Where is the big oil in the world?

Posted by Byron King via Whiskey and Gunpowder

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You go offshore, and you go into deep water, because that’s the last frontier. It’s the unexploited oil deposits. It’s big deposits. You can get these super wells out there where you can make 20,000…30,000…50,000 barrels a day out of one well. Because of these huge volumes and high pressures.

Deep Water Drilling and Expensive Oil

Byron: This blow out in the Gulf of Mexico absolutely should not have happened. Yes, it could have been prevented. But we are already on the other side of Peak Oil. Oil is going to keep getting more expensive and eventually it could get too expensive for life to be anything like what we’ve become accustomed to. The only way to keep that from happening is to go get more oil. A lot more oil. And there is a lot more oil out there, but it’s under a lot of water.

In the three years or so that I’ve been editing Outstanding Investments I’ve tailored the energy side of the portfolio heavily toward deep water oil exploration. And people say well gee, you have an awful lot of exposure for one segment of the industry. Well, that’s because that’s where the oil is.

Gary: Exactly.

Byron: You go where the oil is and the big oil is in deep water. I mean, there’s oil on shore in some parts of the world, but these are parts of the world where most investible plays can’t go. I mean, Saudis, they have lots of oil. Venezuela, they got lots of oil. Mexico, they got more oil than people give them credit for although they’re doing a horrible job of exploiting it. It’s the resource nationalism of the world.

On shore and in many parts of the world — Russia as well as all through the Middle East — the big private oil companies are just publicly owned and other oil companies are just not able to get their foot in the door. Or if they do, it’s under very, very, very limited, very circumscribed procedures. BP bought into the recovery of the rocky oil industry, but they’re getting paid a fee per barrel that they produce.

It’s a pittance really in terms of what’s coming out of the ground and the contribution that they would make towards bringing it out of the ground. So anyhow, where is the big oil in the world? How does a big oil company “move its needle”? How does it move its reserve needle? You go offshore, and you go into deep water, because that’s the last frontier. It’s the unexploited oil deposits. It’s big deposits. You can get these super wells out there where you can make 20,000…30,000…50,000 barrels a day out of one well. Because of these huge volumes and high pressures. Which the flip side of that is that if you blow out your well, which is what we’re seeing you can make a big mess in a fast hurry. That’s what we’re seeing in the Gulf of Mexico right now.

Gary: That can happen on shore as well. But under water, under all that water, that’s the other side of it. That when things go wrong…

Byron: That is the other side of it and I honestly am highly critical of the oil industry and the regulatory side of the house, too, for a distinct lack of imagination over the last 20 years. Everybody was imagining going further out and going deeper and deeper water, deeper and deeper wells. But there has been precious little R&D done in deep water well control, and deep water blow outs. We are watching — say in the last month — 20 years worth of research and development happen inside of a month.

They are literally just taking ideas, throwing them against the wall to see if they stick. You know, whether it’s that big box. Whether it’s the top hat, the top kill, the junk shot, the bridging shot. You know, all these different things that they’re talking about. We’re watching 20 years worth of R&D happening inside of a month and nobody really thought about it. Nobody put any big money into it.

Instead the money went into technology to conduct the operation and in a sense, the idea was that we’re going to put money into building really good equipment, and our technology is so good, and our procedures are so good that nothing bad will ever happen. Well something really bad happened. Now what? I mean that argument doesn’t hold water anymore, which is why at least in the U.S. — and it might be something that spreads elsewhere in the world — the offshore deep-water drilling regime anymore is going to become a much more exclusive club.

Only larger companies with deeper pockets who can afford the regulatory requirements need apply in the offshore deep water drilling space. To the extent that the U.S. government and other governments in the world really permit that kind of deep water drilling. There’s a, there’s a very loud and growing louder, very vocal segment within the political crown out there that just wants to say “see, we told you so.” This deep-water stuff, you should never do it.

To which I say there’s really an element of energy hypocrisy here because the same people who are saying we shouldn’t drill offshore are also the same ones who say we shouldn’t drill on shore. I mean, for the lack of drilling on 640 acres of land in the Arctic National Wildlife Refuge, for example – when I say 640 acres, I mean an acre here and an acre there. I don’t mean like all in one big spot either.

For the lack of drilling in the Arctic National Wildlife Refuge, which you do in the wintertime built on ice pads using ice roads when it’s 40 below 0, and all animal and plant life is in a hybernetic state. And we do understand how to drill in an on shore arctic environment. That is quite doable. And we have existing infrastructure 20, 30, 50 miles away in Prudhoe Bay and a working pipeline, the Alaskan pipeline.

For this lack of drilling in the Arctic National Wildlife Refuge that is all the more incentive for the energy industry to go into the far offshore and drill wells so far away that if something bad happens, it’s almost impossible to conceive of how you could control the problem. You know, in a very perverse sort of way, it’s almost good that the well blew out offshore Louisiana. Not that it’s a good thing because that’s not a good thing.

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