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High Risk Investing – The New Trend in Energy

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Yves here. I’m giving this interview from OilPrice more of an intro than usual because I find it surreal. The fact that the interviewee, Andrew McCarthy, treats “political risk” as all of a muchness, and tries to depict oil extraction in the Sudan as on a par with fracking in New York State is so beyond the pale that I’m struggling for an adequate metaphor for how barmy the comparison is (note I don’t fault the writer for this; he’s being faithful to McCarthy’s stance). Even if you have only a passing acquaintance with the news, it’s hard to miss that the Sudan has been depicted as having the worst humanitarian crisis in the 21st century and is also heavily Muslim (Wikipedia says 70%), neither of which are plusses for Anglos, even benign Anglos like Canadians developing what are hoped to be long-lived assets. Perhaps McCarthy has managed to buy one of the local armies on the cheap or maybe has both a special deal with Academi (the latest incarnation of Blackwater). Otherwise, I suspect readers would like to get some of what he is smoking.

Separately, the idea that this sort of risk is reasonable and we should be gung ho about taking it is yet another sign of how hard the push is on to develop energy sources that would formerly have been seen as too difficult for cost or practical reasons. Notice also the subtext that governments (as in the public) will have to submit in the end to the demands of energy producers.

By James Stafford, publisher of OilPrice. From OilPrice

Risk perception isn’t what it used to be. Ask the swelling ranks of Canadian junior oil and gas companies braving high-risk venues like Sudan, Iraq and even Yemen.

Technological advances and the shale revolution are making risk easier to digest. And political risk is no longer limited to developing countries. Plus, risk is increasingly relative: Ask anyone who’s been caught up in the politics of the Keystone pipeline.

Sudan is a case in point. While instability and a very fragile peace with South Sudan remains a threat, there is also growing optimism. The philosophy is this: Sudan and South Sudan will come to terms for the sake of economic growth, and oil will get them there. The prize: An estimated 5 billion barrels of oil.

In an exclusive interview with Oilprice.com publisher James Stafford, Emperor Oil CEO Andrew McCarthy reveals:

• Why investors are hitting up high-risk regions
• Why Africa is more opportunity than risk
• How political risk is no longer limited to developing countries
• Why Shale WILL live up to the hype
• Why conventional oil is still a great investment
• And why human ingenuity will prevail

Emperor Oil (TSXV: EM.V) is an international oil and gas company with a focus on the Middle East and North Africa. Most recently, the company has renegotiated the terms of a joint venture gas deal in Turkey and introduced a significant conventional oil project in Sudan.

James Stafford: Oil and gas juniors are now setting up shop in high-risk countries like Sudan, Iraq and even Yemen. What’s behind this new era of risk, and are we likely to see more of this?

Andrew McCarthy: This question creates an opportunity for risk comparison – is it less risky to drill a mile below the ocean surface and create the kind of disaster we saw BP (NYSE: BP) deal with in the Gulf, or do we continue to look for work in regions that have accessible resources and are anxious to advance their economic position along with the health and welfare of their community?

James Stafford: So you are saying that on a comparative level even North America has become a political risk? And that in this balancing act, volatile places like Sudan do not necessarily pose any greater political risk?

Andrew McCarthy: Yes, there are always risks associated with any investment. The US halted all exploration in the Gulf of Mexico for extended periods following the BP disaster. This is a risk that few would have foreseen when exploration and development began in a country whose level of political risk is considered to be negligible.

James Stafford: Furthering your point, there have been a number of other unforeseen political risks, both in the US and Europe…

Andrew McCarthy: Certainly. The US banned all exploration and production in the Marcellus Shales in the State of New York. The US has also stalled the construction of Keystone XL pipeline that would link the US to Canada’s oil sands. In Canada, we have seen the province of British Columbia place a moratorium on offshore drilling. Across the Atlantic, we have also seen Europe place a moratorium on all shale exploration and development.

James Stafford: What is your message to investors who still view Africa and the Middle East as too risky?

Andrew McCarthy: Based on all of these North American and European developments, is it any less risky than operating in developing countries?

