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  • Banking On Ethanol And High-Tech Fracking: Keith Schaefer

    Source: Peter Byrne of The Energy Report (1/9/14)

    http://www.theenergyreport.com/pub/na/banking-on-ethanol-and-high-tech-fracking-keith-schaefer

    Keith SchaeferKeith Schaefer, editor and publisher of Oil & Gas Investments Bulletin, has built an impressive track record of foreseeing structural changes in the energy industry. Schaefer knows when to take or refuse opportunities in the volatile ethanol industry, as he demonstrates in this interview with The Energy Report. And he knows how to bide his time while waiting for catalytic moments-the singular events that can make all the difference between survival and extinction for a junior oil and gas company struggling to raise above the fray in the fracking fields.

    The Energy Report: Keith, why do you say that there is an ethanol "renaissance?"

    Keith Schaefer: Ethanol is one of the most volatile sectors in the energy complex. The industry almost went bankrupt during the crash of '08. It rebounded; 2010 and 2011 were fantastic years for ethanol, with great profits. Then, the drought of 2012 caused corn prices to soar and ethanol profitability collapsed. But here we are a mere year later, enjoying the largest bumper crop of corn in American history. Corn is the main input price for ethanol; its cost determines the rate of profit. With corn locked into low costs for a few quarters, ethanol companies are minting money.

    TER: Are ethanol prices always at the mercy of the weather?

    KS: Well, yes, but there have been very few droughts in the last 15-20 years, so the swing over the last two years in crop sizes-and therefore pricing and profitability for ethanol-is not normal. I don't see weather as a big statistical factor over the long term. But in the short run, prices will continue to fluctuate in tandem with drought-reduced crops or bumper crops.

    TER: Are costs stable in the chain of ethanol supply, from the farm to the storage facility to the distribution networks?

    KS: There is not a lot of existing corn storage capacity for the bumper crop excess, but the ethanol industry is building up more storage capacity. The distribution system is tightening, however, because ethanol and corn are shipped in railcars. Due to the large price differential between American oil and international oil, the Brent/WTI spread, the oil companies are renting most of the available tankers to move fossil fuel product. That has negatively impacted the availability of tankers to move ethanol, and there is an actual shortage of ethanol in some areas. I view that as a bullish factor for ethanol going into 2014.

    TER: Do you like any particular ethanol companies?

    KS: The company that needs to be on everybody's radar screen is Green Plains Renewable Energy Inc. (GPRE:NASDAQ). It is hitting new highs close to $20/share. It was just included in the S&P 600. Green Plains is producing a billion gallons of ethanol per year. To put that in context: The U.S. produces 13 billion gallons per year, so Green Plains has one-thirteenth of the ethanol industry. It is the largest independent ethanol pure play. It has one of the top management teams in the entire business-a very competent, smart set of players. They hedge out a huge amount of their production, as much as possible.

    TER: Is hedging a good idea?

    KS: Oil can be hedged out two, three or four years. Due to supply variability, ethanol cannot be hedged out more than nine months. And as the new corn crop gets ready for reaping, there is no visibility beyond three months. It is an incredibly volatile sector.

    But, right now we have about an eight-month pathway of visibility with unbelievable margins. Including the byproducts-corn, oil and distiller's grain-the margin for ethanol, which is commonly called the crush spread, is higher than forty cents per gallon.

    To put that in context, Green Plains produces a billion gallons, so do the math: Forty cents a gallon times a billion gallons is $400 million ($400M) in cash flow. A conservative multiple of five times cash flow generates a valuation of $2 billion ($2B) for a company with only 35 million shares out. The numbers have quickly become very compelling.

    Now the reality is that Green Plains is not going to realize that kind of margin because it is such an active hedger. It is willing to mitigate risk by taking a reduced margin. But the large players in the ethanol spot market are just rolling in cash.

    TER: Prices in the domestic ethanol market are related to oil supply, politics and also to environmental concerns. Is hydraulic fracturing becoming more sustainable?

    KS: Fracking is definitely becoming more sustainable as time goes by. Thanks to pressures from the environmental industry, the oil industry has responded with the creation of food-grade fracking fluid, for example. There is an increasing consensus that fracking does cause micro seismic events, and high-quality baseline studies are being done to assess how best to respond to that issue. Popular opinion polls show that fracking is increasingly accepted by the American public. But, for years, the industry missed the boat on how to sell fracking to the public-particularly on how to calm down fears of poisoned drinking water. Frankly, the industry is still a bit behind on that issue, but it is coming around and slowly adjusting to directly addressing these fears, as opposed to dismissing the concerns outright and just saying, "Well, we create lots of jobs."

    TER: What are some of the improvements in fracking technology you're talking about?

    KS: There are two different kinds of underground water. Everyone gets excited about the potable groundwater that resides at a very shallow level. The casing for the frack that goes through that groundwater is very regulated. When there has been a problem with groundwater contamination, it's either been tied to naturally occurring methane at shallow levels or to a bad cement job.

    But fracking takes place down to two miles below the surface, so that activity has nothing to do with groundwater safety. In fact, there is such a massive amount of water underground that the frackers could be net water producers. Of course, that water is very briny, full of chemicals and dirt, and is not potable. It would take quite a bit of cleaning for this down-deep water to become drinkable.

    However, during the last year, the industry has started to change the chemical composition of its fracking fluids, which allows it to use a lot more of the naturally occurring briny water to frack way down deep-reducing the need to use fresh water.

    Because the meters being drilled is increasing, the amount of fresh water being used for fracking is still increasing, but the amount of recycled water and deep briny water being used to frack is increasing much more rapidly.

    TER: Any other important improvements in hydraulic fracturing technologies?

    KS: It's really interesting to see what pioneers like EOG Resources Inc. (EOG:NYSE) and Whiting Petroleum (WLL:NYSE) are doing. Both firms have made simple but very profound changes in their fracking methodology, principally going with short, wide fracks instead of long skinny fracks. The fairly small sets of data available on this approach show the drillers are getting slightly higher initial production (IP) rates compared to the norm. But the real game changer is that the decline rate on the shale wells and the tight oil wells were at 65-80% in year one. With this simple change in fracking from long and skinny to short and fat, those decline rates are now showing at 15-20%. Slower decline rates mean that wells will pay out faster.

    TER: Will the U.S.-based shale reserves hold up?

    KS: There is a lot of new oil production in the U.S. It seems like every quarter, the experts underestimatehow much oil the U.S. industry is producing. And almost none of these experts are looking at the new wider, shorter methodology being pioneered by Whiting and EOG. Once that method starts to gain widespread acceptance-look out-there could be an unbelievable increase in U.S. oil production in the very near-term.

