Characteristics of an Attractive Oil Investment

There are definite project criteria International Energy Network (IEN) considers before contracting with any operators and/or recommending any investment:

    • It is located in:
      • A politically and economically stable country.
      • An area where there is considerable industry infrastructure in place such as pipelines, servicing companies, experts, etc.
      • An area where there is a strong local demand for the oil and gas product.
      • A tax-friendly environment.
      • An area where there are a number of high-quality, long-established, often family-owned oil companies.
      • An area of KNOWN oil and gas drilling success.
      • An area where there are consistent, and to a fair degree, predictable levels of production and services from drilling activity.
    • There is a ready supply of available personnel for servicing such investment activities.
    • There is an effective and reliable EXIT STRATEGY. Most investors do not wish to be tied into an investment for 10 years or 20 years. They prefer to sell their assets after a much shorter time frame in order to liquidate holdings and crystallise their profits. IEN has a program in place to provide such an EXIT STRATEGY.

How is the Credit Crunch affecting the oil industry and oil investments?

The effects of the credit crunch on the oil industry can be summarized as follows:

  • The collapse in confidence and the fall in global economic activity has reduced oil consumption and this in turn has led to a fall in oil prices, so far, to around $35 to $50 per barrel.
  • This fall in oil prices, together with higher costs of finding and extracting oil from deep waters or from the oil sands in Canada, has led to a cancellation, or at least a delay, in such project developments.
  • Oil companies with relatively high debt levels are struggling to reschedule such loans. In some cases, these loans are being called in.
  • Oil companies with less conservative outlooks, who had invested in projects on the basis of higher oil prices, are clearly having problems.

Are oil prices lower than $35 per barrel likely? This is a difficult question to answer, but we are quietly confident that as a price assumption for the medium term - that is, 3 to 5 years - around $50 per barrel will come to be seen as very reasonable if not conservative. Why? Because of the following factors:

  • Many of the major OPEC producing nations require oil prices at these levels if not higher to meet their budgetary requirements. For example, Saudi Arabia's 2008 budget was based on a $63 oil price. Some commentators feel that Nigeria and Venezuela require prices substantially higher that this level to meet their budgetary commitments.
  • $50 per barrel is the investment threshold for many deep water developments.
  • $50 per barrel is not sufficiently high for the vast majority of future oil sand projects, so they will be cancelled or postponed.
  • Global oil production will continue to struggle to maintain its current levels, or at the very least to grow very much.
  • Global demand, whilst it may well fall a little over the next 2 years, will undoubtedly recover, given China and India's continuing development.

In our view, therefore, it is quite possible that oil prices will dip below $50 per barrel for a short period or periods - perhaps for 3 to 4 months at a time, but we believe that for the most part, prices will remain at or above this level.

What are the consequences for investors interested in oil?

We believe that the combination of the credit crunch, together with the collapse in oil prices from unrealistic levels, will actually be a good thing for the US oil industry, for the following reasons:

  • It will remove the "late entry" oil companies who based their business model on continuing high oil prices.
  • It will remove those oil firms who have large borrowings, as they will struggle to meet redemptions etc.
  • It will mean a fall in the high costs of drilling wells. These costs had risen for the past few years to high levels. We will see falls of between 20% and 40% in drilling costs.
  • It will mean that delays on obtaining equipment from drilling rigs, to pumps and other production equipment will reduce substantially.

Consequently, we will see more high quality investment opportunities, at better prices or terms, with less competition.

In summary therefore, we believe there will be better opportunities available for our investment partners. Our strategy of conservatism, using $40 to $50 oil prices has proven to be prudent. We therefore look forward very positively to 2009 and beyond and strongly recommend that investors exploit this window of opportunity.

Why International Energy Network?