COMMENT

Leonard Le Blanc

Bargain basement

While everyone else is shunning oil and gas production and service stocks in favor of the latest investment rage, a number of professional investors are quietly balancing portfolios with bargain basement buys. Oil and gas stocks are selling at a fraction of year-ago levels.

Many oil and gas producers and service companies are buying back their stock either to support values or secure fundamentally good deals. Oil stocks are not unlike airline stocks, which were in the dumpster just four years ago. Some of these stocks yielded 100% per year gains for astute investors with modest risk.

So what does this mean for the petroleum industry. The fact that investors are shopping the industry - selectively, but with increasing momentum - suggests an oil price turnaround may come quicker than predicted. But there's more.

Investors generally move at the very bottom of the price trough, certain they won't sustain further equity price damage before improving conditions re-awaken interest and the best bargains disappear. While oil price strengthening is difficult to discern at this point, investor interest is re-assuring.

Global destabilization

It would be ironic that US politicians and regulators, reveling at low oil prices and the well-being of the US economy, would suddenly find that those same low prices are collapsing international export demand and destabilizing the economies of more than a few key importing countries.

The prevailing public opinion is that low oil prices impact only a few wealthy OPEC exporter nations. That's yesterday's thinking. Today, two-thirds of Latin America, most of Southeast Asia, the Mideast, West Africa, North Africa, and Russia are dependent on oil as an income producer. Today, petroleum is supply diverse. A great many more nations have oil and gas production and exports.

Nations with as little as 15% of income coming from oil revenues can be destabilized by low oil prices. Even though private consumers are the chief beneficiaries of low oil prices, governments are the losers when royalties and taxes collapse. As foreign currency reserves are pulled down by imports, governments generally raise taxes on imports to head off currency devaluation.

So, the US and other developed nations blithely go on expecting to continue exporting to the other half of the globe increasingly unable to pay. Global export income is due for another big hit - soon - if more nations cannot rationalize their current accounts (import versus export payment flows). There may yet be a hefty payback for the benefits consumers have enjoyed as a result of low oil prices.

The future is hydrogen

Sooner or later, the future for hydrocarbons in terms of transportation fuel will be hydrogen. Not only is hydrogen a clean combustion component acceptable under virtually all environmental circumstances, but it serves as the chief fuel component in a multitude of reactions and transformations. At present oil and gas prices, hydrocarbons are one of the cheapest sources of hydrogen. Here are the critical applications:

Automotive transportation fuel cell technologies are being geared to use hydrogen as a fuel (water and energy are the products).
Most of the early versions of spacecraft for interplanetary travel will have to utilize hydrogen, either in direct combusion or as a nuclear fuel. At this point, hydrogen has no peer for power at lower mach speeds.
In the future, power generation, including power off the producing well, may require conversion of fuel to hydrogen, rather than direct use of hydrocarbon liquids or gases, as the environmentally acceptable solution.

Pulling hydrogen from hydrocarbon products is not easy or cheap, and disposing of carbon or intermediate catalysts can be a problem, but hydrocarbons are one of the most plentiful sources for hydrogen. While water contains more hydrogen per unit volume, extraction costs are higher because of the tighter oxygen-hydrogen bonds, although carbon disposition from hydrocarbons could level the economics.

Just as the pursuit of gas-to-liquids makes sense in order to capture remote production, being able to transport hydrocarbons in liquid form and convert them at strategic points to hydrogen has a great many attractions.

The petroleum industry will someday be in a position where economics (cheap hydrocarbons) will no longer outweigh environmental impact. Petroleum chemists need to perfect hydrogen extraction using all of the advantages that hydrocarbons offer, the least of which is a global product distribution chain that has few equals.