James Stafford: Which brings us to Emperor’s operations in Sudan. When South Sudan declared independence in July 2011 it took with it some 75% of the known oil resources. Since then, the situation between Juba (the capital of South Sudan) and Khartoum (the capital of Sudan) has been tense and even bloody. How will this affect exploration and extraction?

Andrew McCarthy: Well, now we have healthy competition due to the secession of the south and the need for both countries to maximize their economic opportunity. The skirmishes fought in the spring were quickly squelched when both countries realized the impact it was having on their economy and their people. Rather than fight over existing production they have chosen to expand their resource development so that there is a larger pie to share.

There have certainly been many difficulties over the years but the country recently emerged from a democratic process that the South secede in a diplomatic fashion. Both countries are now keen to advance, and the competition to succeed is healthy and beneficial. Of course, one also has to remember how truly enormous this country is and how remote some of the areas are in which much of the oil reserves are located.

James Stafford: There is also the question of infrastructure. South Sudan is seeking alternatives to transiting oil through Sudan, and Juba is extremely optimistic about the prospects of a new pipeline from South Sudan to Kenya. This is all part of Kenya’s massive regional infrastructure plan—the $24.7 billion Lamu Port-South-Sudan-Ethiopia Transit corridor (LAPSSET). How feasible is this pipeline? What are the implications for Khartoum?
How much would Khartoum stand to lose in transport revenues if this pipeline is realized?

Andrew McCarthy: I think this is an unnecessary undertaking that will be difficult to finance for many different reasons. Pipelines are exorbitantly expensive to build and would seem especially unnecessary given the fact that they could face similar problems to those which they have just overcome in Sudan [in terms of prohibitively high transit fees].

It is doubtful that a new pipeline would have any negative effects in Sudan. If anything it would likely cause the country to push for further exploration and production so as to maximize the infrastructure already in place.

James Stafford: The International Energy Agency (IEA) forecasts a drop in Sudan’s oil production through 2017. This contradicts Sudan’s own projections that it could double production in the next two years. How realistic is this?

Andrew McCarthy: I think that they are more than realistic. The main pipeline and port in Sudan is more than capable of handling the capacity. The resources are proven and available.

James Stafford: Despite the problems between Juba and Khartoum, Emperor seems confident that development and production will proceed without interruption. Can you tell us more about your recent progress in Sudan that boosts this optimism?

Andrew McCarthy: Emperor has signed an MOU to acquire a 42.5% interest in concession Block 7 in Sudan. The other 57.5% is owned by the country’s energy company, Sudapet. Block 7 is 10,000 sq km in size and tens of millions have been spent on the property. The property has 3 discovery wells which have been drilled, capped and are waiting for production. Initial production will be shipped by truck using existing roads which connect the property to the country’s main pipeline, located approximately 60kms away. A tie-in pipeline will be constructed during the second phase of development.

James Stafford: Beyond Sudan, another key area of focus for Emperor has been Turkey, a key strategic player in Middle East oil and gas, where oil majors like Chevron Corporation (NYSE: CVX) and ExxonMobil (NYSE: XOM) have significant interests. What can you tell us about Emperor’s recent activities here?

Andrew McCarthy: Emperor has a JV agreement with a partner in the Catalca Block in Turkey’s Thrace Basin. A major gas discovery was made on the property, which is located 30 kilometers west of Istanbul and only 5 kilometers from the natural gas pipeline supplying the country. The short-term plan is to complete the discovery well and connect it with the pipeline tie-in located only 5kms away. The long-term plan is to drill 5-10 more wells and expand the resource significantly.

James Stafford: In high-risk countries, what should investors look for risk mitigation?

Andrew McCarthy: Management with experience and diplomatic skills; a country with a history and commendable track record in negotiation and resolution; resource potential; development costs; production curves.

James Stafford: Certainly, the reverse would be true as well?

Andrew McCarthy: Yes. In Sudan, for instance, Canadians have an excellent reputation for quality work. They embrace the community and are willing to share their technologies and knowledge with the local people. Canadians are seen as net contributors and effective partners whose relationships are valued.

