India is fast emerging as an economic titan and the state of Gujarat is its industrial heartland. In the country’s north-west, this coastal state is outpacing the rest of the country. GDP growth is rattling along at 10% per year. Dotting the landscape are the pipes and chimneys of petrochemical plants. The sea lanes are busy, plugging Gujarat into the global economy.
The state is now a major gateway for international trade. There is money to be made and financiers are busily bank-rolling further expansion.
The Delhi-Mumbai corridor, for example, is a mega $90bn infrastructure project that will link Gujarat with the states of Uttar Pradesh, Delhi, Hayana, Rajasthan and Maharashtra. High-speed trains will carry double-stacked containers; three ports, six airports and a six-lane expressway will provide the backbone. New towns, cities, and industrial parks will spring up. 180 million people live within the hinterland of the ambitious project.
But this remarkable expansion is dependent on a stable, predictable and affordable energy supply – coal. And as the price of coal imports from South Africa and Australia spiral over the next decade, Gujarat is facing an energy shortfall that could short-circuit its ambitions.
Thankfully there may be a ready solution to this problem. And I think one Aim-listed company could play key part in resolving this crisis – tapping a hugely promising new energy reserve in Gujarat itself.
How gas is redrawing America’s energy map
On 5 July I described how the technique of ‘fracking’ has transformed the energy landscape of the USA. Gas that is trapped in the minute cavities of shale does not readily flow. But force a mixture of water and chemicals into the shale at high pressure and the rock can be cracked, releasing the gas.
Shale gas is a game-changer for energy supply, for the world’s climate and for geo-politics. Production is increasing inexorably in North America and by the end of the decade could account for half of all gas production.
That prospect excites American politicians. According to a study from the James A Baker III Institute for Public Policy at Houston’s Rice University, the rise of shale could mean the end of OPEC; it will reduce the USA’s energy dependence on volatile overseas countries such as Iran, Russia and Venezuela; and, because gas is a clean fuel, it will mitigate climate change.
The cost of production of shale gas is falling, making it more competitive against other forms of energy. With the evidence from the United States so compelling, prospectors have started to look for shale gas elsewhere in the world. Who could be the big winners?
Huge new reserves discovered across the globe
According to Rice University “revelations about the existence of technically – and possibly commercially – viable shale gas resources are also occurring in… Europe, China, India, Australia, and elsewhere. To be sure, the enormity of global shale gas potential will have significant geopolitical ramifications.”
Never slow to spot a commercial opportunity, China has just assigned its first licences for shale oil projects to Chinese businesses, and foreigners are now cutting in to the action. Last week, Exxon struck an agreement with the China Petrochemical Corp to jointly assess shale-gas potential in Sichuan. Estimates of China’s shale gas are set at 1,275 trillion cubic feet, 12 times its natural gas deposits and half as much again as is thought to exist in the USA.
Where China leads, India is never far behind. Kalapn Jain, of international consulting firm Deloitte Touche Tohmatsu, reckons that “India’s shale gas reserves may be larger than the conventional gas deposits and has the potential to be a significant contributor to gas supply”‘
So now NM Brah, chairman of Oil India, says that his company is “undertaking a comprehensive study to understand the shale gas potential of its assets in the north east and Rajasthan”. As academics, regulators and oil giants set up committees to look into the exciting prospects for shale gas, small companies are already grasping the nettle.
One of these is AIM-listed Oilex (OEX). Its ‘Black Pearl’ rig is already drilling the Camba shale gas prospect in Gujarat. Best estimates suggest that its drilling target could contain over 700 billion cubic feet of natural gas, and with gas selling locally at $4.50 per thousand cubic feet, this could be worth a lot of money.
Managing director Bruce McCarthy told me that the gas is present, for sure. The question is whether fracking can make it flow. Next month we should know the answer and it could transform the prospects for Oilex – keep an eye on this one.
The energy story of the decade
Whatever happens in Gujarat the shale gas revolution is fast spreading from the United States. As you know, I think this is the energy story of the next decade. I believe that a move to natural gas will turn today’s energy hierarchy on its head – and it’s already making serious money for canny investors.
Shares in Petrohawk Energy have surged 60% in the last few weeks alone after BHP Billiton tabled a $12.1bn offer for the shale gas group. And a new generation of gas explorers – scouring for untapped reserves in Europe, India, China and elsewhere – could repeat the success of these American gas plays.
I think we could soon hear these two stocks mentioned in the same breath as Petrohawk and others. So act now before they attract the attention of the mainstream press.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.