    TER: Have any recent IPOs caught your eye?

    KS: Cardinal Energy Group Inc. (CEGX:OTCBB) is a new IPO put out by Scott Ratushny who did Midway Energy, which was bought by Whitecap Resources Inc. (WCP:TSX.V) in early 2012. Scott is one of the top guys on the street in Calgary and his Cardinal sports an A+ management team. It raised public money at $2/share, $4/share and as high as $8/share privately. The Cardinal IPO launched at $10.50/share and the stock is trading at $11.50/share.

    TER: What is so attractive about Cardinal?

    KS: It controls light oil assets with very low decline rates. But it is breaking ground in the dividend arena. I am not a fan of junior dividend companies-the overall payout ratio between drilling and dividend is usually between 95% and 120% of cash flow. Many juniors spend more than they take in, and then they are forced to rely upon their debt lines and equity to fill in the operating gap. But Cardinal's policy is that the all-in payout ratio, including dividends and drilling, is set at 60% of cash flow. That means that management can use the extra money to pay down debt, or to grow a little more aggressively. And, right now, the market is rewarding that strategy.

    TER: Will that joy last?

    KS: As time progresses, it will be interesting to see (a) what the Cardinal managers do with the extra free cash flow and (b) if the market will continue to reward them for being conservative. Now the big issue here is that Cardinal does not have a huge growth model ahead, so it will have to employ its cash money to figure out the next best move. In Cardinal's favor, its assets have a low decline rate. It is an example of a different approach from the "grow baby, drill baby" model of the last three years. The market is turning from rewarding growth to rewarding sustainability in the junior sector. Management teams that cannot grow and keep their debt to cash flow ratio steady will be punished.

    TER: Is providing energy services for drillers and refiners proving to be a profitable, sustainable sector?

    KS: Energy service firms are the no-brainers of the energy market, because nobody really knows where commodity prices are going. It is hard to see oil and gas prices climbing much higher. In fact, I expect to see a 10% drop in commodity prices during the next year. And a 10% drop in commodity prices is a 20-25% drop in profitability for most of the producers, which will blow a big headwind for their stocks. On the services side, the drillers will continue to require chemicals, fluids and equipment.

    On paper, the service sector sounds great. But there is not a lot of pricing power in it at the moment. On the ground, utilization rates are perking up, but not to the point where prices are perking up, too.

    TER: What service firms should investors look at to survive the next period?

    KS: Both Precision Drilling Corp. (PD:TSX) and CanElson Drilling Inc. (CDI:TSX.V) are well-run companies with leverage to an increased cycle. CanElson is a junior with a great team. It is a "forget about it" kind of stock and I have enough confidence in management that I do not watch it day-to-day.

    On the fracking side, I am a big believer in the Canyon Services Group Inc. (FRC:TSX) team. They are talking about being close to 100% utilization in Q1/14; that means pricing power should enter the market. I am not long on Canyon stock right this second. I am waiting to see how the winds are blowing. But I love that it has a disciplined team that really understands the business. Management is not willing to take on any job at any price, like some of its American counterparts that throw caution to the wind and lowball prices. I am patiently waiting for a dramatic catalyst to drive that sector in western Canada. It should be liquefied natural gas (LNG).

    On the junior side, investors could look to Petrowest Corp. (PRW:TSX). It does a great job with logistics and heavy hauling out in the bush-trailblazing the way for the energy industry to develop the newest areas. Its CEO, Ian Hogg, is doing a champion job and the stock is close to a 50% gain since inception. As it attracts new business, its cash flow increases.

    I also cover Enterprise Group Inc. (E:TSX.V). It has had real success in buying what I call "oddball" service companies with proprietary technologies and higher profit margins than the service sector as a whole. Enterprise's managers are good at convincing the oddball firms to sell out to them, and then they grow these acquisitions very quickly under their corporate umbrella. I love that aspect. And the stock is trading great. It is definitely one to watch for 2014. Enterprise could see up to 30% organic growth every year for the next three or four years.

    TER: Thanks for the tips, Keith.

    Keith Schaefer is editor and publisher of the Oil & Gas Investments Bulletin, which finds, researches and profiles growing oil and gas companies that Schaefer buys himself, so Bulletin subscribers know he has his own money on the line. He identifies oil and gas companies that have high or potentially high growth rates and that are covered by several research analysts. He has a degree in journalism and has worked for several Canadian dailies but has spent over 15 years assisting public resource companies in raising exploration and expansion capital.

    Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: none.
    2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
    3) Keith Schaefer: I or my family own shares of the following companies mentioned in this interview: Enterprise Group Inc., CanElson Drilling Inc., Precision Drilling Corp. and Green Plains Renewable Energy Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
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    Jan 09 3:28 PM | Link | 1 Comment
  • Matt Badiali's Insider Tips From The Energy Fronts In Kurdistan And Tuscaloosa

    Source: JT Long of The Energy Report (1/2/14)

    http://www.theenergyreport.com/pub/na/matt-badialis-insider-tips-from-the-energy-fronts-in-kurdistan-and-tuscaloosa

    Matt BadialiHow can investors get exposure to the hottest new oil and gas plays without getting burned by conflict premiums abroad or regulatory hurdles in North America? Fresh off three months of travelling the globe, S&A Resource Report Editor Matt Badiali shares his insights with The Energy Report readers on how to go where no one else wants to be and make a lot of money doing it.

    The Energy Report: You spent the last three months traveling and logging your discoveries with your S&A Resource Report. What are the major fundamental shifts that have caused the current downturn in natural resources?

    Matt Badiali: Oil prices are up and have been staying relatively high, higher than I thought they would, honestly. But there has just been destruction in precious metals, base metals, coal and uranium. There are two factors impacting the prices. The global economy is still in shambles. That hurts demand for natural resources.

    And there has been a cooling of China's growth. It is still growing like crazy; it's just not growing at the rate we have seen in the past. That's a function, in part, of the size of that economy. It is just enormous. It can't sustain a double-figure growth rate. So we still see demand there, just not as great as it was.

    That reality has pushed down the prices of commodities, which in turn have made the commodity companies less profitable, and in some cases in the gold space, borderline money losers. Investors have pulled out of that market.

    We also have a bull market in the Standard & Poor's 500. Investors are fickle. They want to go where they're going to make money. Right now, a lot of the money has moved into the big blue chips.

    TER: Let's focus on the bright spot, oil and gas. You visited the Kurdistan region of Iraq. Can you describe to me what it was like to travel there? How were you treated? Did you feel safe?

