Modern Energy Monthly - Volume 2, December 2012

Special ReportEditor's Note :

It's hard to believe that 2012 is about to come to a close.

The year has been a rough one for investors as European woes have plagued global markets with fear and volatility. Here in the US, partisan buffoonery and election-time rhetoric sent Wall Street out for coffee and despite some small signs of a very slow recovery, most folks in the U.S. continue to struggle just to make ends meet. What's worse is that 2013 is not likely to be the year things turn around.

That being said, I am convinced the European economic implosion will peter out in the coming year. That's not to say things will be rosy, but at least we'll have some

comfort in knowing that the eye of the storm has passed. As well, now that the election is over, Washington can get back to doing nothing, and we can get back to making money. So without further ado, let's dive right in.

In this month's Modern Energy Monthly. . .

Mexico's Oil CrisisIs America's Shale Boom a Scam?US to Pass Saudi Oil ProductionSolar Installation Market BoomingOPEC Hates This Article

Mexico's Oil Crisis

By: Keith Kohl

You may not be familiar with Rudesindo Cantarell, but you'll most likely recognize his surname...

He's the reason 1971 was a monumental year for Mexico.

I like to think of it as Mexico's "Jed Clampett moment" — only with a stubborn fisherman as the protagonist instead of a hillbilly.

After discovering an oil slick, Cantarell told a friend that worked for Pemex, who passed the information along up the chain of command... Naturally, they ignored him.

Eventually, however, Pemex sent a few men to investigate the complaint, and Rudesindo Cantarell led them to the spot. The first production well began flowing from the field less than ten years later.

Of course, we all know the story behind the Cantarell field's downfall. Once production started to decline, Pemex began injecting nitrogen to boost output. But this strategy was short-lived, and production at the field has been dropping sharply since — roughly 14% each year for the last six years.

Cantarell's decline marked the beginning of the end for Mexican oil production.

The country's new finds have also proven underwhelming. The recent discovery by Pemex in Southern Mexico is a perfect example. According to Pemex, the new field holds up to 500 million barrels of crude oil, a trifle compared to the billions of barrels Cantarell once held.

But these days, Mexico will take whatever it can get... and pray it can hold off the decline.

Crisis of Consumption

Mexico's declining oil production means there's less oil available for export.

Those 2.5 million barrels flowing from Pemex's wells daily are crucial to the country's stability.

When almost 40% of your government budget is paid from oil revenue, exporting less oil is not an option — but that's exactly what's happening

During the first eight months of 2012, Mexican oil exports to the United States were slightly above one million barrels per day. Last May oil exports fell below one million barrels per day for the first time in 27 years.

Barring some miracle taking place in Mexico's oil industry, I believe the country will be a net oil importer within ten years.

Feeding an Oil Addict

But there's an even bigger problem on the horizon.

You see, not only is Mexico selling us less oil, but we're selling that oil right back to them — and at a hefty premium.

What's more, Mexico's own demand for crude is only increasing...

Although Pemex is among the largest oil refiners, they aren't able to keep pace with Mexico's demand. The country imports almost half of its petroleum products (gasoline, diesel, and such).

And Pemex has enough problems simply trying to reverse the long-term production decline that came as a result of Cantarell's production peak. The company spends more money in one year buying U.S. petroleum products (about $26 billion last year alone) than improving their refining infrastructure ($24 billion) over the next decade!

There's only one place left to turn to satiate Mexico's need for crude — and it's an opportunity many have missed this year...

The Winning Oil Sector in 2013

The last six months have been nerve-racking for everyone.

In a market that swings wildly based on outside factors like Europe, this year's presidential election, and Congress' inability to make decisions, it seems like we're doing more panicking today than we are actual investing.

More importantly, this chaotic environment causes investors to overlook upcoming opportunities hidden in the energy sector.

Oil refining stocks fall into this category.

Mexico's crisis of failing production/rising demand is just one of the reasons the United States became a net oil exporter in 2011.

