Oil and Gas Investment Opportunities in China and India

• Revealed: the next energy supertrend...

• A penny stock that could fuel India’s industrial heartland...

                                   OILEX (OEX)

Keep reading to discover where I think some great opportunities lie in China and India for those of you looking to invest in the oil and gas sector.

Revealed: the next energy supertrend

(This article first appeared in Penny Sleuth in July 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

In the next few weeks, top executives from the world’s leading oil companies will descend upon China. The reason? To take a stake in one of China’s as yet untapped resources. This summer China will hold its first licensing round for the production of shale gas – and it is looking for help.

Successful applicants will be expected to hydraulically fracture a minimum number of wells, and you can bet the Chinese will be paying close attention. The nation has looked on with keen interest as the US has transformed its energy outlook through the production of shale gas. Now China wants to repeat the trick.

Why China desperately needs gas

The last time I walked around Beijing I could not wait to get back to the air conditioning of my hotel. Out in the streets the air was choking with pollution – primarily the result of the city’s constant burning of coal.

This level of pollution is a problem, and the Chinese government knows it. Its latest five-year plan for the country’s economy focuses on energy efficiency and clean fuel. It plans to reduce energy intensity (the amount of energy consumed per unit of GDP) by 16%. It has also finally fallen into line with global targets for CO2 emissions set out on the Copenhagen agreement.

For China, this means more nuclear and more renewable energy. But above all, it means more gas. By 2015 the plan is for China to derive 8.3% of its energy needs from gas. That’s up from 3.8% in 2008. Multiplied by the country’s rapid growth, this implies a trebling of annual gas consumption.

You should prepare for the ‘golden age of gas’

This switch away from coal towards gas features strongly in the International Energy Agency’s (IEA) recent research paper, The Golden Age of Gas. This forecasts that not only China, but the world will increasingly turn to gas.

The attractions are clear. It is relatively clean, it is easy to transport and it is ideally suited to the needs of the world’s rapidly increasing urban population. With nuclear under a cloud and governments that are anxious to avoid overdependence on oil and renewable sources only scratching the edges of energy supply, gas is the obvious answer. The question is – can we produce enough of it?

According to the IEA, the answer is yes. It calculates that recoverable gas from conventional sources can meet current rates of global consumption for 120 years. Taking into account gas that can be recovered from unconventional sources, we have enough for 250 years. It’s the ability to exploit unconventional sources that is really altering the picture.

While use of coal is expected to go into decline over the next 25 years and demand for oil is forecasted to lag GDP growth, gas is set to increase its share of global energy supply from 21% to 25%. That may not sound a lot, but combined with global growth this implies a 63% increase in gas demand by 2035. This should generate some fantastic investment stories in the coming years.

Where the biggest gas growth stories could happen

Gas is found the world over, but it is the US that has led the way in the exploitation of gas from ‘unconventional’ sources.

Unconventional gas is basically gas that does not flow freely to the surface. The definition includes tight gas trapped in impermeable rock; shale gas, where low permeability has until recently rendered it uneconomic; coalbed methane, where the gas is trapped in coal seams; and gas hydrates.

The last, a solid form of gas mixed with ice, is found in the far north or in deepwater offshore sediments. There is thought to be more gas locked in these hydrates that in all other sources put together, but any exploitation is decades away.

Coalbed methane gas projects are well established, and trials of underground coal gasification are under way. Another growth area is liquefied natural gas (LNG). Australia is developing some massive LNG projects, including the world’s first floating platform. Within a few years, it could become the second-largest global exporter after Qatar.

But it is production from shale gas that has really taken off, helped by horizontal drilling and ‘fracking’ – the fracturing of rock through high-powered injections of liquid, mainly water. This practice, which threatens to increase greenhouse gas emissions and could damage water supplies, has already been subject to ban or review in France, India, South Africa, Canada and parts of the US. But as yet, these concerns show no signs of derailing enthusiasm. In Poland, for instance, several shale gas projects are under way which could ease the country off its dependence on Russian gas.

So the ‘golden age of gas’ promises plenty of investment opportunities, including some that have barely attracted investors’ attention. The IEA favours the prospects for gas-powered vehicles and it hints at one other intriguing application: small scale LNG liquefaction.

