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Africa, The Most Promising Frontier Area for Oil

Global Economy, On the cover, Sin categoría
AfricaConference_FINALCall_for_papers

(This article was published in Spanish in Cotizalia on Thursday 2nd December 2010)

The oil world is preparing for a new capex super-cycle. In the past 14 years I hadn’t seen a building activity in rigs and seismic vessels as significant as this one. As the world seeks to reduce investment and reduce debt, the oil industry is expected to increase 15% its capex in E&P. And as for new equipment built, it might not reach the 1982 peak, but it’s getting close.

The oil world post-Macondo not only has not slowed down in activity, but every day we see more companies increase its drilling capacity. Three reasons:

a) The oil companies can not develop the recent discoveries fast enough.

b) The industry has finally realized that the era of cheap oil prices is over and we can not continue planning at $25/bbl.

c) Tightness in deep water rigs and equipment has increased as companies seek to accelerate the development of discovery in Brazil … and Africa.

The event that many companies expected (prices to come down and oil service costs plummeting after the moratorium in the Gulf of Mexico) has not occurred. And it has not happened because not only Petrobras is almost monopolizing the market by placing orders for oil rigs at breakneck speed to meet its development program in deepwater fields, but because independent companies are doing absolutely outstanding discoveries in Africa.

Africa overall has about 10% of proven reserves in the world. Not much. But new discoveries have increased the possibilities to advance in the basin of Guinea-Sierra Leone-Liberia-Ivory Coast and Madagascar, and Mozambique-Tanzania-Kenya, which is estimated to be as productive as Tupi in Brazil. There are three factors that differentiate Africa from other areas of the world:

a) Crude oil of very high quality.

b) Geological areas relatively close to the water and ports (so no need to build huge pipelines and infrastructure).

c) Oil outside the influence of OPEC (ex_Nigeria and Angola, of course).

d) Very favourable economic and administrative conditions.

Even the most sceptical would agree that the negative naysayers have had to reduce the estimated cost of development in areas like Uganda and Ghana and expand the reserve estimates (Wood Mac Kenzie has been a clear case of erring on the side of caution in their estimates). And this has been proven, as always, by the independents.

Both in Uganda and Sierra Leone, Liberia, Tanzania and Mozambique, independent explorers have shown that not only the accumulation of hydrocarbons was much higher than originally estimated, but the capacity and speed of development of these discoveries is better than initially expected. Over the past five years, the discoveries in Africa are proving to be of really attractive quality and strength.

Now, once that independents have tested these areas, the big oil companies are re-launching the African region programs with total investments estimated at over $150 billion in the next three years. From Kenya, which was almost forgotten by the industry, to Mozambique, including Madagascar, the geological structure is already estimated, by many companies as AFREN, to be very similar to Tupi in Brazil. In meetings with exploration companies since 2004 I have been following these discoveries and today I can say that all expectations have been exceeded, so the sceptics should at least give them the benefit of the doubt or to take a breath.

Anadarko’s CEO, Al Walker, estimates more than 1 billion barrels of oil equivalent in their recent discoveries in Africa. And BG just discovered the equivalent of 2 billion cubic feet of gas reserves in Tanzania.

Since 2001 there have been more than 15 billion barrels of oil equivalent discovered in non-OPEC Africa, and 2 billion of those barrels only in 2010. In 2015 it is expected that 20% of world production will come from Africa (ex-Nigeria). Cheap oil, of high quality, free of restrictions from OPEC and with lower administrative and political problems. No wonder that the U.S. considers Africa (ex-OPEP) as a strategic frontier in the war over natural resources.

Update:

Ophir provided higher-than-expected gas resources in Jodari in Tanzania (3.4tcf vs pre-drill estimate of 2.2tcf) de-risking concerns about the pace of gas discoveries needed for an LNG development.

Shale Oil: 600 years of abundant energy supply?

Global Economy, On the cover, Sin categoría

US map shale oil(This article was published in Spanish in Cotizalia on November 25th 2010)

Imagine the following scenario. We are in 2020. China has captured 15% of world reserves of conventional oil and gas from its own resources and acquisitions in Africa and Latin America, Middle East and Russia control 60%, the U.S. controls 20% … and the EU? 1%. Nothing.

This is the geopolitical landscape that a good friend, geologist and energy expert who advises the U.S. administration, painted over breakfast in New York, commenting on the recent study by Sanford Bernstein on the electric car.

In this study, assuming the most optimistic forecasts of the U.S. administration, the introduction of electric cars will only increase electricity consumption by 0.4% and my friend told me that the analysis of the U.S. administration expected a “conversion oil-electricity “… that is negative!.

That is, 4.1 million electric cars (about 5,700 MW of load) will not only increase power consumption by a tiny fraction, but will not reduce oil consumption as the energy intensity of the process of network investment, re-industrialization and adaptation of the park ($14.8bn pa for 10 additional years) means increasing the consumption of oil and gas by almost a million barrels a day.