Some investors adjusted accordingly, managing to outperform Big Oil no matter what mainstream news sources are feeding to the masses...

Of course, these stocks are just one set of hidden investment gems in the oil and gas patch.

Truth is these opportunities are popping up all over the North American landscape. There's a little something for everyone, whether you're looking to invest in the short term or for the long haul.

As always, it's up to you to make the first move.

Is America's Shale Boom a Scam?

By: Jeff Siegel

Shale Gas.

It's become our savior... the great American treasure hidden beneath our feet that will power our nation for the next hundred years.

It'll heat our homes, power our trucks and buses, and even provide some pretty big paydays for those who will ultimately export it to nations willing to pay small fortunes to get it.

It's going to pick up where coal leaves off... It will provide the perfect bridge and storage applications for renewables...

And it'll continue to make early investors insanely rich.

I've certainly been taking full advantage of this nation's shale gas boom — and I will do so for many years to come. There's no doubt about it: Consumers and investors are beyond enthusiastic about shale gas. After all, what's better than a hundred-year supply of cheap fuel?

But what if we wake up in a few years to find our enthusiasm quickly extinguished?

What if we wake up one day only to realize the great American shale gas boom... is a bust?

The Contrarian Viewpoint

Although I remain bullish on natural gas, it's in my nature to be a skeptic. And I've never denied the fact that I'm often drawn to contrarian viewpoints. In fact, I credit contrarianism to my early success in the alternative energy game — and my continued success today in the domestic oil and gas boom.

Needless to say, when presented with a contrarian viewpoint, I don't just quickly write it off...

For instance, last week I read an interview with investment guru Bill Powers.

In this interview, Powers claimed the importance of shale gas has been overstated — and that the U.S. doesn't have anywhere near a 100-year supply.

He goes on to say the whole shale gas boom is a myth that's been perpetuated by self-interested industry, media, and politicians.

At at time when most folks look at shale gas as the “great white hope” for the United States, this is a pretty bold declaration.

At at time when most folks look at shale gas as the “great white hope” for the United States, this is a pretty bold declaration.

But is Powers right?

A Shale Gas Folly?

Powers has a book due out next year that takes a closer look at the shale gas boom in the United States, so I understand that he's doing some early promotion for the book...

Still, in this recent interview he offers an early preview into some of his research, particularly as it relates to decline rates...

There is production decline in the Haynesville and Barnett shales. Output is declining in the Woodford Shale in Oklahoma. Some of the older shale plays, such as the Fayetteville Shale, are starting to roll over. As these shale plays reverse direction and the Marcellus Shale slows down its production growth, overall U.S. production will fall.

At the same time, Canadian production is falling. And Canada has historically been the main natural gas import source for the U.S. In fact, Canada has already experienced a significant decline in gas production — about 25%, since a peak in 2002 — and has dramatically slowed its exports to the United States.

Now, this isn't the first time we've heard counterarguments to the enthusiastic shale bulls...

In 2011, petroleum geologist Arthur Berman published a report in which he found that industry reserves had been overstated by at least 100% based on detailed review of both individual well and group decline profiles for Barnett, Fayetteville, and Haynesville Shale plays.

And just last month, energy and Peak Oil expert Chris Nelder wrote:

 ... the decline rates of shale gas wells are steep. They vary widely from play to play, but the output of shale gas wells commonly falls by 50% to 60% or more in the first year of production. This is why I have called it a treadmill: you have to keep drilling furiously to maintain flat output.

In the U.S., the aggregate decline of natural gas production from both conventional and unconventional sources is now 32% per year, so 22 bcf/d of new production must be added every year to keep overall production flat, according to Canadian geologist David Hughes. That's close to the total output of U.S. shale gas, after nearly a decade of its development. It will require thousands more shale gas and tight oil wells to keep domestic gas production flat.

So, what do you think?

