Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
This site uses Akismet to reduce spam. Learn how your comment data is processed.
Today we're going out into the Moroccan desert to evaluate shale gas fields here. It's early morning, and I am now awaiting my "ride."
They tell me his name is Saad, which means "happiness" in Arabic. Seems a strange name for what I'm still hoping is a Jeep.
Nonetheless, I have a few moments before he shows up to reflect on my government meetings in the capital city of Rabat.
This is an impressive city, with large areas of greenery and beautiful gardens. It also boasts one of the largest palace grounds I have ever seen.
Our meetings dealt with setting the legislative and regulatory agenda for shale gas development in the country. Morocco has been exploiting shale oil for more than a decade, but the gas is new. And it's creating some problems for the existing Oil Law.
If all goes according to schedule, the first evaluation wells will be spud over the next few months. That means there is little time left, before drilling starts, to establish the production, environmental, and royalty/profit ground rules.
One thing, however, is already apparent – both here and elsewhere internationally: Having a known volume of gas in the ground is one thing; being able to provide the working structure necessary to exploit it is quite another.
Without Infrastructure, Field Development Will Languish
Yesterday I traveled some 1,250 kilometers round trip, between Agadir in the south and the capital city of Rabat (north of Casablanca).
It's a 16-hour train ride, all told. But the trip would have been much more difficult only a year ago. That's because the new 250-kilometer extension of the motorway between Agadir and Marrakech is barely one year old.
I have seen this in countries throughout the world.
If there is no modern infrastructure, field development will languish. That infrastructure requires field-related investment (wellheads, processing facilities, gathering units, pipelines, compressors), as well as broader support (roads, communications, power, water availability and usage, among other things).
In short, some of this is going to come from the extracting companies, but the rest remains the responsibility of the government and Moroccan private sector.
Morocco certainly seems ready – provided the legal and regulatory structure is in place. Hence the main reason for my coming to the country in July. There is little time to pick this up once operations are in full swing (by the fall).
But there is another aspect rapidly developing here, and it comprises an immediate connection to what we are already seeing in the U.S. market.
Support and Transport M&A Is Heating Up
Even before the production facilities are in place, talk is beginning among likely outside companies about mergers and acquisitions (M&A) involving field supply, storage, and pipeline systems.
Given that most of these fields are some distance from population centers, the ability to provide for essential components will be decisive. Already, companies are calculating the net pricing for gas volume going to Europe (the primary consumer, after Morocco satisfies its own domestic market needs).
That will advance a wave of M&A here quickly – as we are, again, experiencing in the United States.
This is actually the main subject I want to address today.
We are witnessing a rapid acceleration of M&A in the United States. Unlike earlier waves of M&A activity, however, this is not primarily about extraction. The moves are in the support and transport sectors.
This is to be expected – for one fundamental reason: The volume of shale gas coming on the market is staggering. This year, North American producers (U.S. and Canada) could easily increase gas volume by more than 30%… in a single year!
Of course, dumping such volume on the market would cause a dramatic shift in the balance of supply and demand, with prices plummeting as a result.
In this environment, efficiency of operations may still refer to drilling per se. But these days, the ability of companies to realize profits, with the prospects of considerable available volume, depends on consolidating throughout the upstream-downstream sequence – not just in the fields.
Therefore, companies that control storage, processing, and transport facilities are primary takeover targets. And early identification of these likely targets can make for very profitable moves by average investors. More on that in a moment…
Probably the most prized asset class for acquisition is pipelines. The pipeline network in the United States and Canada is more than a venue for the transportation of gas.
The absolute majority of pipeline capacity is actually used for storage of excess volume. As a result, pipelines provide the main balancing act for a market that can easily become oversupplied.
Many of the companies of interest are diversified – made up of gathering, processing, truck, and retail distribution pipeline networks, as well as field operations.
Yet, if there is one conclusion emerging from what will be an increasing M&A feeding frenzy in natural gas, it is this: Operational efficiency requirements are moving acquisition strategies further from the field itself.
The midstream (gathering, processing, and throughput) is the emphasis now.
Some of these are privately held companies, so the retail investor has no access. But others are traded and have already experienced some consolidation.
The key to selecting the most likely profit moves is regional. Larger companies, utilizing an M&A plan to maximize the efficiency of their field operations, will need to acquire the assets that reduce the cost per volume of extraction. These certainly include pipeline, storage, and related facilities.
Here's what I suggest.
Take A Three-Step Approach
First, look at the expected volume anticipated from leased acreage by production companies. The companies will give you that information up front, in quarterly reports and other announcements.
Second, compare this volume with previous quarterly performances in shale basins by these same companies. That will indicate each company's additional midstream asset needs.
Third, assess the publicly traded companies that have assets available. These are always pipelines being of initial interest – processing and gathering secondary. Await indications of interest, and then buy into the shares of the likely target companies.
Using call options on these same companies is also a profitable way to participate in the increasing value, without committing to a longer-term holding strategy.
Back here, it is now 6 a.m. local time, and Ahmed, a field engineer from the company I am visiting today, is at my door. And he has a Jeep!
I tell him how thankful I am and ask him why he named the vehicle Saad. He laughs and says the Jeep is only for the first three hours of the journey into the desert. Saad is for the last hour or so.
