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The Times: Exploring for opportunity in the new $100 oil sector

January 5, 2008
Carl Mortished: Tempus

Banks are in trouble, retailers are wounded and builders could soon be bust. Only the oil companies seem to be making money, selling fuel that consumers will continue to buy – at any price?

It is too late to profit from the oil-price surge with a punt on a speculative oil exploration company – except for those who believe that the price will continue its steep climb. But to believe that, it is also necessary to believe that the average American is impervious to the cost and will fill up his car at any price. That was not true in 1980 and is unlikely to be true today.

However, Opec is committed to these high prices – the Gulf economies are more than ever dependent on the revenues from expensive barrels. Oil will probably remain expensive, trading in the $70-$100 per barrel range for the foreseeable future, and that offers big scope for rising dividends for those who choose a firm with a portfolio that benefits from high prices.

That means avoiding too much exposure to high-tax regimes in Opec countries where the government takes an ever-larger slice of the barrel as the oil price rises. Shell suffers from a harsh tax regime in Nigeria, while BP’s enviable position in Russian oil looks less attractive when punitive export taxes are factored in. The Russian export tax is adjusted every three months, so the time-lag benefits BP on the upswing, but in the end it eats into profits.

Governments are on the rampage everywhere, even in America, where Washington is demanding a bigger share of the Alaskan pie. Expect more tax grabs from Big Oil as the global economy stutters; even in the UK, where the Chancellor might look to the North Sea for easy revenue-boosters to fill embarrassing Budget holes.

Even the lowest tax regimes, such as Albertan oil sands, are being revised upwards. The cost of mining the sticky bitumen, extracting it and refining it is very high and producers have been enjoying a 1 per cent royalty rate during initial investment recovery. That royalty is now subject to scale, from 1 per cent at a $50 barrel, rising to 9 per cent for oil prices above $120 per barrel.

Still, that still looks good for oil sands investors who have already acquired extensive acreage, such as Shell. This is a business with heavy operational gearing and huge economies of scale. In other words, the cost of producing a barrel of synthetic oil from the bitumen deposits is between $20 and $25 per barrel, much higher than conventional oil wells. However, the oil companies recover a much higher profit from every extra dollar per barrel of revenue. As the oil price climbs, Shell’s Athabasca operation in Canada is soaked in riches.

But the costs are rising and that presents a problem for a company, such as BP, which, after years of ignoring oil sands as an expensive and environmentally unsound gamble, has suddenly decided to throw its hard hat into the ring. BP has entered into a joint venture with Husky Energy, a Canadian company with oil sands acreage in Alberta.

Husky claims to have 24 billion barrels of bitumen in place in its oil sands acreage and is already producing 30,000 barrels from its Tucker oil sands project and hopes to produce a further 60,000 barrels per day from its joint venture with BP in 2012. If the crude oil price remains above $90, there is little doubt that Canadian oil sands companies will be targeted by the oil majors. It remains to be seen whether BP will be tempted to go further and pay for an even bigger share.

http://business.timesonline.co.uk/tol/business/markets/article3134328.ece

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