As far as supply, it is a tricky situation. We know that supply plays a role in pricing but speculators/traders can also play a big role. Ultimately, a blockage of Hormuz (and subsequent naval conflict after the blockage) will affect not only Iranian exports but also major producers such as Kuwait, the UAE, Saudi Arabia, Qatar, and Iraq. While the likes of Norway and Russia are large scale suppliers, it would take a while to mobilize that crude to buyers, and it is likely that they won’t do the buyers too many favors in terms of price. This is why despite all these proclamations of embargo from Europe and Japan, when you look at the fine print there are many provisions for transitional periods etc.

While things are getting hotter, so to speak, we are still very much in the ‘shell game’ phase of the conflict.

As far as the impact on energy investment in Trinidad, it is also hard to say. If prices spike up and remain above 120, which seems the likely scenario if the conflict with Iran escalates, it will certainly make many of the mature fields in Trinidad more attractive, along with the deepwater areas–and heavy oil, of which T&T has reserves in hundreds of millions if not over a billion barrels.

The services sector already appears to be on quite a solid trajectory in 2012, esp where upstream is concerned, which bodes well for FONL. However the returns on energy investment in T&T may be lower when compared with many other jurisdictions (ie Peru, Colombia).

Fiscal terms are partially to blame, but also the size of discoveries and existing fields is relatively small. For example, ENI discovered a single field offshore Mozambique that has 25 tcf of gas. The majors who arent already in Trinidad have little incentive to come here when there are mammoth fields like that in Africa and Brazil, not to mention shale plays in the US, Poland, Argentina, and even China. I think many of the relatively smaller companies, especially Canadian-listed, would be very keen to come to Trinidad because of the political safety/stability factor, and they would probably be more likely to hire local services firms.

How do you see that possibility further developing the services sector of the industry, which forms the base for your FONL product?

Assuming a successful embargo and retaliation by Iran, can the supply of oil ( or lack thereof) by countries such as Norway, Brazil, Norway, Nigeria etc, collectively influence the oil price to still achieve a level way below $300

How do you see developments in other parts of the world, such as the Canadian Keystone XL Project also influencing the oil price?

I speculate that underbidding on the deepwater bid rounds can be attributed to a few different factors. Trinidad’s fiscal/taxation regime on hydrocarbons isn’t very favorable, especially when compared with other deepwater areas. Additionally I am not sure that the round was promoted as widely as it could have been; recent blocks put up for auction in Ecuador, Colombia, Angola and elsewhere were promoted with presentations in Houston, New York, London, and Switzerland, while we were not willing to go abroad to press our wares so to speak. Lastly, deepwater is extremely capital intensive, and with the more uncertain environment leading up to the bid rounds (it started in 2010 and culminated in early 2011), many companies may have been unwilling to put bids in on that basis.

LNG prices to Asia (we don’t currently export to China, but that will change soon) are higher than in the US due to very different supply/demand dynamics. European prices are twice as high as in the US, even with all the uncertainty there. There simply is not enough gas whenever they need it, and as long as that persists, even if prices retreat temporarily, the overall long term trend will continue to slope upwards. China is working extremely hard to switch to renewable sources of energy as they recognize that it is in their longer term interest to not import 7 billion barrels of oil a year. They are also in the process of exploiting vast reserves of shale gas that may be comparable to the US’ game changing shale plays. However these scenarios are several years away from having any material impact on T&T LNG prices, and Japan and South Korea will still have to import a lot of gas because China is unlikely to export any energy they find (they just have too much local demand). In a worse case scenario Asian LNG prices will revert to twice the US price (a 50% drop) which would still make it very attractive for Atlantic.

Futures prices are merely an indication of what the market is thinking at the moment. They are useful for figuring out what different market actors *believe* is going to happen in the future–but beliefs and facts often diverge, so making decisions based on a November 2012 crude contract price quoted in December 2011 is quite risky.

Now I am going to go out on a limb here and say that Iran isn’t actually brash enough to block the Strait of Hormuz. It would be the one catalyst that would unite the world against them. China and Russia have expressed hesitation in imposing sanctions and other measures against Iran–but they have never explicitly supported Iran either, and they have no material or strategic interest in coming to Iran’s aid militarily. Additionally, the very well armed and well funded militaries in the Persian Gulf region would all converge on Iran, in addition to the substantial US and European military presence in the region. Even if China were to get involved, the US military’s naval, aerospace and technological advantage is tremendous.

Oil prices would definitely spike to $150-200, but would quickly subside as the various forces respond en masse to such a threat. What ends up happening in a ‘spike’ scenario is that it will eventually go back down by more than it went up. It may remain elevated if there is an actual war, but even then I doubt that the current Iranian regime will last much longer if they suffer a major military defeat. There are already major social, economic and political faultlines that threaten the integrity of the Iranian state and a failure would simply accelerate what is already a serious decline. What we would see is a Libya-like scenario, with elevated external terrorism threats in the US, Europe and Israel. But ultimately Iran would cave under unprecedented attacks from a unified global military operation.

Best,
MC

Where do you expect local export prices of LNG to China to fall given the 4 to 1 premium differential between US and Asian prices/

Would you say that crude futures contracts are of any use as indicative forward looking prices?

How much do you see proposed military exercises in the Strait of Hormuz by Iran affecting oil prices?

Could it be that the heads of T&T have decided that gang leadership may work in their “bestest” interest ,and taking a shot at it themselves ?

If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man.~ Mark Twain

These aren’t NO dogs !