next, the most important
thing that we talk about: Petroleum. Good ol’ crude oil. Not so crude now…it’s
getting nicer and nicer all the time! We crossed the magic $50 level
on statements by Mr. Bernanke that he was officially turning on the
printing presses. We’ve had three days of violent market movements.
Crude oil has moved rather orderly in all of this. Trading above $50
was my magic mark. This is going to be fun!

On Thursday Natural Gas had a .40 cent move. For something trading
at $3.60 a move of .40 cents is significant. It is EXTREMELY significant.

Gold showed an immediate reflection of the weakness
in the dollar, which had the third largest day on the downside ever
recorded. Gold from its low on Wednesday to its high on Thursday moved
$100 an ounce, and is attacking its old double top at $1000. I fully
expect it to penetrate that level and be at $1200 before years end –
making silver the second biggest bargain on the board.

We mentioned the Dollar Index. Let’s take a look at it. A violent day
after Mr. Bernanke’s remarks resulting in a dark cloud on the candlestick
pattern engulfing almost 2 months of trading, penetrating the 50 day
moving average line. The downtrend is officially underway. I have
been waiting for this to occur. Well, folks it’s finally here. What’s
our target…well…it’s a LONG way from where it is, so there’s
a lot left to go in this direction.

I want to comment on
a couple of things we don’t normally cover. Copper has topped the $1.80 level. And Soybean Meal is attacking $300. These are significant because
copper is the world wide indicator of increased economic activity, and
soybean meal is consumed by both animals and humans so it is a good
market for agricultural products. We will be keeping our eye on both.

(Old)
Market Update – For your amusement Only!

Now folks…purely
for your enjoyment we are including comments that we made just a few
days ago for this month’s market updates. I am including them to illustrate
how much difference even a very few days makes. We wrote these up on
a Tuesday…and the above comments just two days later on a Thursday…I
think you’ll get a kick out of the comparison!

The S&P
Index covering a 750 mark is
still 50 to 70 points below its 50-day moving average. Obviously we
broke the bottom from last November and we’ve since made a new low.
Things, I must say, from an oversold sentiment, look better, but the
chart doesn’t give us any guarantee at all. The 200-day moving average
still stands at 1050…we are miles and miles and miles away from that
one!

We have had some moments
of hope with Oil here! Last December’s low has held well.
The 50-day moving average is in the process of bottoming and turning
up which is a very positive technical indicator. The price danced underneath
the 50-day and since we spoke last in the February newsletter has broken
across in late February and we are again dancing underneath $50. Oil
looks positive!

A side comment on Natural Gas: Poor old natural gas keeps getting
boxed around the ears and cannot escape the $4 level. There is some
indication of change and we suggest that you read the other articles
in this newsletter to find out what they are!

Gold: beautiful, beautiful gold. Gold has formed
somewhat of a double top at $1000. I told you when we spoke last it
was there. I also told you it could encounter resistance and would pull
back to its 50-day around $900. That seems to have offered sufficient
support to mount a short term rally. The 200-day moving average, which
for the purpose of this monthly conversation is extremely important,
has flattened and turned slightly upward. The 50-day has been positive
for a couple of months. So, I’m looking from a technical perspective
to attack the old double top at $1000, break it, and go to $1200 before
the year is over.

Well, we’ve thrown
our hands up in the past and said that the US
Dollar is just the worst of
a bad bunch. There are a number of currencies that are showing
some life that we haven’t seen in weeks and weeks. The 50-day we find
at .86 and a small fraction, the 200-day is at .81 and they’re both
rising, which means that there could be continued strength in the dollar.
But remember folks, the only real money is gold or silver. Our dollar
continues to be the worst of a bad bunch!

Georges
Portfolio

There are no additions
to the portfolio this month. You can always view it by entering
the member’s area on the website and then clicking on the Portfolio
Image on the left side of the page.

DISCLAIMER

We
publish the No Bull Strategy Newsletter and Reports. It is a monthly
newsletter enhanced with audio and video placed on this website in which
we discuss energy, along with precious metals, base metals, minerals,
commodities (George calls it stuff) and the financial markets.
Attention will be given to various mineral, energy, commodity and resource
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Bull Strategy” is written and published by, “Zapata”
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exception, every stock that was recommended. In this letter it will
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repeat, will not, discriminate between them when he makes a recommendation,
he may own it, he may not. But, you can rest assured that he has looked
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information herein may contain forward-looking information within the
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