Agcapita November Energy Briefing


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Agcapita is Canada's only RRSP and TFSA eligible farmland fund and is part of a family of funds with almost $100 million in assets under management. Agcapita believes farmland is a safe investment, that supply is shrinking and that unprecedented demand for "food, feed and fuel" will continue to move crop prices higher over the long-term. Agcapita created the Farmland Investment Partnership to allow investors to add professionally managed farmland to their portfolios.

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Agcapita November Energy Briefing

  1. 1. Agcapita Energy Update November 2009 1
  2. 2. Summary It would seem virtually axiomatic that if individual oil wells peak, fields peak and regions peak, global production should also peak. The more pertinent issue then becomes the timing of the peak and the rate of post peak decline. The research presents a wide range of answers to these questions. A recent survey paper from the UKERC found that: – The global average decline rate of post-peak fields is at least 6.5%/year and the corresponding decline rate of all currently producing fields is at least 4%/year. This implies that approximately 3 mb/day of capacity must be added each year just to maintain production at current levels – equivalent to a new Saudi Arabia coming on-stream every 3 years. An additional 1 mb/day must be added to meet demand growth. Contents – More than two thirds of existing capacity must be replaced by 2030 solely to prevent production from falling. 2 Peak Oil Price Modeling – A peak in conventional oil production before 2030 appears 3 IEA – Peak Oil is Here? likely and there is a significant risk of a peak before 2020. For example, a 2008 report by The UK Industry Taskforce on Peak Oil and Energy Security warned that a “peak in cheap, easily available oil production” was likely by 2013. As a thought experiment, Agcapita has produced a model based on known country by country oil demand, emerging versus developed market oil demand growth profiles, demand elasticity profiles and known pre and post peak production growth/decline rates. The purpose of this exercise was not to make highly accurate oil price predictions but rather to gain some insight into the potential magnitude of price changes given fairly conservative production, demand and decline assumptions. Regards Stephen Johnston - Partner 1
  3. 3. Energy Update Peak oil PriCe Modeling Chart 1: saMPle PriCe trend (Peak oil Peak oil price models attempt to reflect an 2012, inflation adjusted in usd/BBl) enormously complex system like oil supply/demand and pricing. Even a simplified model will be highly 300 sensitive to post peak decline rates, reserve replacement rates, elasticity of demand and total 250 reserves remaining amongst other variables. In the spirit of education rather than prediction, we 200 have produced a simple peak oil-pricing model. If you manipulate the core assumptions you should 150 begin to see how modest changes in the underlying assumptions can have dramatic effects on derived 100 post peak prices – even in a highly simplified model like ours. 50 Click Here for Link to the Login Page for the 0 Peak Oil Model 2010 2011 2012 2013 2014 2015 Navigate to our Investor Login Area Source: Agcapita estimates User Name: Energy Password: Energy What Agcapita found was that given the highly inelastic nature of demand for oil, coupled with resilient demand growth in the emerging economies, global peak oil can be expected to cause large sustained real price increases. 2
  4. 4. Energy Update (continued) iea – Peak oil is here? The International Energy Agency (“IEA”) has rejected Even so, the IEA’s 2009 World Energy Outlook allegations from an anonymous internal source that is explicit in its warnings about the impact of a world oil reserves have been exaggerated even “business as usual” approach to energy over the though in its own words “We’re the ones that are next 20 years. “The scale and the breath of the out there warning that the oil and gas is running energy challenge is enormous -- far greater than out in the most authoritative manner. But we don’t many people realize. But it can and must be met,” the see it happening as quickly as some of the peak oil report said. The chief economist of the IEA recently theorists,” Richard Jones, deputy executive director stated that the public and many governments of the IEA. In its recent annual outlook, the IEA appeared to be oblivious to the fact that oil is running repeated its prediction that oil supplies would rise to out far faster than previously predicted and that 105 million barrels by 2030. “Generally, we’re viewed global production is likely to peak in about 10 years as more pessimistic than we should be by the (oil) – at least a decade earlier than earlier IEA estimates industry,” Jones added. based on the finding that production from existing oil fields is dropping much faster than previously The anonymous internal source reported that the measured. The IEA now estimates that the decline in IEA is more pessimistic than its public disclosures oil production in existing fields is now running at 6.7 indicate…”Many inside the organization believe that per cent a year compared to the 3.7 per cent decline maintaining oil supplies at even 90 million to 95 million it had estimated in 2007. The IEA updated forecasts barrels a day would be impossible, but there are fears assume that gas, coal and oil prices will rise along that panic could spread on the financial markets if the with demand and that crude oil will rise to US$115 figures were brought down further. We have already per barrel in nominal terms by 2030. Superficially entered the ‘peak oil’ zone. I think that the situation this represents a large increase but in reality it is a is really bad.” Another anonymous IEA source stated somewhat mild prediction in light of the IEA view on that it was deemed “imperative not to anger the peak production given that this price would represent Americans” who were said to play an influential role in a reduction in real (inflation adjusted) terms. encouraging the body to underplay potential supply shortfalls. 3
  5. 5. disClaiMer: The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither AGCAPITA nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to AGCAPITA and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting AGCAPITA or its relevant affiliate directly. #400, 2424 4th street sW tel: +1.403.218.6506 Calgary, alberta t2s 2t4 fax: +1.403.266.1541 Canada