Underground Energy's projects produce two main products: crude oil and natural gas, with an emphasis on crude oil. The oil products will be medium, heavy and ultra-heavy crude oil depending on the characteristics of each individual resource deposit.
Commodities Pricing Forecast
The recent volatility in the price of oil has created insecurity in investment in the oil industry. The recent economic downturn has reversed the investment in the oil industry beginning shortly after the record highs seen in July 2008. As banks shied away from lending, many oil companies who relied heavily on this capital were forced to sell assets at deeply discounted prices in order to stay afloat. This overreaction has created a favorable opportunity for Underground Energy to acquire some of these undervalued oil properties and emerge with a significant advantage over competitors as oil prices and global markets recover.
The International Energy Agency (IEA) – energy advisor to 28 industrialized nations – remains confident in their forecast of global energy demand growing an average of 1.6% per year from 2006-2030[1] despite predicting a 1.5% reduction in demand for 2009[2]. Developing countries such as China, India, the Middle East
and Latin America are expected to be major contributors to this worldwide increase in demand as they, and other countries, expand and develop economies similar to that of the United States. As OPEC reduces production rates at record levels in an attempt to head off falling oil prices, many independent and Enhanced Oil Recovery (EOR) producers are forced to greatly decrease or halt production because of insufficient profit margins due to the low oil price and the higher cost of enhanced recovery methods[3]. These production cuts coupled with an annual declination rate of 6.5% (5.6 million barrels per day) in the world’s “cheap oil” fields[4] set the stage for a supply crunch once demand rebounds when the global economy inevitably emerges from this downturn. Deutshe Bank forecasts these factors will send oil up to $80 a barrel by 2011[5]. The IEA predicts oil will eclipse $100 by 2015, ultimately reaching $200 a barrel[6], which is significantly more modest than the prediction of T. Boone Pickens of $75 oil by the end of 2009 and $200-$300 oil in 10 years[7]. Underground Energy takes a more conservative position regarding future oil prices. The Company estimates a price of $70 per barrel of oil in 2011 with a 2% average annual escalation, hitting $75 per barrel in 2015 and $100 in 2030.
[1] International Energy Agency. “Oil Market Report” 13 March 2009.
[2] Simpkins, Jason. “The ‘Cheap Oil Era’ is Ending Soon…” 10 January 2009. <http://www.moneymorning.com/2009/01/10/cheap-oil-era/>
[3] Kingsdale, Jim. “Energy Stocks Will Roar Back – But Not Soon.” 3 December 2008. <http://www.energyinvestmentstrategies.com/2008/12/03/energy-stocks-will-roar-back-but-not-soon/>
[4] Kingsdale, Jim. “Energy Stocks Will Roar Back – But Not Soon.” 3 December 2008. <http://www.energyinvestmentstrategies.com/2008/12/03/energy-stocks-will-roar-back-but-not-soon/>
[6] Simpkins, Jason. “The ‘Cheap Oil Era’ is Ending Soon…” 10 January 2009. <http://www.moneymorning.com/2009/01/10/cheap-oil-era/>
[7]“T. Boone Pickens Still Bullish on Oil: Sees $200-$300 Oil in 10 Years” 6 March 2009. <http://www.bloggingstocks.com/2009/03/06/t-boone-pickens-still-bullish-on-oil-sees-200-300-oil-in-10-y/>
Response to Market Conditions
Underground Energy is in a desirable position to react to the current economic situation. The company has not incurred any debt or large capital commitments and has reduced costs by downsizing staff and reducing office space, consultants and overhead expenses to preserve capital. Underground Energy is responding to the opportunities that the dramatic change in the oil markets is presenting through a broadening search for undervalued assets and evolving the company’s business model into one which reacts to the market conditions and capitalizes on opportunities to acquire quality, under-valued assets that can be developed at reduced costs from those seen recently.
Trends
There are multiple trends presently affecting the oil industry which include decreased demand for oil, reduced availability of investment and debt capital, and corresponding reduction in capital costs for oil development projects. Other trends include the continuing decline of oil production supply that will be less than demand for oil in the foreseeable future.
The 2008 global recession decreased the demand for oil causing prices to plummet from the record highs seen in July 2008. This volatility in the price of oil, combined with banks restricting lending, has led many companies to sell oil and gas assets at discounted prices. Underground Energy intends to be positioned to acquire some of these undervalued assets that are best suited for the company’s approach.
When oil prices are low, the cost of services and other commodities are decreased, reducing the capital cost for the development of projects (construction materials, equipment costs, labor costs, and service vendor costs). Underground Energy plans to take advantage of depressed cost opportunities to develop resource projects for production.
