With its wide open plains and existing infrastructure, services and workforce, North American oil and gas development is attracting admiration around the globe and prompting other countries to scratch beneath the surface in search of their own shale revolution. Peter Dupont, oil and gas analyst at Edison Investment Research in London, tells The Energy Report why the U.S. and Canada have retained their lure and discusses vast untapped potential in a number of developing international plays.
The Energy Report: You work for a London-based research organization, and I imagine that you have a somewhat broader outlook on the oil and gas investment arena than most firms do in North America. Tell us a little about what you see ahead for energy markets.
Peter Dupont: Actually, some of the most interesting developments over the past year or two have taken place in North America. North America experienced a production increase of about one million barrels per day (1MMb/d) last year, whereas output dropped about .5MMb/d in other parts of the world. The North Sea was a major contributor to that. I see North America driving the global increase in output in 2013-2015.
I see the global supply/demand picture as pretty comfortable, barring natural, political or technical disasters. Those are always the wild cards. The demand side of the picture looks about the same as 2012, with a fairly subdued increase of perhaps 1MMb/d or a bit less. Demand growth is clearly constrained by recessionary or quasi-recessionary conditions in Europe and sluggish economic activity elsewhere in the OECD countries, including North America. China should see similar increases to recent years, maybe 3-4%. Overall, I don't think we're looking at particularly large increases in demand, which is just a function of the global economic situation.
TER: Politics are playing an increasingly important role in resource development. What do you see ahead that's significant in this respect?
PD: Politics and nationalism concerns have always been there to some degree since the formation of OPEC. That's inevitable.
TER: Are there any areas you're watching that could have some significant upsets as a result of government greed?
PD: I think that risk applies wherever oil is produced in significant quantities. It applies here in North Sea, where you get changes in the tax regime that to some extent reflect movements in share prices. One reason why the U.S. and Canada are perceived as being attractive is you don't have the same degree of nationalism reflected in taxes. State production taxes and royalties vary, but the situation is vastly different compared to a place like Russia, where it's very easy to find the revenue completely consumed by taxes and local operating costs. It's no great surprise that the shale revolution has taken place in North America. In addition to geological conditions and the great fund of expertise available in the U.S. and Canada, the tax regime for oil and gas is more favorable than in other parts of the world. Even if you take into account the discounts on West Texas Intermediate (NYSE:WTI) against Brent, there's still a pretty good margin after all the associated production costs and taxes are factored in.
Furthermore, North America is one of the most favorable places to operate now because of all the infrastructure and oil field services already in place. The terrain lends itself to oil field development. A lot of people are also very experienced in the business. Breakthroughs in tapping into shales certainly makes it one of the most interesting places to operate because the resources are there and you don't have major problems dealing with governments and tax regimes. At the end of the day, you've got to go where the oil is - or where you think it is.
TER: What other jurisdictions do you find interesting at this point?
PD: Shale probably has very big opportunities outside North America. The most interesting area, arguably, is Argentina, which has very substantial resources. There are political issues there, but you have to go where you think the opportunities are and Argentina is high on my list. Colombia is another shale opportunity. Australia has very big potential, with a combination of shale and conventional onshore opportunities.
China is also getting a lot of attention now. Theoretically, it has very large shale oil and gas opportunities, generally in tight reservoirs. The Chinese are very keen on tapping into shale gas to limit their import exposure and emissions.
Europe also has shale possibilities. Because of high population density, it's more difficult to operate onshore in Europe than in the Great Plains of North America. In Europe, you also have all sorts of planning and socio-political issues with any form of oil and gas development onshore. Another factor is sometimes a lack of oil field services, although this is not an insuperable problem.
Most countries are very envious of North America's shale production, and want to emulate it. Efforts should gather momentum in many countries to unlock shales. It's mainly an engineering and economic issue. Some places are obviously easier than others.
In Argentina, the shales are very much laterally continuous, as they are in the U.S., which makes development much easier. Argentina also has low population densities, terrain similar to the Great Plains, good highway infrastructure, adequate oil field services and people who know something about the industry. It's a very hot area at the moment and I think it will continue to be.
TER: What companies look most interesting at this point?
PD: Although I don't follow it closely, one of the most interesting shale stories is another Canadian company called Americas Petrogas Inc. (OTCPK:APEOF), which has one of the biggest shale development projects in Argentina. The main focus of shale development there is on the Neuquén basin in central-western Argentina. Americas Petrogas has joint ventures with Exxon Mobil (NYSE:XOM). Apache Corp. (NYSE:APA) has made some very significant discoveries, including the very promising Los Toldos II in the west of the basin. It has significant exposure to the Vaca Muerta shale formation, which, according to industry estimates, could have 23 billion barrels in recoverable reserves. Americas Petrogas has a lot of upside and there's good potential for a takeout as well. I think it's a very interesting shale play.
There are a number of companies that have done very well in recent years in Colombia, most significantly Pacific Rubiales Energy Corp. (OTC:PEGFF), which is a Canadian company founded by Venezuelans. Gran Tierra Energy Inc. (NYSEMKT:GTE) and Amerisur Resources Plc (OTC:ASUXF) are two other companies that have been highly successful in Colombia in recent years. Gran Tierra also has exposure to the Neuquén basin in Argentina.
TER: There's also a lot going on in Australia. Who is on your radar there?
PD: What we're looking at now are developments onshore in the central part of Australia, where there's been relatively little exploration historically. Admittedly, over the last 40 years or so, the Cooper basin has generated highly significant production but there are other large basins in various parts of Northern Territory, Queensland and Western Australia that offer both conventional and shale potential.
An additional point you have to remember here is that there are companies operating in the central and western Australian basins and creating news flow. Santos remains the key local player in the Cooper basin (and it also has exposure to the Amadeus basin) but Beach Energy Ltd. (OTCPK:BCHEY), Drillsearch Energy Ltd. (OTC:DRLLF), New Standard Energy (OTCPK:NWSTF) and Senex Energy Ltd. (OTCPK:VPTOF) are all examples of growing independents with a focus on the central and western Australian basins. Among U.S.-based companies, Hess Corp. (NYSE:HES) and ConocoPhillips (NYSE:COP) have exposure to the region.
TER: Can you summarize where you think investors should be looking over the next year?
PD: Both in 2013 and 2014, I expect quite significant increases in non-OPEC oil production capacity to be brought onstream. We should be looking at 1MMb/d or more in both years. Over the next decade, I believe there are major exploration and development opportunities globally in unconventionals and, particularly in shale.
TER: Thank you very much for talking with us today, Peter.
PD: Thank you for the opportunity.
This interview was conducted by Zig Lambo of The Energy Report and can be read in its entirety here.
Peter Dupont is an energy analyst at Edison Investment Research in London. He 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 U.K. 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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