Oil Forecasting Legend Discusses Peak Oil, Share Prices

By Michael J. DesLauriers
19 Oct 2005 at 05:13 PM EDT

TORONTO (ResourceInvestor.com) -- When Henry Groppe shares his opinion about the oil patch, investors would be well advised to pay attention. Groppe has 55 years experience in the business and his list of clients includes not only some of the biggest oil companies in the world, but governments as well. Groppe, Long and Litell are known to be among the most accurate forecasters of oil and natural gas prices in the world.

Groppe attributes his success to methodology, “Our approach is to do detailed analysis from the bottom up, to look very carefully at all the producing history and producing trends and recognize then these two controlling fundamentals of depletion and the rational progressive nature of exploration. That has always given us a good approach to accurate forecasting and enables us to forecast major changes in direction and that's what’s most important.”

In a recent interview Henry Groppe shared some of his views on the major issues surrounding these key commodities.

Prices/Peak Oil

Unlike some other well-followed thinkers on the subject, Groppe doesn’t see prices exploding to over $100 a barrel, nor is he quite so concerned about the reserves of OPEC members such as Saudi Arabia.

Groppe believes that, “we are at the point where production is peaking and the price required to restrain consumption to match this future available supply is in the 50-60 dollar range on an annual average basis…This or next year might very well be the all time peak year in world liquid petroleum production.”

His view is that, “it’s going to be essential to achieve reductions in consumption because we're forecasting no continual increase in total world oil supplies in the future.” Groppe estimates that, “a price range of $50-$60 a barrel is going to be required in order to in effect cause no growth in total world oil consumption. That we think will be the composite of continuing but slower growth in transportation fuel use of oil, because that consumption grows essentially with the vehicle population in the world. With higher prices there will be pressure toward more fuel efficient vehicles and we’ll see actual consumption decreases in fuel oil where all you’re after is a source of heat, and that’s the way the system will balance itself.”

Groppe finds himself sort of in the middle in terms of the prevailing views on the future, both optimistic and pessimistic. He stated that, “Matt Simmon's view is that we're just on the verge of seeing very significant depletion decline rates and total world oil production will then decline precipitously and were approaching the end of the world economy as we've known it. Major oil companies take the view that it will be relatively easy to continually expand oil production, specifically, they all agree that world oil production can be expanded 50% in the next 25 years and we disagree very strongly with both of those viewpoints. We think there will be a flattening of total oil supply and the high prices needed to constrain consumption to match that available supply.”

Saudi Arabia

Because outsiders can’t verify the reserve figures of OPEC countries, many analysts wonder whether the published figures can really be backed up. With Saudi Arabia’s largest fields going into decline, the question is: can the oil be replaced and production levels be maintained? Groppe has an answer:

“Saudi Arabia is the largest exporter in the world, I went to live and work in Saudi Arabia in 1948, I know it very well, I follow it very closely. They did a very careful study to develop a long-term business plan for the kingdom and concluded that, and put it in place in 1994. The study reported that roughly 8-9 million barrels a day of oil production is something that they could comfortably sustain for several decades and that’s the balance of the resource base and all the other resources needed to develop and maintain oil production as you’re having to replace and flush over fields with new smaller fields. They've been on that path since 1994, producing in this 8-9 million barrel a day range and we think they'll be able to comfortable sustain that for many years to come.”

“We have six major exporting countries in the world today: Saudi Arabia, Russia, Venezuela, Iraq, Iran and Nigeria. Together they account for over 40% of total world oil supply and security and stability concerns are growing continuously in everyone of those. Its impossible to predict when disruption might occur and in which country but I think that they're equal risk across the board and all of my comments about future oil prices are based on the assumption there are no disruptions, the probability is high that there will be.”

Canada/Oil Sands/Shale

Groppe sees Canada as the most favourable place to invest for energy and sees the country as being of strategic importance going forward. He noted that Canada provides, “something like 14% or so of our total gas supply and with our production having peaked some years ago and declining, that’s been very important to us. In fact over the last 12 or 14 years if Canada had not had the ability and willingness and infrastructure that allowed them to increase their gas exports to us about 500%, we'd have had a gas crisis for many years.”

Despite some concern amongst investors about the increase in CAPEX on a lot of oil sands projects due to rising input costs and technical and logistical considerations, Groppe is convinced that, “even with these increased prices we think the economics of oil sands production in this $50 - $60/barrel range are very favourable. There will be continuing work on the part of all the oil sands producers to use energy more efficiently.”

With high oil prices always come unconventional methods of meeting the world’s consumption needs. One play on that is shale and the share prices of related players have been doing very well. Groppe, however, is not a believer, at least not for the time being. According to him, “We have enormous resources of shale in the western part of the U.S. The difficulty with it is that it's a very dense rock with the oil held in that, it almost looks like a piece of a formation in a typical oil field where if you looked at it, you’d never dream that it could produce oil. It looks like a rock you’d pick up off the ground. To recover it you have to mine that rock, then you have to pulverize it and with heat, drive off the contained oil. In the process that volume of rock is expanded perhaps as much as two-fold, so you've got a huge disposal problem. A lot of work has been devoted to trying to develop in-situ methods but so far none of those have been very successful, so we doubt this is going to be very significant in the next 10-15 years.”

Conclusion

From an investment standpoint the answer still seems clear – energy stocks should continue to move higher despite corrections and volatility along the way. Groppe thinks investors need to hold their ground and not be phased by short-term price swings such as those we’ve experienced recently. His advises that, “if you believe in these fundamentals and the type of future pricing environment that I’ve described you need to ignore these short-term variations in equity prices with the fluctuations in oil and gas prices. I've given you my view on the average annual long-term prices, but since you have both of these very important industries [oil and gas] essentially operating at capacity and you've got all kinds of unpredictable events that occur all year long...there will be significant continuing volatility from this point forward and that just needs to be ignored as long as fundamentals remain intact.”

Groppe has 90% of all his equity investments in energy, and 65% of that is in Canadian energy stocks.