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While the media frets about the breakup of Libya, and who gets the 2% of the world’s sweet oil, as an old Saudi Arabia hand, I worry about the stability of that kingdom.
Saudi Arabia is connected by a causeway to Bahrain - where protests are ongoing - making it is all too easy for insurrectionists from Bahrain to enter. Undoubtedly Saudi’s King Abdullah would hit hard immediately at any sign of trouble in the kingdom, where such anticipated swift brutal action has calmed Western fears of any supply failure from the world’s biggest oil source.
We can only hope that the authority’s actions can hold peace in the kingdom, but if not, we are in real trouble. Hold your breath that the king’s $36 billion ‘bribe’ (not enough) fed into education, industry, unemployment benefits and a universal 15% pay rise last month will act as a sufficient sop to the educated youth, where 40% of the 20 to 24-year-olds are out of work.
The US, which imports 13 million of its 20 million barrels of oil a day, seems confident that Saudi can turn up the taps to cover the shortfall from Libya, but so far this has not happened. Perhaps they choose not to, or – frightening thought – perhaps they are less than truthful about their reserves, and can’t increase output.
Indeed it is surprising that oil production from the kingdom has been static for the last five years.
However it is encouraging that Opec’s share of world oil production has fallen to 40%, whilst production is increasing fast in Russia, Africa and Latin America, whilst the massive shale gas potential, now exploitable with modern drilling techniques, has transformed the world’s estimated fossil fuel resources.
The last 10-month price increase has raised world spending on all products by over 2%, and if it holds these current levels it would trigger a noticeable global slowdown. This hits the energy intensive emerging nations much harder than the developed world, and coupled with a food spend typically 70% of income, not unsurprisingly leads to riot.
From an investment perspective, in the last two weeks I have added to my oil holdings. All of the companies below are listed on London's Alternative Investment Market (AIM).
I bought more shares in Chariot Oil and Gas after they raised their resource asset in offshore Namibia by 700 million barrels (bbls) making their share of the field 10.4 billion bbls. They made a very upbeat statement regarding the interest they are having in plans to partner with an oil major, with several conducting due diligence. There is a view that they might hit 20 billion bbls when the seismic 3D data is fully analysed.
On 7 March they announced a share placing at 250p which is a discount to the market. This raises them £90 million and gives them more leverage in negotiations with the majors in the farming out process. This enhances the value in the long term.
In the same region I bought a few shares in Global Petroleum which will own two sizeable blocks to the south west of Chariot, once they have completed the acquisition of Jupiter Petroleum, presenting a very interesting prospect at a £32 million market cap. Global will have an 85% interest in the 11,730 sq km Namibian acreage, lying adjacent to Arcadia Petroleum, which recently announced 1 billion bbls – a number which is likely to increase with more seismic exploration. This is speculative, but it would be surprising if Global didn’t find similar amounts. They look very cheap at a market cap of £30 million.
I bought more Amerisur, an oil and gas producer and explorer mostly in Colombia, where I think the potential value is still under-appreciated. Last month the company quadrupled their 2P (proven and probable) reserves at one site to 3.6 million bbls where the lifting cost has been reduced to $10 per bbl. Six further wells are planned in the second quarter targeting 35 mbbls and production of 5,000 bbls per day. The company has received a number of offers for participation in other blocks. They have a lot going on which looks increasingly interesting.
Finally I have gone off piste and back to Arabia. I do like Syria where the youthful, erudite president Assad and his wife, a Syrian Sunni Muslim from Acton (London), seem to move informally at ease amongst their people.
Foreign banks are encouraged, there is a stock exchange, the US identifies the country as a friendly supportive regime. However, most interestingly, on 14 February Syria raised $64 million in six-month bills yielding 1% and three-year bonds, yielding 2.7%, bought by nine banks and oversubscribed. This is an enormous act of faith in the economy. And it makes Gulfsands Petroleum wrongly priced for risk. They are producing in Syria 11,000 bbl per day of exceptionally low cost oil, now piped to port, with all capital expenditure from cashflow. They produce 650 bbl per day in the Gulf of Mexico and also have operations in Tunisia and Iraq.
As a final thought, look at alternative energy, which becomes increasingly relevant. We have no idea whether it will be wind, solar, geothermal or biomass energy that will fuel our electric cars, but Impax Asset Management manages over £2 billion in the renewable energy and environmental sectors, and will cover all the options as they gain preference. Perhaps not a short-term play, but I would not want to be out of that long-term market, which could eventually prove to be the ultimate winner.
David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies. He is on the board of one of Impax Asset Management's offshore funds.