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June
14
2013

An Oil "Revelation"
Chris Mayer

It’s an oil play in the Texas Midland Basin. It may have recoverable resources up to 50 billion barrels using the new oil extraction technologies.

Peter Tertzakian, the chief economist at ARC Financial, puts it all in context. I give the full quote because it is, to say the least, a stunner:

“Today’s North American oil boom, if sustainable, takes us back to the discovery atmosphere of the 1950s and ’60s. The potential is hardly limited to the Spraberry/Wolfcamp. North Dakota’s headlining Bakken play is conjectured to contain over 10 billion barrels, while the Eagle Ford Shale could be up to 25 billion. If oil follows the path of natural gas, there are likely to be several more ‘sweet’ mega-plays, including prolific ones germinating in Canada, that could collectively stack up to be the most significant era of reserve additions in the 155-year history of the industry.”

As the late Harry Caray would say, “Holy cow!”

This oil boom in the U.S. is still young. It still befuddles most geologist types, who can’t quite fathom how the cards have changed the game so fast. Since 2008, U.S. oil production is up 43%. It’s not long now before the U.S. actually produces more than it burns. It could happen before the year is out. Five years ago, such thoughts would’ve have brought jeers.

Take a look at this chart from The Wall Street Journal:

US oil production set to pass net imports

This wasn’t supposed to happen. The geologists said so!

I keep telling people this is a technological revolution. Technological revolutions destroy paradigms. They break things. You have to throw away the old assumptions. They won’t work now. This oil boom is a game changer.

Whatever estimates exist, they will surely prove way too low. Technology only gets better and better. Experience tells us how these things work. My favorite example is Kern River. In 1899, when discovered, experts thought only 10% of its modest production would be recovered. In 1942, the field still held 54 million barrels of recoverable oil — after producing 278 million barrels. Over the next 44 years, it would produce 736 million more barrels. At that point, it had 970 million barrels remaining.

The history of oil is full of Kern Rivers. In light of that long experience, the new discoveries are particularly huge.

Needless to say, it is hard to be bullish on oil with such discoveries in the U.S. alone. And Canada still has its vast oil sands. “Still a formidable source of supply,” Tertzakian notes, “but the tight-oil revolution is marginalizing its once awesome size to something that’s merely big among others.”

Look at what’s going on in the rest of the world. At the Value Investing Congress, Geoffrey Batt, of Euphrates Advisors, talked about the humongous reserves in Iraq.

“Iraq has 150 billion barrels of proven, low-cost oil reserves, the fourth largest in the world,” Batt said. “Estimates of proven reserves reach as high as 214 billion barrels, which would give Iraq the second-largest reserves in the world, after Venezuela and Saudi Arabia.” Iraqi oil fields require little cash to bring online and are the cheapest in the world to operate once in production. Iraqis can produce oil for as little as $2 a barrel.

Skeptics will scoff at Iraq, as they did as the Bakken and all the rest. They will be wrong. The oil will come out.

I still haven’t talked about discoveries off the coast of Africa or in the South China Sea or Brazil or many other places around the world rich in oil.

“All this is disquieting to oil producers everywhere,” Tertzakian continues, “especially with retreating Chinese demand growth. Who should be most concerned about this remarkable renaissance? The Saudis? The oil sands producers? Other exporters to the U.S.? Or maybe even the American producers themselves… The jury is out for determining winners and losers.”

I like Peter Tertzakian’s work. I have ever since I read his book A Thousand Barrels a Second: The Coming Oil Break Point and the Challenge Facing an Energy-Dependent World. That was in 2006. His thesis was spot on. Oil prices soared.

But he is unlike so many oil commentators who are too often mere cheerleaders for the black stuff. Tertzakian was perceptive. He recognized the revolution in oil and natural gas. Early.

I heard him speak at an oil conference in late 2011. His talk had an impact on me then. Afterward, I wrote: “His levelheaded and thoughtful presentation blew some of the froth off the beer of the oil crowd by challenging long-held (and largely unexamined) bullish assumptions.”

He made airtight cases for a number of then heretical ideas: that the world could kick its oil addiction by meaningful amounts; that Chinese oil consumption would slow; that American and Canadian oil production would grow — a lot. It was a great talk. Gutsy in how it went against the consensus, it was also well supported with great examples and analysis.

So I have learned not to discount Mr. Tertzakian when it comes to oil and gas.

In the face of all that new production and all those new discoveries, I am not a bull on oil prices. It may be too early to tell the winners and losers among the producers of oil. But there is one clear winner: the users of oil.

Sincerely,

Chris Mayer

Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris has been quoted over a dozen times by MarketWatch, and has spoken on Forbes on Fox. He has also spoken on CNN Radio, and has made multiple CNBC appearances. Chris is the editor of Capital and Crisis and Mayer's Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider.

 

 

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