Could Berman, Powers, and Nelder be the voice of reason in an otherwise overly-exuberant shale gas folly? Or are they simply sounding a false alarm?

U.S. To Pass Saudi Oil Production

By: Nick Hodge

Being right is easy.

It's convincing others you're right that's hard. People love their convictions.

But if you look at data objectively, determining future outcomes — and profiting from them — becomes quite easy.

This article is actually about oil, but take the analysis of the recent election as an example...

One analyst named Nate Silver has turned punditry on its head, correctly predicting — without political bias — the

electoral outcome in all 50 states... and the entire time, he was deriding the talking heads, condemning their “gut feelings.”

While NBC and Fox were talking about the economy and voter ID laws and demographic shifts and minority turnout and Benghazi, Nate was simply saying, “Look at the polling data.”

He created a mathematical model that assigned every single poll a weight based on its historical accuracy.

After tipping Florida slightly in Obama's advantage on the eve of the election, Silver gave him a 90.9% chance of winning. He said the popular vote would be 50.8% to 48.3%; it came out 50.6% to 47.9%.

He was absolutely correct in his forecast.

But you can see why it was hard to convince people — especially the half of the country that didn't want an Obama win.

People called him “extremely partisan,” “in the tank,” and “laughable.” After all, the pundits on the left have to call it for their guy, and the pundits on the right have to do the same (and that's the problem with traditional media... an article for another time).

But Joe Scarborough, host of MSNBC's Morning Joe , might have the most crow to eat. Here's what he said a few days before the election, when Silver had Obama with a 73.6% advantage:

Nate Silver says this is a 73.6% chance that the president is going to win? Nobody in that campaign thinks they have a 73% chance — they think they have a 50.1% chance of winning. And you talk to the Romney people, it's the same thing.

Both sides understand that it is close, and it could go either way. And anybody that thinks that this race is anything but a toss-up right now is such an ideologue, they should be kept away from typewriters, computers, laptops and microphones for the next 10 days, because they're jokes.

Silver responded by betting him $2,000 his outcome would be correct. The only joke was Joe Scarborough.

Data doesn't skew. People do.

Letting what you want to happen or what you think should happen get in the way of what is actually going to happen will cost you a lot.

That's why I had to chuckle earlier this week over the media frenzy that occurred when the International Energy Agency said the U.S. would pass Saudi Arabia to become the world's largest oil producer ...

Seeing the Shift

Here's how the Wall Street Journal put it:

A shale-oil boom will thrust the U.S. ahead of Saudi Arabia as the world's largest oil producer by 2020, a radical shift that could profoundly transform not just the world's energy supplies but also its geopolitics, the IEA said.

In its closely watched annual World Energy Outlook, the IEA... said the global energy map "is being redrawn by the resurgence in oil and gas production in the United States."

If you've been reading this letter, you know we didn't need the IEA to tell us this.

The data has been saying this would be the case for more than half a decade. All you had to do was look at it.

We did — back in 2006.

Our first mention of a shale boom in the United States was in May of that year:

It's not uncommon to hear about coal-bed methane (CBM) from the talking heads in the mainstream financial media.

But what they don't seem to know, or simply don't care to investigate, is that there's more producible unconventional gas than just CBM. And this is exactly what I want to talk with you today about... another source of unconventional gas.

It's called shale gas. And today shale gas is at the stage where CBM was five years ago: No one is talking about it.

But that's not going to last very long.

Estimates for North American shale gas are as high as 1,000 trillion cubic feet of in place resources!

Bottom line: Shale gas is going to be huge.

I can foresee this becoming another longball home run for us.

And a longball home run it was.

We've been picking off winning stocks as a result of this shale boom for the past six and a half years. Tens of thousands of readers like you have netted literally hundreds of double- and triple-digit wins as a result...

All they had to do was accept what the data said without letting their fears or ideology get in the way.

Indeed, it's easy to be right. It's convincing others you're right that's hard.