    MB: This was one of the most highly anticipated trips I have ever taken. I woke up in the middle of the night a few times in preparation for this trip. The Western media makes Iraq sound like a live fire zone and that wasn't the case at all. Kurdistan is the northern region of Iraq. It touches Iran, Syria and Turkey. It's an independent, autonomous region within the country run by the Kurds. I flew in to the capital city, Erbil, or "Arbil," through Germany and I flew out through Dubai.

    I was shocked. It's the Middle East. I expected desert, camels and burkas, but it's not like that. It's high desert; it reminded me a lot of Colorado and Nevada. I saw lots of wheat fields. The people were wonderful. The women wore traditional or Western-style clothes.

    Prior to my arrival, Kurdistan had not had a bombing six years. About three weeks before I went, the city was the victim of a bomb attack against its security apparatus. That put the whole country on alert. There were a lot of checkpoints in and outside the city.

    Just to get into my hotel, guards checked the car inside and out and underneath with a mirror. Inside the gate they passed my bags through an airport scanner. To go into the actual hotel, I had to go through a metal detector and a pat down. Then I was in this wonderful, Western-style hotel. I had wireless Internet, all the modern conveniences, excellent food. I was surprised.

    The money that has poured into Kurdistan because of oil and gas is astonishing. They call it Little Dubai. Everywhere we looked, we saw massive infrastructure projects. Major companies are building there. Exxon Mobil Corp. (XOM:NYSE) is building a multi-story headquarters there. Marriott had a gigantic new hotel project there. Hilton has two properties going in. All the oil service companies are there. I visited the Family Mall and short of the metal detector to get inside, you might as well be in Cincinnati. I felt like I could have been in the US.

    TER: Is there a premium price for doing business there?

    MB: You do have to pay a price for security. Inside the city, it's very safe. Outside the city, it's a little different. I didn't know what to expect, so I hired a security team. Each car came with two guards armed with AK-47s. That may have been overkill for some areas. And some places I wanted to go, like Kirkuk, they said it wasn't safe even with security.

    That added security has to impact the bottom line for companies to work there. For example, a typical well pad in Texas includes a trailer and a guard to keep wanderers out. But in Iraq, you build a compound and employ armed guards. Plus, the stakes are also higher in the Middle East because there is a lot more oil on each site. A well drilled on one of these Iraqi fields flowed 42 thousand barrels a day (42 Mbbl/d). Compared to 300 barrels per day (bbl/d), which is the typical output of a Texas Eagle Ford well, at $100/barrel (bbl)-that's $4.2 million (4.2M) worth of oil every day.

    TER: Is production back to the level it was before the 2003 invasion?

    MB: No, and progress is slow. When Chevron Corp. (CVX:NYSE) and Exxon Mobil came in to southern Iraq to help bring the giant oil fields back online for Baghdad, they found navigating the red tape was impossible. There is also a lot of friction between the Iraqi Arabs and the Kurds so getting the oil out of Kurdistan is a challenge.

    Kurdistan
    source: Wikipedia Commons

    It looks like there is an agreement now to ship it out through Turkey, but it is a political balancing act. I believe we're going to see a lot of oil coming out through Turkey within the next six years. The plan is to have 2 million barrels oil per day (MMbbl/d) going from Kurdistan out through Turkey by 2019.

    TER: Is it mainly the juniors that are working on these projects or is this a job for the majors? Who's actually taking advantage of the opportunities there?

    MB: The juniors were the first movers. This area opened up not long after the war ended. A couple of Canadians led the way, ShaMaran Petroleum (SNM:TSX), WesternZagros Resources Ltd. (WZR:TSX.V) and Heritage Oil Corp. (HOC:TSX; HOIL:LSE).

    Those companies made the initial discoveries. The problem is that a discovery is a science project until you can actually get the stuff to market. That's been the hard part. In fact, one of the fields in operation now uses 700 trucks/day because there's currently no pipeline.

    The majors have started to quietly move in. There has been a lot of resistance and some false promises from Baghdad. Chevron and Total S.A. (TOT:NYSE) are in Kurdistan now with all the other big companies. The attraction for the majors is that this is a part of the world where you can make a discovery that can materially replace reserves for even the biggest companies.

    The attraction for the Kurds is that the major oil companies will develop these fields the best. They have experience in the region; they know how to get the job done and they have clout. The little guys may be technically solid, but it's going to take more than solid technique here to get all this stuff done.

    So the answer is both. The juniors are in there now. The majors are moving in, and the majors are probably going to consolidate this area within the next two years.

    TER: I know you visited some juniors. What's an example of a junior that's operating in the area?

    MB: WesternZagros has a couple of big exploration blocks in the Kurdamir region of Kurdistan. I had a chance to meet with their geologists and members of the team. These people are well informed and technically savvy.

    "The money that has poured into Kurdistan because of oil and gas is astonishing. They call it Little Dubai. Everywhere we looked, we saw massive infrastructure projects."

    They put together a great information session, which they allowed me to attend. The lead lecture was provided by an energy analyst who worked in the Bush White House and was a diplomat prior to jumping over to the private sector and working for the Kurds. He presented an excellent summary of the many influences affecting the oil and gas industry in Kurdistan.

    I was very impressed by WesternZagros. The company is educated on the region, which is critical to success. Companies have to be sensitive to the religious and political differences between the Kurds and the Arabs. The two groups are distinctly different. The Kurdish population is split and isolated due to the arbitrary boundaries drawn after World War II. These boundaries left isolated pockets of Kurds separated in three different countries.

    TER: Understanding that balancing act is probably key for WesternZagros to be able to operate successfully in the area.

    MB: Absolutely. And it's important for WesternZagros' investors to understand, too. Investors boarded a bus-not an armored bus because this area really is very civilized-and went to look at the property for themselves. WesternZagros' leases are in the southeast part of Kurdistan, on trend with the giant Kirkuk oil field, which up until the discovery of Ghawar in Saudi Arabia, was the largest in the world. The oil is lighter and sweeter, which makes it more valuable.

    The company has two production sharing contracts that are about 500,000 acres. It was the fourth international company to come into Kurdistan, so this company was an early mover. The company is fairly small. It has almost 5 billion barrels oil equivalent (Bboe) of prospective oil. It's an interesting little play. When the rollup happens, WesternZagros will be included in that group, absolutely.

    TER: If Iraq and Iran increase production in 2014, what impact could that have on the Organization of the Petroleum Exporting Countries (OPEC) and oil prices?

