Economics is a tug of war between ever-expanding demand and finite supply on the one hand, and the inexorable march of technology on the other. In a nutshell, this is why the predictions that British economist Thomas Malthus made over 200 years ago have not yet come true. In an era of oxen and ploughs, Dr Malthus simply failed to foresee genetic engineering and side-tracked fracture drilling.
Mining technology remains comparatively old school, not least because many of the world's mines are still open cast – the two main tools of exploitation are explosives and massive ore-hauling trucks. But the hydrocarbon industry is undergoing something of a technological revolution, from oil sands, to gas-to-liquids to horizontal drilling. And agriculture is increasingly turning to bioscience, rather than chemistry, to increase yields.
Oil equipment, services & distribution
At about this time last year, as a thick sludge started to fan out across the Gulf of Mexico, many people began to harbour doubts about the future of the offshore oil industry. They needn't have bothered. You don't need to be a cynic to appreciate that the decline of conventional oil reserves will compel the US and other countries to continue giving the green light to offshore drilling, albeit under a beefed-up environmental and safety regime.
The global addiction to oil shows no sign of abating; less than a year after the spill the US Bureau of Ocean Energy Management, Regulation & Enforcement approved the first new deepwater exploration plan in the Gulf of Mexico.
Every spill has a silver lining
BP's Deepwater Horizon disaster may yet come to be seen as a boon for the offshore industry; or at least for those companies providing rig infrastructure and technical support.
While it now seems likely that contractors Transocean and Halliburton are to be held to account alongside BP for the disaster, it is these types of companies that are likely to benefit from the demand for increasingly high-tech drilling infrastructure, together with complex fail-safe systems.
RBC Capital Markets recently asserted that deepwater infrastructure offers "the best secular growth prospects among all oil field services (OFS) sub-sectors over the next three to five years". RBC makes the point that a re-stocking and renewal phase of the OFS cycle, which actually started with land rigs in 2005, has now "spread to jackups, frac equipment and ultra-deepwater floaters".
Orders surge as operators upgrade
This is good news for UK-traded operators such as Lamprell and Kentz Corp, both of which have enhanced their offshore capabilities to exploit this trend. Lamprell recently confirmed that its forward order book – at $972m (£596m) – had swollen by a third in under four months as a result of "demand for more sophisticated rigs in the wake of the Gulf of Mexico spill".
Although Kentz Corp's activities now encompass a wide range of engineering applications, the company has been actively involved in the offshore oil industry ever since the North Sea oil industry kicked off in the early 1970s. In common with Lamprell, Kentz Corp's order backlog at $1.6bn provides a highly visible earnings stream for investors.
NOCs come to the party
Oil service suppliers are increasingly forging alliances with national oil companies (NOCs). There are two major factors that explain the rising incidence of these arrangements. First, there are high barriers to entry for the offshore oil services and engineering industries – in many cases it would be either cost-prohibitive, or logistically unrealistic, for NOCs to try to replicate these services domestically. They could invite western supermajors such as BP, Shell and Exxon in to help, but they are unwilling to relinquish equity in what are still strategic national assets.
Second, for the oil services industry, NOCs hold the promise of a steady income stream, in that they tend to maintain their exploration budgets even during economic downturns. Exploration activity as a whole is highly correlated to the oil price; during the economic slump in 2008 – when the oil price contracted to $32 a barrel – it was the NOCs that provided the principal impetus for the industry.
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The number of global land and offshore oil rigs brought into service is expected to rise by 2 per cent and 17 per cent, respectively, between now and the end of next year. Of these, the majority will be reliant on horizontal (or directional) drilling platforms, which are at the cutting edge of drill technology – so to speak. Put simply, the main advantage of employing horizontal drilling techniques is that it allows operators to exploit oil & gas deposits that were previously inaccessible due to their geological positioning. It is at the heart of the shale gas industry, which could yet turn out to be the most important component of the unconventional oil & gas mix. Companies such as Hunting have been quick to develop proprietary technology to tap into this market, especially in the US where shale gas has been a game-changer; in less than two years, estimated US gas reserves have risen by 35 per cent. But the prospects for this technology are global. |
Squeezing out every last drop
In all, annual revenues from the global oil services market are set to grow by around 26 per cent to $200bn by 2015, according to the latest estimates from GBI Research. Aside from increased demand arising from more stringent environmental and safety regulations, technological developments in areas like electromagnetics and 4D seismic imaging are allowing oil companies to exploit fields that were previously dismissed as unviable from a cost-benefit perspective.
As conventional sources dry up, oil companies have found it increasingly difficult to replenish the average 4-6 per cent of their reserves that are siphoned off annually, but long-term price projections, technological advances and a shift towards unconventional sources of petroleum have pushed oil services to the forefront of the global energy industry.
The agricultural sector
The business of improving crop yields is heading the same way as oil services – ever-increasing sophistication. Gone are the days when getting a better harvest involved chucking fertiliser on a field at one time of the year, and spraying pesticides over it at another.
Seed technology and genetic modification are where the money is these days – but the number of companies involved in it is small, and international. Serious investing in food services is almost certainly going to involve buying foreign shares.
Seeds of fortune
In 2009, revenues generated from the global seed industry amounted to approximately $42bn, while global exports in seeds and seed technology have increased sevenfold since 1970. The market is highly consolidated: the top 10 seed corporations account for 60 per cent of the commercial seed market, and of those just three – Monsanto, Dupont and Syngenta – account for two-thirds of that figure. This dominance is even more pronounced in relation to proprietary seed technology where the same three companies, plus others such as Groupe Limagrain and Bayer Crop Sciences, rule the roost.
The idea that just a handful of companies can effectively dominate the global seed market is one of the most iniquitous manifestations of globalisation, according to some campaigners. But the world will become increasingly reliant on companies like Monsanto to provide ways of boosting yields to feed the swelling global populace. And bio-technology research, like pharmacology, is expensive and front-loaded onto costs.
Muck spreading
Of course, even with the best seed technology that money can buy, you will still need to find something suitably fertile to sow them in. Soil degradation and a rapidly diminishing supply of phosphate are intertwined problems that have got national policymakers worried, as well as farmers.
Last year's unsuccessful bid for Canada's Potash Corp showed that resource giants such as BHP Billiton understand which way the wind is blowing. Securing a leading position in the fertiliser industry is now seen as little different from gaining prominence in the coal industry.
Alongside Potash Corp, other large-scale operators such as Mosaic Group and Belaruskali are growing to meet increasing global demand – and may also attract the attention of companies intent on buying into a growth story.
A brand-new combine harvester
Another segment of the agricultural market with a substantial growth profile is farm machinery. Farm output in many of the world’s largest emerging markets is still constricted by a lack of mechanisation.
Manufacturers such as John Deere and Massey Ferguson have been quick to exploit this trend; the benefits of which became obvious during the 2009 global downturn, when demand from emerging markets such as Brazil and Argentina remained strong relative to mature markets.
