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Natural gas vs oil -- the better investment opportunity


cmakam
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There is a lot of brain power in this board with expertise in this area,so:

 

Given the state of the world today,which is the better investment-natural gas or crude oil ?

 

1)Both are depressed relative to recent past

2)Natural gas is somewhat more local relative to crude oil

3)Per BOE natural gas is cheaper (what is the right (relative) parity level given state of the industry today?)

4)Will new technologies like liquified NG bring about a different level of parity in relative prices,given the substitution impact of liquified natural gas?

5)Which market is over supplied relative to demand ?

6)What is the most logical way to think about the better investment opportunity?

 

-cmakam

 

 

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Not that I am an expert in oil & gas, but I do find this question interesting to ponder.  I'll only make the following observations:

 

1.The low cost oil production in the world is largely not investible to most, being controlled by the national oil companies based in the Middle East or Russia.  What is investible to most investors are higher cost productions, shale oil or otherwise.  The North American shale gas production on the other hand, seem to be world class on the cost curve. 

 

2. Gas is much more local commodity.  The cost of transport relative to the cost of the commodity itself is significantly greater.  Oil, on the other hand, is much more compact, and cheaper to transport relative to the underlying commodity cost, making it a much more global commodity.  Therefore one can make an argument that the dynamics impacting oil is much more global in nature on both the supply and demand side, whereas the dynamics that impact natural gas is much more regional, a mostly North American affair if that's the region you are looking at. 

 

But which market has the greater supply / demand imbalance, and therefore needing more time to work out is a very difficult question to generalize and figure out.

 

As far as North American gas is concerned, whether its infrastructure is already overbuilt because of an expectation of LNG export that might not be fully realized is probably THE question to figure out.

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How are oil/ng properties priced ?How much of impact does the forward curve have on pricing.

 

We keep hearing higher cost producers are driven out,but at the same time we also hear of new technologies allowing drilling at price du jour from individual operators.

 

Is there so much capacity and so much capacity waiting to come online that absent a demand trigger we will be in todays price territory for a long time ?

 

There is a depletion curve but it appears as though sufficient capacity coming online today at today's prices to counter the decline and some ?How long before incremental demand is more the incremental production -- 2016,2017 ?

 

Am asking these questions mainly to get a discussion going,in my opinion neither investing nor commodities allow meaningful discussions with precision but maybe there is a clear point where things are out of whack:)?

 

-cmakam

 

 

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Why:)?

 

You can look at the profile of most recent hydrocarbon discoveries and wells. Apart from expensive oil sands, most of them are nat gas rich. For all of the claims of shale oil overcapacity, we've been swimming in shale gas for years. Heck, nat gas is still being flared in some places since it's not economic to capture/transport/sell. It is very unlikely that nat gas can recover significantly without oil recovery. Even if oil recovers, nat gas likely won't.

 

The only argument for nat gas is local inefficiencies - if you could buy a company that does shale gas in nat gas importing area (assuming no country risk, exploration risk, regulation risk), you might do well. Also nat gas might swing a lot based on winter temperatures, since a large portion is used for heating. But that wouldn't be a secular swing.

 

LNG even if it delivers will just drive global prices to the bottom that we currently see in nat gas rich areas. E.g. Russia is not going to just roll over and stop selling nat gas if Europe gets cheaper LNG. It will just lower the price to compete.

 

Oil is much more likely to go up when/if big projects get delayed/mothballed/cancelled. Its demand is also based on transportation and not energy/heating. So if China/India/etc. continues to drive more, the demand goes up. If China/India/etc. consumes more heating/electricity, that's split between nuclear/coal/solar with only part being nat gas.

 

With all that said, there might be some nat gas companies that will do OKish.

 

Caveat: I'm almost ready to throw in the towel on both oil and natgas. Sign of the bottom perhaps. ;)

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Pricing reflects local, not global, conditions. The global commodity price forecast x change in ability to deliver the goods – over the intended time horizon. 

 

Most would argue that in today’s world, QE would be better delivered through paying for the building of new nation building megaproject infrastructure (ie: FE, or Fiscal Easing).  For Canada, the modern day equivalent of the CPR rail road would be a high capacity cross country West-North-East gas trunk pipeline – connecting all of Canada’s major o/g fields. Not possible without vision, federal help, and provincial cooperation.

