- February 13, 2012
- There's Value in Russia's Future
As Americans ponder the merits of Obama vs. Gingrich, Paul, Romney or Santorum, Russia will be electing its own president on March 4.Perhaps we should say “re-electing” since it’s almost certain former president and current prime minster Vladimir Putin will be elected. While protests and vocal opposition likely won’t prevent Putin’s presidential return, they have forced some interesting changes to the political climate and we’ve observed some positive changes in Russia’s investment landscape.
The story begins last December when Putin’s political party, United Russia, performed poorly in Russia’s parliamentary elections. According to official election results, United Russia retained only 238 seats (down from 315 seats) in the 450-member State Duma, the lower house of the Federal Assembly of Russia.
While these results struck a blow to United Russia’s parliamentary power, it was an uppercut to democracy in Russia as suspicions of fraud emerged following exit polls that predicted an even wider defeat. Another one-two punch combination for Russian democracy came when Putin said he had planned all along to swap seats with President Dmitry Medvedev in 2012.
This did not sit well with many young Russians who were raised with the hope of a democratic Russia, compelling them to take to the streets to voice their opposition.
In an effort to gain popularity among these protesters, Putin announced that he would introduce a one-time tax on oligarch companies that acquired state assets during the privatization of Russia in the 1990s following the fall of the Soviet Union. Privatization helped Russia shift toward a market economy, but it is widely believed that only a few well-connected people (business oligarchs) benefited and caused the wealth gap to increase substantially.
“An overwhelming majority of Russians think—with some justification—that the ‘loans for shares’ assets were sold at substantially below their market value… In other words there is unlikely to be much domestic opposition to this proposal,” says Morgan Stanley.
Putin’s one-time windfall tax appears to be based on the U.K. approach, says Morgan Stanley. In 1997, the U.K. imposed a one-time payment on the owners of assets acquired during privatizations in the 1980s. The tax was 23 percent of the difference between the purchase price and the average net profit during the first four years following privatization, multiplied by the factor of 9.3. This resulted in an extra $8 billion for the British crown, according to Morgan Stanley.
The tax is a political risk in Russia, especially for the oligarch-owned businesses. However, our team has always preferred self-made businesses as the owners generally have their own skin in the game.
To understand the complex political situation in Russia, it helps to hear many sides of a story, so last week we sent Tim Steinle, co-portfolio manager of the Eastern European Fund (EUROX), to Moscow in advance of the historic presidential election. While in Russia, Tim had the opportunity to hear Alexey Navalny, a leader of Russia’s opposition movement, give his side of the story.
Navalny coined the name “the party of crooks and thieves” that became popular for United Russia. According to a profile by The New Yorker, when United Russia threatened to file a suit against Navalny for slander, he posted a poll on his blog asking readers whether they thought United Russia was a party of crooks and thieves—Ninety-six percent of his readers agreed with him.Trained as a lawyer, Navalny has positioned himself as a defender of minority shareholder rights against state-owned companies. He alleges a theft of $4 billion from pipeline operator Transneft that the government refuses to prosecute. In addition, Navalny points out that few management boards have independent directors, and even though by law just 2 percent of shareholder votes are sufficient to nominate a director, all nominations are done by the state. Even relatively investor friendly Sberbank has only one independent director out of 17.
Tim says there is a yearning for positive change among the reform-minded intelligentsia, the name given to Russia’s intellectual social class. The intelligentsia also pushes for a fair playing field and registration for political parties and a free media.
Navalny compares gains by communists and socialists in the recent election to political dynamics in Eastern Europe in the 1990s, when the pendulum swung to liberals and back. In his view, this is a healthy development, as the economic platform of Communist and Just Russia parties are not that different from United Russia.
Navalny wages a battle of a thousand cuts to increase the stress on the regime he says is “on manual control.” Historically speaking, reformers such as Kruschev, Gorbachev, Yeltsin, and Putin came from within the system. Navalny is clearly on the outside looking in.
