Showing posts with label North America. Show all posts
Showing posts with label North America. Show all posts

Monday, February 03, 2014

Pricing and Exporting North American Natural Gas For Asia

The investor relations community works hard to convince analysts like Yours Truly that junior exploration companies in North America have good prospects.  One premise for making this case is the Asian energy market's willingness to pay for cheap North American natural gas.  The IEA's 2013 report "Developing a Natural Gas Trading Hub in Asia" notes that the Asian gas market is not fully responsive to supply and demand fundamentals.  That will change as more producers move to meet demand.  The USDOE's EIA natural gas page shows how the price of gas has recovered nicely from its drop two years ago, and that demand from exports is projected to remain strong.

Gas exports from the US and Canada must travel via liquified natural gas (LNG) ocean carriers.  There are no gas or oil pipelines under the Pacific Ocean; subsea transport of petrochemicals via pipeline over anything other than short distances presents insurmountable technical obstacles.  Canada has taken an aggressive approach to building LNG infrastructure that can serve Pacific Ocean carriers.  The US lags behind, with fuss over the Keystone XL oil pipeline demonstrating the anti-infrastructure mentality of very ignorant pressure groups.  The National Energy Board of Canada still requires export approval but I fully expect that to be reduced to a formality once more Pacific coast LNG infrastructure is complete.   The "pick and shovel" plays for pipeline operators and construction firms operating in Western Canada will be compelling for years.

Forecasting the future price of natural gas is more difficult than forecasting either demand or supply.  Demand can be derived from population growth and energy use per capita.  Supply is a function of capex spent to counter decline rates in well-known geology.  Pricing is different due to all sorts of random factors, including political news, accidents, and weather conditions.  I do not typically pay attention to price forecasts from private firms like PIRA or IHS CERA.  They are valuable in the market because preppie investment bankers hire them to do work they are not smart enough to do themselves.  A more intellectually honest approach would use the NG market price and figure its probability of mean reversion.  This admits the ambiguity of commodity prices, and justifies the hedging strategies all producers use.  EIA reports the NYMEX prices and CME Group prices Henry Hub natural gas futures with this reality in mind.

I do not know the specifics of import requirements that Asian governments set for natural gas.  The US federal coordinator for Alaska natural gas states that Asian market favor wet gas, with more ethane and other liquids to raise the gas' heat content.  A Google search of other Asian content requirements reveals a preference for "sweet" gas with a lower hydrogen sulfide content.  The booming Bakken shale fields are notorious for producers who flare off NG because they have no pipelines or storage tanks to capture it.  That will change as Asian demand moves the NG price far enough to drive such investment.

There's big demand in Asia for natural gas.  The US and Canada have big supply.  Together the twain shall meet.  It's only a question of transport cost, terminal liquefaction (and regasification) services, and content regulation.  Actually, that's several questions, with multiple sub-questions in each one.  The shale drilling boom in North America marches on.  

Friday, December 07, 2012

Thunderbird Energy (TBDYF) And Natural Gas

Thunderbird Energy Corp. (TBDYF on OTC / TBD.V on TSX) is drilling for natural gas in Utah and oil in Wyoming.  Let's see if they've had any success so far.

My readers know my preference for a geologist at the helm.  Their CEO is not a geologist but their Chairman is one, so maybe that plus the petroleum experience of the rest of their team is enough to get something done.

Their Gordon Creek natural gas project in Utah is notable for its 2P reserves of 39.3 Bcf, according to their NI 51-101 report.  Using a current price estimate of $2.71/Mcf, this discovery has an unadjusted gross value of $106.7M.  That may seem like a lot but we haven't yet annualized it based on the expected life of the property, nor have we subtracted operating costs at the wellhead.  Thunderbird's own estimates are more conservative, figuring an operating cost of $1000/well/month plus $0.45/mcf, for a discounted NPV of just under $70M.  Photographs on their website show an extant pipeline on the property, which is all they need to get their product to market.

Their Wyoming oil project is not as well developed, so I'm looking forward to seeing more data.  I'd also like to hear how they plan to extract and market the CO2 reserves they believe they have at Gordon Creek, and how this will not interfere with the more valuable natural gas they will put through their pipeline.

The good news about their natural gas find is that natural gas prices in North America are at record lows thanks to a glut of supply, and every natural gas operator on the continent loves to remind investors of how an eventual increase in price will make their projects worth much more.  It's good that Thunderbird has an agreement with another company to receive royalties and fees.  It's not so good that their breakeven analysis (in their corporate presentation as of December 2012) ignores sunk costs; since they're obviously not making a decision to walk away from the Utah project, their exploration costs should be considered necessary exploration costs and not sunk costs.

Check out their financial statements from January 2012.  Note 2 sheds further light on their agreement to receive royalties and fees; this relationship is contractually contingent on Thunderbird's completion of further well drills.  The $25M in payments agreed upon so far won't dig Thunderbird out of its $29M retained earnings deficit.  Thunderbird will have to hit significant additional 2P finds to remain a viable company.

