The global economy continues to expand and is using more energy. In our opinion demand increases coupled with technological advances in extraction has created one of the best investment environments in years:
IEA Demand Forecast – The International Energy Agency (IEA) raised its global oil demand forecast again for 2010 and for 2011. Projected 2011 demand is now 88.5 million barrels per day. That's compared with the 87.3 million barrels per day now projected for 2010. Production is still around 86 million barrels per day. We expect crude oil prices to remain firm in the coming year.
In 2010 global demand is expected to increase an impressive 2.3 million barrels per day over the previous year – one of the largest increases in the last two decades. In 2011 global demand is expected to increase another 1.2 million barrels per day, reaching record demand levels. Much of the demand growth over the next decade will originate in China according to IEA studies. Higher oil prices will be needed for the market to allocate supplies in our opinion. Chart at right courtesy the CattleNetwork.com.
IEA Chief Economist Fatih Birol at a conference last month said that global production of crude oil probably peaked in 2006. Increasing demand will have to be met by more unconventional sources of oil such as tar sands – sources that are much more difficult to develop and less environmentally friendly. The capital involved in expanding tar sands projects to meet increasing global demand will be enormous, and much higher crude oil prices will be needed to justify those investments in our opinion.
Global demand for crude oil continues to expand, with China importing 12% more crude oil last month than the year earlier period and 35% more refined products. Due to restrictions on electrical generation from the major power plants refined products have been used to power portable electric generators. And vehicle sales continue to grow, increasing demands for diesel fuel. Winter also brings increased demand for crude oil on a seasonal basis. Chart at above courtesy the Financial Times.
Merger & Acquisition Activity - Merger and acquisition activity in the oil and gas sector has already exceeded that for 2009 according to consultants. The backlog of potential deals reportedly is increasing, with an increasing focus on shale plays. Interest in the Eagle Ford and Bakken fields is especially high due to the oily nature of much of these reservoirs. The Haynesville shale field in East Texas, primarily a natural gas producing area, has also seen increased deal making activity.
While the moratorium has been lifted for much of the Gulf of Mexico, reports are that permits are slow to issue. Concerns about the regulatory risks in the Gulf are also high, as firms do not want to commit capital to projects that might be affected by future regulations that might prove costly or might shut-in otherwise viable operations. Some firms are re-directing capital onshore, buying interests in the fields noted above.
UK Industry Taskforce Report – A UK Industry Taskforce issued a report last month entitled “Implications of the Gulf of Mexico Oil Spill”. They claim that due to the delay in offshore projects from the moratorium, and the new regulatory environment, by 2015 offshore operations will produce two to three million barrels per day less than they would otherwise. In such a situation, with growing global demand, the report indicated they expect much higher oil prices.
We agree with the concept that offshore drilling and exploration will become more costly and will involve more regulatory oversight, and as such onshore projects should become more attractive. As costs and regulatory delays increase the Taskforce premise that offshore exploration activity will not be as robust appears sound.
Eagle Ford & Bakken Shale Plays – Because it is so new the Eagle Ford Shale play in South Texas is one of the ‘hottest’ unconventional fields according to some in the industry. The first horizontal wells were drilled and fraced in 2008, with substantial oil and liquids being discovered in the northern part of the play. The Eagle Ford rig count now exceeds the Bakken play according to one recent report, and the acquisition and deal-making around the Eagle Ford appear to be at a frenzied pitch.
The Bakken formation in North Dakota, Montana, and Canada is also very attractive for oil. Production from the two states is expected to double in the next five years, and the rig count is expected to increase by 50% next year. Chart at right courtesy of energy analyst Elliot Gue and the EIA
In addition to the Bakken formation these areas are also underlain by the Three Forks shale, and a new target formation named the Tyler shale. Each may prove to be a separate and distinct reservoir, with separate and distinct wells and completions required.
Initial production tests from these wells are in the 1,000 to 1,500 barrels of oil per day range, and of course decline over time. This compares with the average production rate of existing onshore oil wells in Texas of around six barrels per day (keep in mind many of these wells are quite old, and the incremental costs of operating them are small).
The power needed to hydraulically fracture shale formations is enormous, the shale is actually cracked as water and fluids are pumped downhole. The total frac horsepower used for this purpose has increased 20% over last year and will increase another 20% next year as the lateral (horizontal) legs become longer and more frac ‘stages’ are planned in the completion process. The technology and methodology is still evolving, and efficiencies for each area are increasing with each well completion.