Some of my readers have rightly commented on the risk of energy policies that do not take into account the in-out cost (energy consumed per kilowatt hour generated). In the UK this has been particularly evident (see above graph showing the evolution of energy dependence in countries with strong “green policies”)

Do you know what is the solution? Interestingly, the Obama administration, that criticized the “drill, baby drill” messages sees only one way to mitigate the effect. Increase drilling permits (+75%!) And double-check the possibilities of “Shale Oil” with 143 drilling licenses in North Dakota, where there are more than 4,000 active wells, surpassing the record of 1981.

electric car

It is worth recalling that the concept of “Shale Oil” is not new (has been investigated since 1920) and until recently had been considered too expensive to be commercial … Until the price of oil stabilized at $80 a barrel. Besides, the horizontal extraction technology has seen a giant step in terms of cost and efficiency and the war for natural resources has accelerated. With more than $100 billion in oil and gas transactions worldwide, 39% more than in 2009, nobody can ignore new options to accumulate resources, and above all in the OECD.

The United States accounts for 72% of the world’s Shale Oil reserves. With an organic-mineral ratio of 1.5 to 5, similar to crude oil and about three times higher than coal, the challenge is to continue to explore and determine the commercial potential and the average lifting cost, estimated at c$10-15/barrel.

Unresolved issues

Shale Oil still has many unknowns. One of them is access to sufficient water to fracture the rock and the typical environmental restrictions. But it sums to potential reserves. And after the success of horizontal drilling technology in shale gas, no one should dismiss the possibilities.

In the Bakken formation, one of the most commented in the American press, which extends from Dakota to Montana, there could be an estimated 1.5 trillion boe of shale oil reserves. Around 600 years of abundant energy … if we get to perfect the technology to make production economical.

For now, the latest round of oil concessions in Bakken, Eagle Ford and Niobrara have attracted more than $72 billion of private investment. And taxes and costs so far are not low. There could be an estimated 400,000 barrels per day of production over the next five years.

Only five years ago many people dismissed shale gas saying that it was not economical below $6.5/MMBTU and would never be a real alternative to conventional gas. Today the shale gas revolution has taken gas prices (Henry Hub) to $4/MMBTU levels, and companies are still drilling and generate solid returns of 12-15% IRR without debt.

Now we see the revolution of shale gas reach Europe, starting in Poland, as we mentioned here. So beware of dismissing shale oil. Hess, Williams, PetroHawk, Noble, EOG and others are betting hard on it. At $83/barrel and with horizontal drilling technology improving every year, it is something worth bearing in mind.

This will make you think twice about your long gold

Global Economy, On the cover, Sin categoría

This is an email sent by Cave Montazeri of Barclays Capital doing the rounds all over the market. Great piece and deserves to be read:”You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?” – Warren Buffett

Being a geek from the Golden State, I figured I ought to check those numbers:

Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of 1.61 cm3. A metric tonne (equals 1,000kg = 32,150.72 troy ounces) of gold would therefore have a volume of 51,762 cm3 (i.e. 1.61 x 32,150.72), which would be equivalent to a cube of side 37.27cm (Approx. 1′ 3”).

According to the world Gold Council (www.gold.org), at the end of 2009, the total volume of gold ever mined was approximately 165,000 tonnes. That is equivalent to 8,540,730,000 cm3; or about 300,000 cubic feet, which matches that Warren Buffett said (“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction”). At current price of gold ($1,361) that is a total value of $7.2trn

Exxon Mobil’s market cap is $340bn so 10 Exxon Mobils would cost you $3.4trn (for ease of computation this is assuming to takeover premium). Alternatively, for $3.4trn you could also take 100% ownership of ALL the following companies: Exxon Mobil, Apple, Microsoft, Berkshire Hathaway, Walmart, Google, Procter & Gamble, IBM, J&J, GE, AT&T, Chevron, JP Morgan, Oracle, Coca-Cola, Pfizer, Wells Fargo, Cisco Systems, and Intel

Finally on his last point, according to the USDA, there is 922m acre of farmland in the US, of which 406m can be used for crops (the rest includes woodlands, pastureland, ponds, wastelands, etc…) at an average price of $3,500 per acre; for a total purchase price of $3.2trn (for ALL the farmland)

So the math adds up: $3.4trn worth of S&P 100 companies (10 XOMs for example) + $3.2trn for all the US farmlands + some pocket change left to spend on ipads and parties. Good job Warren Buffett. I’ll buy some farmland REITs.

http://www.ritholtz.com/blog/2010/08/i-love-gold/

Has Cheap Gas Killed The Renewable Star?

