With the price of a barrel of oil tumbling from its $147 peak to a $40 low just six months later you might think that the threatened oil shortage last summer was just a mirage.
Update from Nighthawk Energy
But while the market in traded oil dances to a rhythm of its own, the underlying fundamentals of supply and demand vary very little over time. - AIM-listed US on-shore oil explorer Nighthawk Energy (ticker: HAWK) says that its Kansas oil field could hold 26.25m barrels of oil.
- The company said: "Both oil and gas are currently being produced and sold from the Devon oilfield project, the most recent production rates being about 115 barrels of oil equivalent per day.”
Today the conspiracy theorists are out in force. The Chinese are reputed to be building up supplies of all commodities, including oil, at this time when prices are low. The falling dollar, making oil cheaper in other currencies, is also reportedly boosting demand. And signs of revival for the global economy have rallied the animal spirits of the traders.
Why the long-term outlook for oil is bullish
However, none of these things make a lot of difference to the long-term outlook for oil, or the plans of the oil industry. The cost of hiring a drilling rig has fallen from record levels, an indication that some of the more speculative projects have been put on the back burner.
But by and large it is business as usual and the executives of big oil are challenged by one major question. Where will they find the new reserves of oil to replace the millions of barrels that they are routinely pumping out every year?
The world needs oil. And shareholders expect oil companies to replenish their supplies. But as time goes by this is getting harder and harder. Much of the large and readily accessible reserves of oil have already been exploited…
In my new Oil Report I look at this in more detail. But the nub of the matter is this. Over 60% of the world’s known oil reserves are in the Middle East, much of which – but not all – is out of bounds to western companies. Giants like Shell and Exxon Mobile need big fields. A series of small finds is not going to be sufficient. You cannot feed an elephant on peanuts. So they have two strategies. Either they must find big new oil fields, or else they must buy them.
The former requires huge investment in regions that are, for one reason or another, hostile. Take Russia for example. After spending billions on its Sakhalin project Shell was forced to cede control to the Russian oil giant Gazprom. And in another blatant demonstration of political opportunism, BP has also effectively had its assets seized by the government.
This is not the first time that a national government has changed the rules half way through the game. Governments do not like to see foreigners running off with their precious natural resources, and forced nationalisation of these assets is a popular political manoeuvre. Take Venezuela for example. Here President Hugo Chavez is busy appealing to the masses by seizing the assets of foreign oil companies, and he makes no bones about his intentions. ‘We are determined to regain full petroleum sovereignty’ he has said.
Political interference is not the only problem. In Nigeria militant rebels have attacked Chevron’s pumping station and damaged its pipelines. And, as if sabotage from armed wreckers is not enough, the oil industry also faces criticism from environmentalists, concerned at the damage done to the planet by oil exploration and production.
My favourite way to play the oil theme
Against this background of hostility, off-shore drilling seems relatively attractive. Out of reach of saboteurs and green protestors, oil drillers can work in peace. But off-shore oil production is severely limited by technology. Although rigs have gradually tip-toed their way into deeper waters they are still obliged to cling closely to the shore-line, and the costs and technical challenges of going deeper are formidable.
So perhaps the easiest way of securing new supplies is to buy them. Many a small exploration company has been established to look for oil in the full understanding that, should it make a discovery, it will not have the financial or other resources to exploit it. Once it has identified a likely reserve it will invite a larger partner into the project in what is known as a ‘farm-in’ deal.
A good recent example of this has seen BPC, which has licenses covering a large expanse of water around the Bahamas, form a joint venture with the Norwegian giant StatoilHydro. BPC is a share that is very much on my radar, but there are others that I like right now.
The recent rise of the oil price is a reminder that this is an industry of increasing demand and falling supply – an environment in which, now more than ever, fortunes can be made. To discover my favourite ways to play the oil theme, read my new Oil Report – out tomorrow.
Good investing,
Tom Bulford
For The Penny Sleuth
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