    MB: OPEC has decided it is going to hold total production steady, so it won't have a big impact on oil prices, but everyone else in OPEC has to produce less oil to do that and accommodate a new stream of 1 MMbbl/d. The one good thing for OPEC members is that Libya is still offline and probably not coming back for a long time. That means there will be room to accommodate more crude oil.

    What will probably happen is that OPEC members will cheat, so they'll have their quota and some extra tankers will fill up "accidentally." We may see more oil on the market than the official totals. We'll have to wait and see if the demand can sop up that leakage.

    The U.S. is importing a lot less oil from OPEC, but the majority of OPEC's oil was going to Asia anyway. So the big question will be: What's going to happen to China's demand? All indications are that the Chinese are in love with automobiles, which means the demand for oil will be there. We shouldn't see too much of a decline in oil prices.

    TER: Let's switch to North America, where the controversy is about fracking. Some communities have proposed bans, including Colorado, where you visited recently. As a trained geologist, please give us your perspective on the safety profile for fracking.

    MB: Fracking is only controversial because people don't understand it. It's been completely misrepresented. Fracking is not new. We've been fracturing rocks in oil wells since the 1940s. Back then, they used "torpedoes"-little metal gizmos filled with nitroglycerin they dropped down vertical oil wells and then ran like crazy. It would hit the bottom and blow up. We have been trying to crack rocks to release oil for 70 years.

    The true revolution isn't due to fracking, but rather to technology.

    The computer revolution that allowed us to have cellphones that are more powerful than desktops we had 10 years ago also had a dramatic affect on oil exploration. It allows us to drill a mile and a half down and a mile and a half sideways and end up at a spot the size of a coffee can. You can pick your point now. That's tremendous. We could never do that before.

    Shale beds are the source of the all the oil we have found so far. It is like a carpet soaked full of oil and gas. Drilling conventional oil fields is simply tapping the lucky spots in the rock. Places that happen to trap the oil as it moved out of the shale. Thanks to the computer revolution, we can move from trapped oil to the source of the oil itself.

    There is still a massive amount of oil and gas in the source rocks-the shale. However, the layers are thin, relatively speaking, so you have to be precise. Our ability to crack these rocks in very precise increments and produce them unlocked the potential we are benefitting from today.

    Fracking is the one component of the shale revolution that people are afraid of. And they shouldn't be afraid. The techniques are safe, when done correctly.

    "Investors who are willing to invest where other people aren't investing can buy the biggest player in the space for really cheap."

    We don't use nitroglycerine anymore. Now we typically use a combination of water and guar gum, a food additive. It is very safe. The wells that are tapping shale are not near drinking water aquifers, in fact they are about a mile below the aquifers, for the most part. Some are deeper.

    Simple economics (water seeping into a well would make pumping too expensive) and strict laws ensure fracking will not mix petroleum with water sources. In addition to distance, safety precautions include casing the wells with solid steel tubes to prevent anything inside the well from getting out. If there is an accident, it is due to human error, not fracking. If you don't cement the casing in right, or you damage the casing and don't fix it, or you spill frack water into a creek-those things cause problems.

    There are also laws and safety precautions around how the fracking water is treated once it is pumped out. If that spills, it's no different from a gas station, it can leak dangerous chemicals into the ground. That is why there is an entire industry built around cleaning up spills.

    At the heart of the "fracking controversy" is a large part of the population that would like renewable energy to be the only source of energy in the U.S. They want to make biofuels. They want to use wind and solar energy, and that's it.

    In a period when we believed that oil supplies were running out and natural gas supplies were running out, there was a lot of political clout thrown at alternative energy as a national security issue. We had to import our oil from OPEC, and natural gas from Qatar, and it was scary. It was going to be expensive, and we were going to be beholden to foreign governments, and it was just a terrible, awful, scary thing.

    Now, instead of buying natural gas from Qatar for $14/thousand cubic feet (Mcf), it is available domestically for $1.80/Mcf because there's so much of it. In fact, we stopped drilling in lots of places because economically it didn't make sense. Cheap natural gas kills the ability of renewable energy to compete.

    It can work, but we're going to pay double or triple our current electric bills. The alternative energy faction doesn't want cheap hydrocarbons to continue to produce electricity because it hurts their cause, but it helps electricity users, private citizens and businesses.

    TER: We've heard about problems with faster-than-expected decline rates in some shale wells. Can you explain how shale well development and life cycle is different from those of conventional wells?

    MB: There is a big decline rate. There absolutely is. Initial production will be the most oil or gas produced from a shale well in its lifetime. It's a pretty exponential decline, and then it flattens out. The thing that we don't have good data on right now is how long these wells will last because we just haven't been doing it long enough.

    The oil supply in the shale wells is different from the oil in a conventional well. Conventional wells tap a reservoir. You can think of it like a glass of iced tea, where the tea moves around the ice cubes. A conventional well is like putting a straw in and sucking the iced tea out. If you put two straws in it will lower the iced tea in the glass a lot faster.

    With a shale well, you aren't dealing with a reservoir. The reason we have to crack the rocks is that the shale is a dense rock saturated with oil. Each shale well is its own glass of iced tea. That means you can put shale wells close together and they don't sip from the same glass. That means the volume of oil you can get out of a shale layer is much larger than you would get out of a conventional oil field.

    We're seeing that with the Bakken. The Bakken is the big giant oil shale up in North Dakota that no one believed would ever produce oil. The original by the U.S. Geological Survey (USGS) estimation was for 151 MMbbl oil total. They were so wrong. The production rates just keep going up. Since 2008, the Bakken has produced 450 MMbbl oil. That's three times the initial estimate.

    It defies all the arguments that rapid declines in shale wells are going to bust this trend. I look at this and I see the innovation equivalent of the Internet for energy. Cheap energy is the best possible thing that ever happened to North America and to the U.S. People need to understand just how transformative cheap energy really is to their lives.

    TER: Also, not all shale is alike. How much of the success of a well is based on geology and the type of oil and gas in the resource versus location, the ability to move that resource to consumers? How much is just good management?

    MB: You hit the nail on the head. You need several things. You need the right rocks. There have been some colossal failures in shale plays. There have been some false starts. SandRidge Energy Inc. (SD:NYSE) raised a lot of money to develop the Mississippian (which is actually in Oklahoma). And it made promises about production rates, but the rocks it drilled initially turned out to be better than the rest of the trend play. So the company couldn't fulfill the promises because there just wasn't enough oil. The geologists didn't have the technical understanding of the rocks they should have had before they borrowed all that money. SandRidge imploded and the stock was demolished. Having the right rocks is critical.

