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-- Posted Thursday, 17 June 2010 | | Source: GoldSeek.com
Wellington West Analyst Kevin Shaw lives in Alberta and believes there are few better places to invest than Canada's oil- and gas-rich provinces. But he also sees attractive international opportunities in such places as Kurdistan, the North Sea and Albania. "When you're putting a drill bit into the ground in Kurdistan," he says, "you're. . .'deep-sea fishing.'" In this exclusive interview with The Energy Report, Kevin explains why he's also big on the Cardium, Notikewin, Bakken/Three Forks and the Montney shale plays.
The Energy Report: Last week, the government of Alberta announced that it will reduce oil and gas royalty rates in the province to make them more competitive. You're based in Calgary. What impact will this have on the industry and the oil sands in particular?
Kevin Shaw: For Alberta's oil and gas industry, it's an overall positive move. For the last couple of years, we've been competing in the oil patch against some of our neighbors like Saskatchewan and BC. In Alberta, the regulations were changing every 6–12 months; Alberta didn't have a long-term vision. As a result, small to major companies in the oil patch were pushing their dollars into places that had more attractive fiscal regimes like Saskatchewan and northern BC. Now the government of Alberta has a long-term vision; it has reduced royalty rates and put incentives into some really, attractive technologies on which the industry is focused.
TER: What sort of technologies?
KS: Areas of application like horizontal drilling techniques into more mature oil and gas basins where it's really a recovery-type game to exploit more oil and gas. The government has hit the right spots; it's also stated that nothing will change for three years, so we've got a longer-term vision for our royalty structure, which is what investors, the markets. . .everyone wants to see.
TER: What's the new royalty rate?
KS: There is now a competitive 5% royalty incentive rate in the first 12 months that could extend up to 40+ months, depending on what types of targets are being drilled for oil or gas. Out of the gate, the 5% royalty rate will benefit all Alberta producers. There are a lot of drilling and horizontal resource-play incentives that, in some of the deep shale plays or even the shallower horizontal plays, can be upwards of $1 million per well. That's an incentive for the industry to increase activity in horizontal developments or go after some of the deeper targets—especially targets greater than 2,000 meters below surface. I believe this will bring more focus onto some of the well-known Alberta plays.
TER: Has the new royalty legislation caused you to re-evaluate some the companies you follow?
KS: You definitely look at who can benefit from it. Without getting into a lot of details, these types of royalty incentives in Alberta allow you to drill two or three wells and get almost a third or fourth for free. On a deeper well, you can now get over $1 million in incentives. If you drill three wells, you get $3 million. In a lot of these plays, you can drill a well for $3 million or less. The point is oil and gas companies in Alberta will be able to ramp up their drilling programs with the same capital budget as before but drill incrementally more wells.
TER: If there's more drilling, it stands to reason that some of the drilling companies are good investments.
KS: No question about it. Drillers are definitely going to get busier as activity levels increase. Because of heightened activity levels for horizontal drilling and multi-stage fracks, there's a long wait time to get wells fracture-stimulated because frack equipment is becoming very scarce. It's running around the clock. There's not enough equipment on either side of the border on some of the horizontal plays, which can delay operations in some cases. Frack equipment is becoming a hot commodity. If commodity prices, especially oil, continue to move further or stay in the current range—call it $60–$85—we're going to be very busy as an industry in a lot of these multi-stage frack, horizontal-resource plays. As that happens, we expect that the frack companies are going to be very good investments going forward.
TER: In the U.S., the Obama administration ordered a moratorium on offshore oil and gas drilling as a result of the Gulf of Mexico (GOM) oil spill. What's Wellington's take of what's happening in the Gulf?
KS: Overall, it's a tragedy. For the next six months, obviously, the drilling permits have been stopped for the deeper drilling. Approximately 33 deepwater drilling permits were suspended for the next six months, and no further licenses will be issued until the cause of the explosion is known in more detail. My numbers say approximately 9% of U.S. oil production and about 3% of U.S. gas production comes from the deepwater drilling in the GOM. If you look at shallow drilling, the numbers are closer to 30% U.S. oil and 11% gas. Obviously, stopping deepwater drilling for six months will have an impact.
TER: Do you see an outright ban?
KS: No, I don't. Let's face it, offshore development for the energy industry is very important to the global supply and demand picture. Thousands and thousands of offshore well operations have been executed safely and efficiently. Quite honestly, the industry does a very good job of putting the right procedures in place and operates many safely run operations.
TER: What do you recommend investors do with offshore plays in the GOM?
KS: If people, who are currently invest only in GOM-based companies, want to have a portion of their portfolio in the offshore space, there are other places they can direct their money over the next 6–12 months while the GOM gets sorted out and back up and running.
TER: Where are those places?
KS: There's an awful lot of activity going on in UK's North Sea.
There's offshore in Brazil and lots of other places around the world where you can direct money to the offshore side of the business. Many people in the investment world like the offshore space, given it provides exposure to big reserve targets per well and material changes in a stock's market performance overnight.
TER: A recent Wellington West investment presentation deemed Kurdistan "the world's hottest exploration region." Please explain.
KS: Kurdistan has what we would call "mega play" potential. There aren't too many multi-billion barrel areas that have been under-exploited or under-explored. Kurdistan is one of those regions because it hasn't been open for business to oil and gas nations or entities under the different government regimes of the last 20 years. There's huge hydrocarbon potential there, contained within huge seismic structures. That's the attraction to Kurdistan. The discoveries are so big—it is one of the only places in the world you can still get truly "BIG" oil in place.
TER: What's the risk?
KS: The risk with Kurdistan continues to be the geopolitical environment between Baghdad and the Kurdistan regional government. At the end of the day, you've got over 35 international oil and gas companies in the area. Many governments around the world are trying to work with Baghdad and the Kurdistan regional government to figure out a proper business "law" to move the oil and gas industry forward. Kurdistan is definitely at a real primitive stage, in terms of having a business system and set of regulations for investment into the area by oil and gas companies. That's the risk right now, but there's a huge prize for the government to resolve this situation. I believe it will get resolved, but it may take some time.
TER: Where does the "manufacturing" come in?
KS: If companies boost recoveries on their assets, they'll continue to what I call "manufacture" oil or gas in the space. The Cardium companies are doing that very effectively right now. Bakken players continue to do this very effectively and have made a lot of money for shareholders in the last few years with significant growth we believe still ahead of them in very repeatable plays both in the Bakken and in the Montney resource play in northeastern BC.
TER: Any thoughts you'd like to leave us with?
KS: I see lots of room for growth in the energy side of the business. At some point, I see gas prices coming back to more of our cost basis on the North American side, call it $6–$7. As the gas price appreciates, you're going to see that a lot of stocks—both in the small- and mid-cap space—have a lot of torque to them. As the industries continue to put horizontal technology to bear, there's going to be significant growth in the oil plays domestically and internationally. It's a good place to be for investors—there's a lot of money to be made both domestically and internationally with oil prices over $60 a barrel.
TER: Thanks so much for speaking with us today, Kevin.
Kevin Shaw has extensive industry experience, including engineering, operations and management positions with Imperial Oil Resources, Trimox Energy Inc. and Colt Worley Parsons. Mr. Shaw has a B.Sc. in Mechanical Engineering with a minor in Petroleum; and an MBA from the Haskayne School of Business at the University of Calgary.
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-- Posted Thursday, 17 June 2010 | Digg This Article | Source: GoldSeek.com
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