In the time it takes you to read this story Americans will have gulped down 200,000 barrels of oil. From that total 120,000 barrels will have been imported, much of it from the Persian Gulf; a region that harbors a growing hatred of the United States.
This helps explain why Big Oil is making its last stand hundreds of miles out in some very deep waters.
Consider Chevron Corp., the world’s fifth largest publicly traded oil company. It is operating an oil platform in 4,300 feet of water far out in the Gulf of Mexico. It’s called the Clear Leader, and aboard it sunburned roughnecks are drilling through nearly five miles of ocean bedrock.
Some 200 miles due south of New Orleans Chevron has spent 10 years and a whopping $2.7 billion for this project. This is the cost of running a drill and casing more than 30,000 feet through earth and ocean, the same distance that an airliner flies above the earth.
Chevron will spend billions more and in the end, even with all the high-tech in the world, there are no guarantees that its deep-water experiment will hit pay-dirt. In fact there is less than a 50/50 chance that Chevron’s latest deep-sea adventure will yield anything. Still Chevron and their brethren don’t have a choice.
The Wall Street Journal sums up the situation: “Big easily tapped oil fields close to shore have become off-limits. Western oil companies have been kicked out of much of the Middle East in recent decades, had assets seized in Venezuela and seen much of the U.S. roped off because of environmental regulations. Their access in Iran is limited by sanctions, in Russia by curbs on foreign investment, in Iraq by violence.”
Remembering the Days of Wine and Rigs
I have never met a group that exudes more bravado than wildcatters explaining their latest project. But over the past decade that kind of confidence in exploration has evaporated. In fact the mood in meccas like Calgary and Dallas has turned downright dour. The industry understands that the conventional oil opportunities are drying up.
To understand what is happening with oil think of a bell curve. On the upside of the curve, as production is increasing, exploration and production costs are pretty cheap. But after you have hit the top of the curve and are heading down, it gets harder to find oil, and oil that is found costs more to drill and cap.
To understand the importance of being on the downside of the curve, consider that it took 4.5 billion years for the earth to give us 2 trillion barrels of oil. Since 1886, when the first well was capped, we have used up half of all our inheritance. We have long since past peak discovery rates and in 2008 we hit peak oil production.
The Micro and Macro Economics of Oil
For a specific oil field the key event is not when it runs dry, but the period after production peaks. It is at that time that the field yields less and each barrel pumped costs more.
It is the same dynamic that is working at a global scale. What jars prices higher is not when the oil runs dry, but after oil production has peaked, especially as demand and population are rising.
Consider that world per capita oil production topped out in 1979 and has been in decline ever since. The peak in volume of total world oil production is upon us even as the demand for oil is increasing rapidly.
Globally, petroleum discovery rates peaked during Ed Sullivan’s heyday. In fact, from 1960 to 1980, 600 billion barrels of oil were found. Since 1990 fewer than 250 billion barrels have been discovered.
Despite all our technology and knowledge, the industry is finding oil at less than half the rate of 50 years ago. And the oil people I’ve spoken to believe that less than 100 billion barrels will be discovered this decade.
To understand just how bad this imbalance is, consider that for every new barrel of oil we find the world will consume eight barrels. When my father was publishing OilWeek Magazine 50 years ago that ratio was just the opposite.
Just as individual wells within a field peak at different times, so do different regions of the world. The dilemma that the Obama administration faces, and the real reason the U.S. is embedded in the Middle East, is that U.S. oil production peaked three decades ago and has been in decline ever since. We are pumping less than 5 million barrels per day, or half as much oil as the nation produced when Jimmy Carter gave his fireside chats (see U.S. Oil Production Chart).
The Persian Gulf has become the epicenter for petroleum as the once rich oil veins in Mexico and the North Sea bleed dry.
The only land with substantial conventional oil reserves is in the Middle East. Iran, Iraq, Saudi Arabia and Kuwait hold nearly two-thirds of the world’s oil and nearly all of the world’s remaining cheap oil.
What do I mean by cheap oil? Compare Ghawar—a single mega-elephant field in Saudi Arabia—to the deep waters in the Gulf of Mexico. Both have billions of barrels of oil. But it costs $2 per barrel to pump oil out of Ghawar while it costs more than $15 per barrel to deliver oil from the Gulf.
"A lot of people can get the very easy oil," says George Kirkland, Chevron’s vice chairman. "There’s just not a lot of it left."
As the once-rich fields in the Americas and North Sea are depleted, the U.S. becomes more and more dependent on Middle East oil.
While the amount of oil available may be shrinking, the world’s need for it clearly isn’t. China’s and India’s demand for petroleum continues to rise even in the face of a global recession.
Outlook for Oil
As I mentioned in my Forecast for 2010, energy prices may pause at these levels. Oil has already recovered above $80 per barrel. That’s more than twice as high as it traded 13 months ago. The truth is oil would be back above $100 per barrel except for lingering fears of deflation.
However it is beginning to look like the Bernanke bailouts will offset a depression. But I have to tell you, I wake up anxious each weekday morning and the first thing I do is check the business channel. I can’t seem to shake the feeling that another shoe may drop. Still, I am cautiously optimistic about oil prices and oil stocks.
A Bet worth Taking
The Gulf of Mexico won’t change America’s energy woes. It will however enrich investors who buy into the right plays. I think the best opportunity of the group is Anadarko Petroleum Corp. (NYSE, APC, $66.31).
Anadarko is one of the largest independent oil and natural gas exploration and production companies in the world. It has 2.28 billion barrels of oil equivalent in proven reserves.
Anadarko is also the largest independent deepwater producer in the Gulf of Mexico. It has discovered 30 fields in the Gulf and has infrastructure which includes 11 hubs and more than 50 sub-sea wells. This year the company will explore its extensive acreage that has been accumulated in some of the richest regions in the Gulf.
To learn more about Anadarko’s projects in the Gulf of Mexico, you can go to the company’s fact sheet here.
I like the leverage we get with Anadarko that frankly isn’t available with the large multinationals like Chevron. Anadarko has the properties, technology and expertise to strike it rich in the Gulf and it doesn’t carry all the excess baggage that burdens the multinationals.
Action to take: Call your stock broker and buy Anadarko Petroleum (NYSE, APC) at market.
Yours for real wealth and good health,
Myers’ Energy and Gold Report