Batchelor: Larger Oil Companies, Larger Challenges

Batchelor: I think nuclear is required to meet the world’s demand for energy over the long-term and especially as we want to move to cleaner fuels. I think what happens at the moment is there will definitely be a slowdown in Japan. A lot of nuclear power plants are offline. I think they will stay offline for several years even, while we check them out to make sure that they are all safe and perhaps improve some of those safety margins.

But I don't think long-term the world can do away with nuclear. But it's definitely causing a rethink not just in Japan but elsewhere. We've seen it in Germany and I'm also hearing about it in the U.S. market. So, I think there is more questions out there, the pace of growth of nuclear I think will be slowing.

Markova: Presumably that would have an impact on other energies, and gas in particular?

Batchelor: It does, it does. I mean we need these energy sources from somewhere, if we're going to have the lifestyle we have, so if we're not going to get it from nuclear, where we're going to get it from? That's partly going to be natural gas. In some instances it will also be coal and then in the short-term in Japan, we're actually going to be burning some residual fuel oil and crude oil.

Markova: One other thing you mentioned about gas exploration was shale gas, and shale gas in Europe, do you think that source has the potentiality to change big players from the gas market particularly in Europe in terms of supply?

Batchelor: It’s early days at the moment in Europe. There are some drilling results coming out of Poland, which is where most of the work is being done. I have recently been to Poland to see some of these areas. At the moment, I would say it looks promising, but it's still early days. We're getting early drilling results, not production tests, but what we do know is Europe has quite a lot of shale and therefore, if it follows the same path as we've seen elsewhere, it could be a significant incremental source.

Markova: So where does that leave your projection for the price of natural gas going forward?

Batchelor: In the U.S., we think the market is oversupplied at the moment and will remain oversupplied certainly for the next few months through this year. One of the questions we have is, do producers stop drilling as much for natural gas—we haven't seen much evidence of that yet—or do companies get to export natural gas out of U.S. market, which would tighten supply and demand? So there we think over the longer term, prices will probably rise, but in the short term they are going to stay at these lower levels. In Europe, prices are typically more linked to oil prices anyway, so the question doesn't apply so much in Europe.

Markova: So speaking of oil, one of the understandable market themes you mentioned was the MENA unrest in Libya. Where else other than Libya do you see potential threats in that region?

Batchelor: At the moment, there's concerns over Bahrain which produces I think something like 200,000 odd barrels per day but it doesn't export, so it's not as important. Syria does export, the Yemen does export--200,000 to 300,000 barrels each. Those are areas which there are question marks over per se, but at the moment everything on the oil side continues to move ahead as normal.

Other countries that people are worried about is Algeria. But it's too early to say and I think that some of these Middle Eastern countries in particular have other levers they can pull to help settle down some of the unrest, perhaps they've got bigger balance sheets, they can – there is a couple of things they can be doing.

Markova: One of the things that the situation in Middle East and North Africa points out is the exposure to political risk that an energy portfolio has. How do you isolate your portfolios from these kind of risks?

Batchelor: We prefer good companies that have assets in several different geographical locations, because one, that's diversifying my political risk, my fiscal risk if people change tax rates, but it's also typically diversifying my geological risk. So, I'm going to have assets in different basins, in case there is a problem on the geological side as well. So we like companies that don't just have one asset but have several good assets and the ability to grow and those companies become a larger part of the portfolio.

Markova: Thank you. So, at the end of your presentation there, you mentioned you have some issues with the integrated oil model. Can you kind of expand on that and say if opportunities are not there where else are you looking for them?

Batchelor: The integrated oil companies are run by very clever individuals and they are staffed by very good people, a lot of my friends work in those companies. The challenge they have is because they are producing such a large volume of oil already, and they are still impacted by the same laws of nature in terms of declining production from mature fields, growing their volumes is always a challenge.

Particularly now over the last few years, when we've had more national oil companies enter into the market, and perhaps with lower cost of capital so they are willing to pay more for assets. So I think that makes large companies at a slight disadvantage. Some smaller companies, where we're putting more of our money at this moment given our view on the macro situation, don't have the same hurdle. They can go out, perhaps stay a little bit below the radar, they don't need to find as many large fields to make a difference. So it's nothing against the integrated companies, it's just that their challenges are little bit harder than for some others.

Markova: Thank you Robin, your insights are very interesting.

Batchelor: Thank you.