Canada’s Natural Resource Minister invites China to invest in oil sands.
Two months ago in our series of blogs on oil, I highlighted Canada and its oil sands as a niche area showing great potential. With the recent pullback in oil prices, there is another region, often overlooked by investors, that offers potential.
Over the past few months, I have written about the investment potential of South America. Once ignored because of security concerns, one area that is undergoing a renaissance in terms of oil exploration is Colombia. As stated in a recent study by the Americas Society and Council of the Americas Energy Group: “… In many ways Colombia could be considered a model for energy management in the region. Changes to the investment framework for oil and gas have resulted in greater investment in a sector that was on the decline just a decade ago and now boasts growing reserves and production.” As the U.S. Energy Information Agency points out, Colombia is an important petroleum and coal exporter. It is predicted that oil production in Colombia will double over the next five years.
Historically, most of Colombia’s oil production has centered on the Rubiales field in the southeastern part of the country. However, recent discoveries in areas like the northern Meta province and in the largely unexplored Huila province demonstrate the long term potential for oil production. This fact that has not been lost on China which earlier this year announced talks to build a rail line across Colombia to link the Atlantic ports with the country’s Pacific ports in order to access Colombian raw materials without having to use the Panama Canal. With today’s concerns about future oil supplies, Colombia appears to be a good place for investors to look.
In our past two blog entries we discussed our long-term views on crude oil. Our first note outlined the reasons that average oil prices are likely to remain elevated well into the future. Our second note listed criteria for evaluating the investment merits of companies that produce oil. Today, we discuss a specific niche of the energy sector, namely the Canadian oil sands.
Alberta, Canada holds one of the largest stores of fossil fuel on earth in the form of very heavy oil deposits known as oil sands. Many energy firms are now exploiting this resource from small Canadian companies to the largest international integrated oil companies. While there are some drawbacks to operating in the oil sands (transforming the raw product into useable fuels is expensive and, like all extractive processes, is disruptive to the environment) we think the enormous size of the resource and its location in a politically stable country make it a uniquely attractive opportunity.
The best positioned firms in the space have access to decades worth of resources to drive future production growth. Therefore, they are not subject to exploration risk or high depletion rates that plague most of the industry. These companies can focus their efforts on lowering costs and improving production methods. In fact, even at current oil prices, many of these firms are already highly profitable.