Agora Financial’s Rude Awakening

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Dubai, United Arab Emirates

• Cashing in on the free market’s main response to Peak Oil,
• Why offshore drilling is set to explode…and how you should play it,
• The Agora Financial Reserve: Doors Open Again (but not for long) and more…

Joel Bowman, reporting from Dubai, UAE…

In the latest in a long succession of confidence blows for the once almighty buck, Gulf
Co-operation Council (GCC) member, Bahrain, has reportedly begun the process of
aligning it’s dinar with a basket of currencies.

The Arabic newspaper, Al-Wasat, quoted Bahrain’s finance minister Sheikh Ahmed bin
Mohammad Al-Khalifa as saying, “In regards to delinking the peg and the trading of
currencies, Bahrain will move towards a basket of currencies.”

So what would the decision by a tiny island in the Gulf to abandon the dollar mean for
the beleaguered American currency? Probably not much…at least in the short term.

But consider that GCC countries tend to move more or less in unison when it comes to
monetary policy. Indeed, the Cooperation Council – which includes the world’s largest oil
producer, Saudi Arabia, and the nation boasting the world’s largest Sovereign Wealth
Fund, the United Arab Emirates – are preparing for a monetary union as early as 2010.

Member state, Kuwait, already cut its currency’s ties to the buck back in May of this year
and has subsequently witnessed its dinar rise over 4%. With the dollar making new lows
every other day, it seems unlikely others would not be tempted away from the world’s
most famously erosive currency.

Speculation is rife among nations in the oil-rich Middle East that a mass exodus from the
dollar is imminent. Almost weekly, the papers here report this minister or that official as
saying they are considering moving to a diversified currency basket to sure-up the footing
of their own currencies and combat the runaway inflation that is plaguing many of the
residents in the region.

But Gulf States are not only diversifying their economies away from the dollar, they are
also weaning themselves off the oil well’s teat.

When I spoke to Dr. Nasser Saidi, Chief Economist for the Dubai International Financial
Centre a short while back, he told me that, in addition to looking beyond the dollar, the
region is also beginning to move beyond oil and invest in things like infrastructure. The
massive construction boom in the region, lead by Saudi and the UAE are evidence to that
end.

Clearly the region’s leaders know that, along with the dollar, oil reserves won’t last
forever. One will dwindle in value, the other in supply, until they both reach the bottom
of the barrel.

In the column below, Strategic Investments editor Dan Amoss takes a closer look at the
“Post Peak” world of energy. Enjoy…

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Offshore Riches
By Dan Amoss

The world gets about one-third of its daily oil supply from offshore wells. Over the next
decade, this share should grow even larger. Dr. Michael Smith, CEO of EnergyFiles Ltd.,
has published the most comprehensive research I’ve seen on the world oil supply
situation. He’s a very experienced geologist and now consults for the industry. I featured
his work in the May issue of Strategic Investments.

In a recent publication, Dr. Smith notes:

Rigs are more costly than ever, and new drilling technologies are very expensive with
high startup costs that have led to a consolidation of service providers. Meanwhile,
shortages of opportunity, the profitability of the industry, and the historic actions of
OPEC with its oil conservation policies have ensured that even the most expensive and
marginal of offshore drilling projects go ahead.

In the nearby chart depicting Dr. Smith’s global oil supply forecast, you can see that
offshore sources provide about a third of total supply. The gray bars in this chart are
historical and projected discovery volumes, the solid black area is onshore production,
and the solid red area is offshore production. If the declining trend in discovery volume
(gray bars) continues downward, oil supply will have a very hard time keeping up with
demand. This is likely, in Dr. Smith’s view, to open up a supply gap by the middle of the
next decade – i.e., the “post-peak” part of Peak Oil.

So what, besides higher prices and lower consumption, will be the free market’s main
response to Peak Oil? Accelerated exploration and drilling activity.

Deepwater oil drilling in particular should continue growing rapidly. After reaching their
peak production rates, offshore wells tend to decline much faster than onshore wells. This
tendency means that offshore oil production is more drilling-intensive than onshore
production. So the offshore drilling industry is likely to remain very busy for decades to
come – a likelihood which will spur growing demand for products and services
throughout the offshore drilling production-chain. Floating production systems (FPS), for
example, will enjoy booming demand.

