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Here are highlights from Thursday's Analyst Blog:
Thoughts on Oil & the Middle East
Most of the increase in production that has come in total oil produced worldwide in the past ten years or more have come from three sources: previously underdeveloped or neglected regions such as Russia, Central Asia, and Africa; deepwaters in the Gulf of Mexico, offshore Brazil and a few other places; and really unconventional places, like the oil sands of Canada, Venezuela's heavy oil deposits, and, most dramatically, the shale gas formations in North America, which also contain liquids.
Some of the exciting new discoveries offshore and in frontier areas like tropical Africa are large but expensive, are taking a long time to ramp up to full production -- such as the deep salt sites offshore Brazil -- and will only replace the declining production elsewhere, while demand in China, India, and Africa relentlessly increases. In the sense that the only net increase in production has come from heavy oil, oil sands or EOR, then indeed Peak Oil has really come to pass.
It is also little known that U.S. domestic oil production has actually increased in the past several years, partly or sometimes mainly as a consequence of the exploitation of shale gas formations, and the oil and liquids that go along with them, and partly from the Gulf of Mexico (the latter now drastically curtailed in the regulatory caution following the Deepwater Horizon blowout at the Macondo well drilled by BP (NYSE: BP) in April, 2010).
The oil companies' exploration methods have improved greatly in the past twenty to thirty years, and they are able to 'tweak' their efforts to accentuate the exploitation of shale gas reservoirs within the larger formations that are more 'oily,' if natural gas prices are considered too weak to sustain the cash flows necessary to reinvest in replacing and increasing production. Chesapeake (NYSE: CHK), EnCana (NYSE: ECA) and EOG Resources (EOG) are doing this, I believe. They are also prudently using hedging to protect their production costs, at the least. That their efforts to build value are appreciated by other firms in the industry is attested to by the partial sale of assets by EnCana and Chesapeake, and the outright sale of XTO Energy to ExxonMobil (NYSE: XOM) last year.
In the short term, there is indeed, a 'shortage' of light, sweet, easily produced crude oil. However, there is an abundance of heavy, sour, and more expensive crude. We will never run out of it.
Canada's reserves are not the ~150 billion bbl that the IEA and API state; that is just the amount exploitable and recoverable with current technology at current (actually, much lower than current) prices. The total amount of Canadian oil sands, in all four formations, is over 3 Trilion bbl. That is no typographic error. For every rise in prices, more of it becomes attractive and economically feasible to exploit.
There are only three or four large plants that use the mining extraction method, which send the oily sands to a steam plant to separate out the oil and deposit the slightly contaminated residue in tailings dikes.
The other main method is called 'Steam-Assisted Gravity Drainage' ('SAGD'), which drills holes down to the oily layer, injects steam, and via other drilled holes pumps up the now-flowing oil. This is less injurious to the surrounding environment, less of a potential hazard to groundwater and wildlife, and, in many respects, more economical and less labor-intensive. Both main methods use a lot of energy, much of it natural gas. That is what makes the radical increase in shale gas reserves and production VERY interesting.
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