Tim also sat in on a discussion with former finance minister Alexei Kudrin, who served as Russia’s minister of finance from 2000 until September 2011. He was the longest-serving finance minister in post-Soviet Russia, credited with prudent fiscal management and a champion of the free market. He helped Russia weather the global financial crisis in 2008 by creating finance reserves which held a portion of the revenue from oil exports in a stabilization fund despite strong opposition from others who wanted to spend the money. Those savings were crucial to Russia’s economy when the crisis hit and oil prices dropped.Over the past 10 years, Russia’s GDP grew at a robust pace of 7 percent annually and Russian companies greatly benefited from profits reinvested in their businesses. Russia’s growth story now turns to value as Kudrin expects Russia to grow at a much slower pace, averaging around 4 percent.
We have seen this transformation in some Russian companies lately. Domestically, we have looked for growing, profitable and well-run companies that demonstrate significant growth in three key areas: revenue, earnings and return on equity.
Russian companies have not usually met the criteria, but when we run this screen today, we see that many large-cap businesses are showing significant revenue growth, earnings per share growth and return on investment. Additionally, many of these companies can be purchased at the lowest valuations they have been at in three years. Whereas the price-to-earnings ratio for the Russian MICEX Index has averaged near 10 times since 2003, it is currently at 5 times.
Increasingly, Russian companies have begun paying dividends too, with some companies paying as much as a 10 percent annual dividend. As interest rates around the world will remain low or even negative for years to come, dividends offer investors the opportunity to earn income with the potential of appreciation.
Although political risks remain, we believe the country continues to be a hotbed of opportunity for emerging market investors. For the Eastern European Fund (EUROX), we’ll continue to seek self-made businesses that pay dividends. These companies generally are run by owners who have invested their own capital and have a track record of growth.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.
The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.
Holdings in the Eastern European Fund as a percentage of net assets as of 12/31/11: Transneft: 0.0%, Sberbank of Russia: 5.69%.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- December 14, 2011
- Eastern Europe Financial House Stronger than Debt-Ridden Neighbors
For some Eastern European investors, the geographic proximity to the eurozone has been too close for comfort, with the Russian MICEX Index declining about 20 percent year-to-date. However, stronger fiscal and monetary stances in Eastern Europe compared with its western neighbors warrant a second look.
Eastern European countries generally have experienced higher GDP growth along with less debt, so financing costs have less of a negative effect on GDP than in Western Europe. According to research firm UniCredit Research, in most of Eastern Europe, every one percent increase in the cost of funding only detracts about 0.5 percentage points from GDP. Hungary is the only exception. This compares favorably to developed European nations, as additional interest rate expenditures shaves three times more from Greece’s GDP and twice as much from the GDPs of Italy, Ireland and Portugal than in the East.
The Central and Eastern Europe region is also “in a more comfortable fiscal position” when it comes to making adjustments to the primary balance, says UniCredit. These countries’ public debt compared to their GDP is about half that of developed Europe, requiring there to be a lower adjustment to what they borrow or lend, not including interest payments. Countries such as Russia, Estonia and Turkey are running at a slight deficit and have little public debt to GDP, so there is less of a need to make adjustments to their primary balance. UniCredit says, “Poland has outperformed its own targets in 2011 and is well on track for a continued narrowing of its deficit next year,” and Turkey can “use fiscal policy to support economic activity next year if needs be.”
Turkey has increased its fixed capital spending in machinery and equipment, says BCA Research. Whereas other developing nations including Brazil, Mexico and South Africa are not investing in their own countries, capital spending is booming in Turkey, with fixed capital investment as a percent of GDP above 16 percent, a 15-year high.
And while BCA believes there are a few difficulties facing Turkey, including financing its current account deficit, its “structural outlook remains bright.”We believe the fiscal and monetary soundness are important factors that will help Eastern Europe weather the financial crisis better than its western peers. Historically, following major corrections, emerging Europe stocks have rebounded much more strongly compared to the overall MSCI World Index. With company valuations currently depressed, this area is worthy of a closer look today.
Tune into U.S. Global’s Outlook: 2012 Webcast to hear our investment team discuss what to expect from emerging markets, gold and natural resources in the new year. Sign up now.
