POWER UP: A little bit of caution for oil and gas speculation?

Recent activity from ASX listed oil and gas companies has seen some junior explorers returning impressive gains of the type that investors in crypto are more familiar with.

In one case, the gains followed intriguing results from an exploration well, which could open up an entirely new gas and condensate province, while the other was on the back of an extremely large gas resource estimate.

First off, it is important to realise that these gains (of more than 100%) were made on the back of speculation – that is buyers are snapping up shares in these two companies in the hope of greater gains to come.

And if one is making that investment decision while recognising this fact and doing so wisely (ie not betting your farm on it), there’s absolutely nothing wrong with doing so.

However, it must be reiterated that these are entirely speculative – one more so than the other – and can carry significant risks.

For the first, while drilling has returned some encouraging results, the company is yet to carry out more rigorous tests that could provide definitive answers.

This is still inarguably a fair bit more than our second example, which had announced both in-place oil and gas estimates that look like the answer to Australia’s energy woes on the East Coast – if you’re not a renewables fan at least.

Here’s here we would like to issue a word of caution. In-place estimates are calculated based on the total amount of oil and/or gas that could be contained within a reservoir.

It is by no means the amount of oil and gas that could be recovered from the reservoir which is complicated by factors such as the reservoir’s porosity and permeability, or that commercial amounts of hydrocarbons are present in the first place.

The International Energy Agency has estimated that just 30% of the oil contained in the reservoir will be produced using primary recovery – production from the natural pressure – and secondary recovery – where pressure is maintained by injecting water or gas.

Further recoveries are certainly possible using enhanced oil recovery methods, but this adds an extra level of cost and complexity.

Reservoirs can also be incredibly complex, as Woodside (ASX:WDS) can attest with the Chinguetti oil field that was sold to Malaysian state oil company Petronas back in 2007.

Oil speculation positive or negative?

A notable example that can serve as both encouragement and caution for speculation is Carnarvon Energy (ASX:CVN).

Looking past its long history to more recent events, shares in the company traded below 10c for most of 2017 and the first half of 2018 before climbing rapidly to well past 60c in August 2018 as punters first speculated that its Dorado-1 well was on to something after receiving confirmation of an oil discovery in mid-July.

While the price plummeted back below 40c after, it stayed well above 30c up until the impact of COVID-19 sent its shares down to about 15c.

Since then prices in the company have see-sawed back and forth with the latest fall sparked by news that Dorado – despite subsequent wells proving it up to be a rich prize – wouldn’t see a final investment decision this year due to the “current inflationary cost environment and period of supply chain uncertainties”.

However, operating partner Santos (ASX:STO) is currently focused on incorporating the nearby Pavo discovery, which Carnarvon also holds a stake in, into Dorado as an optimised integrated gas and liquids development concept.

As such while Carnarvon is decidedly much closer to the development side of the equation, its past performance remains both a tale of both encouragement and caution for speculative investors.