Prime Meridians: Why Is There So Much Going On In Offshore?

This week in Pierce Points:

Tesla investigated the mining business. The electric car maker is reportedly in talks to partner with Codelco for lithium.

Norway offered new oil licenses. The country’s 23rd bid round drew strong interest, mainly in the newly-opened Barents Sea.

Michigan moved to make copper mining easier. A new bill in the state senate would reduce hurdles for small-scale operations.

Colombia mulled its first ever frack. ExxonMobil says it has applied to use the game-changing technique in the country’s north.  

Why Is There So Much Going On In The Offshore?

I spent the past week in the wilds of Myanmar — inspecting the progress at the camp of Asia Pacific Mining’s developing silver-lead-zinc project.

The geology here is captivating. With the project surrounding a century-old mine that was at one time the largest supplier of metal to the British World War II effort. There are 600 year-old Chinese smelter slags around pockets of really high-grade ore (which probably ran something like 50% combined Pb/Zn, and hundreds of ounces of silver per tonne).

In short, it’s pretty cool.

Evenings in bush camp were a little less exciting, as any field geologist will attest. And I spent much of the time on this trip watching a friend who has recently dedicated himself to solving the classic Rubik’s cube puzzle.

As he explained, much of mastering the 80s toy comes down to pattern recognition. So much so, that masters of the cube are able to solve it in under five seconds.

I like patterns — and I do a lot of recognition in writing this advisory. Trying to connect breaking events in order to identify unfolding undercurrents across the natural resources business —  the kind that are going to drive the industry for months, years or even decades to come.

And lately I’ve been struck by the amount of activity happening in one particular sub-sector of the oil and gas business — the offshore exploration industry.

As this week’s news on Norway’s big 23rd bid round shows, industry appetite for offshore is still going strong. With big names like BP, Shell and Chevron all converging on Norway for the chance to get into the country’s newly-released acreage in the Barents Sea.

This follows on the heels of an absolutely massive bid round in Ireland, which saw more than 291 offshore blocks on offer receive multiple bids.

And the offshore news doesn’t stop there. This week, Offshore Magazine reported that historic frontier 2D seismic surveys are proceeding in not one but two new spots globally: the Indian Ocean off Somalia and the East Black Sea. 

Attention on Somalia is being boosted by recent offshore finds in nearby Kenya. And the Black Sea by big gas discoveries in the west — which has led geologists to conclude that the underexplored eastern part of the Sea could contain big oil reserves. 

To top it all off, there’s the growing excitement over the massive Zohr gas discovery in the eastern Mediterranean off Egypt. A field that operator Eni believes could contain up to 30 trillion cubic feet of natgas — making it a monster in terms of recent finds.

There’s even been talk that Zohr could combine with other finds like Aphrodite in offshore Cyprus and Leviathan/Tamar in Israel to form a new Eastern Mediterranean natural gas hub. You can see in the map below that the geography makes a lot of sense. 

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Source: Bruegel

So is there really a growing movement afoot in offshore exploration and development? Or is this a case of seeing connections where there are none, like William Gibson’s unfortunate protagonist in the novel Pattern Recognition?

One thing makes me believe there’s something to the idea of a growing offshore movement: the current nature of investment in the oil and gas industry. 

The thing is, over the last five years, much of the focus in the petro-world has moved to North American shale. An industry where drilling costs are much lower than the offshore, but decline rates are generally much steeper — meaning that shale fields need constant and steady investment to keep them humming along. 

That worked really well when investment cash was easy to come by. Up until recently, shale firms had no problem raising investor equity and/or debt to keep the drilling machine turning on their expansive acreage positions. There’s a reason why more than half of all natural resource private equity globally has been raised in the U.S. this year. 

But that availability of money has been crimped a lot lately. Raising equity is difficult today — and E&Ps are lucky to have their debt facilities maintained even, with very few developers getting new debt. 

In such a tight-cash environment, effective shale development becomes a lot harder. And that might be leading firms to reconsider the high-impact climes of the offshore. 

As discoveries like Zohr prove, offshore drilling offers one big advantage over shale — the ability to add massive, game-changing assets with a the stroke of a single drillhole. Yes, the drilling is more expensive. And yes, the risk is considerably higher. But in today’s environment, big and immediate upside might be a proposition that works. 

Certainly from an equity perspective. I can personally attest that shale plays are getting little love from retail stock buyers these days. With crude below $40, slow and steady just doesn’t get people excited. 

But high-impact plays are a bit of a different story. This week, I had a call with the management of International Frontier Resources, a public firm that has seen its share price rise over 200% the last three and a half months, on the back of the company’s planned bidding for new oil and gas blocks in Mexico’s upcoming bid round next week. 

This shows investors are still buying oil and gas stories they see as having potential for big and quick asset additions. Exactly the kind of potential that offshore exploration offers. 

Could the same mentality be starting to permeate the business development divisions of E&Ps? With managers deciding to use their exploration budgets to take big shots — the kinds that make a difference even at low crude prices? 

Judging from the recent action in global bid rounds, such a shift does appear to be in motion. And that’s a pattern worth watching. 

Here’s to big game hunting,

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Dave Forest

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