Author Archives: Arjun Thakkar

Future of Oil and Gas

In an era of rising demand and hype for electric vehicles (EV) and battery technology, commodities and ETFs linked to oil and gas have managed to hold their prices. EV stocks like Tesla and Nio have increased by 71% and 100% respectively in the past year. The price of WTI Crude Oil has also increased by 76%, while prices of micro-cap oil stocks like #ECHO Echo Energy and #MSMN Mosman Oil and Gas have increased by 58% and 13% respectively.

This clearly signifies that even after the rise in demand of EVs, commodities like oil and gas are here to stay in the short and long term.

Consumers are under the impression that they could be in an oil-free world by 2030 and most consumers perceive batteries and electricity as the primary source of energy. However, this is highly unlikely and nothing but a series of myths planted in our brains due to effective marketing.

The International Energy Agency (IEA) that analyses trends in energy industry, released its annual World Energy Outlook in November 2019. It looks at potential energy demand and supply under different scenarios to explore different possible futures. The IEA scenario stated a global increase in energy demand by 24% by 2040 of which, oil and natural gas will supply 64% of the world’s energy needs. In accordance with the Paris Climate Agreement, if based on the Sustainable Development Scenario, the oil and natural gas will still supply 47% of the world’s energy by 2040.

More than 15% of oil demand goes into non-combusted use including petrochemicals which is expected to grow to 20% by 2040. Even if the demand for gasoline and other fuels may hypothetically be on the decline, the petrochemical sector, in contrast, still has room to grow. Some major companies have even pledged some $100bn into the petrochemical industry over the next decade.

Developing countries like India have one of the most aggressive renewable power capacity roll-out programmes worldwide. However, its access to affordable fossil fuels remains a priority for its government because its needs for cheap oil, gas and coal continue to rise to meet energy demand that is forecast to more than double by 2040. India’s petroleum minister Dharmendra Pradhan believes the world’s third-largest oil consumer could be the “golden goose” for crude suppliers as it buys more than 80% of its oil needs from foreign crude purchases.

The graph below demonstrates that the forecasted oil demand for 2040 is higher than present day with non-combusted being the driver to increase the demand. While in the primary energy consumption chart, oil is forecasted to maintain its consumption as a primary source by 2040. Whereas the primary consumption of gas is forecasted to rise.

(Financial Review, 2020)

Texas Oil Wells

In 2018, companies in the Permian Basin – “an ancient, oil-rich seabed that spans West Texas and South Eastern New Mexico — were producing twice as much oil as they had four years earlier” whilst forecasters expected the production to double again by 2023.

The International Energy Agency (IEA) had also predicted that American oil mostly from the Permian will account for 80% of growth in global supply over the next seven years.

Some small companies already had presence in the Permian Basin before these predictions and report in 2018. In 2017, Mosman Oil & Gas (MSMN) acquired several oil and gas leases comprising the Welch Permian Basin Project for a consideration of $310,000. Although the Welch project contributed to a gross profit of $167,000 in the year ended 30 June 2020, recently Mosman sold this Welch Project for $420,000 receiving a premium of 40% from the sale of the project alone.

Mosman is steadily growing its working interests across a number of projects in Texas, including Stanley, Falcon-1, Winters and Galaxie. These have produced a gross profit of over $500,000 in the 2020 year. Stanley also has a 100% success rate with oil production from four wells drilled to date.

Texas wells are providing high returns to oil companies, and with a growing number of projects and acreage, Mosman is well placed for future growth.

South Argentina Oil Wells

Many companies own wells in Argentina and Latin America as it is considered a region rich in resources with 4% of natural gas reserves and 20% of world oil reserves. They are also often undergoing positive development in macro conditions. A strong demand outlook for energy consumption and economic growth coupled with underdeveloped – but lower cost – onshore plays, makes Latin America a favourable region for companies like Echo Energy (ECHO) to deploy its expertise in support of an exploration-led growth strategy.

For the financial year ended 31 December 2020, Santa Cruz Sur at the south-eastern tip of Argentina helped Echo Energy to increase its revenue fourfold to US $11.1mn. This was also due to Echo securing new gas sales contracts at premium rates to the prevailing spot markets in early Q1 2021.

The increase in revenue drove an significant increase in the Echo Energy (ECHO) stock price by 51% from 55p to 83p between December 2020 and January 2021.

Major and Small Suppliers of Oil and Gas

The difference between the barrels of oil supplied can be huge when major suppliers are compared to the small suppliers. But all that glitters is not gold. High supply and production would require a higher demand to be profitable, if the demand of oil stagnates in the future it will affect the major suppliers before the small suppliers.

The big 10 companies accounted for 28% of global oil production in 2020 as shown below.

When this is compared to small oil producers like Echo Energy and Mosman Oil and Gas,  Echo Energy produced a cumulative of 94,000 barrels of oil in Santa Cruz Sur in South Argentina. While Mosman Oil and Gas produced a gross of 90,000 barrels of oil in the year ended June 2020. Based on available data, the production of Echo and Mosman combined is 0.2% of the global oil demand.

This is effective during times of recession or when the global demand is low as during unprecedented times a major oil supplier to generate profits and work at full capacity would need to sell between 5-12% of oil demand while small suppliers of oil would need to fulfil a negligible percentage of global demand of oil to turn profitable. This is due to high storing and inventory costs for major oil suppliers as well as higher fixed costs due to bigger operations.

Conclusion

Therefore, even though the oil demand is perceived to be lower in the future due to alternative resources, the demand doesn’t seem to be in decline due to oil having uses other than fuel and gas for cars and transportation like non-combusted petrochemicals. Even if the demand for oil is on the decline it would not affect small oil suppliers; as working at full capacity they fulfil just a small percentage of global oil demand and still manage to make hefty profits.

These among many, are the reasons keeping the oil prices buoyant and in the mix, not only for the present day but also for the future.