 

The Alberta Tar-Sands are essentially a tilted, exposed oil field; where the volatiles have long since evaporated off. As a source of conventional oil, it is a high cost stranded asset that is extremely harmful to the environment.  But think of it as a giant sized carbon filter (ie: odour eater) – capable of sequestering enormous quantities of CO2 and methane, & we have a global sized chemical lung; rivaling the size of the rain forests.  A different vision, that is not possible without global & federal help. 

 

A whole nation using the least damaging fossil fuel to combat climate change, as necessary; acting as one of the major lungs of the world, & getting paid for it – as a generator of carbon credits.  Essentially, petro $ recycling, but in a different way. The US & Russia did the space race, but this is really not Canada’s style. The ‘green’ race is, and it is perhaps THE greatest legacy, today’s leadership can pass on to the future generations. If you want to rank up there with the founding fathers, this is quite possibly THE best shot at it. Vision.

 

Obviously there are many possible visions; but if you think something like this may have legs, then the WCSB has to be high on the list.

 

SD

 

 

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Why:)?

 

You can look at the profile of most recent hydrocarbon discoveries and wells. Apart from expensive oil sands, most of them are nat gas rich. For all of the claims of shale oil overcapacity, we've been swimming in shale gas for years. Heck, nat gas is still being flared in some places since it's not economic to capture/transport/sell. It is very unlikely that nat gas can recover significantly without oil recovery. Even if oil recovers, nat gas likely won't.

 

The only argument for nat gas is local inefficiencies - if you could buy a company that does shale gas in nat gas importing area (assuming no country risk, exploration risk, regulation risk), you might do well. Also nat gas might swing a lot based on winter temperatures, since a large portion is used for heating. But that wouldn't be a secular swing.

 

LNG even if it delivers will just drive global prices to the bottom that we currently see in nat gas rich areas. E.g. Russia is not going to just roll over and stop selling nat gas if Europe gets cheaper LNG. It will just lower the price to compete.

 

Oil is much more likely to go up when/if big projects get delayed/mothballed/cancelled. Its demand is also based on transportation and not energy/heating. So if China/India/etc. continues to drive more, the demand goes up. If China/India/etc. consumes more heating/electricity, that's split between nuclear/coal/solar with only part being nat gas.

 

With all that said, there might be some nat gas companies that will do OKish.

 

Caveat: I'm almost ready to throw in the towel on both oil and natgas. Sign of the bottom perhaps. ;)

 

But there is a linkage between natural gas and oil.  If oil were to come up in price, and gas doesn't, all the LNG projects would all of a sudden come back alive, LNG delivered to Asia being priced mostly off oil prices, and Natural Gas Liquids would all come back alive as well.  After all, shale gas has been around for quite a bit longer than shale oil, and natural gas prices has been low for a lot longer than oil prices has been, yet the natural gas producers were all doing just fine right until the moment oil fell off the cliff, because they were making plenty of money off NGL's.

 

I just think it's very difficult to generalize, and each company has its own circumstances that impact its own supply/demand dynamics.

 

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Current U.S gas consumption is say 76bcd,if we assume a production decline is say 5 percent (i.e without taking into account any new supply),shouldn't we have say 3.5bcfd come online annually to keep production constant-where is this coming from?how price sensitive is this marginal annual production?

 

Based on my admittedly limited perspective it appears as though very very few companies can maintain production based on today's prices with cash flows generated (let us ignore asset sales and debt to finance drilling ).

 

Is the inflection point when we cant have 3.6bcfd at today's prices ?

 

I agree there has to be some correlation between ng and oil but how can we explain widely fluctuating  levels per equivalent BOE,it is almost as though both dance to an independent drum beat but may influence each other.It also seems as though big chunk of ng demand will not shift to gas (since ng is usually cheaper per BOE) and the oil demand needs oil and cannot shift to ng (or it would have).Am guessing wildly here but perhaps a very very small percentage of demand really has the choice to go oil/gas.

 

LNG is definitely a key element in relative price of ng and oil but  wouldn't it be a while before lng can be substituted for oil (in a meaningful portion of oil demand)?

 

-cmakam

 

 

 

 

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