Over the next few years, you will come across news of the discovery of one new giant oil field or another. It's inevitable.
However, too many people make the mistake of believing there is an endless oil supply.
I know these people aren't thinking that we have an infinite amount of oil underground — thankfully, I haven't met anyone gullible enough to believe that.
At least not yet.
So you can imagine my intrigue when an extremely optimistic reader touted the idea, as he put it, that the world has "an endless supply of oil."
And when he casually made this statement, I couldn't help but prod him for an explanation.
He was under the impression that no matter how far demand jumped, technology would always come up with an answer.
It's optimism that I simply can't share.
Can you?
I'm curious as to how many of you would actually put faith in technology's ability to keep pace with future demand increases.
Granted, demand has yet to recover from last year's decline. . . but things are looking tighter for the next few years.
The IEA recently revised their forecast for global demand, which they expect to average 84.4 million barrels per day this year and 85.7 million barrels per day next year. If you're keeping track, that's nearly a half-million-barrels-per-day increase over previous estimates.
Drilling to the Ends of the Earth
One of the first things I wanted to convey to readers when I arrived in Baltimore a few years back was how far companies have to go to pump today's precious crude oil. My outlook hasn't changed in the slightest — even after the economy hit the fan last year.
Let's take a look at the three most recent oil discoveries that come immediately to mind.
The first is the latest oil field discovery in California. Most of you already know how underwhelming I found the Kern County oil flop. It's underwhelming in the sense that the 250 million barrels of oil equivalent satisfies a little more than a few weeks of our oil demand.
(And remember. . . that's assuming some magical wand is waved, allowing Occidental to produce all of it at once. Also, keep in mind that two-thirds of the discovery is natural gas.)
My optimistic reader made a point to mention BP's discovery at the Tiber prospect. What he didn't realize was that he was further proving my point in doing so. The three billion barrels of oil was only reached after drilling deeper than any other rig has ever drilled before in the oil and gas industry. Drilling 35,000 ft. is certainly not an easy task. Furthermore, producing oil from that deepwater discovery may not even happen for another five years.
Finally, the third example we have is the latest Petrobras discovery in the Santos Basin. Unfortunately, the Guara deepwater field isn't the saving grace we've been looking for. The nearly two billion barrels of oil in the Guara deepwater field isn't expected to start production for another three years.
Furthermore, these new oil supplies will come at a steep cost. Companies like Petrobras will have to pump billions of dollars into developing these new offshore fields.
There aren't many more places for companies to go. In fact, countries are already setting their sights on the Arctic seabed. Can you think of a more dangerous place to drill?
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If nothing else, the lengths at which we've had to go for good news have opened a door for investors.
Many of the offshore stocks that were beaten down in 2008 have been on a roll since the second quarter of 2009.
Some of my favorites, including Hercules Offshore (NASDAQ: HERO), Atwood Oceanics (NYSE: ATW), and Noble (NYSE: NE), have been putting up some hard hitting gains in 2009. Take a look:
Even though we're currently in one of the weaker periods of the year in terms of demand, this is a perfect time to build up a strong position. It's not a question of if so much as a question of when these offshore drillers make another run.
Although my aforementioned reader may have been a bit too optimistic concerning our future oil supply, he did make a good point regarding the advancements made in drilling.
For example, the use of horizontal drilling has changed the game completely for some burgeoning plays, including the Bakken formation in North Dakota.
Until next time,
Keith Kohl
@KeithKohl1 on TwitterA 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.
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I like your commentary of various oil sector activities, however working for Canada's largest privately owned Directional and Horizontal Drilling Company (Newsco) I have to say that this isn't really a new technology, unless you're talking about third world countries and their oil industries. I've been working in North America, South America, Russia, the Mid East and now I'm GM of our Asian Directional Drilling operation. Directional drilling has been around in North America for the last 30 years, before computers and cellphones. Granted the 'technology' was rudimentary at best back in the day, today it grants us the wealth of experience and the world class technology we regularly develop and employ. Particularly regarding this article about 'New, Big Oil finds", the fact that North America has access to first class people and tech, essentially we've drilled ourselves out of a job, so to speak. Any fields identified in North America have been scrutinized and developed by the biggest, richest oil companies on the planet, we're giving the advantage to the rest of the world trying to make a buck. Competition is fierce in North America with the slimmest margins, so this industry will dry up quicker than the rest. Elsewhere in the world, the opposite couldn't be truer. Oil and gas well's that are 5 years old and older, the owners don't know where they are downhole. The survey technology was so bad, and still is coming out of Russia and China, that these well's are basically 'ghost' wells. They could be here, or there. Usually not a big deal, until if you're like us and what we're asked to do. Go into an old, rusting away well, cut a window in the well casing, and drill a completely new horizontal well into the pay zone, which they couldn't do a few years ago with their technology and operator experience. If you drill a vertical well into a pay zone that's only 10 feet thick, you get ten feet of producing area to extract the oil or gas. However we go in and put a horizontal bore into that same pay zone, sometime up to 1800+ feet long, which gives you 1800+ feet of producing area. A massive benefit to the well's owner, sucking out their oil that much quicker.
So even though these "Big New Finds" will fade away with time, re-entering these old 'ghost' fields to open them up properly (as per North American spec)is turning out to be big business. Technology isn't the answer for everything, but it's a huge help nonetheless for those with billions of dollars already sunk into the ground, literally. Couple our processes with carbon sequestration for example and the industry could supply for decades to come, really. Given the fact that the average well only recovers 10-20% of the oil that's downhole, our re-entry horizontal techniques begin to level the production playing field.
Keep up the good work.
Thanks and Regards,
Robert Cennon
P.S. I'll give you the inside scoop when we go public ; )