James Stafford: How are technological advances contributing to the juniors’ readiness to operate in risky territory?

Andrew McCarthy: With ever improving technical advantages in extraction methods I believe we will see more opportunities for resources which have a lower cost structure. Shale oil and gas developments will continue to evolve and conventional oil will have to compete on a cost level. Traditional extraction methods won’t have the same exploration budgets nor will they be able to compete unless the extraction is simple and inexpensive. I believe this is why we are starting to see a renewed interest in Africa and South America.
Energy reserves are abundant, they are often defined by past work and are inexpensive, efficient and safe to extract. This creates a significant advantage that can in many cases offset the political and geopolitical risk that was once associated with these parts of the world.

I also see the world becoming a safer place. Modern communication has improved access to information and changed people’s basic needs to wants and desires. Resource development creates employment and wealth – the cornerstone from which luxury and comfort is attained. Energy development is fundamental to advancing social, economic, health and safety standards for the world.

James Stafford: On a broader level, does natural gas have much further to fall, or have we seen the bottom?

Andrew McCarthy: I think we have seen a bottom in North America but Europe’s moratorium on shale exploration and China’s environmental concerns and air quality issues create a huge demand for natural gas, which in turn creates a long-term, sustainable model for natural gas exploration, development and export.

James Stafford: Will the shale revolution live up to the hype?

Andrew McCarthy: I really don’t believe the hype has even started yet. Unfortunately, the uninitiated are still focusing on the concept of ‘fracking’, while this is in fact one of the oldest technologies. We’ve been ‘fracking’ oil and gas wells since the 1930s. What has changed and continues to change is the technology applied – do you know they actually use CAT scan equipment to check shale porosity? It’s truly a fascinating region of science. The shale oil developers refer to 2010 like its ancient history and there is no reason to expect this rapid pace of development and advancement to slow.

James Stafford: While shale is currently the hot item, which sector will be the next big thing for energy investors?

Andrew McCarthy: Conventional oil is an excellent place to invest if you can find opportunities in areas that have excellent resources and are overcoming or mitigating their political risk. I think that technology stocks which are focused on the energy sector create wonderful investment opportunities. We are in a technological revolution in this industry. When people speak of peak oil they should first realize that the issue is energy – not oil. And in order to talk about a peak we have to eliminate the human factor – man’s creativity, ingenuity, invention and design always has and always will prevail.

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16 comments

  1. Lyle

    The extractive industries have been full of promoters since the Comstock if not before. Recall that 120 years ago a mine in the west was called a hole into which you pour money without getting anything out. Also there have been schemes in oil almost since Col Drake. (which interestingly is about the time of the Comstock). One must do ones own due diligence on companies like the ones suggested and not rely on the paid shills that are selling the penny stocks involved. If something big is hit it will be nationalized pure and simple.
    Look at Saudi where Chevron hit it big in the 1930s but in the 1970s Aramco was nationalized.

    As with many things one can only follow a couple of rules if you can’t understand it just say no, and read all the documents supplied, and if it seems to good to be true it likely is. Consider that all financial salespersons are really used car salesperson wannabes.

  2. The Rage

    Shale will be gone before you know it. I guess it if buys another decade of the suburban lifestyle, what is not to like eh?

  3. Paul Tioxon

    “This is low-income housing superior to anything Philadelphia has done in half a century. Not only are the rowhouses stylish and modern both inside and out, they are among the most energy-efficient ever built in the United States. Produced by Onion Flats, the quirky firm that designs, builds, develops, and sometimes markets its own residential projects, the homes are the first in Pennsylvania to be certified by the demanding International Passive House Institute, based in Germany. Nationally, there are about 30 projects that qualify as “passive” because their energy consumption is near zero, and several more without certification.

