Thursday, 19 January 2012 – Melbourne, Australia
By Kris Sayce
- The Oil of the 21st Century
- The Scramble for Resources in Central Asia
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| 82%, 58% and 75% gains from shale gas stocks in 2011. Is shale still a buy for 2012? According to Dan Denning, high oil prices, geopolitical tension plus the US shale boom should all underpin the long-term case for the development of an Aussie shale gas industry. "The only wildcard, of course, is domestic politics and whether the industry is killed by politics. But that's the political risk you run when you buy Australian stocks these days." Click here to read Dan's compelling-and controversial-case for shale... |
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In today's Money Morning: ... more taxpayer money needed to bail out banks and governments...having an emergency plan...there are still profitable ideas...a part of the world set to boom...
The Oil of the 21st Century
Yesterday the papers splashed the latest warning from the World Bank.
The Financial Times reported:
"Predicting significantly slower global growth in 2012 than it expected last summer even if the eurozone muddles through its crisis, World Bank economists said that if financial markets deny funds to eurozone economies, global growth would be about 4 percentage points lower than even these figures, with poorer economies far from immune."There's no doubt there will be another downturn. The pieces are already in place for it to happen. The only unknown is when.
Of course, the knee-jerk reaction is to say, what would the World Bank know? It nevergets things right. But it is worth remembering what the Bank wrote in 2007...
"A soft landing remains likely, but the global economy has reached a turning point and many factors could result in a more pronounced slowdown. A faster-than-expected weakening of housing markets in high-income countries could generate a much sharper downturn and even recession, with potentially significant effects for developing countries. Much slower growth would likely cause commodity prices to weaken more than already projected..."But we won't big-up the World Bank too much. After all, the guys over at our sibling newsletter The Daily Reckoning banged on about the economic meltdown as early as 1999.
Besides, it's important to understand why the World Bank is making this prediction. It's not to warn investors about the risks of investing. It's not to admit that the world is now paying for the mistakes of the past. No. It's simpler than that...
It wants more taxpayer dollars.
Or rather, it wants governments to give taxpayer money to the International Monetary Fund (IMF) so the IMF can give more cash to broken banks and corrupt governments.
If you needed any proof, right on cue the following report appeared in the FT yesterday:
"The International Monetary Fund has asked its member countries for an extra $500bn in firepower to combat the world's spreading fiscal emergencies, which it estimates will generate demand for bail-out loans totalling $1tn over the next two years."Coincidence? No.
It's the latest attempt by meddling bureaucrats to stall the inevitable: a full-scale economic collapse. Whether it's a repeat of 2008 or something much worse is anyone's guess.
That's why it's vital you have an emergency plan...
Building Wealth From Gas
Last year, Australian Wealth Gameplan editor, Dan Denning suggested where you should have your assets to prepare for "complete financial collapse". He provided the following handy chart...
How to Protect Your Wealth In A Complete Financial Collapse
Source: Australian Wealth Gameplan
Dan's advice was to move into assets that had real value... assets you could use to sustain life and trade. The break-up was partly tongue in cheek... but the idea behind it was not.
The one problem is that it's almost impossible to know when the collapse will happen.
Will it be this year? Or next year? Or will it be in 30 years...
That's why even though you may have a big picture, macro-economic view on the state of the economy, it's still important to think about the small things. And that means earning a living and building your wealth through the right investments... regardless of when the collapse happens.
Remember, despite the poor state of the economy, businesses and ideas still carry on. Business owners and managers still look to make profits... entrepreneurs still think of new ideas and take risks... and, share prices can still go up.
It was this kind of thinking that got Dan interested in the shale gas industry. And in particular, three stocks he backed last year to benefit from this booming industry.
If you're not familiar with shale gas, in simple terms it's gas that's trapped in deep rock formations. It's different to conventional gas. With conventional gas, the gas forms in porous rocks and can be easily "sucked out" by drilling into the rock.
But with shale gas, the rocks aren't porous. They need to be cracked apart (fractured) to allow the gas to escape. Only then can it be "sucked out" through the well.
It's this kind of innovation that provides benefits to shale gas investors (such as the readers who invested in Dan's recent stock tips) and to consumers. As this report fromBloomberg notes:
"A shale-driven glut of natural gas has cut electricity prices for the U.S. power industry by 50% and reduced investment in costlier sources of energy."
Buy Gas While the Price is Low
Yesterday we mentioned how the natural gas price was back to 2008/09 levels. Overnight it has fallen further, to just USD$2.49 per million British thermal units.
At some point you'll see a floor under the gas price. After all, with all the money spent on exploring and producing the stuff, gas producers aren't going to give it away for free.
That's what makes taking a punt on natural gas (and especially unconventional natural gas) a good bet right now. The best time to buy an asset that's about to leap in demand is when prices are low. Compare that to oil which is still at USD$100.
The longer things stay this way and with more big gas discoveries, there's a big chance natural gas will be the energy source to replace oil. And when that happens you can expect a boost to the natural gas price and big rewards for the companies and investors who take a punt while the price is low.
Cheers.
Kris.