We also discussed the Russian Elections in last week’s Investor Alert.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
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- November 21, 2011
- The Gold Triple Play – Volatility, Currencies and Europe
Resurgent investment lifted global gold demand 6 percent from the previous year to just over 1,000 tons during the third quarter of 2011, according to the latest Gold Demand Trends Report from the World Gold Council (WGC). The potent cocktail of inflationary pressures in the emerging world and the European sovereign debt fiasco left investors searching for a safe haven—they looked for it in gold.
In an uncertain era where many asset values are declining, gold has thrived. Gold prices averaged $1,700 an ounce during the third quarter of 2011, 39 percent higher than the same time last year and 13 percent above the previous quarter, according to the WGC.
In total, investment demand increased 33 percent on a year-over-year basis to reach the third-highest quarter of investment demand on record, says the WGC. The increase was broad in scope. Investment in gold bars and coins jumped 29 percent year-over-year while holdings in gold ETFs reached an all-time high.
All global markets other than India, Japan and the U.S. experienced gains in investment demand; many of them (except Thailand and Saudi Arabia) saw double-digit increases.
While investment demand thrived during the third quarter, jewelry demand fell victim to the quarter’s economic fragility and price volatility—falling 10 percent on a year-over-year basis. Only four markets—China, Hong Kong, Japan and Russia—saw jewelry demand increase.
The WGC says a shift toward high-growth economies is “undeniably conspicuous in the gold market.” Nowhere in the world is this more evident than in China, where consumer thirst for gold appears unquenchable. China’s total demand, around 612 tons year-to-date, has already eclipsed that of 2010. In addition to domestically consuming every speck of gold mined in China, it’s estimated that the country’s gold imports could reach 400 tons in 2011. That’s roughly equal to the combined tonnage of gold demand for the Middle East, Turkey and Indonesia in 2010—and that’s just imports.
Consumer demand for gold in China increased 13 percent (year-over-year) during the third quarter as the country continues to close the gap on India. Chinese jewelry demand, also up 13 percent, eclipsed India for only the fourth time since January 2003. Combined, the two Asian giants account for over 50 percent of global jewelry demand.
The WGC says, “China’s increase in demand is being fueled by rising income levels, a by-product of China’s rapid economic growth.” This growth has given birth to more than 100 million gold bugs in China’s rural areas. China’s smaller third- and fourth-tier cities were responsible for the bulk of the increase in jewelry demand, the WGC says. In addition, the Gold Accumulation Plan (GAP), a joint effort from the Industrial & Commercial Bank of China (ICBC) and the WGC which allows investors to purchase gold in small increments, reached 2 million accounts in September. The WGC says GAP sales have already exceeded 19 tons so far this year.
Things weren’t quite as rosy for demand in the world’s second-largest jewelry market. Indian jewelry demand took a 26 percent hit as volatility in the rupee shook investor confidence. The rupee decreased 9 percent against the U.S. dollar during the third quarter, more than double the currency’s average quarterly move over the past five years.
Historically, Indian jewelry demand bottoms in July-August, before picking up heading into the Shradh period of the Hindu calendar. That didn’t happen this year because Indian consumers were discouraged by high and volatile prices. The WGC says:
Consumer confidence in India has been knocked by the persistence of high domestic inflation rates. Inflation of almost 10 percent, as measured by the Wholesale Price Index (WPI), adversely affected jewelry demand, through its impact on both disposable income levels and general consumer sentiment.”
Currency Effect on Gold Prices
The weaknesses of the rupee against the U.S. dollar also negatively affected India’s demand. This chart illustrates the dramatic effect currency fluctuations can have on gold prices.
The gold price in Indian rupees has appreciated over 31 percent since June 30, more than three times the price appreciation denominated in Japanese yen. This means that a consumer looking to buy gold in Japan would have three times the purchasing power to buy gold at their local dealer than an Indian counterpart.
The gold price in yen terms has lagged due to the currency’s strong appreciation against other global currencies. It’s a similar story for the U.S. dollar and Chinese yuan (pegged to the U.S. dollar), which investors have favored since fleeing the euro.
