Australian oil and gas juniors like Bengal Energy (TSX:BNG) are in the spotlight after political shenanigans and a shortage of gas in Europe have resulted in an unprecedented surge in gas prices.
In an ironic twist of events, the gas squeeze in Europe has strengthened oil and gas exploration companies like Bengal Energy (TSX:BNG) in Australia.
In its rush to downscale on fossil fuels like oil, gas and coal, Europe, and the rest of the developed world, suddenly finds itself amid a deepening crisis. The northern hemisphere is facing one of the coldest winters in ages and has suddenly run out of sufficient energy to keep itself warm. Europe’s gas shortage has prompted its leaders to re-shuffle the geopolitical cards, and Vladimir Putin is about to play his royal flush.
Winter is upon us
Winter is coming and Europe, and the USA for that matter, is as ill prepared as Germany was when they attempted to invade Russia during the height of the winter in 1940.
This time around, Europe is a sitting duck, and its woes cannot be entirely blamed on climate change. Putin’s great fields of gas were always going to be strategic in the battle of the new world, where renewables are pursued at all costs.
It is a noble idea, of course, and critical to reduce carbon emissions as freakish weather events keep on reminding us. But in the absolute blind haste to transform their baseload, someone forgot to tell the Europeans that the sun doesn’t always shine, and the wind doesn’t always blow. When they shut most of their coal fired and nuclear power stations, countries like the UK and Germany not only scored an own goal, but they handed the ball right back to Putin, who dribbled it a bit, before closing the gas to checkmate his western neighbours.
Europe turns towards fossil fuels
Without reliable gas supply, Europe is turning to coal again to meet electricity demand that is now back to pre-Covid-19 levels. Coal usage in Europe jumped from 10% to 15% this year as gas storage sites continue their spiralling depletion. This doesn’t look good in the run-up to COP26 in Glasgow in November, and it is a situation European countries like Germany, France and the UK wanted to avoid at all costs. It puts them on the backfoot before even heading to Scotland.
When the continent recorded freezing temperatures earlier this year, Liquefied Natural Gas (LNG) cargoes were sent to Asia, with the assumption that the Nord Stream 2 gas link from Russia to Germany will fill the gap when it came on-line later in the year. However, the deal is not done yet, and Putin is using Europe’s unhealthy reliance on Russian gas to force Germany to sign the agreement on Russian terms.
At the same time, Russia reduced its supply to Europe from Ukraine. With significant shortages, and demand for gas at an all- time high, natural gas prices have gone through the roof, which bodes well for those companies drilling new wells, especially in the USA, Australia and in part of Africa.
Europe’s fuel reserves are 25% below the five-year average
According to a recent Morgan Stanley report, European storage is currently 25% below the five-year average and benchmark. Dutch gas prices have consequently surged more than 50% this year. Futures are currently trading near their highest level for this time of the year since 2008.
The report states that electricity demand, which crashed as the coronavirus locked down cities from Frankfurt to London, is now back. Usage in countries including Germany, Spain and the Czech Republic are above the five-year average, while demand is flat in Italy and France.
As winter approaches, more people are investing in generators, and as industry ramps up across the globe in the aftermath of the most severe waves of Covid-19, demand for fuel and oil has spiked once again, reflected in a massive resurgence in the Brent Crude price.
The perfect storm for fossil fuels
All these factors have created, ironically, the perfect storm for oil, gas and coal. The fossil fuel trio has recorded new highs over the past few months. It has also put oil and gas explorers, who were rejected not too long ago, back in the spotlight.
Far removed from the seemingly calamitous ice sheets of Europe, the Cooper Basin in Australia is facing the hottest summer in decades. In fact, for many of the budding exploration companies down under, this summer will be red-hot, not only in the Basin itself, but also on the world’s most important stock markets. The dearth of oil, gas, and coal, also in China, is expected to continue driving the energy indexes.
The natural gas price has been on a steady incline since May this year and in September reached highs of more than USD5.84 per thousand cubic feet. In a strange alignment, rising gas prices have coincided with higher oil prices (and coal prices) and US investment bank Goldman Sachs has raised its forecast year end price for oil to USD90 per barrel.