No matter how excited the media get that we're now “officially” going to pass Saudi Arabian oil production... the fact of the matter is it's old news — useless for investment purposes.

You have to be ahead of the story to make money.

Solar Installation Market Booming

By: Nick Hodge

We've seen what happens when crony capitalism enters the energy industry.

Today if you type in the ticker symbol of multiple clean energy companies that received government funds, you'll get the same error message: TICKER NO LONGER VALID.

That's because scores of them have been delisted. Bankrupt, in bankruptcy, or on the verge of it.

Evergreen Solar (ESLR)... Satcon Technology (SATC)... A123 Systems (AONE)... Ener1 (HEV)... They're all gone, completely erased from stock market history or trading for pennies on Pink Sheets as former hulls of themselves.

Much of this is because the government bet on friends and supporters instead of technology that can compete in the real world.

The key to successful clean energy is to lower the cost, not to reinvent the wheel. But that's precisely what failed solar companies like Solyndra were trying to do...

Solyndra was trying to perfect expensive copper indium gallium selenide (CIGS) solar cells. These types of cells are still just a tiny sliver of a market still dominated by silicon.

Silicon solar still accounts for over 80% of the market.

It will be improvements and cost reduction in this area that will lead to widespread adoption and profits.

Record Growth Continues

As we approach 2013, we're starting to get an idea of what the year looked like for solar installations.

I've told you already this year that 2011 was actually a great year for solar investments, with $91.6 billion changing hands for a 20% improvement over 2010's $71.2 billion.

But this year looks like it's going to be even better...

According to GTM Research , installations in the first quarter this year were 83% higher than 2011. Installations in the second quarter were over 115% higher!

, installations in the first quarter this year were 83% higher than 2011. Installations in the second quarter were over 115% higher!

The trajectory is only moving higher:

So solar investment is up. Solar installations are up. And that's all great.

So, then why does a chart of solar stocks look like this?

If so many solar panels are being sold, why is every stock in the industry from First Solar to Sunpower to Suntech down over 80% since 2008?

The answer is simple yet misunderstood.

It's because prices have been falling so fast and solar panels have turned into a commodity.

Think about it. If a company produces oil for $100 per barrel, it can't make a profit when oil is below $100 per barrel. Same thing in solar — but instead of a “per barrel” price, solar has “Average Selling Prices.”

And they've been falling extremely fast. In the first quarter of 2011 solar panels were selling for $1.56 per watt. Today they're selling for less than $0.90 per watt.

And if a company can't cut its own costs fast enough... it won't make a profit, and it will be forced to close like our friend Solyndra.

This is counterintuitive because all you hear is that solar is too expensive.

As the selling price falls, demand is surging. Installations are growing faster than ever while solar companies continue to struggle.

This industry isn't dead by any means.

As soon as production costs fall enough to increase margins and grow profits, solar companies will be in for a major turnaround. And the solar industry is still so small it will produce huge percentage growth for years to come...

The time to buy is now, while the blood is in the street.

Solar investments will expand to $130.5 billion by 2021.

The key to profits for you will be investing in the companies that do the most for reducing the cost of solar.

OPEC Hates This Article

By: Jeff Siegel

I've been writing about electric, plug-in hybrid electric, and conventional hybrid vehicles since 2004.

I've followed the steady growth in conventional hybrid adoption, the earliest stages of high-performance battery development and, make no mistake about it, long-time Energy and Capital readers first heard about Tesla Motors (NASDAQ:TSLA) and other electric car developments from me — not the mainstream media outlets.

And certainly, we've made a few bucks along the way... To this day, I still get emails from investors who thank me for past profits and want to know where they can find the next big electric car investment opportunity.

And folks are always hounding me about what I think is the best fuel-efficient vehicle on the market.

Of course, I'm not an automotive journalist — but I probably spend about as much time as those guys do at electric vehicle conferences, car shows, and factory tours.