Gold’s Volatility
Chaos in the currency markets amplified gold’s volatility to roughly twice historical levels during the third quarter, the WGC says. Our research also shows that gold’s recent roller-coaster ride is an anomaly. We sorted through 10 years of data to capture all of the 10 percent (plus or minus) moves selected assets have had over a one-month period. The results show gold experiences plus/minus 10 percent moves 7 percent of the time; about the same as the S&P 500 Index. In comparison, crude oil sees moves of this magnitude 30 percent of the time.
Volatility of Various Assets Number of +10% Moves Number of -10% Moves Frequency of
± 10% MovesNYSE Arca Gold BUGS Index (HUI)
563
284
33%
WTI Crude Oil
465
325
30%
MSCI Emerging Markets (MXEF)
137
170
12%
Gold Bullion
128
52
7%
S&P 500 Index (SPX) 41
93
6%
Calculated over rolling 20-trading day periods. Based on approximately 2,600 total occurrences over the past 10 years as of 9/30/2011.
Source: BloombergGold equities have been more volatile than gold bullion. The NYSE Arca Gold Bugs Index (HUI) experienced these swings 33 percent of the time. In a market with gold prices trending upward, this beta provides a potential boost for miners. However, this can also have a negative effect during volatile markets as investors overreact to downside swings.
Gold Outlook
“Gold demand faces headwinds in the near term because of the strength of the U.S. dollar,” Marcus Grubb, Managing Director of Investment for the WGC said on a conference call Thursday. “I still think the macro situation is very favorable to gold because we still don’t have a lender of last resort in the eurozone.”
Speaking of the eurozone, Nigel Farage—leader of the United Kingdom’s Independence Party—spoke some much-needed harsh words to the European Council this week. Farage is one of the U.K.’s most powerful conservative officials and is an unabashed Eurosceptic, meaning he does not ideologically believe in the idea of the European Union. I originally saw the video posted on Zero Hedge but it has since gone viral.
Farage lambasted the group saying, “The Euro is a failure and who is actually responsible, who is in charge out of you lot? Well of course the answer is none of you because none of you have been elected. None of you actually have any democratic legitimacy for the roles that you currently hold with this crisis.” “You should all be held accountable for what you’ve done,” Farage continued later. “You should all be fired.”Click here to watch the video.
I think Farage echoes the sentiments of many, who are exhausted, enraged and exasperated by the technocrat circus in Europe. Europe’s carousel of fiscal calamity will certainly keep spinning in the near term and will likely continue to be covered heavily by the media. This will continue to drive the Fear Trade, while China and the Far East power the Love Trade by feasting on gold.
Now that’s something all gold investors can be thankful for. I wish you and your family a very Happy Thanksgiving! If you happen to be in the San Francisco area November 27-28, come visit me at the Hard Assets Investment Conference where I’ll be speaking about market supercycles.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of September 30, 2011: Industrial & Commercial Bank of China.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.
By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
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- November 14, 2011
- The Many Factors Fueling a Return to $100 Oil
Oil prices rose about 5 percent last week to finish only a dollar short of regaining triple-digit status. Since dipping below $80 per barrel on October 3, West Texas Intermediate (WTI) prices have increased almost 28 percent. This increase is nearly twice that of the S&P 500 Index, up 15 percent since October 3, but reinforces a recent trend for oil prices—as equities go, so goes oil.
This chart put together by the U.S. Energy Information Administration (EIA), illustrates how WTI crude oil prices and equities have moved nearly in tandem over the past few months.
The EIA says “the recent strong relationship between oil and equity prices resembles that seen during the economic downturn and recovery in 2008-2010.” According to EIA data, crude oil and the S&P 500 Index have had a positive correlation in 12 of the past 13 quarters. A positive correlation had not occurred once in the previous 35 quarters. In fact, crude oil and equities experienced a negative correlation during five quarters over that time period.
This recent strong correlation implies that equities have the potential to move higher if oil prices continue along their current trajectory. Given oil’s current supply/demand fundamentals, there’s a good chance of that happening.
Demand Holds Strong Despite Global Uncertainty
One of the key drivers for rising oil prices is demand, which has held steady despite the turmoil in Europe, sluggish economic growth in the United States and a slowdown in China. In fact, Citigroup says there is “no indication of a demand collapse unfolding as in 2008.”
