The U.S. oil industry has been reborn, with oil flowing from new fields like North Dakota's Bakken at rates not dreamed of just a few years ago - and it has created a new crop of best investments for those hunting for energy profits.
U.S. oil production climbed from a low of 5 million barrels a day in 2008 to 7.2 million barrels per day in February of this year.
The first stage of the U.S. oil revolution is pretty much over.
This stage saw U.S. oil independents mainly, such as Continental Resources (NYSE: CLR), conduct exploration and spend roughly $53 billion on an acreage buying spree in the lower 48 to secure drilling rights in the most promising locations. Today, there are approximately 10,000 wells a year being drilled in the U.S., according to Bloomberg News.
That phase, while not over, is fading into the background. As early as last spring, Chesapeake Energy (NYSE: CHK) said that all of the major untapped oil deposits in the continental U.S. had been found.
The second phase of the U.S. oil revolution is now beginning... a phase that will be led by technology. The best investments will be the companies using these latest advancements.
Technology's Huge Role in Creating Oil's Best Investments
Technology will be the key component in this phase due to the fact that oil is tougher to extract from shale rock than gas is.
Money Morning Global Energy Strategist Dr. Kent Moors has pointed out many times that unconventional oil is more expensive to produce than conventional oil. In fact, shale oil is about 20 times more expensive to extract than to get oil from Middle East fields.
U.S. shale oil wells are different too than offshore wells, which can cost upwards of $100 million each. Onshore shale wells cost only $10 million initially. But these wells have a rather steep production rate decline, so continued drilling is required to sustain the output from the field.
But that does not mean independent oil companies cannot still turn a profit.
The Financial Times pointed out that in 2012 Continental Resources reported a profit increase of 72% on the back of a 58% rise in oil production.
But other independent energy companies weren't as fortunate...
Bloomberg stated that independent U.S. oil and gas producers ended last year with an average cash flow deficit of $1.5 billion. This does not compare well with the world's major oil producers which ended 2012 with an average cash flow surplus of $386 million.
This poor performance brought pressure to companies' management, much as it has in the global mining industry. The pressure from shareholders is for companies to reduce their operating costs.
Technologies, including quicker and longer horizontal drilling and improved imaging data, aim to improve not only the flow of oil but also companies' bottom lines.
3D modeling of underground formations will aid oil firms in predicting the nature, exact location and permeability of reservoirs. Longer drilling bores moving sideways through the length of an oil field puts it in contact with a larger area of oil-containing rocks than a simple vertical well does.
Best Investments 2013: Companies with the Latest Techniques
One example of a company employing the latest drilling techniques is Newfield Exploration (NYSE: NFX). The company is now drilling horizontal wells as much as two miles long. This is 10 times the length of the wells drilled at start of the shale revolution. This has, in the past 18 months, cut the cost of its drilling in excess of 50% to about $1,000 a foot.
Noble Energy Inc. (NYSE: NBL) is drilling in the Denver-Julesberg Basin in Colorado with 9,000 foot horizontal bores. The company estimates each well drilled there will yield the equivalent of one million barrels. This is up from an estimate three years ago of just 40,000 barrels using previous technologies.
Advanced technologies are already aiding U.S. independent oil companies in reducing costs.
Continental Resources plans to triple its production by 2017. Last year, the average well cost it $9.2 million to drill. It expects soon that cost to fall to $8.2 million.
Another company experiencing falling drilling costs is Hess Corp. (NYSE: HES). The company told the Financial Times it had cut the cost of drilling a well in the Bakken from $13.4 million a year ago to just $8.6 million in the first quarter of 2013.
Even troubled Chesapeake Energy is benefiting from the use of new technologies. According to the company's website, the cost of drilling a well in Ohio's Utica Shale has fallen from $8.5 million to $5.9 million. Drilling wells is also speedier according to Chesapeake. The time to drill a well in the Eagle Ford shale fell to 18 days from 25 days a year ago, with the ultimate goal being 13 days.
Bottom line for investors?
The U.S. shale oil revolution is far from over. The spreading use of new techniques and technologies will keep domestic oil production competitive even if the global price of oil falls.
You'd think that the U.S. shale boom would create so much inventory that oil prices would plummet. Not the case; here's why.
Related Articles:
- Bloomberg:
Shale Drillers Squeeze Costs as Era of Exploration Ends - Financial Times:
Better Drilling Techniques Line Road to Profit