Prime Meridians – We Have A Winner In The International Shale Race

This week in Pierce Points:

India’s gold buyers looked to South America. “Dore” from spots like Ecuador and Bolivia is being used to beat import taxes.

A major coal buyer kept its options open. Japan’s Tepco will make purchases at floating prices — for the second year running.

The North Sea was surprisingly productive. Oil drilling hit an all-time low in 2015, but reserves adds were unexpectedly strong.

Chile panicked over low copper prices. The country’s president called for calm, while mining firms planned “dramatic” action.  

Argentina signed another oil mega-deal. Chile’s state energy firm ENAP will invest $165 million in the fast-emerging oil and gas nation.

We Have A Winner In The International Shale Race

I’ve been speaking the last few weeks with friends in Canada’s oil hinterland of Alberta.

And the view is bleak.

With benchmark crudes like WTI and Brent slipping below $30 the last week, oilpatch professionals in Alberta are worried about their jobs. Fearing that new rounds of layoffs may be just around the corner in the E&P sector, and at midstream firms and services companies.

I’ve heard stories about people in the industry literally bursting into tears over dinner. Professionals here are that worried.

I sympathize — having worked as a geologist in ever-cyclical industries like energy and mining, I know how scary it is to watch your sector crumble around you. And in a spot like Alberta — where most business is somehow linked to oil — it’s daunting to think of finding other employment once a job is lost.

It always strikes me as interesting though, the way people react when these inevitable downturns present themselves in the resources industry.

Namely, they take it as the end of the world.

People I’ve been speaking with lately talk about the oil sector like it’s on the verge of disappearing. The thinking seeming to be that at $30 crude, all the pumps will stop and fields will simply be left to go to seed while pipelines run dry.

And nothing could be further from the truth.

Let’s go back to the last time WTI was below $30 — in December 2003. A period when crude was actually rising off a low of $10 set in December 1998.

That period of ultra-low prices from 1999 to 2003 certainly had an effect on production. Across the U.S. for example, crude output showed a steady decline during those years.

But not to the extent we might imagine.

In December 1998 when oil touched $10, the U.S. was pumping out just over 187 million barrels monthly. And when crude finally jumped above $30 in late 2003, production had fallen to 172 million barrels monthly.

That’s only an 8% decline in total production due to this period of low prices. Showing that the industry was far from packed up and put away.

And this time around things will be the same — the industry isn’t going to disappear.

In fact, there’s still a lot going on in petroleum these days. Just this week, U.S. midstream giant Plains All American got a $1.5 billion investment from private equity — showing that big investors are still very much focused on oil and gas.

In fact, statistics from private equity analysts Preqin released this month show that energy private equity firms had another banner year in 2015 — raising a total of $56.9 billion in funds, which will be available now for deployment into new oil and gas investments.

One of those groups is American Energy Partners (AEP), a private investment vehicle run by former Chesapeake Energy CEO Aubrey McClendon. Which late this week made a big move into a play that’s emerging as a huge story in oil and gas for 2016.

That’s Argentina. Where AEP Thursday announced a $500 million investment in the Vaca Muerta shale play.

AEP’s investment targets a three-year pilot development project across 200 square kilometers in the Vaca Muerta. Bringing this high-profile shale player alongside other energy majors recently entering Argentina’s shale — including ExxonMobil and Chevron.

This big buy — along with the $165 million ENAP deal in Argentina discussed above — comes after last week’s announcement that Argentina’s government is setting its crude price for 2016 at US$67.50 per barrel. A fact that almost certainly helped push AEP over the line on an investment decision here.

Importantly, all of these events appear to cement Argentina as the current leader in the race to develop significant shale production outside of North America. That competition had been coming down to a fight between Argentina and Australia. But this week’s AEP deal shows that Argentina has now pulled into the lead. 

Just look at the investment dollars involved. Last August, AEP also entered the Australian shale space — striking deals worth $100 million in the country’s northern McArthur Basin.

But this week’s $500 million Argentina deal dwarfs the Australia expenditure. Showing that today, the shale experts at AEP would rather bet big on the Vaca Muerta. 

Add that to Exxon’s planned program of up to $14 billion in the Vaca Muerta, and the new leader in global shale is clear. This is going to be one of the most important spots to watch in energy during 2016 — and may surprise many observers who think the oil and gas industry is headed for mothballs this year. 

Here’s to it always being 5 o’clock somewhere,

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Dave Forest

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