My bottom line on Thunderbird is that it's one of those natural gas plays that has done a lot of things right up until now.  Their management still has to do a lot of things right - further fundraising, further successful drilling - to keep the company alive and/or out of a forced sale to benefit its royalty partner.

Full disclosure:  No position in Thunderbird Energy Corp. at this time.  

Further disclosure:  Please note that I use the energy sector's convention of "mcf" for one thousand cubic feet, but the financial sector's newer convention of "M" for one million dollars.  

Tuesday, February 07, 2012

Free Trade For Cuba

The US economic embargo against Cuba is half a century old.  It has utterly failed to accomplish its stated purpose of regime change in Cuba.  It is prone to leakage because the US does not enforce it with a naval task force that can interdict seaborne commerce.  The pain it inflicts on ordinary Cubans has spurred some to seek refuge in the United States, adding to our country's immigration burden.  This embargo is even outside the norms of the trade relations the US had with other Communist bloc countries during the Cold War.  The US allowed American companies to buy Soviet oil and sell the Russkies some Midwestern wheat.  Trade relations gave the US an additional lever it could pull to influence the Soviet Union's internal human rights policies.

Let's try a radical, outside-the-box solution to our Cuba problem.  The US should lift the embargo and negotiate a free trade agreement with Cuba.  The immediate effect of such a deal would be a rush of American companies looking to offshore low-wage production to Cuba.  The follow-on effect would be newly prosperous Cuban workers looking to spend money on material goodies.  Access to modern goods helped ordinary Soviet citizens see what they were missing in a system of central planning.  A little middle class spending in Cuba would go a long way toward breaking Communism's psychological grip on the island.

The US can declare victory in the last Cold War front in the Western Hemisphere.  The Castro boys have one foot in the grave anyway.  Opening up trade relations now would undermine any plans they may have for a familial transfer of power in the style of North Korea's Kim dynasty.  The Cuban-American lobby may not like this approach but they are much less influential now than in the 1960s.  If Richard Nixon could go to China, then modern American leaders can go to Cuba.  Economic influence is an element of national power.  We should use it to invite Cuba into the capitalist world.

Nota bene:  I have never smoked a Havana cigar.

Thursday, January 19, 2012

Keystone XL Pipeline Could've Been A Contender

I may have been too generous a few days ago when I saluted a U.S. proposal to streamline business regulation.  What the government giveth, the government taketh away.  Federal support for the Keystone XL oil pipeline has suddenly ended, for the time being  I guess the reform proposal forgot to take away the State Department's veto power over commerce decisions.  This major infrastructure project would have provided jobs for unemployed Americans and secure energy for businesses.  The lesson for its backers is that it probably wasn't as environmentally friendly or cost-prohibitive as a failed solar panel maker like Solyndra, which of course got plenty of help from the U.S. government.  

Even our natural allies scratch their heads at this kind of decision making.  China now has a golden opportunity to obtain Canadian oil in furtherance of its strategic goals.  Chinese purchases of Canadian oil via pipeline would constitute a strategic breakout by giving an Asian nation its first-ever foothold in North America (well, at least since Russia owned Alaska in the 19th Century).  It sure would be nice if the State Department had taken that into account before it recommended against the Keystone XL pipeline.  TransCanada did the smart thing by trying to re-route the pipeline, so now it must wait until after the 2012 election cycle for the project to be approved when no one's paying attention.  

Monday, December 26, 2011

Riverside Resources (RVSDF) With Multiple Mexico Properties

Most exploration-stage mining companies will stick to a handful of properties, like no more than three.  They do this to stay focused, contain costs, and keep operations predictable.  Portfolio approaches are typically for major miners that can deploy capital and talent globally, or incubation companies that can spin off projects as separate companies.  Riverside Resources (RVSDF) is an exploration-stage mining company with a business model that defies this conventional wisdom.  They are exploring multiple properties in North America with a focus on Mexico.

The good news is that they have plenty of cash and short-term investments, and are profitable as of June 30, 2011 (a big change from the net loss in the same quarter in 2010).  The quality of management probably has a lot to do with that result.  The CEO and members of the team responsible for drilling have strong backgrounds in mining.  Riverside seems to have done a lot of things right according to its unaudited financial statements, with timely capital raises and a sufficient number of wholly-owned properties.  Their key to turning a financial corner appears to be the revenue they've collected from larger partners who held options to explore various properties.  Majors who elect not to extend these options allow properties to revert to 100% ownership of the original explorer.

The risk for Riverside is that too many of its properties could be abandoned by larger partners.  Having 100% ownership is not a selling point if the owned properties have been abandoned by prospective joint venture partners.  Riverside would then be under pressure to prove its remaining properties are viable.  A quick scan of several of their press releases reveals a lot of drill intercepts at less than 1.0 g/t Au.  This past quarter's profitability gives Riverside some breathing room it can use for more exploration.

Full disclosure:  No position in RVSDF at this time.