Saad is a camel.
Dr. Moors has been smuggled in and out of Cold War Russia and trudged through the frozen tundra of arctic oil fields. Now he's investigating a seismic shift that's underway in the energy market – a shift that could deliver 11,100% growth to a single natural gas company.
You can look for more information on that company to come later this week. You can also sign up for the Energy Advantage, Dr. Moors' energy-sector advisory service by clicking here.]
News and Related Story Links:
- Money Morning:
The Greek Debt Crisis and the Price of Oil - Money Morning:
Don't Fret Over Europe's Debt Crisis – Oil Prices Will Bounce Back - Money Morning:
Crude Oil Prices: What's Behind the Spike to $112 – And Why There's More to Come
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
From what I've seen so far, the natural gas extraction process from shale is dangerous and potentially environmentally devastating. Natural gas may be great for many purposes, but it brings to mind the oil shale deal in Western Colorado during the Carter Administration. Actually Carter lost a lot of my respect when he suggested that it would be worth it if large parts of Western Colorado ended up ruined, as a "National Sacrifice Area". Fortunately that ended up as "pie-in-the-sky". Nevertheless, for awhile Grand Junction was a boom town which really got off the ground.
I realize fracking for natural gas is already being done, with the extraction results considered successful. The environmental impact has been a disaster for the environment and has already ruined watersheds including peoples lives. Sure the ones who sell out love the money, but people who love their country living have already been ending up losing everything including their health. You've probably seen the videos of kitchen sink faucets that can be lit like a blow torch. Believe me natural gas has virtues, but it is no substitute for pure clean water or air.
Wealthy investors can sit in their corner offices, as masters of all they survey, but when it comes to natural gas, they are willing to destroy all that is truly valuable for abstract wealth. What is life all about if all that matters is the price of everything when nothing is appreciated for its inherent value. Pickens would probably flack under the Statue of Liberty if he thought he could make a buck.
Certainly since corporations own the President and Congress, environmental laws can just be set aside for instant natural gas gratification.
I live in Sedona, AZ, and I met a couple from Pennsylvania while out mountain climbing. I mentioned that, though I'd never been there, I supposed Pennsylvania was a green natural paradise. They told me that natural gas fracking was popping up all over the place, and ruining the environment. Being a "tree hugger" myself, I was shocked! Of course, this sort of "news" doesn't serve the best interests of the corporate media, so most people don't even known what's involved. Regretfully, as the old saying goes "the die has been cast"!
So 2 mt climbers told you it was "ruining the environment".
Sounds like all the proof you need.
I'm betting Gore's equally unfounded, exploitive (he made millions of your ignorance) horrific "claims" about man-made global warming really got your panties in a wad. And, I'll bet they stayed that way since you "tree huggers" so "conveniently" avoid the facts that have come out since that whacko movie.
I appreciate and have shared Patrick's concern but think that Dr. Moors' question and answer session on the dangers of fracking, the mistakes of the past and the improvements that have been made, combined with necessary and intelligent regulation will reassure him and others. I want to add how much I have enjoyed Moors' spontaneous postings from around the world between meetings and sometimes in the lurch of political upheaval, always colorful, thoughtful, and spot on. Thanks.
I just sent the third gas man packing after offering me an insulting gas and oil lease contract for my 130 acres. Not everyone around me is making out like bandits on these leases – I am not only a treehugger, I operate a private nature preserve where I have rehabilitated injured wildlife for 3 decades. I have refused the gas and oil and coal companies that whole time – glad I did even though I have had to sometimes choose between my own health needs and a veterinarian bill, shivering through hard winters where "free gas" would have been nice. THIS IS IMPORTANT – because eveyone around me already had old leases – and those companies that hold those leases are now the ones getting the big bucks as they TRANSFER the leases to the high paying frackers – AND I can be LEGALLY FORCED into leasing my gas and oil rights to them as they own leases on everything around me! Do you hear that? So what would you have me do – proactively seek the best contract that protects the 13 springs and the ponds and waterfalls here – or sit like a duck waiting for them to either suck it our from under me or offer me a back-against-the-wall lease that favors them? Fracking IS dangerous – look at the damage to PA – and guess where they ship their toxic fluids to re-use in drilling…their nextdoor neighbor here in Ohio. It's not all black and white – every person has their own story – please remember that before making blanket judgments about people you think are "greedy" – I'm greedy alright – I'd hog every acre around me if I could get it – to protect it for the next 7 generations – of animals and plants as well as people! Thank you.
Could you manage your refuge without oil and gas, or coal?
No. You probably have vehicles that use hydrocarbons and/or devices that use electricity, which uses fuel to be generated.
Even if you were 100% renewable (which is impossible ) you would still depend on hydrocarbon fuel driven components for equipment/technology, involved in manufacturing, transporting, etc.,
What's more, all of your various suppliers/supplies are probablly heavilly dependent on these as well.
Translation: if everyone shut down and/or did not lease, your refuge would die. So, would a lot of other things.
It is so easy to talk about what everyone else should do. Whether it's environmental, taxation/redistribution to mitigate guilt, or whatever.