The Commodity Investor Q&A
With Matt Badiali
July 9, 2008
Q: The Democrats keep saying oil companies have millions of acres of leases they haven't drilled on yet. Is there any truth to this? – K.H.
A: According to congressional Democrats, oil companies hold 68 million acres they aren't currently drilling. That's true... but here's the important bit the politicians are leaving out:
Since 1987, companies that want to explore for oil and gas on public land have to go through a competitive lease process – it's like an auction for land. Oil companies bid against one another for the right to explore.
Federal leases have 10-year life spans. That's a reasonable amount of time to figure out if a company wants to spend the money to drill or mine.
Once a company secures its lease, it must spend more money to hold and develop that land. The company must run surveys, acquire seismic data (basically a sonogram of the earth), and figure out where the oil is before it drills.
Then it prioritizes drill targets. A company might have 100 targets, but only three are high priority. Every well it drills tells its geologists something new about the land. For example, they might see a clue pointing to another oil field on a part of the lease they thought was barren.
In fact, a company could learn something on the 400th well that suddenly adds another 100 targets on the property. Eventually, production will increase.
That won't happen if the government makes companies give up acreage that isn't being drilled right now.
But I can tell you why the government likes this idea. It would get to renegotiate lease terms. Leases are going for much higher prices today than they were 10 years ago.
A Gulf of Mexico lease sale in March 2008 raised $3.5 billion. That was for prime leases, but you get the picture. The government stands to make a lot more money if it can take back old leases and resell them.
In other words, this is just political maneuvering to capitalize on high gas prices and a general distrust of oil companies.
Q: In your response on shale gas last week, you failed to mention our huge Marcellus shale field. How about some respect for us Pennsylvanians? – B.L.
A. Ease up! I'm from Pennsylvania myself. I did my undergrad at Penn State. So there's no forgiveness for my Penn-less answer last week. My apologies.
To recap, shale is a sedimentary rock made of fine particles of clay and mud deposited at the bottom of ocean basins or giant lakes. The shale that oil and gas companies like has a lot of old plants and algae mixed in. That kind of shale makes natural gas and oil over time.
Until recently, exploration companies didn't have the drilling and extraction technology to exploit the world's shale deposits. That has all changed in the past few years, and we're undergoing a historic shale boom in certain parts of the country... like Pennsylvania.
You see, underneath a huge swath of the Appalachian Mountains from West Virginia northeast up into Canada, is shale. The shale under Pennsylvania, called the Marcellus, has enormous potential – as much as $1 trillion worth of natural gas.
Technology developed in other shale basins over the last five to 10 years is finally equal to the requirements of the Marcellus. Companies only began buying up land to drill on a couple of years ago, but now the region is beginning to boom. (Pennsylvania State University's Agriculture School just put out a primer to educate farmers on oil and gas leases.)
The scene is comparable to the land boom around the Barnett Shale in Fort Worth Texas and the Bakken Shale in Montana and North Dakota. Many of those shale plays have soared hundreds and even thousands of percent. There's still a lot of exploration to do in the Marcellus shale.
So you bet I have respect for oil and gas in Pennsylvania... I even dedicated my most recent issue of the S&A Oil Report (out yesterday) to two huge opportunities in the Marcellus. I'm a natural gas bull, and I believe you'll make a fortune in these two gas-focused producers.
Good investing,
Matt Badiali
Editor's Note: Let me know if you have any questions about natural resource investing... I answer readers every Wednesday in Growth Stock Wire. 
