Energy Sector - 2

Naresh · 11-30-2006, 03:12 AM

[center]This Oil Reserve Is 8 Times Bigger Than Saudi Arabiaâs[/center]

Some optimists believe the spike in oil prices we've seen over the last three years is merely temporary.

T. Boone Pickens isn't one of them.

The long-time oilman and current chairman of BP Capital Management was recently asked in a 60 Minutes interview when he thought we'd see $1.50 a gallon at the pump again.

"We won't ever see $1.50 a gallon again," said Pickens. "No, that's gone."

It's tough to disagree. On the demand side, citizens of the wealthy West aren't using any less oil, nor are the up-and-coming Tigers of the East.

On the supply side, just look at many of the world's biggest exporters: Iran, Nigeria, Venezuela, Saudi Arabia, and Russia. It's a virtual rogues' gallery, filled with nations that represent tyranny, corruption or instability.

Fortunately, the world's single-largest oil deposit sits right here in North America. Time magazine calls it "Canada's biggest buried treasure." It's an area with up to 2.5 trillion barrels of oil, locked in Alberta sand. That's eight times the total reserves of Saudi Arabia, enough to satisfy the world's demand for petroleum for the next century.

This is easily the worldâs most exciting energy story.

And one publicly traded company is supremely positioned to earn billions from this region in the months ahead.

The Competition For Oil Is Heating Up

In August, the International Energy Agency (IEA) revised upwards its estimate of world oil demand, squashing hopes that a significant decline in oil prices is imminent.

Demand growth this year is running at its fastest level in 24 years. Last year, world oil use was estimated at 82.6 million barrels a day. The U.S. burns a quarter of that. But competition for oil is heating up.

Emerging markets -- and particularly giants like China and India - are rapidly industrializing.

According to the U.S. Energy Information Agency, world demand for oil is expected to increase 54% over the next 25 years.

Unfortunately, American oil production has been on the downswing since 1970. And many of the world's major oil suppliers are either indifferent or downright hostile to U.S. interests. Where can Americans look for a steady, reliable source of black gold?

How about 900 miles north of Montana, in Alberta, Canada?

Jed Clampett Never Imagined...

Alberta's oil sands are the largest known reserve of oil on earth, containing between 1.7 and 2.5 trillion barrels. (Saudi Arabia, by comparison, has only 262 billion barrels of proven reserves. In fact, all OPEC nations combined have less than 900 billion barrels.)

For decades, these sands weren't even considered part of the world's oil reserves because the oil there wasn't economically extractible at prevailing prices using then-current technology.

But times have changed... And the gold rush is on.

In Alberta's oil sands, energy companies don't drill for oil. They dig it up. After excavation, giant trucks three stories high - carrying up to 400 tons of oil sands - carry it off to a processing plant. There, the sands are heated in a cell where the oil comes to the top of the water and the sand drops to the bottom.

This oil froth is then sent to an upgrader and eventually to a refiner.

Is this oil really as good as the stuff coming from Saudi Arabia?

Actually, it's better. According to Clive Matter, chief of Shell Canada, this oil is "absolutely as good as it gets. In fact, it even trades at a premium because it's high-quality crude oil."

Already a million barrels a day are coming out of the oil sands. And oil production is expected to triple within a decade. By that time it will be the single-largest source of foreign oil for the U.S. - even bigger than Saudi Arabia, which is currently sending us a million and a half barrels a day.

And hereâs the kicker: Exploration of Albertaâs oil sands is virtually risk-free. You canât drill a dry hole here. Thereâs no drilling at all. Itâs a mining operation â and the reserves are thoroughly outlined. So what you really need is a company with plenty of machinery, money and manpower to dig it up and process it as quickly as possible.

Thatâs why you should own Suncor Energy (NYSE: SU).

The Blue Chip Oil Sands Play

There are dozens of small companies flocking to Alberta for a piece of the action. But in this capital intensive business, why gamble on the small fry? We suggest you opt for the undisputed blue chip play : Suncor.

Based in Calgary, Suncor is an integrated energy company. It extracts and upgrades oil through its oil sands operations near Fort McMurray, Alberta. Its operations throughout Western Canada produce natural gas. It operates a refining and marketing business in Ontario, with retail distribution under the Sunoco
brand. And it has operations in the U.S. and retails its products under the Phillips 66 brand. It also manufactures the gasoline additive ethanol.

However, the most exciting aspect of Suncorâs business is in Albertaâs oil sands, where it operates the single largest extraction operation. CEO Rick George says the mine will be in operation for at least 25 years.

And thatâs a good thing. Over the last few months, oil prices have been impacted by escalating violence in the Middle East, ongoing concerns about Iranâs nuclear program (and the possibility of sanctions), saber-rattling in Venezuela, the threat of civil war in Iraq, and explosions at a Nigerian pipeline.

The steady rise in oil prices over the past three years and the fear of potential supply disruptions have created an environment where a triple-digit oil price is hardly unimaginable.

Fortunately, Suncor is moving full speed ahead to bring its reserves to market. Production at its oil sands facility in July averaged 225,500 barrels per day. And this summer, Suncor announced it has started production at its new $108 million St. Clair ethanol plant, which will turn corn into the gasoline additive.

Earnings are already blasting higher. Second-quarter profit rose 14-fold, from $73 million last year to $1.07 billion this year. Management gives most of the credit to higher oil sands production. But there are other factors, too.

âThe refining and marketing side just left the Street in the dust,â said oil analyst Martin Molyneaux at FirstEnergy Capital in Alberta. âIt was outstanding results.â

But the company is just gathering momentum. Suncor plans to spend $3.2 billion to boost daily output from the oil sands to about 350,000 barrels by 2008.
Increased production is lowering per-barrel operating costs, as well.

Costs are also falling because of lower natural gas prices. (Natural gas is used to help process oil sands into oil.)

And, bear in mind, oil sands excavation is not the only thing the company is doing to meet rising energy demands.

Suncor has been blending ethanol into its Sunoco-brand gasoline for 10 years now. Its Ontario plant will produce 53 million gallons of ethanol a year, making the plant the largest ethanol producer in Canada.

Ethanol and the Alberta oil sands are the two best short-term solutions we have to avoid a looming oil crisis. And Suncor is the premier play, with 87% revenue growth since last year and 20%-plus operating margins.

Given that political uncertainty in the Middle East is unlikely to change â and viable alternative energy sources are still years away â oil reserves outside the troubled region are likely to fetch a premium.

And, of course, so are shares of Suncor.

Cheers <img src='style_emoticons/<#EMO_DIR#>/cheers.gif' border='0' style='vertical-align:middle' alt='cheers.gif' />

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