The oil industry hype machine
Buzz is building around a deposit of oil in Texas that some in the oil industry say is the largest deposit in the world. It's no surprise then that the industry is trotting out the America-as-the-new-Saudi-Arabia theme once again, Cobb writes, a theme that many have shown to be pure bunkum.
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Many investors in such deals are not particularly sophisticated about oil and gas investments and so the hype works. The money flows in, the wells get drilled, and then the oil and/or natural gas flows or it doesn't. Or it flows, but not enough to justify producing it. Or it flows and is produced at a loss in order to get back at least some money.Skip to next paragraph
Kurt Cobb is the author of the peak-oil-themed thriller, 'Prelude,' and a columnist for the Paris-based science news site Scitizen. He is a founding member of the Association for the Study of Peak Oil and Gas—USA, and he serves on the board of the Arthur Morgan Institute for Community Solutions. For more of his Resource Insights posts, click here.
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Let's see what's already happening at Spraberry/Wolfcamp. First, we have the claim that Spraberry/Wolfcamp has 50 billion boe. For the uninitiated, boe is short for "barrels of oil equivalent." So, it's a mixture of oil and natural gas, but we are not made privy to how much of each is supposedly there. (About 6,000 cubic feet of natural gas contain the same amount of energy as a barrel of oil.) It's an important distinction since North American natural gas prices are so low that few operators are making any money from gas. Any emphasis on natural gas production in Spraberry/Wolfcamp should make investors skeptical about the profitability of selling more natural gas into an already glutted market.
Second, this number is labeled as "recoverable reserves" when it ought to be labelled "technically recoverable resources" which are based on very sketchy data that are continuously revised as drilling proceeds. And, just because something is technically recoverable doesn't mean it is economicallyrecoverable.
What will ultimately be economical to extract will actually be only a tiny fraction of what is technically recoverable. And, in any case, we should remember that previous large estimates of technically recoverable resources in America's shale gas fields were later rather dramatically downgraded. Furthermore, neither technically nor economically recoverable resources represent "reserves" which are, of course, only that very small fraction of resources which can be produced profitably from known--that is, drilled--fields using existing technology at today's prices.
Third, one has to ask why Pioneer Natural Resources, one of the largest holders of drilling rights in the Spraberry/Wolfcamp deposit and the chief cheerleader for its exploitation, would almost immediately sell 40 percent of the company's stake to a foreign investor.
There are many reasons to sell a stake such as raising money for new ventures. But, Pioneer is telling the public that this deposit may be the largest in the world. Does the company really expect to do better than that with the money it received from the sale of a large portion of its interest? Or does the sale tell us that the company doesn't have as much faith in Spraberry/Wolfcamp as its pronouncements seem to indicate? Furthermore, this outside investor will also shoulder 75 percent of the "drilling and facilities costs" as part of the deal. Alas, the problem of finding money to drill the actual wells has in this case simultaneously been solved with other people's money.
The last time foreign investors came rushing into U.S. oil and gas deals was at the tail end of the shale gas boom, and they subsequently got clobbered. It has often been an indication that a boom is ending when foreigners flock to a particular American investment theme since foreigners are usually the last ones in.
This may have to do with the fact that even in the age of instantaneous electronic communication, it is still difficult to get a read on what is happening an ocean away until something has become a fairly big story in the media. (And, so it's no surprise that companies like to talk to reporters in highly optimistic tones as they seek outside investors.)
What ought to worry these late-to-the-party investors is the fate of those who invested not only in shale gas, but also in certain tight oil plays. (Tight oil is often mistakenly called shale oil which actually refers to oil made from oil shale, but that's a different story). Investors believe oil should be a better investment than natural gas since world rather than regional markets dictate the price, and that price continues hover near all-time highs based on the average daily price over the last three years. There is something to this logic unless the amount one is able to extract is small. And, that's what is happening to investors in the Colorado and Ohio tight oil deposits who thought they were in for a bonanza. Both regions were heavily touted, and both turned out to be huge disappointments.