Considering the costs and engineering involved, it doesn’t make sense to lay oil and gas
pipelines underneath 5,000 feet of ocean water, so the industry is increasingly turning to
FPS solutions. A recent issue of Petroleum Review provides figures:

The FPS concept has proved to be a cost-effective method of developing both marginal
and world-class offshore fields worldwide. According to the Douglas-Westwood
database, by year-end 2006, there had been a total of 290 FPS installations in the various regions of the world. Of these, 187 are currently installed and operational. To date, the
Western Europe region has seen the greatest number of FPS installations – 22% of the
total – followed by Latin America (21%) and Asia (20%).

Oil Demand Increasingly Supply Constrained

Credit Suisse’s energy research team recently published a report that explains why it
expects oil prices to average roughly $70 per barrel over the rest of the decade – one of
the most bullish oil forecasts on the Street. The team writes:

Production shortfalls, notably in Mexico and the North Sea, longer project development
times, restricted global reinvestment, and the maturing of Russia’s Brownfield
renaissance, are all [contributing to] global oil decline rates…Decline rates are generally
lower in OPEC countries and are currently highest in countries such as the U.K., Norway,
and Mexico… Offshore decline rates are meaningfully higher [emphasis added]. If we
combine our assumptions for decline rates with our list of new projects in both OPEC and
non-OPEC, we [face] a potential production shortfall by 2010.

It is possible that we are not capturing all of the reinvestment trends currently taking
place, and the data for OPEC are notoriously incomplete, but the implication is clear:
Either supply needs to decline less quickly, or net new investment needs to rise to prevent a supply squeeze around the end of the decade… This piece of our market analysis again suggests that the resolution of the oil cycle will need to take place mostly on the demand curve [emphasis added], where changes are slower to take effect, but where there is still room to moderate consumption growth in the next five years.

Translation: Demand growth will be increasingly constrained by available supply…and
oil prices will likely rise. To capitalize on this powerful long-term trend, I’ve
recommended several offshore oil services and drilling stocks in the pages of my
investment letter, Strategic Investment.

Here’s a brief synopsis of the stocks I’ve recommended. ENSCO Intl. (ESV), an offshore
contract drilling company; NATCO Group (NTG), which provides wellhead equipment,
systems and services – both onshore and offshore; National Oilwell Varco (NOV), which
designs and sells various products used in oil and gas drilling; and Grant Prideco (GRP),
which produces tubing products for oil and gas applications. (I wrote about three of these
fours companies in prior editions of the Rude Awakening. So if you’re interested in a
little more detail, you can check out the following links. To read the July 12, 2006
column about Grant Prideco, click here: Nodding Donkeys. To read the September 18,
2006 column about ENSCO, click here: “All Aboard“. And to read the March 1, 2007
column about National Oilwell Varco and Grant Prideco, click here: “Drilling Down“)

Now that the post-peak oil world is upon us, offshore reserves will assume growing
importance to the world’s oil supplies. This trend means that good things will happen to
the offshore drilling industry. So we think folks can do themselves a favor by investing in
the leading companies of the offshore drilling industry and hanging on for the ride. Please
check in tomorrow, when my colleague at Outstanding Investments share a few more
ideas about the offshore drilling industry.

[Joel's Note: Your Rude Awakening is able to disclose that Dan Amoss will be releasing
the much anticipated Strategic Short Report sometime next month. The production team
are still fleshing out the details but the testing phase has revealed some astounding results for Dan's upcoming service. As Executive Series readers, you'll be the first to know about the launch when it does come online.

Of course, if you're a member of the Agora Financial Reserve – the lifetime membership
package of all Agora's services – you will automatically be enrolled, free of charge, way
ahead of the earliest applicants. If you're not a Reserve member, but would like to know
how you can guarantee yourself a spot in Dan's upcoming service – in addition to a
lifetime subscription to the rest of our publications – here's a link to all you need to know
to get started.

Agora Financial Reserve – Doors Open until Jan. 1

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Rude Endnote: As anyone who missed out on the mid-year opening of the Agora
Financial reserve will know only too well, once the membership doors are shut, it’s a
long 6 months to wait until they re-open. Be sure to grab your seat before all those
holiday commitments distract you and you’re left holding an empty stocking.

Agora Financial Reserve – Sign Up Today.

That’s all from us today. We’ll be back with more Rude insights tomorrow.

Cheers,

Joel Bowman