With the world forging ahead in this modern
industrial and technological era, the king of commodities continues to flex
its muscles as the most indispensable of resources. Oil, the lubricant
of global commerce, is seeing record levels of demand.
Amazingly
global oil demand is up nearly 50% in just the last 25 years. In 2010
it is estimated that a record 87m barrels per day (bpd) were consumed, surpassing
the previous high from 2007. And it is forecasted that 2011’s
will come in even higher, at around 89m bpd.
And regardless
of the current state of the global economy, oil consumption will continue to
rise over time. According to the US Energy Information Administration
(EIA), world oil demand is expected climb to between 108m to 115m bpd in the
next 25 years. This range accounts for a low-side oil price of $50, and
a high-side price of $200. Even on the low side, demand is expected to
grow by a hearty 21% from today’s levels.
Needless to say, this forecast
is quite ominous in an environment where big oil deposits are getting harder
and harder to find. And as they’ve always done, oil’s
biggest consumers are jockeying to sustain and grow their own supplies.
No other
country has more of an appetite for oil than the United States. The US
consumes about 22% of the global total, to the tune of about 19m bpd.
This sum is 35% higher than the European Union, the next-highest consumer,
and nearly twice that of third-place China. As a major consumer, the US
needs to stay on top of where tomorrow’s oil is going to come from.
Procuring
supply is especially important for the US considering its lack of
self-sufficiency. Interestingly the US saw its peak in production way
back in 1970, at about 9.6m bpd. At this clip it only needed to import
about 1.3m bpd to supplement domestic demand. But with its mature
fields depleting and a lack of material discoveries to renew reserves and
thus feed offsetting development, the US suddenly found itself in need of a
much-bigger portion of supplemental supply.
With post-1970
production declining and demand continuing to rise, this supplemental supply
came in the form of sharply-accelerating imports. Incredibly US oil
imports had doubled in only a couple years, and by 1977 they had increased
five-fold. From the late 1970s to the mid-1980s imports tailed off a
bit, but they eventually continued to rise. And by 1994 US crude-oil
imports exceeded domestic production for the first time ever.
In the years
following this historic event, the prevailing trends would endure and the
balance of trade would shift well in favor of foreign oil. And by 2005
oil imports were nearly double the volume that domestic producers were able
to wrest from within the US’s borders. But as you can see in the
chart below, it was around this time that a strategic shift in trends would
manifest.
By 2005 US
imports had topped 10m bpd, 665% more oil than what this country was buying
from foreigners back in 1970. But this 2005 top was the highest imports
would get. Provocatively, over the last six years imports have actually
been trending down. Over this span the US has seen imports drop by 1.3m
bpd, a material 13% drop from their apex. And based on the annualizing
of official data from the EIA over the first half of this year, 2011’s
imports will be the lowest since 1999.
An extended
decline in imports the likes of which we’re seeing today hasn’t
occurred at this magnitude since the first half of the 1980s. Back then
oil supplies were at a big surplus as a result of the 1970s energy
crisis. In addition to this oversupply, demand was down as folks were
forced to conserve energy thanks to higher fuel prices. But this
so-called “1980s Oil Glut” was of course only temporary.
There are two
major reasons for this latest decline in imports. And like the
situation in the 1980s, the first is a demand decline subsequent to the 2005
peak. As a result of higher oil prices and economic turbulence, US oil
consumption is actually down a bit in recent years. But the second and
perhaps more important reason for falling imports is an increase in domestic
production.
Following its
1970 peak, the US had seen oil production fall by a painful 49% to its 2008
low of 4.95m bpd. You’d have to go back to 1946 to find the last
time the US had sub-5.0m-bpd production volume. Back then the US was
producing about half of the world’s oil, a stark contrast from 2008
volume in which it only produced 6% of the total global supply.
Over the last
40+ years many of the US’s big mature fields had become depleted, new
major discoveries were few and far between, costs were rising to tap the
deeper and/or unconventional reservoirs, and foreign oil was cheaper to
buy. The US’s production decline was deemed irreversible, and this
country had come to grips that its oil dependence would need an ever-larger
fix from foreign sources.
