A Reversal: US Oil Production is Now Up!

Surprised?  I was,  . . .  but its true!   In decline since 1970, the American Petroleum Institute reported US oil production has now turned up, with October production of 5.36 million barrels per day, the most since 2005. See the article here. Even Exxon (XOM) is "coming home" with its proposed acquisition of XTO Energy -- XTO has a large position in North Dakota Bakken Shale acerage.

The Cheyenne River Indian Reservation  in western South Dakota is wild, desolate . . . and beautiful!  Three million acres of rolling prairies and buffalo, just as trappers and the first settlers saw it.  Much of the surface soil here is shale, Pierre Shale.  In the 1970's I found 80 million year old ammonites exposed, right on the ground.  The high clay content makes the soil poor for agriculture (probably why it was given to the Sioux Indians as a reservation in 1889).  Due to surface exposure, the original oil and gas components here are long gone, but not so for the deeper shale and sandstones deposits to the north, where a bonanza in oil and gas has been found.

Further north (meaning North Dakota, Montana, Saskatchewan) oil production is skyrocketing.  North Dakota may be sitting on one of the largest pools of oil in North America.  Bakken Shale oil production alone may reach 500,000 barrels per day in 2011, up 50% from two years ago.   And now, beneath the Bakken a new, apparently just as prolific, oil formation, called the Three Forks, is being explored.  The Three Forks is rumored to contain just as much oil as the Bakken.  Also, newly exploited to the northwest, in Canada, the Cardium formation is showing an abundance of oil.  SA author Keith Schaefer has written extensively on the Cardium.

Multi-stage fracturing, or fracing, of horizontal wells in tight shale formations is providing an unexpected abundance of gas and oil.  This new and rapidly evolving technology involves insertion of various liquids or gases (water, carbon dioxide, nitrogen, air etc.) along with proppants into horizontal bore holes in "tight" rock formations such as shale.  The liquids or gases create fractures in the shale and proppants (sand, ceramics, etc.) keep the fractures open.  Oil and gas then flow into the fractures and can be harvested.  For more information on the technology  read here.

Mid-Continent shale may have as much as 500 billion barrels of oil (admittedly a wildly optimistic estimate but if so think Saudi Arabia).  While it is true that much of this oil may not ever be recoverable, increasing prices and the aforementioned technology is rapidly improving the odds.

And, don't forget the Gulf of Mexico.  Although drilled heavily, companies are also producing more oil from the Gulf. Major projects are now coming on line while old fields, due to technological advances, are producing more than expected. New discoveries keep coming, read about BP's recent "giant" find here.  At the same time, smaller companies such ATP Oil and an Gas (ATPG) are prospering by extracting more oil than ever thought possible from old fields.  Technology is truly evolving and allowing us to find and produce ever more oil and gas.

So,  is all the "gloom and doom" of Peak Oil talk just that -- only talk?  Well, not so fast, the US increase is minuscule when compared to worldwide daily demand of approximately 85 million barrels of oil.  Oil demand, while stagnating in developed countries, is jumping fast in developing countries.  Car sales are exploding upward in India and China as road infrastructure is built out.  The "American Dream"  of car ownership is now becoming the Chinese or Indian dream.  With Asian populations many times that of the US the potential is enormous.

A few years ago severe shortages of natural gas were predicted in the US and several LNG port projects were started in anticipation of imports.  Now, construction has slowed or halted, and the facilities are languishing -- mostly due to US shale gas production.  It seems unlikely the same could happen with oil any time soon, but keep your eye on US domestic production.

Below are some US companies with significant stakes in Mid-Continent (read North Dakota) shale oil plays: 

Continental Resources  (CLR), at $6.7 billion market cap and 605,000 net acres is in both the Mid-Continent and Gulf Coast regions.  82% of the shares are held by insiders, with Harold Hamm, CEO, holding most of it.  Continental under Hamm, excited by the potential, has recently made a major move into the Bakken in North Dakota,

EOG Resources  (EOG), at $23 billion market cap and 513,000 net acres is in the Mid-Continent and Gulf Coast regions.  EOG, an international company, is probably the least speculative way to invest in the Bakken.

Whitting Petroleum  (WLL), at $3.4 billion market cap and 89,000 net acres is in the Mid-Continent Whiting is also in the Permian Basin, the Rocky Mountains, Gulf coast and Michigan.  Whiting is exploring the Three Forks formation under the Bakken.

Below are some Canadian companies that have significant western shale oil stakes.

Crescent Point Energy  (CPGCF.PK) is active in the Canadian Bakken and "believes it has a drilling inventory of 3000 wells to drill."

PetroBakken  (PBKEF.PK) recently combined with TriStar Oil and Gas and supposedly has an inventory of 1,300 Canadian Bakken wells.

Also, many of the Canadian Royalty Trusts have significant land holdings in Canadian shale areas.  An added bonus: they often offer attractive dividends.

A cautionary note:  I am not recommending any of the above equities.  Everyone's situation is different so use your own due diligence and investigation before investing.  It is true that there is a lot oil in North American "tight" shale, and technology is improving the cost of getting it out.  However, a sharp drop in world oil prices could make the shale oil, which is still fairly expensive to pump, uneconomical and many shale oil companies may be adversely affected.

Disclosure: Long BP and PBKEF.PK

Not Telling Jennifer . . .

"I'm not telling Jennifer" he said.  This from the man selling wooden chopping blocks last summer at a Michigan craft festival.  He was responding to my query concerning sales tax.

Not tell Jennifer? . . . Who is Jennifer? . . .   His wife? . . . Co-worker? . . . Why would she care?

Then I got it.  Jennifer Granholm is the governor of Michigan.  Conditions in Michigan are really bad right now and may be looking worse for the future.  The state,  businesses, residents . . .  everyone is scrambling!  Unemployment is 14.3%, up from 8.7% a year ago.

A recent, and rather frightening article, predicts that Michigan's General and School Aid funds will need to be cut almost 50% by 2017 (see here) if the budget is to be balanced   More and more residents are rebelling, clamoring that state employees and social welfare recipients also need to start sharing the pain.  Its a mess.

In a way ,the state brings on its own problems.  We collect sales tax on summer rentals in Michigan.  What I found quite astounding was how difficult it was to set up forwarding the payments on to the state.  You need to fill out forms and jump through a lot of hoops -- and thats to send money to them!

The state doesn't seem to have a provision for individuals to pay sales or use tax, even if they owe it.  The forms are all company oriented, and there is less and less traditional employment in Michigan.  After unproductive phone calls and emails I finally gave up and just put my last name in the "Company Name" field.  Not sure if it was correct, but they are accepting and cashing the checks.

Untaxed, unregulated, unlicensed, unreported . . . America's underground economy keeps growing.  The Christain Science Monitor recently estimated the shadow economy to be as big as $1 trillion or 8% of GDP  (see here).  Every uptick in unemployment, every tax increase, and every new regulation drives the figures up.

If you are unemployed and ambitious you do what it takes to get by.  Telling Jennifer is all too often just not a priority.