    Takeaway capacity is also critical. There was a time when companies were sitting on hundreds of wells that had been drilled but not completed because they didn't have pipeline capacity to get the stuff out. I'm sure you've heard what's happening up in the Bakken Formation where they're hauling oil by rail.

    These days, it's as hard politically to get a pipeline permit as it is to actually build one. There is the whole Not In My Backyard (NIMBY) factor. People like the idea of domestic oil production, but they don't want an oil pipeline anywhere near their houses. So they're putting it on railcar. It's twice as expensive to move oil by rail as it is to put it in a pipeline and nowhere near as safe. But it is expedient and sometimes the only option. I think we're going to see a lot more rail because you just can't get pipelines permitted.

    TER: Is that more of a problem in Canada than in the Midwest?

    MB: I think it's equal. I think there's going to be more political pressure for Canada to build some big pipelines. Historically, all of Canada's pipelines pointed south because the world's largest consumer of oil and gas is in the US.

    Now the U.S. is importing less because it produces its own higher-quality crude. That makes the new market for Canada's oil either Europe or Asia. However, it has to build a pipeline across the country or get the Keystone Pipeline through the middle of the U.S. to the ports in Houston.

    It is a no-brainer in my opinion. We should let Canadian crude oil come to our ports. Cheap energy could be an enormous boost for both our economies. We're already seeing it. BMW relocated a plant to the U.S. An Egyptian fertilizer company is building a plant in Iowa. A gas-to-liquids plant is going to Louisiana in a parish where the unemployment rate was ridiculous. This is the sort of thing that can happen when you have cheap, abundant energy. I'm a huge fan.

    But because it is so difficult to get oil to market, places in the Bakken are selling crude at a discount to West Texas Intermediate (WTI). Canada's crude oil is trading at massive discounts. It's hard for oil companies to make money when they can't get it to the markets that have the demand.

    TER: Let's talk about some of these places. According to the Fraser Report, nine of the 10 best places to invest in oil and gas exploration worldwide are in North America, the top three being Oklahoma, Mississippi and Saskatchewan. I understand that the Tuscaloosa Marine Shale in Mississippi and Alabama is one of your favorites. How does it compare with the other shale resources?

    MB: It's new, so it's really an unknown commodity right now. What we've seen in each of the shale plays is that the first-moving companies figure out the peculiar combination of the best rocks and the best development techniques. For example, Continental Resources Inc. (CLR:NYSE) is the Bakken company. It has been one of the most amazing success stories in the shale plays, period. Coming out of 2009, Continental was a $14 stock. It touched $121/share in October of this year because of production growth out of the Bakken shale. The company has done the work and found the best way to drill the Bakken, and the numbers prove it. Continental has a tremendous story. Several other companies have done the same thing in their own particular shales.

    Sanchez Energy Corp. (SN:NYSE) is another great example. Sanchez ownership has been active in the Eagle Ford and now it is bringing that expertise to the Tuscaloosa Marine Shale in Mississippi and Louisiana. The Tuscaloosa Marine Shale is an analog to the Eagle Ford. When the sea level was higher, it was part of the basin. That means it has great basics-the right rocks, with the right combination of organic carbon and thickness. It should be an ideal place to use understanding of shale to develop a new region.

    A few small companies operate there. Lots of infrastructure is already in place. I think it will do very well.

    TER: Compared to Continental, does a company like Sanchez have more upward room to grow?

    MB: Yes, it's a scale thing. Continental is a $19 billion (B) company. It takes a lot of new oil production to generate material growth for Continental. Sanchez, on the other hand, is fairly small. It just had its initial public offering. It's a $1B company, so it has lots of room to run. It doesn't take anywhere near as much oil production for a company like Sanchez to grow. Companies like Sanchez that are hungry, smart and run by great operators will really benefit as production increases.

    TER: You mentioned the Eagle Ford Shale. I've heard that production targets estimate tripling production there in 20 years. Who is going to be the beneficiary of all of that growth?

    MB: A lot of companies are down there nowadays. When Eagle Ford initially opened up, nobody thought it extended more than a couple of counties in southeastern Texas. Now, it extends under the border of Mexico and it's moving north toward Houston. This play just continues to get bigger. The problem is none of the companies there are cheap anymore. I do like the companies that are going to be transporting that oil out of the Eagle Ford, the pipeline plays. There are some interesting plays in logistics.

    TER: Any other insights for investors preparing for 2014?

    MB: I'm going to give you an insider tip. The secret to investing in commodities is to look at what people hate. Go to the places where people think you are nuts.

    For instance, I like coal because it's cheap. Coal mines are going out of business left and right, but there are companies in the space making a lot of money. I told my readers to buy Peabody Energy Corp. (BTU:NYSE). Peabody is basically the Exxon Mobil of the coal space. It has operations in the least expensive district in the U.S., the Powder River basin. It owns the world's largest coal mine and it produces coal in Australia that gets sent to Asia.

    In the U.S., coal was just destroyed by low natural gas prices. But in the rest of the world, coal is in high demand. Japan is shifting to coal from nuclear. Germany is doing the same. China burns an enormous amount of coal. The Chinese government is shutting down several coal mines a week because they aren't safe.

    That means investors who are willing to hold their nose and invest where other people aren't investing can buy the biggest player in the space for really cheap. Then you can send me a thank you note next year.

    TER: Thank you.

    Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources, including silver, uranium, copper, natural gas, oil, water and gold. He is a regular contributor to Growth Stock Wire, a free pre-market briefing on the day's most profitable trading opportunities. Badiali has experience as a hydrologist, geologist and consultant to the oil industry. He holds a Master's degree in geology from Florida Atlantic University.

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    Jan 02 6:01 PM | Link | Comment!
  • Has Shale Broken OPEC's Grip? Peter Dupont Names Powerhouses Of The Future

    Source: Tom Armistead of The Energy Report (12/12/13)

    http://www.theenergyreport.com/pub/na/has-shale-broken-opecs-grip-peter-dupont-names-powerhouses-of-the-future

    The Shale Age is the age of the nimble junior, and exploration has revealed oil and gas resources that could forever alter the global production profile. Peter Dupont, oil and gas analyst for Edison Investment Research, tells The Energy Report how companies in North and South America, Australia, Africa and the U.K. are upending the oil and gas order and creating a whole new energy investment landscape.

    The Energy Report: The price of Brent is holding steady above $100/barrel ($100/bbl) while West Texas Intermediate's (WTI) price is slipping back into the $90s. How are these prices and the spread between them affecting exploration and production of oil and gas?