P.S. We've written about shale gas for some time. But you're mistaken if you think it's too late to join in the boom, because it's only now starting to hit the mainstream. As a report in today's the Age proves: "Australian shale assets 'next big thing' for investors".
The report notes, "While shale assets in Texas sold at $US25,000 an acre this year and a holding in Ohio and Pennsylvania changed hands at about $US15,000 last month, shale properties owned by Australia's Beach Energy can be bought for $US406 per acre..."
Could Aussie shale assets increase 6,057% to the same price as Texas shale assets? Why not? To find out which shale stocks Dan Denning has picked to benefit from the shale gas boom, click here for a no-obligation trial to Australian Wealth Gamplan...
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The 3-Step Punter's Plan to Play This Crazy Market for 75%-458% Gains ENOUGH about Europe! If you're looking for a POSITIVE Australian investment idea and you're up for a bit of carefully controlled risk,CLICK HERE |
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The Scramble for Resources in Central Asia
By James McKeigue, Contributing Editor, Money Morning (UK)
Life in central Asia's former Soviet republics has never been easy. The larger states - Kazakhstan, Uzbekistan and Turkmenistan - are dominated by tree-less steppes and arid, sprawling deserts. The terrain of the smaller countries, Kyrgyzstan and Tajikistan, consists of little more than mountains. Throw in the fact that the whole region is landlocked, and has no navigable rivers and little decent agricultural land, and it's no surprise that the five 'Stans' are among the most sparsely populated countries on earth. On average, there are only five people for every square mile in the region. Or to put it another way, a population roughly the size of Britain's is spread out over a region 17 times as large.
Yet despite the harsh geography and sparse population, some of the region's economies are booming. Why? One reason is the demand-fuelled surge in commodity prices over the last decade. The Stans are host to vast amounts of natural resources, many of which were underexploited during the years of Soviet rule. As a result, the last ten years have seen a horde of Russian, Chinese and Western firms pile into central Asia in a dash to secure the best assets.
But it's not just about the hunt for resources. Thanks to the growing power of China and India, and the war in Afghanistan, the Stans have also gained in geopolitical importance. As a result, the US and Chinese governments are desperately trying to expand their political and military influence in the region.
This renewed interest is critical to the development of the Stans, says geopolitical analyst and publisher Stratfor. The vast, barren landscape of the Stans means that, "with the exception of commodities, central Asia is endemically impoverished and will always have massive infrastructure demands. The central Asian states can therefore only be remotely functional if they can tap the capital supplies of a larger state outside the region. Without outside assistance, they will continue struggling to maintain the capital necessary to maintain existing infrastructure, and developing new infrastructure will pose an even greater challenge." Indeed, in the 1990s, neglected by Russia, the Stans largely stagnated. Now, however, the region is tapping the capital of three larger states, which are all jockeying for influence - and that spells opportunity for bold investors.
Central Asia's treasure trove
So just how large are the region's commodity reserves? It differs from country to country, but the short answer is 'enormous'. Take Kazakhstan. It is home to 3% of the world's oil, 4% of the world's coal and 15% of its uranium. It has the world's largest reserves of zinc, lead and chromite, and it is in the top ten for supplies of copper, iron ore, gold and manganese. This may seem surprising until you realise that Kazakhstan is the world's ninth-largest country: it's five times the size of France. The only resource Kazakhstan doesn't have much of is people. With only 16 million citizens, little of these precious commodities are needed at home, leaving more for exports.
Turkmenistan is also rich in energy, with almost 4.5% of the world's natural gas. Again, it uses little, freeing up most of the gas for export. It also has 500 million barrels of oil. Uzbekistan has significant natural gas reserves, about 0.8% of the world's total - about the same amount as Libya - and sizeable gold, copper, lead and uranium reserves. It's also the most populous 'Stan', with 26 million people.
That's more than enough to get less resource-rich nations envious. But geologists believe there is a lot more commodity wealth yet to be discovered in the Stans. Dr David Robson, chief executive of Tethys Petroleum, a small London-listed firm operating in central Asia, believes the region's Soviet past has left some areas underexplored. "We have just made a find in Tajikistan. In Soviet times Tajikistan was a rural part of the economy and not thought of as a source of oil and gas, but we believe it has similar geological traits to other hydrocarbon-rich parts of the region."
Location, location, location
The Stans are also well-positioned geographically to benefit from this resource wealth. Since before the time of Christ, trade between Asia and Europe has travelled through central Asia along the Silk Route. Today that positioning means that Kazakhstan is in the perfect position to satisfy demand both from Europe, and the growing economies of Asia.
However, until recently, it has been difficult for miners and oil firms to take advantage of central Asia's great location. Miners need good road or rail networks to get their goods to international markets. These already exist in established resource areas, but large swathes of central Asia are underserviced.
Another problem is that much of the transport infrastructure that does exist was built in the Soviet era and, as a result, is aimed towards servicing Russia. Oil and gas travels by pipeline to Russia, which pays a low price for it. "We sell gas to the local market but effectively the price is dominated by what the Russians pay for the exported gas," says Robson. Meanwhile, minerals must travel through a Russian-controlled river and canal network if they are to leave landlocked Kazakhstan and reach the Black Sea.
