The Price of the U.S. Oil Boom
Solving the Crisis of Cost
The good old days are gone.
I know that's not what you want to hear. But it's the truth.
A century ago, huge wells like Spindletop blew crude into the air at an incredible rate, spewing more than 100,000 barrels per day for a week and a half before workers could get it under control...
In 2008 the average oil and gas well in the United States was actually six times deeper than Spindletop. And that gap is even wider today, when you consider how much the drilling of deep, unconventional oil formations has accelerated since.
We're no longer discovering the gushers of years past.
To add insult to injury, our future oil supply comes with a hefty price tag.
The Cost of Our Oil Boom
We've talked in these pages about just how far companies are willing to go for crude oil.
I think it's just as imperative to understand how much we're truly willing to pay for those barrels...
Although a traditional well can run a company a cool $1.5 million, depending on where they're drilling, even a small well can cost upwards of half a million dollars.
At last count, only about one-quarter of all drilling rigs in North America are drilling vertical wells. The rest, as you've probably guessed, involve horizontal and directional drilling.
And horizontal wells don't come cheap. The average cost per well increased more than 360% between 2000 and 2008!
(click chart to enlarge)
That price spike is actually a positive thing, as it's an indication of our oil boom. Without tapping into our tight oil and gas plays, production would have continued its decades-long decline.
Expensive wells have become commonplace in the most prospective shale plays across the United States. In 2011 the average well cost in the Eagle Ford Shale was over $10 million; prices were even higher in the Bakken.
I've actually heard of companies ponying up more than $16 million for a single shale well!
I hope you can see the opportunity that's presenting itself...
I'll let you in on a little secret when it comes to investing in the U.S. oil boom: The most profitable companies from here on out won't necessarily be the ones sitting on the most oil.
No. Our biggest returns will be from companies that can accomplish one goal — improve drilling efficiency.
A hundred years ago, wildcatters were frantically drilling across the country, hoping to strike oil. Nearly all of the older drillers have experienced the frustration of hitting a dry well. And I can't possibly think of anything worse than spending millions and hours of labor only to strike out.
I mentioned earlier this week that today's Bakken drillers don't have this problem. The name of the game isn't finding the oil, but rather extracting it efficiently.
So the only one area that needs to improve for that to happen is in the technology side of drilling. And that, dear reader, is taking place as we speak...
Two Months to Stockpile
Considering the fact that there are nearly 200 fewer rigs drilling in the U.S. than one year ago, it's difficult to believe production will keep growing. But that's exactly what's about to happen in North Dakota — within the next two months.
Lynn Helms, director of the Department of Mineral Resources, reiterated this point for us. According to Helms, the drilling rig count is expected to jump by more than a dozen by early summer; state production is expected to top 800,000 barrels per day by the end of May.
I'll give you three guesses as to how companies are going to do it, but you're only going to need one...
It'll all come down utilizing multi-well pad drilling.
When Helms reported an increasing amount of companies in NoDak are switching to multi-well pads, my eyes lit up.
Rather than just putting one well on a single pad, these guys have typically been drilling up to eight. But for them, eight isn't nearly enough. Some shale players are putting more than a dozen wells on one pad, while others are gunning for at least 18. A few are pushing for as many as 24!
This drilling strategy is driving down costs in turn — some by as much as 30%.
This is precisely how they're going to boost Bakken production.
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.