How Investors Are Playing “New World Order” in Oil and Gas

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Thanks to the fracking boom of the last few years North America is now on a path toward energy self-sufficiency.

By Peter Krauth, Global Resources Specialist, Money Morning

In fact, the International Energy Agency (IEA) now believes that, thanks to astonishing growth in oil and natural gas output, the U.S. could even become a net exporter of natural gas by 2020, and even net-energy self-sufficient by 2035.

According to IEA estimates, the U.S. is already the world’s No. 2 natural gas producer.

The IEA has also indicated that increasing production from Canadian oil sands means North America could become a net oil exporter. And by 2035, it’s forecast that nearly 90% of Middle Eastern oil exports will find a home in Asia.

These tectonic energy shifts have not gone unnoticed by OPEC and large state-owned energy companies. Major Asian and Middle Eastern interests have already made major acquisitions in Canada and the U.S., with an eye towards many more.

Every day it seems the energy scene is changing at a lightning pace, creating a new world order in energy.

So to gain further insight into this rapidly changing climate, I recently sat down with energy consultant Peter Barker-Homek, a true energy insider.

Peter is the founder of Eta Draco, an advisory firm focused on building operations and capital structures to provide for enduring growth and to anticipate cyclical downturns for small- to medium-sized enterprises.

Mr. Barker-Homek knows more than a thing or two about the global energy sector.

As the previous CEO at TAQA, the Abu Dhabi national energy company, and a seasoned energy executive in a Fortune 20 company, Peter has completed $40 billion in energy-related transactions.

He has more than 20 years’ experience in major markets worldwide, and even served in the U.S. Department of State and the U.S. Marine Corps as an Officer/Pilot. He has appeared on CNN, BNN, CNBC, Sky News, Bloomberg TV, BBC Radio, Al Jazeera, and CrossFire, and is regularly cited in industry journals and periodicals.

I think you’ll enjoy what Peter had to say during our recent Q&A.

If I did my job right, some of it may even shock you.

Insights on the New World Order in Energy

Krauth: Fracking has become a major source of shale oil and gas production in the U.S. and Canada. How do you see the future of this subsector of the industry?

Barker-Homek: Drilling for oil and natural gas in shale rock is supporting 1.7 million U.S. jobs this year, including workers outside the energy industry, according to researcher IHS Global Insight, and could double over the next 10 years.

Cheap natural gas will bring industry back to the USA and Canada from emerging markets such as China. We are already seeing industries that were deemed only to be competitive in Asia now returning to North America.

Think of the political impact of not having to import 8% of our oil from Venezuela or 45% of our oil from the Middle East and North Africa!

The abundance of shale gas brings the possibility of low, stable prices. North America has approximately 4.2 quadrillion (4,244 trillion) cubic feet of recoverable natural gas that would supply 175 years’ worth of natural gas at current consumption rates.

Krauth: Could it really lead to energy independence for America?

Barker-Homek: 2012 saw the U.S. providing for 83% of its oil needs and close to 100% of its natural gas supply. If we have a GDP contraction as predicted — if we fall off the fiscal cliff — then the U.S. could be energy independent by the end of 2013 and will, on its current trajectory, with current growth forecasts, reach energy independence by 2020.

OPEC has already started to recognize this, and with other national oil companies begun lobbying for stringent regulation of oil and gas shale production. This is merely a deceptive effort with the real aim to protect their market dominance.

It is also the reason the “New Seven Sisters” are buying up assets worldwide.

The “new seven sisters,” or the most influential energy companies from countries outside the Organization for Economic Co-operation and Development, have been identified as Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras, and Petronas of Malaysia.

Overwhelmingly state-owned, they control almost one third of the world’s oil and gas production and more than one third of its total oil and gas reserves. In contrast, the old Seven Sisters – which shrank to four in the industry consolidation of the 1990s – produce about 10% of the world’s oil and gas and hold just 3% of its reserves.

The IEA calculates that 90% of new supplies will come from developing countries in the next 40 years. That marks a big shift from the past 30 years, when 40% of new production came from industrialized nations, most of it controlled by publicly listed Western energy groups, noted a report published by Rice University’s James A. Baker III Institute of Public Policy.

Meanwhile, national oil companies are banding together to help to develop each other’s reserves, leaving growth in the oil and gas industry — and the resources for world economic development – in the hands of the new Seven Sisters and the governments that control them. The consequences of this could hardly be more profound when you add that the new Seven Sisters have strategic alliances in all major markets with the remnants of the old Seven Sisters – The group comprised Anglo-Persian Oil Company (now BP); Gulf Oil, Standard Oil of California (SoCal) and Texaco (now Chevron); Royal Dutch Shell; Standard Oil of New Jersey (Esso) and Standard Oil Company of New York (Socony) (now Exxon Mobil).

Krauth: What do you expect from the Obama administration’s Bureau of Land Management (BLM) regarding regulation for this industry?

Barker-Homek: The Obama administration sees energy independence as fundamental to U.S. national security. The increase in transportation mileage standards and drives towards greater efficiency will be blended with robust development in oil and gas exploration and development, renewables (wind & solar) and hybrid/electric vehicles.

The EPA will continue to develop and enforce stronger environmental regulations that will consider the full value chain. Specifically, developing oil and gas shale plays at the expense of agriculture or community health is not a sustainable approach.

BLM will continue to open federal lands. The rules are clear and responsible, containing three parts:

  1. All chemicals used in hydraulic fracturing must be publicly disclosed following the completion of fracking of a given well.
  2. New guidelines for how drillers case (enclose) drilled wells, which must be approved prior to drilling the well.
  3. Drillers must submit and have approved water management plans prior to drilling – plans that include how wastewater will be disposed.

Krauth: What’s your take on the current and near-term potential of mergers and acquisitions in this space?

Barker-Homek: The oil and gas sector now has $154.2 billion in announced global deals [this year], according to Dealogic. That puts it in the top spot, above real-estate and technology.

  • Midstream consolidation: Driving the midstream numbers was the largest oil and gas deal of the past year, Kinder Morgan’s acquisition of El Paso Corp. for $36.7 billion in May. This deal highlights the degree of consolidation occurring in this space, especially around transmission and storage of natural gas.
  • Shale oil and gas portfolio moves: Chinese companies were notably active in the U.S. shale oil and gas sector. Sinopec International Petroleum Exploration & Production, a subsidiary of China Petroleum & Chemical Corp., acquired a 33% stake in interests in Niobrara, Mississippian, Utica Ohio, Utica Michigan and Tuscaloosa shale oil fields from Devon Energy for $2.5 billion. PetroChina Co. Ltd. acquired shale gas assets in Groundbirch, Canada from Royal Dutch Shell for $1.3 billion.

Krauth: About 7 years ago a number of sovereign wealth funds met with the IMF in Santiago to outline numerous guidelines on governance, transparency, audits, investment concentrations, etc. How much do these funds control and what’s their track record regarding those best practices?

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