Infrastructure is expanding
But since independence, governments in the area have pushed ahead with new infrastructure projects designed to increase their access to new markets. In 2009, the first gas pipeline to be built without Russian involvement came into operation, linking Turkmenistan, Kazakhstan and Uzbekistan to China. Qiang Xiaoyun from Shanghai Business School Journal estimates that Chinese gas imports will double between 2010 and 2020, most of which will come from central Asia. This will help to reduce China's reliance on liquefied natural gas (LNG) imports, which travel by sea and are therefore more vulnerable to terrorism and piracy.
China is also making heavy investments in Kazakhstan's oil fields and mineral projects. Economic cooperation between China and the five Stans has grown steadily. Over the past few years, the volume of trade has increased by 40% a year, reaching around $20bn in 2010, and this growth shows no sign of stopping.
China isn't the only one with an eye on the region's gas. India and Pakistan are both struggling to meet demand amid rising gas usage. On 11 December last year, Turkmenistan, Afghanistan, Pakistan and India signed an inter-governmental agreement on the TAPI gas pipeline. This agreement provides for the construction of a 1,735 km gas pipeline at a cost of $8bn. When completed in 2013-2014, the pipeline should enable Turkmenistan to export 33 billion cubic metres of gas in total, with five billion cubic metres going to Afghanistan and 14 billion cubic metres to Pakistan and India.
Western oil firms are also well established in the region. American firms dominate, controlling 75% of new oil fields. Their overall investment of $30bn represents around 40% of foreign investment in Kazakhstan and Azerbaijan. But energy companies from Britain, France, Italy, Iran, and Japan are also present. For example, British firm BG Group leads a consortium in Kazakhstan's massive Karachaganak oil and gas field.
The great game revisited
Central Asia also forms an important plank of US foreign policy. America is keen that the region continues to provide support for Afghanistan, especially when American troops leave. America's 'New Silk Route' strategy focuses on bolstering north-south trade - linking India and Pakistan via Afghanistan to the Stans. Notably - if unsurprisingly - Iran, an important post on the original Silk Route, has been left out of the plan.
Perhaps feeling that he needed to regain the initiative, Russian prime minister Vladimir Putin has in turn proposed investing $500m in a joint project with China that would transmit electricity from central Asia to India and Pakistan. The Stans have always been Russia's backyard. The country still has a network of military bases, infrastructure and political alliances in the region that give it clout for now, and it certainly doesn't want other powers gaining the upper hand in its sphere of influence.
"The central Asian countries are benefiting from competition between the powers," says Xie Wenxin in China Economist. "They have maintained close relations with Moscow, since much of their oil and gas exports continues to transit via Russia. But for technical and financial reasons, they are in the process of re-examining their cooperation with Western oil companies." Rivalry between the great powers should help central Asia fund the infrastructure it needs to exploit its resources, and in turn open up more lucrative markets to sell to. Where there's reward, there's risk
Of course, while central Asia may be full of commodities, it is also full of risk for investors. First, there are the internal politics. In all five countries, former Soviet strongmen seized power when the region gained independence in the early 1990s. One such leader has been forced out by death (Tajikistan), another by revolution (Kyrgyzstan), but the rest stay in power. Indeed, despite what their well-paid Western PR agencies might try to tell you, all apart from Kyrgyzstan are dictatorships.
The most politically stable of the Stans is Kazakhstan. It is ruled by Nursultan Nazarbayev, the former first secretary of the Kazakh Communist Party, who became president when the country gained independence in 1991. Despite maintaining close links with Russia and keeping most of the Soviet-era bureaucracy, Nazarbayev has opened the economy up to foreign investors. The autocrat didn't have an easy ride in the 1990s. "Like most Commonwealth of Independent States (CIS) countries, Kazakhstan's economy collapsed in the 1990s in the wake of the break-up of the USSR," says Baillie Gifford's Andrew Stobart in the firm's Trust magazine. The economy almost halved in size, between 1989 and 1998. "Inflation peaked at nearly 3,000% in 1994."
Yet eventually Nazarbayev's focus on opening the economy up began to pay off as production of oil, minerals, metals agriculture and heavy industry increased. The economy grew at around 10% a year between 2000 and 2007. But the boom drove a debt-fuelled property bubble that burst in 2007 when cash-strapped European banks started calling in loans (sound familiar?). The crisis tested Kazakhstan's young financial institutions, and the nation's sovereign wealth fund had to buy stakes in two listed banks to prop up the sector. But, unlike in the West, growth has returned, and Stobart reckons it can be maintained at "high-single digits" for the next few years.
This year, Nazarbayev was re-elected president with 95% of the vote. These elections were neither free nor fair, but most analysts think Nazarbayev - who is well liked for raising living standards - would win even if they were. Kazakhstan is also the best bet for investing in central Asia. It has the most resources, the largest economy and welcomes foreign investors.
James McKeigue
Contributing Editor, Money Morning (UK)
Publisher's Note: This is an edited version of an article that first appeared in Money Morning (UK).
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