by Aaron Levitt | May 21, 2012 9:35 am
When it comes to energy production and reserves, a few countries and regions top investors’ go-to lists. Energy giants like Russia, Canada and the Middle East often take the lead. Additionally, new technological innovations in drilling have allowed the U.S. to move ever closure to realizing its dream of energy independence[1], which is opening lots of opportunity for domestic investors to stay close to home.
However, while these major energy producers’ stories are evolving every day, they’re still well known to investors and policymakers alike. That’s why some of the lesser-known and more unconventional sources of supply could offer more tempting returns. Some investors are turning to places like Africa and the Ukraine, which are quickly becoming hotbeds of energy activity.
Another such rising star is Vietnam. Ignored by everyone except the most seasoned frontier-market investors, the nation is quickly developing into an emerging energy powerhouse because many of the same drilling advances have been applied to its fertile offshore deepwater fields. As Southeast Asia and the ASEAN trade bloc remain a key area of economic growth, Vietnam’s ample energy reserves could become quite valuable over the next few decades.
Most of the players in the region are private or state-owned enterprises. However, the ones that aren’t — especially a Canadian company that has been suffering lately — could offer investors a great chance to play Vietnam’s oil potential.
Over the last two decades Vietnam has emerged[2] as key oil and natural gas producer across Southeast Asia. The nation has introduced various market reforms to support the energy industry, including boosting exploration activities as well as allowing for greater foreign investment and cooperation. Overall, these measures have helped increase oil and gas production in the face of Vietnam’s own rapid economic growth and industrialization.
These exploration efforts have also paid off regarding the nation’s proven and probable reserves. According to industry publication Oil & Gas Journal, Vietnam now ranks third in terms of proven oil reserves in the Asia-Pacific. The use of deepwater horizontal drilling has allowed it to expand its reserve base from just 0.6 billion barrels of oil at the beginning of 2011 to more than 4.4 billion barrels of proven oil reserves as of January 2012.
At the same time, these advanced drilling measures have also increased the nation’s natural gas reserves. Vietnam now holds more than 24 trillion cubic feet (Tcf) worth of the fuel. Based on current production and demand, the country is self-sufficient in natural gas, with state-owned PetroVietnam predicting that it won’t be until 2025 until demand outstrips supply in the country. Similarly, the nation exports the bulk of its crude oil production.
Yet, much of Vietnam remains relatively underexplored. Natural gas production stems from just three major offshore basins. So, there’s certainly potential for exploration and production (E&P) firms to uncover new natural gas fields as well as tap the fertile offshore oil reserves.
The Vietnamese government understands that potential and has recently opened and auctioned off new blocks for exploration. Russian energy giant Gazprom (PINK:OGZPY[3]) was the first to jump at the chance to add acreage when it recently secured a 49% production-sharing agreement[4] with PetroVietnam to explore two blocks in the South China Sea.
One potential source of huge new supply could lie in the Spratly chain of islands in the South China Sea, which could contain hydrocarbon reserves worth as much as $23 trillion. That doesn’t even include the gold, silver, iron and nickel reserves located in the archipelago’s shallow waters.
Vietnam claims ownership of the island chain, but so do the Philippines[5], Malaysia, China, Taiwan and Brunei. Vietnam and its ASEAN neighbors have reached agreements in the past to conduct joint exploration for oil and natural gas resources in the area. However, continued territorial disagreements have hindered these efforts. The latest setback involved allegations of China attacking a Vietnamese fishing vessel in the contested area.
Despite the potential conflicts in the Spratly Islands, Vietnam’s future as major contributor to Southeast Asia’s growing energy demand makes it worthwhile for investment. Unfortunately, in its bid to “shrink to grow,”[6] ConocoPhillips (NYSE:COP[7]) recently sold its interests[8] in the nation to privately held Penrenco. That decision could come back to bite the former integrated oil company as demand and production in region remain robust.
Aside from Gazprom, PetroVietnam also has formed partnerships with several other international energy firms including ExxonMobil (NYSE:XOM[9]), BHP Billiton (NYSE:BHP[10], BBL[11]), Malaysia’s Petronas and France’s Total (NYSE:TOT[12]). However, perhaps the best way to play Vietnam’s energy future lies with beaten-down Canadian E&P firm Talisman Energy (NYSE:TLM[13]).
Looking past its operations across North America’s various shale formations and in Algeria, Peru and the North Sea, Talisman has a huge presence in Southeast Asia. So much so that its interests in Indonesia, Malaysia, Papua New Guinea and Vietnam account for 37% of Southeast Asia’s total energy production[14]. The energy firm’s projects in Indonesia and Malaysia provide the bulk of that production.
However, Talisman’s operations in Vietnam represent its rising star. It currently has one field that produces just 1,900 barrels per day — still accounting for around 2% of Southeast Asia’s total production — but more are scheduled to come online relatively soon. In addition, Talisman has begun exploring five offshore blocks located near the critical deepwater Nam Con Son pipelines — one of the assets Conoco recently sold off.
Overall, Talisman expects to shell out nearly $700 million in capital spending in the region, with more than a third of it going toward new exploration efforts.
Talisman’s importance to Vietnam’s energy markets isn’t lost on equity index providers. The company accounts for nearly 3.5% of the popular and only pure Vietnam exchange-traded fund[15], the Market Vectors Vietnam ETF (NYSE:VNM[16]).
Now could be a great time to buy the rising Southeast Asian superstar. Talisman’s holdings across North America have been held hostage by the historic collapse in natural gas prices. The company is a huge producer in shale fields such as the Marcellus and Eagle Ford. However, the bulk of that focus has been dry-gas wells. Needless to say, Talisman’s share price has plunged right along with the slide in natural gas prices.
Now trading at $9.85, the stock has steadily sunk this year to the tune of 23%.
That provides an opening for forward-thinking investors who can see Talisman’s potential in Vietnam. Shares haven’t been this cheap since the depths of the credit crisis and market sell-off back in 2009.
As of this writing, Aaron Levitt doesn’t hold any securities mentioned here.
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