This Tiny Aussie Oil Stock Could Be a Big Winner in China’s Latest Trade Deal

by | published November 18th, 2014

The U.S.-Chinese accord on climate control may have grabbed the most headlines yesterday, but the trade pact signed between China and Australia is likely to have a much bigger impact.

In the shadows of the G20 meeting in Brisbane, Canberra inked a free trade agreement with Beijing that will see tariffs on all resources and energy products removed within two years.

By agreeing to the deal, Australia will now reap the benefits of zero tariffs on major exports like iron ore, gold, crude oil, and liquefied natural gas (LNG).

But that’s not the only upside “Down Under.”

This landmark agreement could also have a big impact on a tiny Australian oil stock…

A Gigantic Bet on the Biggest Export Market in the World

Of course, Australia has been moving closer to Asia for some time now.

Despite its status in the British Commonwealth and as a long-standing member of the Western security network, successive governments have stated quite openly that the future of Australia is in the Asian markets.

From Canberra’s point of view, a fair trade agreement with China makes economic sense. The Asian market is Australia’s biggest and geographically closest trading target.

Australia’s goal is to become the main outside provider of energy, raw materials, and food to China and the rest of the Asian mainland. And as if anybody would doubt it, Canberra expanded the list by stating it wants to serve India in the same capacities.

On the energy side, where Asia in general and China in particular have pressing needs for some immediate relief, Australia now looms as a major export source. In fact, it already provides more metallurgical grade coal (the kind needed to produce steel) to Asia than any other country.

On the natural gas side, Australia’s emergence as the main regional source of significant additional volumes of LNG has underpinned five huge gas projects in northwestern and western parts of the country.

The balance of all these projects, however, remains a question. The Chevron Corp. (NYSE: CVX)-led Gorgon Project provides a good case in point.

I actually spent some time several years ago advising on this particular initiative, one in which a remarkable underwater production network was introduced offshore for the first time anywhere in the world.

At the time, the discovery of expanding (and massive) offshore reserves had created a potential problem for a project that was going to devote just about all of the gas for LNG exports. As it turns out, a small amount was reserved for local consumption to avoid a political roadblock and PR mess.

On the other hand, with several large LNG export projects in various stages of development in Australia, and two more in Papua New Guinea (PNG), concerns began to emerge that the competing projects would drive down the price of LNG and run the project budgets deeply into the red.

Gorgon, after all, turned out to be a significantly more expensive operation than its designers had originally intended. At the time, I had expressed some concerns about the reliability of the initial figures used in developing the projections, and I even wrote a minority report to that effect. But the end result has been even worse than I anticipated.

Meanwhile, ExxonMobil Corp. (NYSE:XOM) had a huge LNG undertaking of its own on Papua New Guinea, and was also a minority partner in Gorgon. Chevron management often expressed the concern that if push came to shove, Exxon would sell its own LNG to Asia first, putting Gorgon into an even more untenable situation.      

That was in addition to the three other LNG projects in either Australia or PNG that were likely to add even more pressure on pricing.

Back then, the primary export market was still seen as Japan, with South Korea coming in second. Everybody recognized that China would eventually emerge as a major consumer of LNG. Yet, most estimates on when that would occur still put it 15 years or more into the future.

The worry was that projects like Gorgon would go belly up before that as all the new projects attempted to dump LNG on the Japanese market, driving down profits in the process.

But it didn’t quite turn out that way.

One day, the Chinese announced that they would be building five coastal LNG receiving terminals simultaneously. That was followed by additional LNG commitments elsewhere on the continent.

Today, all of the LNG production from all of these projects is now contracted for the next 20 years, with the lion’s share of it headed to Asia.

Home to 200 Billion Barrels of Unconventional Oil

Of course, this is just a small part of a larger wave. There is going to be more and more of this activity in the future.

As I’ve noted several times before, the global energy focus will be shifting to Asia, at least through 2035. And as the closest “new” source of energy, Australia will be the first to benefit from the rise of an entire continent.

Australian coal and LNG will be exported to Asia in ever increasing amounts, with the only real limitation being the Australian infrastructure and its shipping capabilities.

That’s where another part of the Chinese trade agreement may prove pivotal. Beijing has also announced that it’s developing an Asian infrastructure investment bank with an initial funding of at least $50 billion.

And while you can bet projects receiving the green light for funding will primarily benefit Chinese energy production and delivery needs, there’s one project that may be catapulted into the foreground now.

It involves a company I recommended to both Energy Advantage and Energy Inner Circle subscribers some time ago.

