Henry Groppe

Natural gas. Greatly undervalued in terms of fundamentals. Peaked in the US 40 years ago and will inexorably decline long-term. Increasing use and current prices would create 8 billion foot a day and gas prices would have to almost double. Recent shale gas diversion is only about 13% of total gas supply and of that, 60% is Barnett shale that peaked a year ago and is in significant decline.

Oil sands. There is not a wide enough realization yet that we have absolute peaking of world oil production. We are entering a totally new era where there will be a continuing decline of global supplies creating higher prices. Oil sands is the only resource in the world that he forecasts a continuing rise of supply in the future.

Natural Gas: With the drop in prices, drilling activity has fallen from about 2000 rigs in September to under 1000 now. Monthly production has started to decline and will accelerate. Expects any surplus will have dissipated by the end of this year and there will be a doubling of prices from now. Looking for $6 by year end and averaging $7 in 2010.

Company Consolidations: Expecting a great step up in the coming years as oil production will be declining and this is one of the few places in the world where companies can acquire new assets and grow production. Anticipates that larger global companies will buy out most of the operators in Canada in the next 5 years or so.

CONTANGO: Refers to what is happening to the future strip. Each month in the futures market has its own contract and CONTANGO is when future months have a higher price than nearer months and there are expectations that the longer-term price trend is going to be higher. E.G. when there is a December futures contract price oil at $60, the probability is that prices are going to be higher.

Oil: Oil price collapse was because of Saudis in 2006 and 2007. Believed a forecast there was going to be the largest increase in OPEC production in history, so cut production significantly. No increase or change in consumption so created a shortage and drove prices up in 07. Followed by a cold winter creating higher demand. Chinese went on a buying spree. Saudis increased production in mid-07 that caused a price collapse. Now cut twice as much production as they had before, which should create a shortage later this year. Looking for a doubling in oil prices this year.

Natural Gas: Production has peaked but new technology in the gas shales is creating some surplus. Thinks there will be a gas shortage in 8 to 15 months.

Hubbert Peak Oil Theory: World oil production would be peaking at about this time. He sees nothing to change this view.

US Environmental Policy and the Oil Sands: There is an inverse correlation between oil price and environmental concerns. Dominant environmental concern in the US is coal, which is a quarter of all their energy supply. He forecasts that Canada's oil production is the only growing production in any country for the foreseeable future. US’s #1 oil supplier and will become even more important.

Oil: A lot of volatility at this time but expects to see crude oil back up to $85 or so by the end of March and perhaps $95 in early summer.

Coal: China, about 8 years ago, planned to launch a major increase in coal mining capacity by adding 1.6 billion tons of new capacity to existing 1.1. Built 400,000-megawatt coal fired power plants, bringing 1 on every 5 days. Consumption outstripped production so had to import. If they can complete their mining extension, this will impact their imports.

Oil: Nothing has changed about basic fundamentals. Total production will be on an undulating plateau but into an irreversible decline. Prices will gradually rise from about $70 to about $95 over the next 10 years or so. Last fall's price was a total aberration caused by a mistake that the Saudis made. Very attractive investment environment for both oil and gas going forward

Natural Gas: Total Production in the US peaked several years ago and is levelling out in Canada. He is anticipating a significant long-term irreversible decline and prices will have to be high enough to cause a decline in consumption. There has been an aberration for the last 2 years, primarily because production has been restrained by developing tight gas through closer and closer drilling as well as new techniques. Prices will rise gradually from $7 to about $11 during the next 7 years. Very attractive investment environment for both oil and gas going forward

Henry made comments throughout the show along with Dean Orrico. Henry was more general while Dean dealt with stocks. Henry's comments: Natural gas and crude prices are rising. This is because all the easy exploration and development have been done, and now the hard ones are left, which means you have to have higher prices to justify the work needed to get at the heavy oil, or the oil sands. Significant commitment to upgrading investment, and refineries around the world. The most aggressive investors are the exporting oil companies. The expansions have been underway for a year and a half or two. Thorium will is unlikely to be a uranium replacement for nuclear power. Towards the end of the year, we will see the first application for the first new nuclear power generation plant. This will trigger several more. Canada oil sands are a unique resource in the world oil supply demand picture. Canada's oil sands represent reserves second only to Saudi Arabia. All of their work identified the Canadian oil sand to be the only location in the world where they are forecasting increasing production as far into the future as you can see. It will be the dominant oil producer in the world over the next few decades. Very large ongoing expansion in ethanol production, and more recently a number of smaller bio-diesel facilities being started, thanks to government subsidies. Ethanol is subsidized to about $44 dollars a barrel, (22 locally, 22 as an import duty), Bio-diesel is subsidized as well. In the case of ethanol, the energy required to produce it is more then can be produced by the product. It's a political solution, not a practical one, not sustainable. There is a mandated ethanol amount in the gas in the US. This is forcing a huge push on production of ethanol which has not been reached yet. In a few months, it will zoom past the mandated levels, and there will be a drop in the price of ethanol, (and corn and soybeans) which will reduce the interest in investors for these alternative fuels.

Forecasting oil/gas for about 60 years. Into a new era that he calls “scarcity and price rationing”. All easy things in getting supplies has been done and now it is a question of the price required to constrain consumption to match supply. Expects oil will be $55-$65 when things are normal. For every 100,000 barrels per day disruption there is a loss of $1 a barrel. Feels we are close to a bottom for both oil and gas.