Truth is the only real difference between those guys and me is that they report on the performance of the various vehicles they test-drive, whereas I focus more on analyzing the vehicle's potential for success in the marketplace. But today I'm going to switch gears a little bit and do both.

When Toyota was King

For the sake of full disclosure, I should note that I am a satisfied owner of a 50 mpg Prius. It's a great car, and I have been completely impressed with the vehicle's ability to limit my trips to the filling station.

That being said, I've also been quite vocal about Toyota's first real threat to its hybrid dominance... and that is coming via Ford's C-Max.

This crossover SUV delivers a combined fuel economy of 47 mpg, comfortably seats a family of five, and can go for about 600 miles on a single tank of gas. And in its first month, it outsold Toyota's comparable Prius model, the Prius V, 3,182 units to 2,769.

That's pretty impressive. And I think the roominess, the price, and the fuel economy of the C-Max do serve as a triple threat to the Prius V. All in all, I don't think Toyota's Prius V will be able to rival the C-Max once the C-Max has been on the market for a year or two, though earlier this week we learned that Ford has now tripled its number of dealers selling the C-Max.

Of course, Toyota's still got a lot of skin in this game. And the automaker has a lot to offer for fuel-conscious consumers...

There's the tried-and-true Prius, which delivers an impressive combined fuel economy of 50 mpg. More than three million have been sold to date. With all the annoying fees and extras, you can pull out of the lot with a new one for about $24,000. Not bad, considering it's actually a very comfortable and roomy sedan with all the bells and whistles we've come to expect with any other comparable sedan.

The Prius C is a smaller version of the Prius offering roughly the same fuel economy, but at a lower price. The Prius C runs about $19,000, and for city driving especially, you'll definitely get superior fuel economy. I've seen estimates as high as 52 mpg.

You can also find a plug-in hybrid electric version of the Prius at most dealerships. Although the all-electric range is limited to about 11 miles, it's pretty much the most inexpensive plug-in hybrid on the market.

And despite Toyota seeming to show little interest in promoting the vehicle, it's actually been selling quite well: Since September, it's been the second best-selling plug-in behind the Volt. Earlier this year, the Prius Plug-in was the third-fastest selling car in the United States behind the BMW 3 series and the BMW X5.

Still, in the realm of electric vehicles, Toyota's not the only game in town...

Will Ford Take the Lead?

The Ford C-Max, which I just mentioned as giving Toyota's Prius V a run for its money, also comes in a plug-in hybrid model, which delivers an all-electric range of 21 miles and a total 108 MPGe. I believe this model can give the Prius Plug-in a run for its money as well.

You see, the Ford C-Max Energi (the plug-in version of the C-Max) starts at around $33,000; the Prius Plug-in starts at around $32,000. So we're basically looking at the Toyota Prius Plug-in offering a $1,000 discount to the C-Max — but with a less impressive all-electric range and less room.

Truth be told, if I'm in the market for a plug-in, the C-Max looks like a better deal.

Though there is something to be said for brand loyalty. You'll be hard-pressed to find many unhappy Toyota customers, and I'm not convinced the C-Max is enough to tempt a significant number of long-time Toyota owners just yet.

But there is one thing I'm certain of: Ford's C-Max and C-Max Energi have officially catapulted the Detroit automaker to the status of “serious player” in the world of hybrids and plug-ins. And there will be no turning back.

There's just too much at stake, and way too much money to be made.

The Cars They Love to Hate

I tell ya, it must've been difficult for Nissan and GM over the past few years — not just because they launched two of the most disruptive vehicle technologies since the Model T, but because they were met with an unprecedented amount of criticism by those who have somehow equated superior fuel economy, technological breakthroughs, and the ability to help displace foreign oil as plagues on our great nation.

It's been one of the most frustrating and truly ridiculous attacks I've ever witnessed from politicians and the mainstream media.

It's one thing if you want to rail against the tax credits. I get that.

But to criticize these vehicles for being anything but ground-breaking is about as dishonest as you can get.