    Stuffed with insulation and topped with rooftop solar panels, the Logan houses are designed to produce almost as much energy as the owners use.”

    http://www.philly.com/philly/columnists/inga_saffron/20121026_Changing_Skyline__High-quality_homes_for_low-income_Philadelphians.html

    This is the 2nd wave of passive designed super energy efficient row homes built in this city. Over 30 years ago, a block of similar in design homes were built without central heating systems, over the protests of the local city owned Gas utility. Once again, the obvious is placed before the world to see: we do not need to burn fossil fuels to produce warm homes or the electricity needed to run them. Maybe this time around we won’t get crushed by a Raygun Revolution just when things start to take off.

      1. ambrit

        Dear steve;
        Hey, don’t look that gift horse in the mouth! Decades of employment in residential and commercial retrofit for a large chunk of the population that doesn’t ‘fit’ into the “information economy.” This would be a win win deal for everyone involved, especially the Nation.

  4. steve from virginia

    McCarty = Bilge. The energy cornucopians have lost their minds.

    Energy reserves are abundant,

    There are a lot less of them today than there were last week, last year, ten years ago … the cheap reserves are gone. I guess it all depends on what you mean by ‘abundant’.

    … they are often defined by past work and are inexpensive, efficient and safe to extract.

    Not when compared to the reserves that have been ‘burned through’ already! Drilling a mile under the ocean or in the Arctic or in South Sudan speaks for itself.

    This creates a significant advantage that can in many cases offset the political and geopolitical risk that was once associated with these parts of the world.

    Locals are going to wait until you are finished before they expropriate your ‘investment’: see ‘Qaddafi’, ‘Repsol in Argentina’.

    I also see the world becoming a safer place.

    Such as … Syria? Libya? Iran? Kurdistan? Nigeria? How safe is Shia Kingdom of Saudi Arabia? South China Sea?

    Modern communication has improved access to information and changed people’s basic needs to wants and desires.

    Everyone on Planet Earth with a TV is goaded into wanting a new car … so what? Modern communications conduit for propaganda.

    Resource development creates employment and wealth – the cornerstone from which luxury and comfort is attained.

    Wealth is a surplus of money, an industrial good that is a claim against capital … which is destroyed by the exercise of the claim. Resource development destroys what it produces, nothing remains at the end of the day. Luxury is both subjective and transient, meanwhile, the resource capital is permanently gone with nothing to show for it!

    Energy development is fundamental to advancing social, economic, health and safety standards for the world.

    Believe you or my lying eyes, right? Energy development hasn’t advanced anything but the enrichment of auto-and-oil tycoons. Energy development is fundamental the destruction of capital, given enough time energy development will destroy all value including human life on the planet.

    Don’t worry rich, your day of reckoning is coming, there is nowhere for you to hide.

  5. jake chase

    Put this guy in a $2,000 suit, let Andrew Ross Sorkin interview him on television, and 10,000 suckers will plunge into this stock in less than a week. The perfect sales pitch has always combined nonsense and understatement. Jack Welch did it that way for over thirty years and his company didn’t even threaten to implode until five or ten years after he retired.

  6. Max424

    McCarthy: “… man’s creativity, ingenuity, invention and design always has and always will prevail.”

    That is the exact type of person I’m looking for when I want to make a cash game in a pool room –a man of faith, and the more profound and blind his faith the better.

    Lacks regard for Laws of Probability. Thinks Odds & Percentages is a breakfast cereal. Believes games that are 90% luck –like poker, backgammon, dominoes for points– are games of chance, and would find it inconceivable that the better player will win almost every single time in the short run, and always, without fail, will crush you in the long run.

    My mentor in the discipline called these type of imbeciles, “guppies.” He’d make a hook out of his forefinger, put it in his mouth, pull one of his cheeks, and garble, “Throw a line in the water, D, and real em in.”

    “It’s gonna be too fuckin’ easy tonight.”

  7. The Dork of Cork.

    I found it hard to read to be honest

    It is indeed full of banalities.

    Western countries have relied on cheap mindless energy for so long now.
    Their command and control systems have ossified to the point of absurdity because of this continuous oil sugar highs.