In Australia, replete with new oil and gas exploration ventures, the mood is upbeat. LNG is one of the country’s biggest exports. Currently spot prices for cargoes of LNG are trading at their highest levels in a decade as demand from the northern hemisphere surges.
Australia on a good wicket
With Putin yet to let the cat out of the bag and developing new markets for oil and gas in Europe becoming more important, (Especially to the UK, which has been pummelled into unrelenting chaos), oil and gas companies in Australia are having a field day.
Companies like Blue Energy (ASX: BLU), at its North Bowen Basin project in Queensland, Vintage Energy (ASX: VEN), in South Australia’s Otway Basin and offshore explorer BPH Energy (ASX: BPH), are making headway.
Meanwhile oil and gas major Beach Energy (ASX: BPT) announced its entrance in the global LNG market by means of a landmark long-term supply deal with UK energy giant BP.
Hot in Cooper Basin
However, with the gas prices heading north, it is worth turning the attention to Cooper Basin, the most prolific oil and gas field in Australia. The Cooper Basin was discovered in the 1960’s and hosts Australia’s largest onshore oil field, the Jackson oil field, which was discovered in 1981. More than 1,800 petroleum wells have been drilled in the Cooper Basin.
Overall, there are close to 160 gas fields and 75 oil fields in production containing 630 producing gas wells and about 340 producing oil wells. There are many junior-listed companies drilling the Basin. They include, amongst others, Austin Exploration Limited, Cooper Energy, Beach Petroleum Limited and Bengal Energy.
The largest producer in the Copper Basin is Santos QNT Pty Ltd with its main production facility at Moomba in South Australia at the head of the Moomba Adelaide Pipeline System.
Santos recently signed a farm-in agreement with junior exploration company Bengal Energy Ltd. (TSX: BNG), a company that has been active in the oil and gas space for more than 15 years.
Bengal’s agreement with Santos
Bengal’s strong mix of JV, 100%-owned cash generative assets and high growth exploration assets makes it an interesting small cap to watch. The company has a debt-free balance sheet, CAD4-million working capital and a positive operating cash flow. In a market where oil and gas prices look set to skyrocket, what more can one ask for? Well, in addition to being located in a top tier jurisdiction with a favourable royalty and tax regime, Bengal has proximity to the Asian markets, and world class infrastructure.
The farm-in agreement between Bengal and Santos covers a portion of Bengal’s 100% owned ATP 934 oil and gas exploration tenement in southwestern Queensland.
Recent preliminary exploration drilling encountered thick, high quality reservoir sands, although not in commercial quantities. Moreover, initial results from the primary Permian Toolachee formation showed evidence of residual hydrocarbon saturation. In addition, good fluorescence shows and elevated gas readings through the Jurassic lower Birkhead Fm/Top Hutton Sandstone indicate oil has passed through the reservoir, supporting the search for a valid closure to test this play.
The findings from the Legbar-1 Well will help Bengal refine its exploration targets going forward, both with Santos in the Santos Farm-in Block,and across the balance of ATP 934.
The Farm-in Lands offset recent successful exploration wells, which are located directly to the south of ATP 934. The remainder of Bengal’s ATP 934 exploration and development portfolio is not subject to the Farm-in Agreement. Bengal intends to continue its own exploration campaign on the remaining area, with ATP 934 having been amended such that Bengal’s work commitments on the tenement are to be met in the next six-year term of ATP 934, which commenced on March 1, 2021.
Chayan Chakrabarty, President and Chief Executive Officer of Bengal, says that ongoing exploration in this region has the potential to add value for Bengal shareholders. “We will add value by lowering the risk of our exploration targets and increasing access to the eastern Australian natural gas market through the anticipated availability of additional pipeline infrastructure,” says Chakrabarty.
As the world continues its energy transition, gas is without a doubt the solution in the interim. With Russia playing games, and Europe desperately searching for new markets, Australia will come into play. As Australia prepares for another scorching summer, oil and gas companies like Bengal Energy (TSX:BNG) that are operating in the Cooper Basin are upping the ante. The year 2022 will be red-hot.
