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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”
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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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