Shale the Conquering Hero!

Finally! Something happened yesterday that doesn’t have anything to do with interest rates, monetary policy, or the currency wars! Peter Bond, you beauty! Just when we thought the market would go gently into the weekend without strong leadership from an emerging powerhouse sector, news of a significant kind arrives.

It’s hard to know what to make of Linc Energy’s announcement that there could be $20 trillion worth of oil locked in Australian oil shale formations. The geology looks promising. That is, there is probably oil or something very much like it trapped in the Ackargina Basin in South Australia.

But Bond, Linc’s CEO, says it could be 3.5 billion barrels at the low end…or hundreds of billions of barrels at the high end. At 233 billion barrels, Aussie oil reserves would be the second-largest in the world. Only Saudi Arabia would have more black gold.

However, as any non-greenhorn resource investor knows, estimated resources are not the same thing as proven reserves. Reserves are what you can extract economically. Resources are what may be in the ground. There’s a big difference.

We’re particularly interested in the story because we’ve been personally following it for almost eight years now. In 2005, your editor paid a trip to Shell’s Mahogany Ridge project in western Colorado. There were no other analysts or media on the trip. It was a handful of mayors from surrounding towns wanting to know what Shell was up to, if jobs were coming, and what affect the operations would have on local power and water.

Back then, it was clear there would be no oil produced from shale – either through unconventional in situ production or conventional retorting – for a long time, if ever. But then technology came in to the picture and changed everything. Oil bearing shale formations were laden with gas, which was originally seen as a by-product and un-extractable in commercial quantities anyway.

Horizontal drilling and hydraulic fracturing changed everything. And the American shale gas boom began. Later, the same technology that unlocked trapped gas in shale was used to extract oil. Peter Bond is saying the same thing can happen here in Australia – which is why Linc’s shares jumped as much as 30% yesterday.

Whether it should or will happen in Australia is an entirely different matter. It’s a geology question, an investment question, and a public policy question. But at the very least, it shines a light on the companies already moving towards commercial extraction of shale gas from the Cooper Basin. That’s probably good news if you’ve been reading The Denning Report for the last two years.

But even if you haven’t, there’s a larger and more interesting point here for Australian investors. When you invest in a share market dominated by resources shares, there is always the possibility of a news-driven event driving a single stock or sector higher – no matter what’s going on in the market or the world.

When a company finds oil in the ground, it has nothing to do with Japan’s trade deficit. Or when an ore grade turns out to be higher than expected based on drill results and lab analysis, nothing the Federal Open Market Committee says that day can change the geology of a big find. This means you always have the potential of news events powering stocks higher (or lower) independent of the market trend.

There are probably no other major stock markets in the world where this is more possible than Australia. It IS possible when a stock market has lots of technology stocks listed. Then you get a similar thing: breakthrough technologies coming when they come, driving stocks higher on the strength of the news, not the strength of a market trend.

Of course, Australia isn’t exactly a laboratory for publicly-listed breakthrough technologies. The CSIRO has spun off some great ideas where the intellectual property behind them turned into the selling proposition of a public company. But in general, Aussie investors have to get their news-driven breakthroughs in resource stocks, not technology stocks.

The good news is, the news is good, at least when it comes to energy trends. For example, Royal Dutch Shell just announced a $9.53 billion shale gas development deal with Ukraine. Shell’s going to drill 15 exploratory wells in regions the Ukrainian government reckons could hold as much as three trillion cubic metres of natural gas.

Energy reserves like that would be enough for at least the next 50 years for Ukraine. It would also change the nature of Ukraine’s relationship with Russia. Currently, that relationship is one of energy dependence, which is a kind of political or strategic subservience as well. Change the energy relationship, you change the geopolitics. This goes for every country that chooses to tap into unconventional energy resources.

By the way, the Japanese trade deficit for 2012 is not entirely unrelated to the energy story. Japan, you may recall, hadn’t run a trade deficit for 30 years, until 2011. Then, when the earthquake/tsunami/nuclear accident struck, exports fell and energy imports rose. The result has been two consecutive annual trade deficits for an economy driven by exports.

Japan’s trade data showed that exports were down in December 5.8% from the same time last year. Meanwhile, imports were up 1.9%. Only two of Japan’s fifty operational nuclear reactors are generating electricity at the moment. Directly related is the news that LNG imports were 8.3% higher in December than a year ago.

All of this relates to Australia. We began the week talking about rising domestic gas prices. Gas from the Northwest Shelf and Gladstone is going to Japan. Local industry says it should stay here. Producers say there’s plenty of gas for exports and domestic industry, but at higher prices.

Meanwhile, the entire unconventional energy sector could be on the cusp of a great, US-style boom. This would be great news for investors. But regulatory and policy decisions at the State level will have to be made during a Federal election campaign where energy prices, the carbon tax, and ‘climate change,’ are all sure to be issues.

But even sooner than that, Japan’s trade data show that the Bank of Japan will have to be extraordinarily committed to an easy monetary policy if it wants to weaken the Yen and get Japan’s export engine firing again. That brings us back to the currency war issue, which is probably a good place to end the week, but not without mentioning that just because you need growth doesn’t mean you can always make it or find it.

Keep that in mind while you read a story below from our friend Byron King. Byron joined us on our trip to South Africa late last year. We looked at the situation in platinum group metals and both walked away with some solid investment ideas. The idea your editor featured in The Denning Report is now up over 85%. Byron explains in this article on palladium why the case for the PGMs could get stronger in 2013.


Dan Denning
for Markets and Money

From the Archives…

To Be Better at Investing, Invest Like an Entrepreneur
18-01-13 – Nick Hubble

The Future is on Shaky Ground
17-01-13 – Murray Dawes

Attention Hoaxers: Ideas Have Consequences and so do Actions
16-01-13 – Dan Denning

India’s Gold Mania
15-01-13 – Douglas French

China’s GDP: Still Making Up the Numbers
14-01-13 – Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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