    Peter Dupont: Over $100/bbl for Brent is still a pretty good price in terms of potential profitability for most companies. If the price of WTI should drop significantly below $90/bbl, then a question mark begins to arise over drilling activity.

    Bear in mind, though, that the price structure in North America for other onshore grades at the moment is discounted to WTI. The Bakken price has recently been $15/bbl less than WTI. It's beginning to move into an area where many people think low prices could, at some stage, trigger a decline in drilling activity. I don't think we're there yet; I think the decline has to be sustained for a period of time. Prices north of $80/bbl for Bakken and $90-plus for WTI are still really attractive for developers.

    TER: Are these spreads caused by transportation challenges? Do you foresee the spread increasing or do you think it will level off as producers find ways to move more oil to consumers?

    PD: A few months back, most people thought the U.S. supply/demand issue had been brought into equilibrium because the differential between WTI and Brent dropped to $4/bbl or less. On some days in Q3/13, there was almost no differential. Lately, the spread has widened. One factor has been a decline in refiner demand for crude. That's partly seasonal, of course, and related to maintenance activities. I would expect the refinery utilization rate to rise; it already has from the low point.

    Oil production is still very buoyant in the U.S. and I expect that trend to continue. Near term, we're looking at a spread that might be a bit larger than we expected a few months ago. On average for next year, I'd expect a Brent/WTI differential somewhere in the high single digits, assuming there are no big weather factors or major unplanned refinery outages. Those would be the wild cards.

    Also interesting is the big spread that has opened up on the Gulf Coast between Brent and Louisiana Light Sweet crude (LLS). LLS has moved from an historical premium of a dollar or so per barrel to a discount of about $10/bbl. It reflects the fact that surplus oil is being shifted to the coast now that the Cushing bottleneck has been alleviated. The U.S. oil price on the coast is now substantially below international levels.

    TER: What are some companies that are taking advantage of the shifts we're seeing today?

    PD: The big advantage is for refiners because they're getting oil that is very competitively priced from a global perspective.

    TER: What are some of the refineries that you've been watching?

    PD: They're all well-known companies. HollyFrontier Corp. (HFC:NYSE) is one of the big inland refineries. The Tesoro Corp. (TSO:NYSE) refinery in North Dakota also has a pretty big advantage. I'm beginning to see an advantage for coastal refineries as well, because with the big discount now opening up for domestic crude, they are receiving internationally competitive crude net of transportation costs. Competitively priced oil is beginning to come into West Coast refineries and Atlantic Coast refineries. The refineries that are really benefiting, however, are those in the Midwest and Mid-Continent. That would include the refining complexes in the Chicago, St Louis and Detroit areas and increasingly along the Gulf Coast.

    TER: So, is this a good time to be looking outside the U.S. at companies that are leveraged overseas?

    PD: There has been a drop in international oil prices as well. Until late November, we were looking at light crude prices significantly below $110/barrel. However, with light crude prices over $100/bbl, producing oil is still a pretty profitable business in most cases.

    If you're an oil producer, you're a price taker. The big argument becomes whether the price starts to drop toward what's called the long-run marginal cost, which includes all the capital costs in addition to operating costs, royalties and taxes.

    If the price in the U.S. drops south of $80/bbl, and particularly south of $70/bbl, then drilling may be affected because the icing will have been taken off the cake, so to speak. Also, remember that quite a few companies in the U.S., particularly the smaller ones, use debt to finance development activity. Banks always require hedging, and depending on the shape of the forward curve, this can hurt margins.

    A sustained drop in price below $75/bbl for several months would in all likelihood have an adverse impact on drilling activity in the U.S. In Canada, there is a particular issue surrounding heavy oil. The price of West Canada Select (WCS), a heavy grade, stands at a discount of $40/bbl or so to WTI. It's the cheapest oil in the world for practical purposes. If the price of WCS is depressed significantly south of $50/bbl, it would have the potential to adversely impact production by choking off sources of finance. Marginal oil sands heavy oil producers with above-average operating and transport costs would be the most vulnerable.

    TER: Let's talk about the producers. Are the large, international oil companies or the small producers better positioned right now?

    PD: For onshore production and development activity, the big international oil companies have not been leading the pack; the great innovators have been a series of medium-size producers.

    Probably the most renowned of the Bakken producers and the largest in terms of acreage is Continental Resources Group Inc. (CRGC:OTCBB). You've got others like EOG Resources Inc. (EOG:NYSE) and Marathon Petroleum Corp. (MPC:NYSE). They are quite big companies in terms of market capitalization, but they're not household names. They're not the Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE), Exxon Mobils (XOM:NYSE) and BPs (BP:NYSE; BP:LSE) of this world, which have all been late to the game.

    TER: Are the small and mid-size producers good investments right now?

    PD: I believe the shale revolution is probably at a very early stage. It's got quite a few years to run. These companies have the engineering expertise to unlock the Holy Grail. I think they will probably continue to lead the field, but investors have to be patient. Obviously these companies have their ups and down, but they remain interesting investment opportunities.

    You also have to remember, particularly in the case of Continental, that production is trending strongly upward. This reflects the scale of its acreage in the Bakken and Oklahoma, innovative technology, a sizeable resource base and the aggressive drill program. Continental continues to look interesting from an investment perspective.

    TER: How about outside North America? Any companies that could do well based on Far Eastern growth?

    PD: CBM Asia Development Corp. (TCF:TSX.V) is an Indonesia-focused coal bed methane (CBM) outfit. The company's key issue at the moment is to get development activity up and running. Unfortunately, the company has had a major constraint in raising capital and hasn't been able to undertake the development activity that was expected for this year. It remains to be seen how quickly it can resurrect the situation. That's really dependent on the company's ability to renegotiate a joint venture agreement with Exxon Mobil. CBM has indicated that it is attempting to renegotiate certain aspects of the joint venture. There's been no news on progress but according to the company, an announcement is expected in the near future. If CBM does manage to renegotiate the joint venture so Exxon Mobil carries more of the financing, this would transform the outlook for the company and potentially provide a major boost to the stock.

    TER: What about the national oil companies? What are the prospects for those names getting more involved?

    PD: The Brazilian government has tried to establish closer control over Petrobras (PBR:NYSE; PETR3:BOVESPA) over the last few years. It has insisted that all the pre-salt development activity be undertaken by Petrobras itself. As a result, it's become a much more difficult situation for non-Petrobras players to be involved in Brazil. They can participate as investors, but it's impossible for anyone other than Petrobras to be involved as an operator. You've got a tightening of the state's grip there.

