The Commodity Investor Q&A
With Matt Badiali
May 14, 2008
Q: How long before Bakken has a real impact on the price of oil? – D.H.
A: The answer's never, sorry. Here's why...
The Bakken Shale is a rock formation in the Williston Basin, a 202,000-square-mile depression that stretches along the eastern edge of the Rocky Mountains from southern Canada through North Dakota and Montana. Oil-hunting geologists targeted the U.S. portion as far back as the 1950s.
By the 1960s, oil companies had discovered more than 375 million barrels of reserves in North Dakota and eastern Montana. In the early 1980s, Montana's oil production peaked at 32 million barrels in 1982 and North Dakota at 50 million barrels in 1983.
Then oil plunged from $35 a barrel down to $10. It became too expensive to produce Bakken oil, and the companies shut down operations... until recently.
In 2004, Oil and Gas Investor ran a story called "The Bakken Is Back." Rising oil prices and tremendous advances in drilling technology suddenly made the Williston Basin a great place to be again.
Wood Mackenzie, the oil and gas industry analysts, estimate Bakken holds 200 billion barrels of oil. That sounds like a lot of oil, doesn't it? The problem is that it doesn't tell you one vital piece of information: How much of that oil is recoverable?
In the best oil fields, recoveries are under 30%. However, Bakken isn't an ideal field. According to a North Dakota Department of Mineral Resources study (which echoes federal findings), Bakken will probably see 1% recovery. So right now, with 200 billion barrels in the ground, we can expect to get 2 billion out.
That's about six months worth of U.S. imports and not nearly enough to affect the price of oil.
Of course, with oil at $120 per barrel, somebody will figure out how to squeeze more oil out of Bakken. It may cost more, but as long as there is money to be made, somebody will work it out.
Q: I just read Russia is spending $45 billion on finding new oil and gas... How does this compare to other countries? – B.F.
A: Some of the biggest recent news in energy infrastructure has come from Russia's state-run oil giant, Gazprom.
Gazprom plans to triple its annual exploration and production budget for natural gas to $45 billion by 2010. This is an enormous amount of spending... even more than Brazil's Petrobras, which plans to spend $118 billion over the next five years (that works out to about $26 billion per year).
And both companies have giant projects to finance. Gazprom needs about $75 billion to develop two giant Arctic fields, including one that holds enough gas to supply the entire world for a year. And Petrobras will spend an estimated $50 billion to $100 billion to develop Tupi – the second-largest discovery in 20 years.
These mind-boggling spending plans are further evidence that the costs of finding and exploiting giant oil and gas fields are soaring. Most of the large fields being discovered are in technically challenging places. It's not anything like Saudi Arabia's legacy fields, where you can stick a straw in the ground and up comes crude oil. This spending is incredibly bullish for oil services... and it's another reason I'm buying Canada.
Gazprom has to drill in the unforgiving Arctic, and Petrobras is trying to tap oil under miles of water. Canada's oil sands, on the other hand, are right there on the plains of Alberta and Saskatchewan. We already know where it is, how to drill it, and how much it's going to cost – comparatively little when you look at Tupi and other difficult fields.
And while oil prices are high, oil-sand drillers are making a fortune. Most of Alberta's main players already have this priced into their stocks. But I've found a few fantastic companies next door – in Saskatchewan – that have so far gone undiscovered. Click here to read more details.
Good investing,
Matt
