As we stand at the edge of the fiscal cliff we also stand at the edge of another fundamental change in world politics and economics. The U.S. is becoming an oil producing giant. We've heard a lot about this recently-- the 'shale-gas' boom and the coming 'shale-oil' boom, which will turn the U.S. into Saudi Arabia and dispel the chimaera of energy independence and make it a reality for Americans. What effect this will have on prices is not germane to this article. There are so many cross-currents that handicapping oil and gas prices will have to wait for another day.
It is the shifts in where the supply and demand for oil are leading us and its effects on infrastructure that I want to focus on today. The global ramifications of U.S. oil and gas production are legion. Most notable is the pull back to the U.S. by the major oil and gas producers from around the world and along with the change in U.S. foreign policy.
The crash in natural gas prices has nearly bankrupted Chesapeake Energy (CHK) and created a perfect opportunity for its competition to re-align assets domestically. Exxon-Mobil (XOM) has fed off of Chesapeake's bloat, for example, while also selling assets in Kurdistan and Northern Iraq to become more North American-centric. Conoco-Phillips (COP) sold its assets in Vietnam and the Kashagan field in the Caspian Sea while splitting off its downstream operations, creating Phillips 66 (PSX), to double down on its Eagle Ford shale production.
This pullback to concentrate on domestic sources will create a shift in U.S. foreign policy. The oil empire of the U.S. no longer justifies the investment in security anymore. World demand has risen to the point to sustain oil prices that make the shale formations profitable to exploit. The U.S. both politically and economically can now draw back and rebuild from cheap domestic oil production. As opposed to exporting debt it will export refined oil and liquefied natural gas leaving the security of oil resources from the politically unstable regions of the world to the BRICS and Southeast Asia.
For while the U.S. will increase its production dramatically in the coming years it will not offset the rise in demand emanating from the ASEAN + 5 economic bloc and India - the 10 ASEAN nations plus China, South Korea, Taiwan, Australia and Japan. Current regional demand is 28.5 mbpd - one-third of global demand -- and that number is likely to rise to a minimum of 40 mbpd according to our research and could reach as high as 50 mbpd. The region produces approximately 8 mbpd currently and will not likely increase production dramatically from here.
This is why China's major oil companies are acquiring assets all over the world now, like the acquisition of Nexen (NXY) by CNOOC (CEO). This deal-- along with others like Malaysia's Petronas acquiring Progress Energy - is important because it secures supply in a politically stable area of the world and there are no major chokepoints between the supply and demand. It is also why Kitimat, B.C. by Royal Dutch Shell (RDS.A) will become a household name. No less than 3 LNG export terminals are being developed there to send energy to China, Japan and the rest of Southeast Asia.
Geographic chokepoints like the Straits of Hormuz and Malacca will only acquire greater significance in the coming decades. Pipelines and ports that can alleviate shipping volume through these waterways are strategically important assets. Myanmar stands as the middleman for China to secure oil from the Bay of Bengal, the Middle East and its African joint ventures. The massive 2000 km crude oil and gas pipelines from Kunming to Kyaukpyu are scheduled to be completed by 2013 amid violence between Muslims and Buddhists.
Once completed the pipelines could supply as much as 10% of China's total energy needs and drastically reduce the flow of tankers through the Straits of Malacca. The beleaguered port complex project at Dawei, directly west of Bangkok in the peninsular south of Myanmar, is still looking for stable investment, which will further open up the rest of Thailand, Cambodia and southern China, again making it more difficult for piracy and terrorism to disrupt the flow of goods from West to East.
These supply disruption concerns are necessitating changes in oil reserve policy for the region. China has implemented its reserve policy and holds 3 months of domestic supply. But countries like Thailand are holding much less and are looking to change their policy to having a 90-day reserve which means building a lot of new infrastructure. Indonesia has not finalized its plans and Vietnam has more than doubled the required reserves to 72 days.
For investors, understanding these political and economic shifts is of great value. We see the great opportunity in energy in the infrastructure and shipping sub-industries not necessarily in the exploration and production industries. For this reason I reiterate my preference for a REIT like Singapore's Cache Logistics Trust [CLT] ((K2LU.SI), which owns a series of commodity and logistics warehouses around Southeast Asia to take advantage of the long-term growth of the region's energy and commodity needs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.