James Moore: The oil market is one for the gambler

Outlook Bad news for Cairn Energy, which got pummelled on the markets yesterday after admitting that it had failed to make any significant oil discovery at its wells in Greenland.

Greenland has a number of similarities to the Falkland Islands. Both are cold and inhospitable places, but both are attracting an awful lot of attention because they might have oil – oil in areas that are highly controversial for environmental and (at least in the case of those windswept rocks in the South Atlantic) geopolictical reasons. The excitement among investors is such that the more naïve have already been salivating at the prospect of (black) goldmines in chilly surroundings, and trying to work out how the local difficulties can be overcome.

Unfortunately, the one thing you can be sure about with bubbles is that sooner or later they have a tendency to pop. The news from the Falklands has been mixed at best. The news from Greenland, as far as Cairn is concerned, has been nothing short of rotten. That is the problem with oil exploration and production. Unless you are a magician or someone like Tom Cross, the former boss of Dana Petroleum, it is very much a hit or miss business, with as many misses as hits.

Those buying shares in E&P companies are often taking a gamble, and not always a very scientific one. Environmentalists can be reassured: the prospect of oil does not mean it is there.