“One-half of the estimated 134bcm of gas flared in 2010… could produce some 0.7m barrels of additional liquid hydrocarbon fuel”, the IEA says. So far as the latter is concerned, readers of Red Hot Penny Shares are already on the case…

If you’d like to find out my favourite plays on this enormously exciting story, then why not take a 1 month trial to Red Hot Penny Shares today?

A penny stock that could fuel India’s industrial heartland

(This article first appeared in Penny Sleuth in July 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

India is fast emerging as an economic titan and the state of Gujarat is its industrial heartland. In the country’s north-west, this coastal state is outpacing the rest of the country. GDP growth is rattling along at 10% per year. Dotting the landscape are the pipes and chimneys of petrochemical plants. The sea lanes are busy, plugging Gujarat into the global economy.

The state is now a major gateway for international trade. There is money to be made and financiers are busily bank-rolling further expansion.

The Delhi-Mumbai corridor, for example, is a mega $90bn infrastructure project that will link Gujarat with the states of Uttar Pradesh, Delhi, Hayana, Rajasthan and Maharashtra. High-speed trains will carry double-stacked containers; three ports, six airports and a six-lane expressway will provide the backbone. New towns, cities, and industrial parks will spring up. 180 million people will live within the hinterland of this ambitious project.

But this remarkable expansion is dependent on a stable, predictable and affordable energy supply – coal. And as the price of coal imports from South Africa and Australia spiral over the next decade, Gujarat is facing an energy shortfall that could short-circuit its ambitions.

Thankfully there may be a ready solution to this problem. And I think one Aim-listed company could play a key part in resolving this crisis – tapping a hugely promising new energy reserve in Gujarat itself.

How gas is redrawing America’s energy map

In the article above, I described how the technique of ‘fracking’ has transformed the energy landscape of the USA. Gas that is trapped in the minute cavities of shale does not readily flow. But force a mixture of water and chemicals into the shale at high pressure and the rock can be cracked, releasing the gas.

This is a game-changer for energy supply, for the world’s climate and for geo-politics. Production is increasing inexorably in north America and by the end of the decade could account for half of all gas production.

That prospect excites American politicians. According to a study from the James A Baker III Institute for public policy at Houston’s Rice University, the rise of shale could mean the end of OPEC; it will reduce the USA’s energy dependence on volatile overseas countries such as Iran, Russia and Venezuela; and, because gas is a clean fuel, it will mitigate climate change.

The cost of production of shale gas is falling, making it more competitive against other forms of energy. With the evidence from the United States so compelling, prospectors have started to look for shale gas elsewhere in the world. Who could be the big winners?

Huge new reserves discovered across the globe

According to Rice University “revelations about the existence of technically – and possibly commercially – viable shale gas resources are also occurring in… Europe, China, India, Australia, and elsewhere. To be sure, the enormity of global shale gas potential will have significant geopolitical ramifications”.

Never slow to spot a commercial opportunity, China has just assigned its first licences for shale oil projects to Chinese businesses, and foreigners are now cutting in to the action. Last week Exxon struck an agreement with the China Petrochemical Corp to jointly assess shale-gas potential in Sichuan. Estimates of China’s shale gas are set at 1,275 trillion cubic feet, 12 times its natural gas deposits and half as much again as is thought to exist in the USA.

Where China leads, India is never far behind. Kalapn Jain, of international consulting firm Deloitte Touche Tohmatsu, reckons that “India’s shale gas reserves may be larger than the conventional gas deposits and has the potential to be a significant contributor to gas supply”.

So now N M Brah, chairman of Oil India, says that his company is “undertaking a comprehensive study to understand the shale gas potential of its assets in the North East and Rajasthan”. As academics, regulators and oil giants set up committees to look into the exciting prospects for shale gas, small companies are already grasping the nettle.

One of these is AIM-listed OILEX (OEX). Its ‘Black Pearl’ rig is already drilling the Camba shale gas prospect in Gujarat. Best estimates suggest that its drilling target could contain over 700 billion cubic feet of natural gas, and with gas selling locally at $4.50 per thousand cubic feet this could be worth a lot of money.

Good investing,

Tom Bulford Editor, Red Hot Penny Shares

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(These articles first appeared in Penny Sleuth in July 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)