“It amazes me that we keep seeing this in the headlines,” I heard my colleague mutter this morning.
I looked over and saw his attention was fixed on a news anchor spouting the evils of oil speculators on his computer monitor.
“How can they possibly think things are still cheap?” he continued, giving me a sidelong glance. “Haven't they caught on by now?”
The anchor went on to make a bold prediction, saying crude oil would soon collapse to $35 per barrel.
While I just laughed and shrugged off the story, he was in complete disbelief.
“They have no idea what's coming,” I heard him say as he closed the window with the news story and huffily walked away from his desk.
He's right — and here's why...
Deeper Down the Oil Well
We've come a long way since the first commercial oil wells were drilled in the mid-1900s.
The six-horsepower steam engine Drake used in northwestern Pennsylvania only drilled at a rate of three feet per day. Thankfully, Drake only had to go down to a total depth of 69 feet.
Today, the average oil well in the U.S. is more than 5,000 feet deep.
Slowly but surely, we're being forced to bore further and further to extract our oil resources.
Practically all of the good news coming out of the U.S. oil and gas industry is from unconventional sources.
As you can see below, more than half of our drilling rigs are positioned in various tight oil and gas formations.
These new shale wells are far from shallow and cost millions of dollars to drill.
The average Chesapeake well in the Eagle Ford is about 8,000 feet; natural gas in the Marcellus Shale can be found just as deep in some parts, around 9,000 feet underground.
Of course, we're all well aware of the role North Dakota has played in our recent shale boom. More than half a million barrels per day are now flowing out of the state, nearly all of which come from the Bakken tight oil play.
The scary truth of the matter is that when it comes to drilling for oil, the rest of the world is in the same boat we are — or worse off.
You can see just how far we're willing to go for tomorrow's oil (click image at right to enlarge).
We're drilling deeper than ever before.
Brazil, which is currently developing its massive offshore Tupi field, is a perfect example...
In order to reach the 20 billion barrels of probable reserves off of Brazil's coast, companies will be drilling in 7,000 feet of water, then 16,000 feet of rock and salt.
Then we have Russia's Sakhalin-1 project, where one of Exxon's wells hit a new depth record of 40,502 feet.
Our picture doesn't include the horizontal reach of the well, which also made the record books at a length of 37,648 feet.
It took ExxonMobil sixty days to drill.
If Edwin Drake had been given the same task, his pace of three feet per day would've taken more than 36 years!
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Still think crude oil prices are headed for a fall?
The $12 billion Russia is spending on the Sakhalin-1 project is a drop in the bucket compared to the $225 billion Petrobras is expected to shell out on the Tupi field.
So why are we drilling further, deeper, and spending more than ever before?
For starters, we're losing the cheap, easy-to-produce barrels to which we've grown accustomed.
The giant oil fields that produce more than half of the world's crude supply are becoming scarce.
Almost 25% of global supply comes from just twenty fields, many of which have been producing oil for over five decades.
You don't have to be a fervent Peak Oil observer to see where we're headed...
Even with a modest decline rate, replacing those inexpensive barrels with costlier ones adds up quickly.
What's more, we got a good sense of the quality of this new oil when we saw Saudi Arabia attempt to pick up the slack when Libyan production was disrupted last summer. European refiners simply weren't able to handle the heavy, sour spare capacity flowing from Saudi wells.
Still, there are ways to take advantage of this shift to unconventional fuels. And anyone with a dime in the energy markets should know it won't be the ExxonMobils, Chevrons, or BPs of the world that will deliver the best returns...
So what do you do?
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.