But while the
US will likely always be dependent on some level of foreign oil to bridge its
supply gap, the deliverance of production growth in 2009 squashed the notion
of an irreversible downward trend. And 2009’s 8.3% increase in
production to 5.4m bpd not only broke a streak of 17 consecutive years of
declines, it started a new trend that is showing this reversal to be the real
thing.
Based on
annualized production figures from the first half of 2011, the US is on pace
for its third consecutive year of production growth. Over this time
domestic production will have grown by 12%, adding nearly 600k bpd. And
it is expected that this trend will continue for many years to come.
The EIA sees US production exceeding 6.0m bpd by 2018, with the possibility
of exceeding 7.0m bpd by about 2025. And many experts believe these
volume estimates to be conservative.
There are a
couple of key factors that have contributed to the US’s recent growth
in domestic oil production. And the most important is higher oil
prices. Preceding the commencement of oil’s secular bull in 1999
was a brutal secular bear. Oil prices remained low for many years,
averaging $26.50 in the 1980s and $19.70 in the 1990s. Over these bear
years there was little economic incentive to explore and develop.
But oil prices
flow and ebb with the best of the major commodities. And upon the turn
of the century oil caught a major bid that gave huge incentive to revisit
what was thought to be a dying US oil industry. Major global
conglomerates and small entrepreneurs alike started dedicating resources to
rediscovering opportunity in the US. And boy have they found it.
Higher prices
indeed empowered oil companies to pursue the revival of the US oil
industry. And this brought on technological innovations that have
directly translated into production growth. More specifically, advances
in horizontal-drilling and hydraulic-fracturing methods have opened up vast
resources within large shale-oil formations that underlie the US.
Interestingly
horizontal drilling is not new. In fact, it has been a work-in-progress
in the oil industry for over 50 years. What’s
really revolutionized this method of recent is vast improvements in drilling
equipment and radical innovations in down-hole monitoring
instrumentation. Drillers can now guide their bits at the precise
angles/degrees to access longer portions of deep thin/tight reservoirs.
And precision
horizontal drilling has come in real handy when trying to recover oil from
massive shale formations like the prolific Bakken
field that underlies the Williston Basin in North Dakota and Montana. Bakken’s thin band of continuous crude stretches
about 25k square miles, with the main pay zone about two miles below the
surface. But since this zone only swells in thickness to about 150 feet
at the most, in many spots pinching under 50 feet,
historic operators had little success drilling vertical wells.
With horizontal
drilling the reservoir is essentially flipped on its side, thus greatly
extending the pay zone. So instead of pulling oil from just a small
vertical cut of a large thin horizontal reservoir, Bakken’s
operators drop their wellbores into this rich formation and extend them
laterally. Many of these wells are two miles in length at the lateral!
While
horizontal drilling has indeed accessed this formation nicely, the geology of
this tight oil-bearing rock requires another major step to bring forth an economic
flow of hydrocarbons. Getting oil out of a tight shale body is an
active process, it must be encouraged to flow up the
well. And to do so an operator must stimulate the host rock via
hydraulic fracturing (fracking).
Like horizontal
drilling, fracking is not new. It too has
been around for over 50 years and has been a work-in-progress in the oil
industry. But only in recent years have new innovations in fracking allowed formations like the Bakken
and the new and exciting deeper Three Forks formation to see wildly-positive
economics. Advances in multistage fracking
have allowed operators to maximize drainage across the entire lateral,
revolutionizing the way petroleum engineers are approaching shale-oil
development.
Incredibly
operators are still in the early stages of uncovering the Williston
Basin’s enormous potential. And they are making amazing progress
as seen in the Bakken’s robust production
growth. Production has grown from practically nothing in the early
2000s to around 400k bpd in 2011. And many are projecting Bakken volume to exceed 1.0m bpd in the not-too-distant
future. This is significant and material output that is one of the
major reasons for the US’s upward trend.
Bakken is
the most-recognized of the emerging oil districts, and it has opened the
doors to other shale-oil formations in Texas, Colorado, Wyoming, and Utah
that will farther contribute to the US’s growth profile. But
new-development shale plays are not the only contributors to this
trend. Enhanced Oil Recovery (EOR) within existing fields is also
getting a lot of play.