    Whether that will continue is possibly a bit more of an open question now because of very heavy development costs. Hitting 5 million barrels a day (5 MMbbl/d) by 2020 will be a costly task and will require a lot of technical and operational resources. Bringing the production onstream along with expanding the refining infrastructure is placing a huge burden on Petrobras. There is no doubt about the existence of the oil. The problems relate to extraction and logistics given the deepwater location, distance from the coast and the technical challenges of drilling through a very thick layer of salt. I have no doubt Petrobras will succeed in due course, but there are a lot of technical and financial hurdles to be overcome.

    The other place in South America where you've had a tightening state grip of late is Argentina. Here the largest domestic oil and gas producer and former Repsol unit , Yacimientos Petrolíferos Fiscales (YPF:NYSE), was partly nationalized in April 2012. The government there is also increasingly involved in LNG imports. Argentina, however, is a very interesting place given its geology and particularly the quality of its tight shale formations. Argentina is not a newcomer to oil and gas production. Oil, in fact, has been produced there for 100 years and there is well-developed midstream/downstream infrastructure. The country is well served by oilfield service companies, there's plenty of engineering know-how and Argentina is host to Tenaris (TS:NYSE), the world's largest producer of seamless tube. There have also been three big shale oil and gas joint venture announcements in the Neuquén Basin in recent months between YPF and Chevron Corp. (CVX:NYSE),YPF and Dow Chemical Co. (DOW:NYSE) and Gas y Petroleo (Neuquén provincial government) and Wintershall Holding GmbH (a subsidiary of BASF Corp. [EUR53.17:XETRA]).

    Arguably, the prospects for further shale oil and gas projects have been greatly enhanced in recent weeks following the tentative agreement between the Argentine government and Repsol on compensation terms for YPF. It should also be noted that the business environment has been improving of late in Argentina. This reflects such factors as commodity pricing reforms, the accelerated depreciation of the peso, more business friendly statements emanating from government and a less confrontational government stance vis-à-vis international bodies. Significantly, the Buenos Aires Stock Exchange Merval Index is up about 3X over the past year, driven in large part by expectations of a change of government in October 2015.

    There are a couple of particularly interesting Canadian juniors operating in Argentina: Americas Petrogas Inc. (BOE:TSX.V) and Madalena Energy Inc. (MVN:TSX.V). Both have large acreages in the Vaca Muerta shale oil and gas zone in the Neuquén Basin. Several medium to large U.S. and European players also have interests in Argentina, including Exxon, Chevron, Apache Corp. (APA:NYSE), EOG, BP, Shell, Total S.A. (TOT:NYSE) and Wintershall. BP is active through its 60% stake in the closely held Buenos Aires company and second largest domestic oil and gas producer, Pan American Energy (CNOOC and the Bulgheroni family are the other shareholders). Presently the excitement surrounding Argentina mainly relates to Vaca Muerta in Neuquén. There is, however, another potentially large shale play called D-129 in the San Jorge Basin in Chubut province. Reflecting its dominant position in the Basin, Pan American and by implication BP could potentially be beneficiaries of D-129.

    Vaca Muerta could be as big as the Bakken. It may hold as much as 25 billion barrels of oil equivalent (25 Bboe) in recoverable reserves, which is a very substantial number. Neuquén and nearby provinces also boast well-developed oil and gas infrastructure including refining and petrochemical facilities.

    One of the key points of differentiation in Argentina compared with the U.S. is the ownership of the mineral rights. In the U.S., mineral rights are generally owned privately unless land is federally or state owned. By comparison, in Argentina and in fact in most other parts of the world, mineral rights are not owned by private individuals/concerns. They're owned by the state, in one form or another. In Argentina mineral rights are the property of the provinces.

    Shale oil and gas development has considerable support both at the federal level and the provincial level in Argentina. The federal authorities are interested in increasing the domestic supply of hydrocarbons due to a sizeable import bill for oil and gas of over $10 billion per year. The provinces, by contrast, are interested in oil and gas royalties, which are, in fact, the major source of income (excluding transfers from the federal government) in some provinces, including Chubut, Neuquén and Santa Cruz.

    TER: You mentioned the role of the Canada-based juniors operating in Argentina. Are those long-term investment plays?

    PD: Some of these companies have first-mover advantage. Madalena and Americas Petrogas are the most obvious examples. As is often the case, the junior outfits saw the opportunity in the Vaca Muerta early on or were willing to take the risk before the majors, but big bucks are required for development activity. At some stage the juniors will probably look at selling a stake in the projects or selling the whole company. There are some companies, of course, that may wish to go through the whole process from conceptualization to development-the proverbial company-maker concept.

    TER: Which model do you think Madalena and Americas Petrogas are following? Are they looking to be bought out or do they want to go all the way to production?

    PD: Both companies already have producing assets in Argentina. Production is running at about 2,250 barrels of oil equivalent per day (2,250 boe/d) for Americas and 200 boe/d for Madalena. Americas has modest 2P reserve of 10.4 MMboe/d but the interesting angle is the potential upside reflected by the substantial unrisked recoverable resource position of 8.3 billion barrels of oil (8.3 Bboe). Americas' pilot projects at the moment are relatively small scale. The company is in joint ventures with Exxon and Apache. I suspect, given the lead times involved, the company is planning to find a buyer or to sell down the stake. Indeed, Americas has commissioned Jefferies to undertake a strategic review of the business. If Vaca Muerta and the other tight formations in the Neuquén Basin do indeed look like they are hosting the best part of 25 Bboe in recoverable resources, then the Americas shareholders could be off to the races. Although selling down stakes in some of the Vaca Muerta plays may make sense from a project finance perspective, disposal of the whole company could be premature at this stage if the recoverable resource position is as large as appears to be the case.

    Madalena has working interests ranging between 35-90% in three blocks in the Neuquén Basin comprising a sizeable 135,000 net acres. Contingent and prospective recoverable resources are estimated by Madalena at 2.9 Bboe, of which 45% are oil and natural gas liquids (NGLs). There is a mixture of conventional and unconventional plays. Small quantities of oil are presently obtained from the conventional Sierras Blancas formation in the Coiron Amargo Block, where horizontal drilling technology is being applied. Madalena's key focus presently is to secure a joint venture partner for the appraisal and development of the Vaca Muerta and Agrio shale formations. Securing a partner or partners would be a critical catalyst for the stock.

    TER: It sounds like you see a lot of opportunity in South America.

