U.S. Oil Boom Profits

Brian Hicks

Written By Brian Hicks

Posted November 15, 2013

Some members of OPEC believe the shale oil boom throughout North America won’t last because of the expensive equipment required to keep up production, and many analysts share this view.

But OPEC will not freely tell you that it may be forced to cut production in 2014 because of the shale oil market.

There are those who believe that shale oil cannot compete with conventional oil from OPEC suppliers, as the rising middle classes of China and India will fuel demand for cheap energy in the next few decades. When it comes to the U.S. boom, drilling technology will need to evolve in order to extract more from hard-to-reach reserves, and this assessment is correct.

oil drillingBut here is where this analysis tends to get too cynical.

Above all, domestic oil production is about fostering some semblance of energy independence, and it is an endeavor worth the risk. Exports and competition with OPEC is second on the agenda.

And while it is true that shale oil has a long way to go in competing with OPEC, we must remember that the U.S. is in the unique position of being one of two major shale oil producers in the world.

The U.S. is fortunate enough to have a combination of shale natural gas and shale oil reserves. We even have the more expensive oil shale if all else fails – the largest reserves in the world. The U.S. has a perfect mesh of the most valuable energy resources in the world compared to other nations.

Other shale oil and gas nations, like Russia and Argentina are closer to becoming producers, but not anytime soon.

China, Poland, and the U.K. are on their way to becoming shale producers as well, but these counties only have shale gas reserves, the geological makeup is different, and they lack the necessary technology to become major extractors.

That is why the U.S. stands the best chance of becoming a top energy producer in the next few decades and a primary competitor against OPEC – provided we have the political stomach to ship shale oil abroad.

And the U.S. keeps exceeding expectations.

For the first time since 1995, U.S. oil production exceeded imports in October. Output reached 7.74 million barrels per day, while imports averaged 7.57 million bpd, Bloomberg reports. Imports declined from 7.92 million bpd in September.

Production is at a 24-year record, while imports are at their lowest in 17 years.

Experts predict that this trend will continue into the next decade, with production growing and the reliance on imports decreasing.

These positive numbers can be attributed to a combination of lower domestic consumption and rising production. With rising gasoline prices and fuel-efficient vehicles and electronics, the populace is not consuming as much energy as previously predicted.

But here is where I am more hopeful that the shale boom will last a long time.

North Dakota is home to the Bakken, and Texas is host to the Permian Basin of West Texas and the Eagle Ford of South Texas.

These areas have been the primary hubs of the shale energy frenzy, but other promising plays will propel American energy production forward.

New Plays

Mancos Shale

The Mancos is a play rich in shale oil and other liquids that is located within New Mexico, Colorado, and Utah. It is not on par with the likes of the Eagle Ford or the Bakken, but it is proving to be an emerging shale region.

Industry experts are hopeful that the Mancos will play a role in bringing back production in the San Juan Basin – a region that has been suffering from declining output for decades. And the Mancos will be a successful play for natural gas drillers when prices return to higher levels. Reserve estimates are 60 billion barrels of oil in the region – 10 percent of which is recoverable.

Niobrara Shale

Another play gaining attention in the western states is the Niobrara Shale – covering most of Colorado and parts of Nebraska, Wyoming, and Kansas. It isn’t on many investors’ radars just yet, but activity is beginning to swell. Because of the Niobrara, Colorado reached its highest oil output level in 50 years: 48 million barrels.

A small unit of Shell (NYSE: RDS-A) has been in the region, along with WPX Energy (NYSE: WPX) and Anadarko Petroleum (NYSE: APC), and other major players like Marathon Oil (NYSE: MRO) have had successful results.

Cline Shale

The west is filled with discovery, but so is the Deep South. The Cline Shale is part of the Permian Basin and is considered a massive a play when it comes to oil and gas. The Cline Shale could hold up to 30 billion barrels of oil – towering over that of the Bakken and the Eagle Ford.

Texas has already reached over 2 million bpd because of West Texas oil production, which also comprises 14 percent of national production.

Three Forks Formation

The Three Forks is next to the Bakken, but it is a new play within its own right. Because of this new area, researchers from the U.S. Geological survey were able to peg the Bakken region at 7.38 billion barrels and 6.7 bcf of natural gas.

The Three Forks contains around 3 billion barrels of oil. By all accounts, the Bakken has been tested at around 33 percent, while the Three Forks has been explored at 5 percent. Continental Resources (NYSE: CLR), XTO Energy (NYSE: XOM) and Marathon Oil are companies worth following in this area.

Domestic Investment

Current and trending plays are reasons you should park your investments domestically. You’ll want to keep your eye on domestic energy companies, since they are the ones producing the best results for shale oil.

There are no guarantees in the energy business, but U.S. shale is your safest bet compared to the turbulence of Brent crude and the Middle East.

The Arab Spring and the toppling of various leaders in the region has caused a ripple effect throughout the Middle East, causing greater uncertainty than ever before.

And Brent crude is of inferior quality compared to WTI.

Brent may be the international standard for many parts of the world, with a higher price rate, but Brent crude production is not picking up, and there needs to be more competitive benchmarks worldwide.

The Russians may be hoping to launch their ESPO benchmark in Asia, and WTI can be more impactful in the coming years.

In terms of the best plays hot on the radar, you’ll want to look into the Eagle Ford, where EOG Resources (NYSE: EOG) is the top producer of shale oil in the region. When it comes to the best producer in the Bakken, Continental Resources has had the best success in North Dakota.

No one knows what the future will hold, but investing in shale oil is your best energy play going forward.


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