Shale Envy: Why N. America Is The Oil And Gas Sweet Spot

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 the 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 (WTI) against Brent, there's still a pretty good margin after all the associated production costs and taxes are factored in.

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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. Ukraine, for example, is going down this route and announced a big joint venture several weeks ago with Royal Dutch Shell Plc (COP ) have exposure to the region. Importantly, Central Petroleum has the largest gross land position spread across the Amadeus basin, the Pedirka basin, the Georgina basin and the Lander Trough.

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. I think that companies like CBM Asia, Central Petroleum, Range Resources Ltd. and Americas Petrogas all present interesting opportunities at this time.

TER: Thank you very much for talking with us today, Peter.

PD: Thank you for the opportunity.

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.

DISCLOSURE:
1) Zig Lambo conducted this interview for The Energy Report and provides services to The Energy Report as an employee or as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: CBM Asia Development Corp. and Royal Dutch Shell Plc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Peter Dupont: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: CBM Asia Development Corp., Range Resources Ltd. and Central Petroleum Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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