The Arctic’s Bounty: Cheap Energy Still a Thing of the Past

The raw numbers are impressive: A report by the US Geological Survey (USGS) found that 25 areas inside the Arctic Circle contain about a fifth of the world’s undiscovered but recoverable oil and natural gas reserves.

According to the USGS, the area north of the Arctic Circle has an estimated 90 billion barrels of oil, 1,670 trillion cubic feet of natural gas and 44 billion barrels of natural gas liquids, accounting for about 22 percent of the undiscovered, technically recoverable resources in the world. The Arctic accounts for about 13 percent of the undiscovered oil, 30 percent of the undiscovered natural gas and 20 percent of the undiscovered natural gas liquids in the world.

The long-term impact might be relatively slight, though: At the present consumption rate of 86 million barrels a day, the oil in the Arctic would meet global demand for three years. The reserves might bring a little relief to tight markets, but they don’t look like the answer to declining production in oil fields in the rest of the world.

As for natural gas, the region’s undiscovered reserves are equal to Russia’s proven gas reserves, the world’s largest. Most of the new estimated recoverable gas is located in two Russian provinces.

A separate USGS study estimates that a billion-barrel Arctic oil field would cost about USD37 per barrel to produce, plus about USD3 per barrel in exploration costs. It costs about USD2 per barrel to pump oil from the ground in Saudi Arabia and USD5 to USD7 per barrel in Venezuela and Azerbaijan. And it costs more than USD30 to mine, haul and upgrade a barrel of synthetic crude from Canada’s oil sands.

Asia’s Impact

PIMCO co-CEO Mohammed El-Erian took a seat at Charlie Rose’s oak table last Thursday to discuss the current state of the economy and financial markets. The first words from El-Erian’s mouth concerned “a short-term answer” and “a long-term answer”:


You can watch the interview here.

Here’s the shameless plug portion of our post today: My colleagues Yiannis Mostrous and Elliott Gue and our former colleague Ivan Martchev co-authored a book published in April 2006, The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity, wherein they address many of the themes El-Erian discussed with Charlie, including the precarious state of US financials.

The utility of the book is defined by the action steps self-directed investors can take given the shift in growth leadership to Asia and other emerging markets. We’ve discussed here and in Canadian Edge the impact emerging Asia has had on Canada’s economy, particularly in light of the continuing slowdown in the US. The region has allowed our neighbor to the north to better withstand declining exports to its largest trading partner; greater global demand for Canada’s ample energy and mineral resources has led to better terms of trade and rising real incomes.
  
Canada’s Competitiveness

It may come as a shock to income trust investors traumatized by Finance Minister Jim Flaherty’s October 2006 announcement of the Tax Fairness Plan, but overall, Canada is among the lowest-tax-cost environments in the world, according to a study on tax and competitive alternatives conducted by global accounting shop KPMG.

KPMG studied the general tax competiveness of 102 cities in 10 countries, focusing on 35 cities with populations greater than 2 million.

Competitive Alternatives 2008 Special Report: Focus on Tax assesses taxes paid by businesses in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the UK and the US.

The report measures the total effective tax burden, including corporate, capital, sales, property and business taxes, that a business bears while operating within a given country. Cities were measured by a total tax index, which compares the actual tax cost in each city.

Key findings of the report, according to KPMG, include:

• Canada is the third-least-expensive country when it comes to the tax burden placed on business.
• Out of the 35 large cities (with populations greater than 2 million), Vancouver, Toronto and Montreal are in the top seven for providing low tax costs. Additional findings on manufacturing, services and R&D also show Canada in a very favorable overall position.
• Paris is ranked No. 35 for the most expensive for taxes, with Naples, Frankfurt, London and Yokohama close behind.

Canada’s score on the total tax rate was 78.8, behind the Netherland’s 78.3 and Mexico’s 70.2. A lower index score indicates lower tax costs for businesses.

Canada had three cities in the top 10 of the study’s ranking of 35 major metro areas. Vancouver ranked fourth with a score of 77; Montreal came in sixth with a score of 94.5, while Toronto came in seventh with a score of 94.8.


[Editor's Note: For an updated take on income trusts and income investing, check out David Dittman's 7/16/2010 piece: Income Investing: How "Low Yield" Can Equal "High Return]