Interestingly
when a conventional oil well is drilled, its initial production flow is
driven to the surface via natural underground pressure. This pressure
eventually weakens, thus causing the flow to slow and lose its
economics. But since primary recovery only recovers a small portion of
the oil, it’s common practice to force the lift of oil via such methods
as pumpjacks and/or re-pressurization (some common
secondary methods of re-pressurization include injecting water and/or air
into a reservoir).
Secondary
recovery captures more of the oil, but even when this method runs its course
there is still plenty remaining. EOR, also known as tertiary recovery,
ups the ante of maximizing drainage. One of the most common EOR methods
is carbon-dioxide flooding. In this method the operators re-pressurize
the reservoir (usually with water), and then inject the gas which ultimately
addresses the viscosity issues that prevented much of the remaining oil from
coming to the surface.
EOR has been
around for a while, but since its development requires big upfront capex this method needs sustained higher oil
prices. In order to roll out a commercial operation an operator must workover many of the existing production wells, drill
injection wells, build a gas plant, develop a transportation network for the
large quantities of required gas and water, and develop all other associated
infrastructure.
While this
process appears cumbersome, it can be quite lucrative. EOR fields can
produce bankable flows for decades. And there are a lot of mature
fields in the US that are amenable to EOR. Oil companies are of course
well aware of this, and they’ve been scrambling to build-out
operations. And some of the operations built out over the last decade
are starting to bring material production online, which has greatly
contributed to the US’s recent growth.
Advances in
horizontal drilling, hydraulic fracturing, and EOR, enabled by higher oil
prices, have indeed been major factors in the recent uptrend in US oil
production. And this has allowed investors to capitalize on a
growth-oriented US oil industry, a 21st-century US oil boom.
Following some
exhaustive research centered on one of the sweet spots of the oil-stock
sector, I’ve found that this US oil boom has created great
opportunities for investors. Over the summer at Zeal we took on a major
project to identify the best-of-the-best mid-cap oil stocks that trade in the
US and Canada. And many of these elite producers center their
operations in the US’s lower 48.
In our
hot-of-the-presses research report, we
fundamentally profile our dozen favorite mid-cap oil stocks. And
surprisingly nine of the 12 have operations in the US, with seven making the
US their primary area of focus. Several of these stocks are Bakken-centric companies on the cutting edge of
technology, and a couple are developing some
impressive US EOR operations.
This report
also includes several companies that operate in Canada. Interestingly
Canada was in the same position as the US back in the early 1970s. It
had experienced a peak in production and entered into a decline that most
thought was irreversible. But thanks to the advent of profitable
oil-sands production not only was there a trend reversal, Canada is now
producing at its highest level in history. And this has allowed it to
become the US’s largest source of foreign oil.
Mid-cap oil
stocks really are a high-potential sector for investors. These companies
usually recycle all their cash flow and then some into drilling projects, and
are typically delivering huge growth at the bit as they strive to one day
join the ranks of the major producers. Mid-cappers are also the sweet
spot for acquisitions by the majors as they look to spend their hoards of
cash.
To find out
which high-potential mid-cap oil stocks are our fundamental favorites, buy your report today.
This 36-page report ought to really enhance your knowledge of this
fascinating industry. You’ll learn a ton about the mechanics of
horizontal drilling, fracking, EOR, oil sands, and
more.
At Zeal we do
this research to better our own knowledge in a given sector, and also to feed
trades to our acclaimed subscription newsletters. Since 2001 all 591
stock trades recommended in our weekly and
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newsletters have averaged annualized realized gains of +51%. Subscribe today.
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The bottom line
is the world’s largest oil consumer is undergoing a radical shift in
some long-standing supply trends. The US is seeing its first material
decline in imports in a quarter century. And this is partly due to a
once-unfathomable rise in domestic production.
Of all the
regions in the world amenable to oil development at higher prices, the US is
one of the hottest destinations. And technological advances have
allowed oil companies to find great success in growing production. In
turn, investors are finding that many of the best companies thriving in this
movement are fast-growing mid-cap producers.
Scott Wright
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