    PD: I think the most interesting developments and opportunities in oil and gas are in the Americas, both North and South. In addition to the relatively well-known opportunities in Argentina and Brazil, I believe that Paraguay and maybe onshore and offshore Uruguay could emerge as new frontier oil and gas provinces over the next few years. Governments are supportive of oil and gas exploration and development in both jurisdictions. Currently, Paraguay and Uruguay import virtually all their oil and gas needs.

    TER: Is there a company in Paraguay or Uruguay that you like?

    PD: The key company in Paraguay is an AIM-listed junior called, President Energy Plc (PPC:LSE). It also has interests in Argentina. President has shot seismic in Paraguay's sector of the Chaco Basin, apparently with very positive results. The company has referred to 'giant' field potential. Drilling is scheduled to commence in Q2/14. A contract has been signed with Schlumberger Ltd. (SLB:NYSE) for project management and drilling services. The Argentine zone of the Chaco Basin has been a significant producer. Another AIM-listed junior, Amerisur Resources Plc (AMER:LSE), also has some early-stage exploration interests in Paraguay. Amerisur has had a very successful exploration/development program in Colombia.

    Recent drilling activity in northern Uruguay by state-owned ANCAP and the ASX-listed junior Petrel Energy Plc (PRL:ASX) has yielded positive results with evidence of a working petroleum system. The most significant offshore event of late has been Shell's acquisition of Petrobras' interests. Several other majors and mid-tier concerns are also present offshore Uruguay. The theory is that Brazil's pre-salt reservoirs could extend a long way to the south. Interestingly, a major gas discovery has recently been made by a Total/Pan American Energy (PAEYE:NASDAQ)/Wintershall consortium offshore Tierra del Fuego.

    TER: Does all the production in North and South America leave OPEC in a less powerful position?

    PD: Clearly, yes, because you've got a lot of supply coming online outside of OPEC. There will be about 1.7 MMbbl/d in 2013 and probably a similar amount in 2014. Within OPEC, Iraq (not subject to quota restrictions) is planning to boost output by approaching 1 MMbbl/d in 2014 as new terminal and refurbished oilfield capacity comes onstream. Libya and Iran would also like to substantially increase production during 2014. On the demand side of the equation, global growth is considerably slower than in the mid 2000s. Growth is now running at 0.8-1.0 MMbbl/d-less than 1% a year. With demand growth likely to lag potential gains in supply, OPEC members other than Iraq and Iran may need to cut production significantly over the next year or two to avoid downward pressure on prices. Saudi Arabia would have to carry the burden of the adjustment.

    In 2013, OPEC crude production will be down about 1 MMbbl/d to 30.5 MMbbl/d while NGL output could be up 0.1 MMbbl/d to 6.4 MMbbl/d. From a recent historical perspective, OPEC production has remained at a high level. The key negatives for OPEC output in 2013 have been the impact of sanctions on Iran and ongoing civil unrest and strikes in Libya. Iranian output has dropped by about 1 MMbbl/d, while Libyan production has fallen from about 1.4 MMbbl/d in early 2013 to 0.3 MMbbl/d of late. The void has to a large degree been filled by Saudi Arabia and to a lesser extent the UAE and Kuwait.

    Late in Q3/13 and into Q4/13, Iraq's production also dropped. This is principally because the country is updating major terminal facilities in the Persian Gulf. That will enable Iraq to increase exporting capacity, but it has temporarily adversely impacted production. Additionally, northern Iraq has been plagued by terrorist activity that has interrupted flow on the Kirkuk-Ceyhan export pipeline. If not for the disruptions to output in Iraq and civil unrest in Libya, we would probably have been looking at a much lower Brent price in Q4/13.

    TER: Are there any other superstar companies or geographical regions that we didn't touch on?

    PD: The Bowland Basin in northwest U.K. is looking interesting as a shale gas play. Some drilling activity is expected to start next year. Russia arguably offers major shale oil potential and there are major conventional exploration and development opportunities in Eastern Siberia. Tax incentives may be offered in Russia to encourage shale oil and gas development. China is another interesting area, both for shale oil and gas. You could see drilling activity accelerate here considerably in the next few years, driven by official policy to develop domestic energy supplies and reduce dependence on imports. North Africa is also attracting conceptual interest as a potential shale province. A lot of highly successful exploration activity has been undertaken onshore and offshore East Africa in recent years. Following discoveries made by Tullow Oil Plc (TLW:LSE) and Africa Oil Corp. (AOI:TSX.V), Kenya looks like it's emerging as an important new oil province. Somalia and Ethiopia continue to offer frontier rift play potential. Last, central Australia is a very large unexplored area for oil and gas and offers both conventional and unconventional potential in the Mesozoic and Paleozoic basins that characterize the zone.

    TER: Are there companies you like in Australia?

    PD: This is a little outside my orbit. However, Santos Ltd. (STO:ASX) is a major player in central Australia with midstream and downstream interests and pioneered the development of the Cooper Basin 40-50 years ago. Other smaller players active in central Australia are Beach Energy Ltd. (BPT:ASX), Central Petroleum Ltd. (CTP:ASX), Drillsearch Energy Ltd. (DLS:ASX), Norwest Energy (NWE:ASX) and Senex Energy Ltd. (SXY:ASX). Arguably Central Petroleum looks particularly interesting on the basis of its recent Sunshine discovery, its massive acreage and its two large-scale exploration joint ventures with Santos and Total. Interestingly, Central Petroleum is to a large extent carried in the early stages of these joint ventures.

    TER: It sounds like there are a lot of opportunities, particularly for people who have a long-term view on investing in oil and gas.

    PD: Oil and gas is a long-term business requiring big bucks. Companies not only need technical resources, but access to capital and a strong balance sheet. Investors need to have a solid understanding of the technical and economic background to oil and gas projects and, as in other areas of investment, strong nerves and confidence.

    TER: Thank you for taking the time to update us on the world of oil and gas investing.

    PD: Thank you for having me.

    Peter Dupont has been involved in investment research for 30 years in the industrial and resource sectors. Between 1983 and 1998, he worked for Union Bank of Switzerland (UBS) in London covering engineering and metals stocks. In early 1998, Dupont moved to Commerzbank to head its research activity in the European and UK metals and natural resources sector. Between 2005 and 2009, he worked as a consultant analyst for a London-based boutique investment bank, Libertas Capital. Since 2009, Dupont has worked for Edison Investment Research covering the oil and gas sector. Dupont produces regular macro oil and gas studies and covers developments in the "unconventionals" field. He has a Bachelor of Science from the London School of Economics.

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    DISCLOSURE:
    1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family owns shares of the following companies mentioned in this interview: None.
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    3) Peter Dupont: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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    Dec 12 3:46 PM | Link | Comment!
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