It’s a company called Linc Energy Ltd. (OTC:LNCGY). Linc is a small Australian-based (but with its ownership office in Canada) company that is best known for coal gasification projects and Alaskan Northern Slope crude oil.

Its real jewel, however, is back home in South Australia.

Linc controls the Arckaringa Basin, home to an estimated windfall of over 200 billion barrels of unconventional oil. The company has recently moved from the Australian Stock Exchange to trade on the exchange in Singapore. Now Chinese money is moving into the stock and Chinese oil majors are poised to provide operational support.

So don’t be surprised if the Arckaringa Basin becomes the center of China’s attention… and the first major joint energy infrastructure and development project.

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  1. Joe Clenney
    November 19th, 2014 at 08:46 | #1

    Dear Kent, I have maintained a strong position in LNCGY since you first recommended it so I am pleased that you are still positive on the stock.Sometimes the writers of newsletters appear to have forgotten about the readers so it is refreshing to read your updates.

  2. allan hamblin
    November 19th, 2014 at 11:25 | #2

    Kent, being Aussie, I went heavily into Linc based on your early recomendation. I met Peter Bond at a company meeting 12 months ago, but he didnt seem interested in discussing Acaringa. Oil interest (in USA), coal gasification has seemed to be his main interest. At the meeting which approved the move to SGX, he said it would eliminate short sellers and marketmakers, to shareholders benefit. Sadly to date the price has gone well down. I hope it begins to climb now. The last I saw the Head off ice was still Brisbane. What do you mean “its ownership office in Canada”?

  3. November 19th, 2014 at 13:15 | #3

    Thank You, WRW

  4. December 2nd, 2014 at 12:47 | #4

    Sometimes, people need to think of longer term relationships with their stocks, at other times they need to look in out of the way places.

    For Americans, with a mainstream media, that rarely looks beyond the shores of the U.S. (I lived and worked there during the Tech-boom, and was frustrated by the lack of overseas News) they need access to overseas markets, and we Brits have our own junior stock market called the Alternative Investment Market (AIM), with some huge potential there.

    One company which had oil facilities and reserves in 4 markets – Malta, Spain, Gulf of Mexico, and Trinidad and Tobago, began focussing its efforts in existing producing assets, but which had lacked investment.

    As a result, this company bought further licences in Trinidad and Tobago, and focussed their efforts on its T&T assets, sold off its G.o.M assets, paid off the JV licence holder of the Maltese asset, and put resources into re-activating 90 existing wells, and intend drilling new ones. (20-30)

    The assets had lacked investment since the 1980s, and drilling technology has moved on in leaps and bounds since then. After re-activating over 30 wells, and drilling several new ones, the company now finds its infrastructure isn’t big enough to cope with the oil it is finding.

    They have recently bought some smaller company assets in the vicinity, recently and built a new oil tank. They have also conducted an aerial survey using Magnetics, bought rigs and new deeper licences; a new CPR is due any week now, and the transfer equipment that will allow transfer of the crude to Petrotrin without human interference will be installed in the new year allowing improved output.

    The company have some exciting prospects, that possibly tap into the Venezuelan off-shore reservoirs, and as no deep licences have been drilled in the last 30years, the potential is HUGE..

    The Company’s share price is what is commonly referred to as a penny stock , but according to all the research I’ve done, the price could shoot up x10+ over the next 2years. Their agreement with Petrotrin – the State Oil Corporation – means that their receipts are somewhat hedged based on variable production and oil prices, and cost of production is one of the lowest I’ve heard about – All in costs below $35/bbl

    Given all the news scheduled for the next few months, despite a falling oil price, the next 2years will see this company transformed from a minnow, to a medium sized corporation.

    And this company is? LGO Energy, and their shares are currently below £0.04p, already having risen from £0.006p during the summer 2014.

    I am not a broker, so IF you do buy… Don’t take this information as a recommendation. It is merely your starting point. As ever – DYOR or get professional advice. Or maybe the good Doctor could run his slide-rule over the company and comment in a later piece?

    Will. S.

  5. December 21st, 2014 at 10:19 | #5

    What impact does the new price level bracket for crude and the new world s&d levels have on linc energy with respect to bringing new production into the equasion?

  6. RJ
    January 30th, 2015 at 11:20 | #6

    st a simple comment that would be extremely helpful to myself an many others. As much as I enjoy Dr. Kent’s articles, I wold appreciate it if you would use black and not dark gray for the font color. You know, just like any book you would read. There is nothing stylish about using text colors that do not contrast with the page background. Moreover, usability studies do prove that readers will spend LESS tine with the material when presented in this manner…or should I say fashion.

    It’s as simple as that.

    Consider making the available with maximum user-friendly practices.

    Thank you.

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