Of course, that's how it is these days...

But despite the fools who buy the lie that electric cars are anything but the biggest disruption in vehicle technology and design in a hundred years, these cars are here to stay.

They're going to get cheaper; they're going perform better and better; and they're ultimately going to prove that for most daily commuters, electric cars will be the most sensible form of personal transportation.

Until that time, however, electric car consumers will have limited choices. And they'll all come with pretty hefty price tags.

In the all-electric category, we have the Nissan LEAF, which will run you about $35,000 before the $7,500 tax credit. The vehicle will give you anywhere between 60 to 100 miles on a single charge depending on your driving habits, and it offers all the features you'd get with any other modern vehicle on the market today.

There's also the Mitsubishi i, which will run you about $30,000 before the $7,500 tax credit. It's a bit smaller than the LEAF, and the all-electric range is between roughly 50 and 80 miles (again, depending on your driving habits). The car's a little less impressive when it comes to bells and whistles, although the price is pretty darn good considering the competition in this space.

For those who are less concerned about price and more concerned about range, performance, and luxury, look no further than the Tesla Model S. It's an absolutely beautiful vehicle that delivers an all-electric range of about 160 miles for the base model.

There is a pricier model that'll give you 300 miles on a charge, but that'll run you about $98,000 after the $7,500 tax credit.

Of course, if 160 miles on a single charge is good enough for you (and it is for more than 70% of the daily commuting U.S. population), you can get one for about $50,000 after the tax credit.

The Model S is a more expensive electric vehicle, and it's not really designed for the masses; it's for those who have the kind of scratch that can get you a quality luxury vehicle. Bells, whistles, and then some are standard on these cars. If you want one, you'll have wait, because there's a pretty long waiting list right now, and the small car manufacturer is only pumping out a couple hundred a week.

And finally, there's the Chevy Volt, a true breakthrough in engineering and a vehicle that has won a number of engineering and performance awards. Although not an all-electric vehicle, the Volt is a plug-in that'll get you between 25 and 38 miles on a charge, but if you switch over to gas, you'll get about 380 miles.

The advantage of the Volt is that most drivers are able to stay in all-electric mode during daily commutes, but they have the option of going further distances if necessary with assistance from the small gas engine. Interestingly, I've been noticing more and more Volts on the road over the past few months.

Early rollouts were slow, and the price tag — around $32,000 after the tax credit — isn't low enough to draw the masses...

But overall, it's been one of the highest-rated vehicles for customer satisfaction ever. In fact, in a Consumer Reports satisfaction rating, 93% of Volt owners said they would purchase the vehicle again!

The Fuel Economy Bar is Being Raised

Of course, I realize not everyone is ready to go electric.

And whether the reason behind this is the price tag, the fear of range anxiety, or the fact that some folks just want to wait a bit longer for the manufacturers to get all the kinks worked out, electric cars do have a long way to go before they become common sights on our streets and highways...

That said, I don't know a single person who doesn't want a vehicle that offers superior fuel economy. And there are plenty to choose from — even if you don't want to go the hybrid or electric route.

If you're looking for a minicompact, the Scion iQ will get you about 36/37 mpg and run you about $16,000. In subcompacts, the Ford Fiesta will get you about 34/35 mpg and run you about $14,000.

If you don't mind diesel, you can get some pretty solid fuel economy from the Audi A3, which delivers a combined fuel economy of about 34 mpg while running you about $30,000... or you can check out the Volkswagen Jetta, which delivers about 43 mpg and runs around $24,000.

Certainly, internal combustion vehicles are upping the ante on fuel economy. But if your main concern today is fuel economy, I think your best and most affordable bet is the Prius, the Prius C, or the Ford C-Max.

These are all quality, competitively-priced vehicles that will limit your time at the gas station and do just a little more to help kick OPEC to the curb. Not a bad deal.

You can view the HTML version here: Modern Energy Monthly - Volume 2, December 2012

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