While year-over-year comparisons show global demand growth is slowing, Citigroup points out that this year’s data compares with a 2010 period propped up by government policies encouraging consumption, such as the Fed’s QE2 program. Citigroup says these comparisons are “obscuring the fact that demand continues to grow and, barring a sharp derailment of the global economy, is on course to make a record high in 4Q11 and on an annual basis in 2012.”
By the end of 2012, the EIA forecasts world crude oil and liquid fuel consumption will total nearly 90 million barrels per day. This chart from PIRA carries the demand curve further into the future, forecasting demand to surpass 110 million barrels per day by 2025.
What is driving this increase? The emerging market transportation sector.
In its World Energy Outlook released last week, the Paris-based International Energy Agency (IEA) says crude oil consumption will be driven by developing countries over the next 20 years. These countries will account for 90 percent of the world’s population growth, 70 percent of the increase in economic output and 90 percent of global energy demand growth over the period from 2010 to 2035.
The agency predicts global crude oil demand will rise to 99 million barrels per day by 2035 “as the total number of passenger cars doubles to almost 1.7 billion in 2035.” If this prediction holds true, it means that there will roughly be as many cars in the world as there were people 100 years ago.
Long-term, Short-term Constraints Threaten Supply
WTI prices have remained in backwardation since shifting from three years of contango in late October. Contango means that the price of commodity contracts expiring in the near term is lower than the forward, future price of crude contracts. Backwardation is the opposite: The price of a commodity today is higher than the future purchase price.
While everyday investors may get tripped up by the contango/backwardation jargon of oil markets, the most important thing to recognize is that this significant shift signals there are short-term constraints in supply pushing prices higher. In fact, crude oil inventories in the United States are now at the lowest seasonal level in seven years, according to Bank of America Merrill Lynch. When the shift occurred, BofA analysts wrote this “is a major development for the crude oil market” and “signals $105 oil.”
Backwardation is a short-term signal; a long-term signal is the growing amount of geopolitical unrest bubbling up to the surface in the world’s largest oil-producing region.
Last week, the International Atomic Energy Agency (IAEA) released a detailed report that verified many suspicions of nuclear proliferation in Iran. The IAEA noted it was concerned about Iran’s “activities related to the development of a nuclear payload for a missile.”This news does not sit well with others in the region, such as Israel, who have threatened military action should the country deem Iran a security threat. A research note from Barclays articulates the combustible situation with a quote from Amos Harel and Avi Issacharoff, writers for Haaretz: “A few more weeks of tension and one party or another might make a fatal mistake and drag the region into war.”
War and/or unrest in the region have the potential to have a tremendous effect on oil prices because of its proximity to the majority of global oil production. PIRA says that the Middle East accounts for over 70 percent of OPEC oil production and account for over 95 percent of the cartel’s capacity growth along with North Africa.
It’s not only production that is threatened. One of the largest chokepoints along the global oil supply chain is the Strait of Hormuz, which roughly 90 percent of all Persian Gulf oil tankers—some 18 million barrels per day—pass through, according to Barclays. With Iran controlling the entire northern border of the strait, there is a significant chance for disruptions should the country fall into conflict or war.
This is just one example of oil’s geopolitical DNA. With more than 40 percent of the world’s oil controlled under autocratic rule, oil supply in democratic nations likely depends on the state of autocratic nations.
Following the death of Moammar Gaddafi, the Washington Post reports that oil companies are eager to begin pumping oil in Libya again but the new regime is still battling Gaddafi supporters and the country is a long way from being unified. Barclays notes several concerns: oil fields need to be repaired, Interim Transitional National Council has experienced growing factions, and there’s been a proliferation of weapons.
There’s also sanctions and persistent violence in Syria. In Yemen, an oil export pipeline was blown up a couple of weeks ago, making it the fifth attack in just a month. Barclays indicated that “almost half of Yemen’s 260,000 barrels per day of oil output has been offline since March” and it doesn’t look like the situation will improve any time in the near future.Trends in Demand and Supply Maintain Pressure on Prices
While BofA analysts think that oil prices could be headed toward $105 per barrel in the short term, the IEA offered a longer-term view that should give natural resources investors calm for many years to come.
