Linc Energy said on Thursday that it had uncovered an oil deposit with up to 233 billion barrels of shale oil, rumored to be valued at around A$20 Trillion (US$20.8). Linc’s chief executive Peter Bond distanced themselves away from the A$20 Trillion valuation, which was probably arrived at by multiplying the resource estimate by current prevailing oil price – around $95 USD per barrel. According to Bond, proper valuation rule of thumb divide reserves by categorizing them by Proven, Probable and Possible reserves. Lowest grade 3p (proven, probable or possible) is only valued at $1-2 USD a barrel, while 2P grade (proven or probable), considered “good quality”, is valued slightly higher. Highest grade 1P (proven reserves) gives you around $US 10/barrel. Shale plays are also valued on an acreage rate – by land size – with low end fetching around $1000 USD per acre to $20,000 an acre for the higher end ones. No matter how you cut it, the A$20 Trillion estimate is certainly far off from actual reality, meaning buyers of Linc Energy shares that pushed price 30% higher yesterday should be worried of significant pullbacks.
But we are not here to discuss Linc Energy’s share price. What about the implication to AUD/USD?
Though the valuation of the oil reserves is way out, the size of the reserve was never in doubt. The minimum of 3.5 billion barrels of oil is “virtually unheard of this days”, according to Mr Bond. Mining Minister Tom Koutsantonis said that the amount of oil will allow Australia to become a self-sufficient net exporter. Australia currently ranks 31st by oil production according to CIA’s World Factbook data. This is certainly good news for the Australian Mining sector which has seen significant decline after the boom in 2011, which also contributed greatly to the rally of AUD/USD hitting above 1.10.
China will also be delighted to hear that Australia will be able to export more Oil to them, reducing their reliance on US Oil which is forecasted to be the biggest oil producer by 2017 according to the International Energy Agency. Other than increasing overall global Oil Supply, demand for US Oil will fall, reducing demand of USD indirectly; further pushing AUD/USD higher.
AUD/USD has been trading sideways since 2011, due to the conflicting fundamentals of weaker Mining Sector opposing incoming global demand of AUD due to its “safe haven” status on top of higher interest yields. Once we take out declining Mining Sector out of the equation, bullishness in AUD/USD will be able to rise, assuming the interest yield differential against USD and EUR remains.
Just word of caution. Nothing is confirmed as of now. We are still at the infant stages of Australia being a meaningful Oil Exporter, with Linc Energy still seeking partners to mine out the oil reserves. Furthermore, initial estimates could turn out to be a dud, which will negate the discussion above.
Productions is expected to begin by 2014, while commercialization will take about 5 years, just in time when US is expected to become the world number 1 producer.
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