Fire in the Hole!

Posted by Bob Irish - Investors Daily Edge

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Before the Oil Derrick

Did you know that workers were extracting oil out of the ground before the oil derrick made its first appearance?

But it was a small industry made up of small companies and serving a small market. What changed it?

Technology. Before an enterprising oil worker saw derricks operating in a salt flat and thought that just maybe it could work for oil, digging for oil was a long and difficult endeavor. Up until that point oil was used to light lamps plus some other small uses.

The oil was always there in the ground. The industry was held back from growing beyond those modest applications because oilmen could only tap into a small percentage of the underground oil.

The introduction of derricks into the oil industry changed everything. It allowed the oil industry to grow into a major business. In fact, the growth of modern industry and the growth of oil went hand in hand.

Still About Change

The oil industry has gone back to its roots. For the first time in about 100 years, it’s seeing limits on its growth for the very same reason as a century ago. Oilmen can only tap into a limited portion of the oil in the ground.

That’s about to change. Once again technology is about to spark another oil boom.

How would you like to be an oil baron? When derricks first came on the oil scene, nobody believed in them. Derricks were just a lucky thing the oil industry stumbled on. They were too good to be true. An accident.

Don’t be one of those disbelievers. Technology transformed the industry once. And it’s about to do it again.

Left-Over Oil

Oil companies typically abandon their fields with a lot of oil left in the ground…around 60% it’s estimated. Why so much?

In most oil reservoirs, the oil resides in porous rock that are tens of meters thick but stretch for miles. A conventional oil well is a vertical shaft. It’s in contact with only a narrow cross section of the reservoir. Such a well depends on oil percolating through microscopic pores over long distances. A lot of the oil is stranded inside the irregular geometry of the oil field.

Fire in the Hole

Water flooding and carbon dioxide injection can force some of this trapped oil out. But IDE’s Dr. Rusty McDougal has found a technology which does much better than water flooding. It actually creates a controlled fire down the oil hole. The fire produces steam and heat, creating a wall of unbelievable pressure which drives the remaining oil out of the hole.

This could change the whole calculus of oil field development and production. Schlumberger, for example, has recently been making most of its money from improving existing wells (instead of developing wells), such as fracturing rock underground to improve oil production. Dynamite is last century’s technology. Forcing water and steam down a hole is also 20-year old technology.

Oil companies are also beginning to use “smart wells” with sophisticated sensors that can detect, for example, when water (instead of oil) is being pulled into the well. But the upfront costs are high and sensors only provide more information. They don’t directly increase oil production.

The company’s “controlled fire” technology promises to enhance oil recovery at a time when the oil majors are having trouble increasing their output. The need for this technology has never been greater than it is right now.

Rusty says the technology is perfectly safe… “The process is established sufficiently to pose no safety issues (it is being done in California, no less). The fire continually burns and more and more oxygen is injected for continued production. You put out the fire by ceasing to inject oxygen.”

Some estimates say that this technology can double or triple the output of a field and extend the life of a field for several more years. This technology is clearly a game changer. 

Rusty recommends the company offering this technology in his last issue of The Resource Speculator. He also says that this recommendation “has moonshot written all over it.” If you want more information on Rusty’s resource picks, click here.

Keeping Your Eyes on the Road

Imagine getting on the highway as you drive to work and traffic is brutal. But as you weave in and out of traffic, your attention is drawn to the big 18-wheeler which is trailing you. You keep looking behind you to see where it is, what it’s doing, if it’s getting closer. In fact, you spend more time looking out your rear window than you do looking ahead. The inevitable then happens. You hit the car that had just cut in front of you. You curse. You should’ve seen it coming, but you took your eyes off the road.

The most common mistake investors make? Taking their eyes off the road. Investors are the most distracted group of people I know. They’re constantly looking backwards, trying to figure out why the market acted the way it did yesterday or last month or last year. But to drive your investments to their most profitable gains, you should be looking ahead and not backwards.

Case in point: Instead of trying to figure out how we got into our current crisis, you should be trying to figure out how we’re getting out. On the highway to profits, it’s not what exit you got on but what exit you’re getting off which matters. For example, if you think that housing will lead us out, then you should consider getting into housing assets, like REITs, early.

But housing isn’t leading us out. The banks aren’t leading us out. High-tech isn’t leading us out. And energy isn’t leading us out. 

Brave New World

What was successful in the past won’t be successful in the future. In today’s investment world you have to clear your head of the belief system that drove your investments during the past two decades. It’s a different world with different opportunities and different risks.

If you have trouble understanding that, just think of Florida, one of our rich states where the housing bubble blew the hottest. Housing prices are expected to fall further by 27% in Orlando and 26.8% in Naples by June 2010. You really think Florida will be one of the first states in America to get healthy?

Wells Fargo’s commercial loan group doesn’t. They just hired five more guys and still can’t keep up with the volume of defaults. One of the worst hit areas?  “Southeast Florida and Tampa are serious trouble spots,” they say.

Now imagine poor and scrappy Alaska. It doesn’t exactly conjure up images of suntanned 30-somethings driving around Lamborghinis, does it? But Alaska’s oil revenues are keeping the state from racking up debt. And its Alaska Production Tax passed in 2007 is squeezing even more money from oil producers.

In contrast to Florida, housing prices are expected to rise 2.5% in Fairbanks and 2.1% in Anchorage by the middle of next year.

I’d much rather buy Alaskan than Floridian bonds these days.

IDE’s Steve McDonald has been talking about this new brave world of investing for years now. His investments cover the gamut of stocks, bonds, covered calls, and global opportunities. If you want to invest safely and opportunistically, check out Steve’s Sound Profits right here.

Invest Safely,

Bob Irish
Investment Director
Investor’s Daily Edge

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