Global Economy, On the cover, Sin categoría

cheap gas(This article was published in Spanish in Cotizalia on Oct 14th 2010)

I find it very interesting to see how in a globalized world, few have stopped to discuss the devastating impact that cheap gas has on the growth of wind and solar facilities, particularly in the U.S., and in turn the chilling effect posed by renewables on gas demand. However, companies on both sides, gas producers and renewable developers, are betting (praying, I would say) on electricity prices rising one day to generate acceptable returns again, even though the two sectors create a deflationary effect on prices. And without acceptable power and gas prices, investments are ruined. This is a war to see who loses more money, sooner and faster. In the European Union we are used to accept energy decisions that are not economically justifiable, as the decommissioning of nuclear power stations or coal subsidies, but in the U.S. this is not so easy.

The plummeting of natural gas prices in the U.S. continues. Not only it has broken the support of 2003 (Henry Hub), but production continues to grow by 1.5% per year and storage is at historic highs, 3.750 bcf. Thus, the price falls inexorably, from the 2006-2007 average of $8/mmbtu to $4 today.

The revolution of shale gas and a much more efficient and economical extraction process, hydraulic fracking, has led to reach 250 years of proven reserves and see the unit cost of production fall by 33%. Thus all producers, from Shell to Petrohawk, continue to increase production despite falling prices. Now that revolution is coming to Europe, as we mentioned here (May).

Of course, there are differences in the different gas prices in the world. NBP, the English natural gas, for example, is trading at nearly $7/MMBTU equivalent as the Norwegians are closing the tap at the Langeled pipeline at a rate of nearly 30 million cubic meters per day to avoid overcapacity. Being an island also helps.

But the general trend in all markets is clear: Very low likelihood of increased natural gas prices as the market continues to have a surplus capacity of 13-15BCM (billion cubic meters) annually, which is estimated to continue until 2014. And the producers of liquefied gas from Qatar to Yemen, will not cut production at these prices because most investments were made (FID, final investment decision) with an estimated gas price of $1.5/MMBTU.

However, the effect of cheap gas is essential to understand the drop in wind power installations.

The issue is as follows:

a) The price of electricity is set in a marginal system, like the U.S.one, by the price of gas (mainly) or coal.

b) The price of gas depends mainly on electricity demand to go up or down.

c) New technologies, wind and solar, when they exceed a critical mass, generate deflation in electricity prices because they add new baseload capacity at a low price (ex-subsidies).

d) However, to see further growth in renewable installations with adequate returns, wind and solar power plants need to see a higher price of electricity, which they themselves contribute to cap. Currently wind farms cannot sign long term PPAs, power price agreements, due to very low prices. This is the deflationary impact of renewables. And if electricity prices do not rise to reasonable levels, they will still require subsidies to survive, creating a vicious circle. Does the right hand eat the left?

e) So if they are eroding demand for natural gas and coal to generate electricity, they cannot expect prices to rise unless the taxpayer pays for a minimum return.

In short, renewables are needed and gas as well, but as from a certain critical mass and percentage of the energy matrix onwards, both engulf the same hand that feeds their returns.

Given this scenario, deflation, the only way to improve returns is to remove capacity (“coal? it is virtually defunct) or create more demand for electricity that, due to increased efficiency, is not easy.

Or promoting the electric vehicle, but when oil demand falls, oh surprise, the price of gasoline falls as well and remains much more competitive than the electricity including subsidies and aids. Unless we use the xenophobic argument that we do not like the country that sells us the commodity. That’s another story

To close the circle, the fact that the price of this invented and surreal “commodity” created by bureaucrats in the EU called CO2 is at rock-bottom prices (at €15.6/mt, oh surprise, also due to falling demand for gas and coal) does not help, and as it doesn’t add significantly to the costs of thermal power, it breaks the deck. Numbers don’t add up.

Trying to force the displacement of baseload commodities and technologies forces a downward revision of price, thereby wiping out the marginal technologies. That’s why they are commodities, because marginal cost adapts to demand.

Returning to the U.S., as the price of electricity is well below the price required to make a wind or solar power plant financially viable, the U.S. administration gives no more subsidies. Why? Not for political reasons, as many say, but for reasons of price, cost and demand. States are unwilling to accept price unreasonable rate cases when gas is abundant and very cheap.

Large power companies are beginning to seriously worry about the low returns on their investments, given their high gearing levels. And they witness the negative effect of over-capacity in the profitability of their businesses. Who would have thought that the enemy to beat, fossil fuels, was in turn essential to maintain a minimum return for their investments. Meanwhile, gas producers, with very low debt, accept the market price, as they always have, and produce more in a traditional suicide strategy to stifle the opposite sector. Now they would all have to find a way to agree to ensure that overcapacity does not continue to increase.

The day, a few years ago, when the energy sector decide to bet on “ever-growing demand” and forgot that “control and management of supply” is paramount, was also the day when we started to see the growing “running to stand still” strategies that have caused so much damage to the sector. Because governments do not care whether companies shoot each in the foot as long as the energy bill goes down. But this downward spiral will not end until we see corporate bankrupcies. And we might see them sooner rather than later.