The IEA says “trends on both the oil demand and supply sides maintain pressure on prices. We assume the average IEA crude oil import price remains high, approaching $120 per barrel (in 2010 dollars) in 2035 (over $210 per barrel in nominal terms).”
That’s a distant projection but it certainly illustrates why you should consider investing a portion of your wealth in oil.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. None of U.S. Global Investors Funds held any of the securities mentioned in this article as of September 30, 2011.
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- November 2, 2011
- Poland’s Power Play for Energy
Poland is setting the stage to become a rising player in the European natural gas market. Europe has long been reliant on Russia for its supply of natural gas, but domestic discoveries of shale gas—along with strong governmental support for drilling—might soon catapult Poland to the forefront of the energy landscape.
According to BP’s 2011 Statistical Review of World Energy, Poland’s production of natural gas has been relatively flat over the past 40 years. The country historically produced less than 1 percent of the world’s natural gas, vastly paling in comparison to one of the biggest natural gas players, Russia, which produced 18 percent of the world’s natural gas supply.
The European Union now imports 30 percent of its natural gas from Russia, says Morgan Stanley, and Poland has been one of the best customers. Last year, Poland alone imported nearly 63 percent of its natural gas—87 percent originating in Russia. The chart shows the vast web of pipelines that Russia has spun through Belarus, Ukraine, Slovakia and the Czech Republic in order to carry its gas to the other European nations.BP reports that the only country outproducing Russia in natural gas is the U.S., which accounted for nearly one-fifth of the world’s natural gas in 2010. However, the U.S.’s natural gas production rose to its highest level since 1973 due to the extraction of shale gas. “Shale gas related horizontal drilling surged in early 2010 and shale gas output rose to account for 23 percent of total U.S. production,” reported BP.
The U.S’s new drilling technique, which extracts natural gas from rock deep underground, is “reshaping the world of natural gas,” BP says. To unlock the resource in shale basins, engineers must employ horizontal and hydraulic drilling, commonly referred to as “fracking” or “hydrofracking.” This requires pumping highly pressurized amounts of water, chemicals and sand underground to release gas trapped in shale formations.
Now this groundbreaking technique could shift Europe’s natural gas market to the East. A report by the U.S. Energy Information Administration (EIA) on “World Shale Gas Resources” found that Poland has the largest shale gas reserves in all of Europe, with 187 trillion cubic feet of recoverable natural gas resources.
Specifically, the EIA finds three organically rich shale formations in Poland that are favorable for gas exploration development.The Baltic Basin is roughly 102,000 total square miles in size, larger than the Marcellus shale basin in the U.S., and extends over a portion of Poland, Lithuania, Russia, Latvia, Sweden and the Baltic Sea. This basin could contain significant levels of natural gas, making it the most promising deposit of this untapped resource in the region. Surrounding the Baltic Basin are Poland’s gas-rich regions of the Lublin and Podlasie basins.
Chevron began drilling the company’s first exploratory well in southeast Poland this week and that’s just the beginning. The EIA says a number of international firms such as ExxonMobil, Marathon Oil and PGNiG, Poland’s state-owned gas company, have been evaluating the Baltic and Lublin basins, but no exploratory wells have been drilled at Podlasie as of yet. Substantial infrastructure is also needed for companies to be able to extract and transport reserves, including thousands of miles of pipelines and dozens of rigs.
Helping to offset some of the transportation difficulties, Poland’s largest state-owned energy company recently announced plans to build approximately 620 miles of gas pipeline.
Although it may still be two to five years until the country is able to begin production, Morgan Stanley cites several reasons for Poland’s likely success: a large resource base, gas pricing that is almost twice the pricing of the U.S., a developed gas market, and political support that welcomes foreign firms and hydraulic fracking permits compared to other countries in Europe. Just as shale gas is significantly driving the supplies of natural gas in the U.S., Poland’s shale gas could shift where Europe gets its energy in the future.
The following securities mentioned in the article were held by one or more of the U.S. Global Investors Funds as of September 30, 2011: Marathon Oil. By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
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