    Wepollack at the coalface talks about the lack of command and control.

    with for example people without useful jobs burning gasoline to get to their desks while people with physical skills are isolated from the flow.
    http://www.youtube.com/watch?v=dycVRTZgyNs

    In his other videos he talks of a triage system happening in Long island – but its a sort of propaganda triage where the most numbers can be claimed are back on line rather then saving the most desperate people that can indeed be saved.

    As I said there is something deeply weird about the modern market state – the soviet system was far more functional.

  8. Susan the other

    Did I catch his leitmotif correctly – that Canadian tar sands will never be cost effective? And fracking for natgas is politically dead? And when he said we have reached peak “energy” not peak oil, did he mean to say that environmental restrictions will make only the most cost-effective, abundant, easy-to-extract oil a viable investment?

  9. JEHR

    Canadian mining companies are not “benign.” From The Globe and Mail ( http://www.theglobeandmail.com/news/national/time-to-lead/for-canadian-companies-overseas-a-corporate-heart-of-darkness/article573681/ ):

    “Ottawa also set up the elaborately named Office of the Extractive Sector Corporate Social Responsibility Counsellor, under scholar Marketa Evans, to monitor the behaviour of Canadian mining and oil and gas companies abroad. But the office acts only on complaints – there have been none so far – and cannot intervene without the consent of the companies involved. Human rights groups call it toothless.

    “They lobbied unsuccessfully for the more powerful post of ombudsman, with the right to investigate companies and make reports to government. Karyn Keenan, a program officer with the Halifax Initiative, a watchdog group, calls Canadian policy “a wholesale failure.”

    “We haven’t taken the issue seriously. There is no regulatory oversight.”

    “With Canadian resource companies doing business in so many poor and undemocratic countries, that is bound to be a problem, the government’s critics say. In the latest instance of trouble, Human Rights Watch reported allegations of beatings and gang rapes at the waste dump of a mine in Papua New Guinea run by Toronto-based Barrick Gold. The company said it had investigated the “disturbing” allegations and was taking action.

    “Company leaders insist they don’t need a gun to their head to act responsibly. They argue that it’s much better when they take it on themselves to respect workers, human rights and the environment.

    “In Guatemala, the Vancouver-based mining giant Goldcorp agreed to perform a human rights impact assessment of its Marlin mine on the recommendation of an ethical-investment group. Over 18 months, consultants interviewed scores of residents, officials and local interest groups. The company says it is now working on implementing the consultants’ 67 recommendations, including adoption of a corporate responsibility policy.”

  10. charles sereno

    “Surreal” indeed. A new con. NC has linked “wolf in sheep’s clothing” articles from this OilPrice site before (rightly so in terms of content). This is the incredible crap world today. Take a 2nd or 3rd look before you bite. NC is safe. Take it from me.

    1. Yves Smith Post author

      They have a lot of hype on that site, agreed. But they also report on some news stuff in a rather bland manner that does not get picked up in the MSM. So if you can ignore the noise (which is considerable), some of their stuff is useful. Sort of like the NYT business section on finance, but much less artfully packaged :-)

  11. Nathanael

    Bluntly, I made a lot of money over the years investing in oil companies. I’ve been slowly divesting from all of them because I think the industry is about to die.

  12. John Lenihan

    Energy: Looking at the recent photos of gas lines raises many questions?

    Why in a place like New York do people need gas-buggies at all? Simple Answer: The eighty-year continuing campaign to destroy public transportation (including buses, trains, taxis, jitneys and all the other historical ways of getting around) to enrich auomotive-plutocrats (now nearly all foreign) and oil plutocrats (mostly foreign).

    Look at the photos again! There are quite a few mini-buses providing quasi-public or essential private services, but the most common vehicle is the gargantuan Slob-UV, almost never seen with more than one driver or a very rare passenger. There are even a few unoccupied and unladen four-door, four-ton pickups with shiny (and empty) new tool-boxes to add spice to the whole unholy mess.

    The “gas-crisis” whether happening after a storm, or at any other time, is a “self-inflicted” wound which we certainly have the power to change, especially considering that methanol (a cheap and nearly perfect motor fuel) can be made in huge quantities from domestic agricultural waste, garbage, and even sewage. Look in the mirror and see your enemy!

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