Oil and Gas Outlook
Oil and Gas Outlook
Chesapeake Energy, Petrol Oil and Gas, Eden Energy and CanWest
Petroleum Evaluate Impacts of Current Environment on Future Oil
and Gas Supply and Energy Prices
Ann-Marie Fleming www.OilandGasStockNews.com,
www.NaturalGasStocks.com February 2006
Despite the recent storms, the overall mild temperatures that
the United States and Canada have faced so far this winter has
allowed for a reduction in pressure on natural gas supplies.
Jeff Mobley, Vice President, Investor Relations and Research for
Chesapeake Energy Corporation (NYSE: CHK) explains, "Short term
prices for natural gas will largely be driven weather. We are
fairly late into the winter heating season and we have had
extremely mild weather to date with last month being the warmest
January in over a hundred years. This resulted in a tremendous
lack of heating demand at the peak of the heating season and
relieved what had been considerable pressure on natural gas
prices early in the winter. Looking forward, there is a
substantial amount of natural gas in storage. Warm temperatures,
particularly early in the summer, may be needed to generate
incremental demand for natural gas fired power generation and
help balance ample current gas supplies"
However, many insiders believe that the price of natural gas
will remain high into 2006 and beyond despite the recent
declines in demand and related price reduction due to the mild
weather. Philip McPherson, Director of Research, C.K. Cooper &
Company, describes the arena for natural gas moving forward,
"With Natural Gas futures breaking $8.00 per Mmcfe for the first
time since July this has everyone calling for $6.00 natural gas.
It's not going to happen. While storage levels are well above 5
year averages, a cold snap at the end of February could quickly
restore a level of fear in traders pushing prices back to the
$10.00 level. We have argued that natural gas will bounce around
the $8 to $10 level this year dependent upon level. I think this
recent sell-off in the natural gas names is a great buying
opportunity as these companies are reaping huge profit margins
even at $7 gas. Investors new to the sector must realize that
just 4 years ago gas prices where $2 per Mcfe."
As Paul Branagan, CEO of Petrol Oil and Gas (OTCBB: POIG)
describes, "With record market prices late last fall followed by
a relatively mild winter and storage capacity currently above
the 5year historical range according to the Energy Information
Administration (http://tonto.eia.doe.gov/oog/info/ngs/ngs.html),
it's to no ones surprise that natural gas pricing levels have
fallen significantly in the past month. Nevertheless, current
pricing trends are still well above those for 2005 and from
Petrol's point of view that remains a very strong indicator for
continued aggressive drilling and development within the natural
gas sector."
In terms of oil, many experts anticipate a continuation of high
prices. Tim Brock, a Consultant with CanWest Petroleum
Corporation (OTCBB: CWPC) explains, "There are many reasons for
the price of oil to stay above $50 per barrel; world events and
world economies and demand will dictate what the future price
is, but I think it is fair to say that we are into expensive
oil."
Don Sharpe, CEO of Eden Energy Corp, (OTCBB: EDNE) describes,
"We think oil prices will remain strong in the medium term, say
for the next 5 years. Projects to increase production from non
conventional sources have long lead times and meanwhile global
demand appears strong. Eden is preparing a number of high impact
drilling projects and intends to be in position to benefit from
this higher pricing environment. Of course, with higher prices
come higher costs, and that underscores our belief that
companies must build their drilling portfolio based on their own
concepts and not be an industry chaser. This allows them to move
projects forward without the high land costs we tend to see in
pricing environments like we have now."
Political uncertainty in specific oil producing areas has the
potential to contribute to continued high oil prices. "Crude oil
has been very strong of late particularly with geopolitical
tensions in Iran and Nigeria, explains Mobley. "In general, the
world oil market still is reasonably supply constrained with a
limited amount of excess supply capacity. Current inventories
have been built to a fairly comfortable level in no small part
due to mild weather. Absent further geopolitical turmoil it may
be difficult for oil prices to test record levels with
inventories building short term. However, if oil prices were to
be sustained below $60 per barrel, OPEC would be in a better
position to cut production levels, potentially in their March
meeting, which would provide support to oil prices."
According to McPherson, "For 2006 we believe we could have a
year of consolidation in oil prices, where weather and
geopolitical news keep oil trading in a tight range of $55 to
$70. This would be a good occurrence as it would give the world
a year to adjust to these higher prices, before the next move,
probably up, occurs."
Industry Response:
Being able to balance exploration efforts, production levels and
costs with changes in natural gas demand and pricing, is a
necessary corporate strategy in particular as the industry is
highly impacted by weather. As Branagan explains, "When the
winter weather forecasts begin to gel this summer the market
will adjust accordingly and like most independent producers
we'll continue drilling while we reconsider the focus of our
activities and how to persist in improving our assets and
revenue. Since Petrol's production concentrates on shallow coal
bed methane our development costs are relatively low and average
well production although modest is relatively certain thus we
are quite capable of sustaining a significant price reduction
and still be quite profitable."
As President Bush reiterates the need for the reduction of
dependence on foreign oil, industry participants evaluate ways
to increase the exploration and production of oil domestically.
As Sharpe explains, "There are a number of things that
government and industry can do together to help boost domestic
oil supply. These would include streamlining regulatory
processes, providing tax incentives to encourage exploration in
more remote or high risk areas, and encouraging non conventional
oil production from tar sands, oil shales and heavy oil
projects."
As described by Tim Brock, Canada has the ability, through the
development of the Athabasca oil sands that has occurred over
the last 10 -15 years, to help boost domestic supply of oil.
"World's largest deposit of oil of approximately 1.7 trillion
barrels and using current technology recoverable is around 400
billion barrels of oil which makes it the largest secured supply
of oil for the North American market. What you will be seeing is
a significant amount of capital being invested in this region by
several major corporations who believe that this area can boost
the amount of oil that Canada is able to supply to the United
States near term," explains Brock.
Canada today provides around 15% of the U.S. oil needs and that
will probably double over time according to Brock. "It becomes a
strategic and interesting asset particularily for the Americans
and as a result the Athabasca district has become a significant
play and is being followed by the investment community very
closely," adds Brock.
Many believe however that this dependence on foreign oil is best
addressed through addressing energy consumption levels.
According to McPherson, "The only way we are going to reduce our
dependence on foreign oil is to reduce demand. Consumers will
either have to cut back or be willing to pay more for the oil.
Additionally, even if the U.S. does lower their dependency the
global economies of the world are decades behind us in
efficiency. It's widely known that 50% of the energy generated
in India is lost during transmission from source to user due to
their archaic power grid. China's consumers barely have the
means to afford a car, let alone one that is fuel efficient.
These in and of themselves will propel oil prices higher over
time."
As Brock explains, "Ultimately we North Americans need to
understand that we are into expensive oil and therefore we need
to understand how to be power smart. Two things that need to
happen, better production on one hand and on the other hand we
need better use and we'll see our way through."
Emphasizing the need for long term planning, Mobley describes,
"The country does need a cohesive energy strategy that makes
sense with respect to economics and pays attention to supply and
demand. There are plenty of long term fundamentals that are
going to be supportive of higher energy prices, therefore longer
term thinking is very important."
Ann-Marie Fleming Ann-Marie Fleming completed her MBA in the
United States, where she attended Webster University. She also
holds an Honors B.A from the University of Toronto. She has over
fifteen years of experience within the financial industry to
include retail banking and brokerage, investment banking, and
mortgage brokerage within the United States and Canada, with a
firm background in corporate research.
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