Friday, August 06, 2010

Interview w/ Keith Schaefer, of Oil & Gas Investments Bulletin

Keith Schaefer was interviewed on a range of topics covering investments in oil and gas, by The Energy Report. Schaefer's comments on oil prices were particularly interesting.
TER: ... Does oil need to get past $80 to have a run?

KS: No, not at all. Oil doesn't need to run. I'm happy to see oil trade here for the next five years, because there are lots of companies that make fantastic profits at $75 oil. Technology is lowering costs in the oil patch. With the new horizontal drilling technology and multi-stage fracking, all kinds of new plays are opening up. Literally. Just yesterday, a new play opened up in Canada that no one had really paid much attention to. One of the independent consultants estimated that there are over 6 billion barrels of oil just in that one formation in Alberta in B.C. So all over the place you're seeing new basins, new formations being opened up with all this new technology, and it's relatively low-cost oil, not compared to the Saudis per se, but by the standards everywhere else in the world, it's very profitable oil at these prices. The oil price does not need to go any higher.

TER: Do you see it staying in that range for the next couple of years?

KS: That's a question that only history is going to be able to tell us. But I would suggest that, with the decline in demand in the U.S. and Western Europe being offset by the rise of China and India, we're going to see a fairly stable oil price for a while.

TER: You were talking just a few seconds ago about technology opening up some new plays. At the same time, fracking is not all that new. Multi-stage fracking has been around for a while. and horizontal drilling has been around for a while. What are new technologies in oil and gas exploration that we haven't heard about?

KS: There are new ones coming up all the time. But let's just go back to fracking and horizontal drilling for a second. Although those technologies have been around for 40, almost 50, years, it was just 10 or 12 years ago that the technologies got perfected enough so that they could start producing oil and gas out of rock. That was the Barnett shale.

What you've seen here now is that many new plays around Canada and the U.S., where the technology was developed, have become newly commercial. Even though they're old technologies, they're still opening up many, many new plays all around the world—the European shale gas plays, the African shale gas, and that's just scratching the surface. We're going to see huge growth in Europe and Africa shale gas over the next 20 years. You're right, they are old technologies, but they're being used in new basins for the first time and that's creating big value for shareholders.

One of the new technologies that I'm really intrigued by is radial drilling, which is used in heavy oil basins. I believe this is a technology developed by Halliburton Co. (HAL). Little jets are sent into the very porous heavy oil formations and are able to create wormholes 100 meters out into the formation, to get oil to flow back to the well. Before this technology was being used, you could only get about 3 to 5 meters outside of the wellbore. It's a huge increase in potential production and reserve creation.

TER: And that's making some of these old basins profitable again?

KS: Yes. What's happening is that the old basins that have been worked over now have a new lease on life. I would say that heavy oil formations haven't really been used or exploited that much. The world's been very focused on getting the light oil out. But over the last dozen years, much more time has been spent focusing on the heavy oil. They're continually finding ways to improve the technology and lower the cost.

TER: What are the big differences between heavy oil and light oil?

KS: Light oil is easy to process, and doesn't need much work to get into the form that would go into your car. Heavy oil has heavy products in it like metals; it's the basic component of asphalt. We have to spend a lot of money to remove the asphalt, rocks, and bits of metal to make heavy oil into various types of fuel. Heavy oil doesn't go into your car; it will go into heating products or diesel, or products where it doesn't need to be refined quite as much. _Schaefer_Interview

There is a lot of heavy oil that is easy to access. When more refineries are equipped to deal with heavy oil economically, expect yet another large source of hydrocarbons to increase -- rather than peak.

When humans turn away from oil and other fossil fuels, it will be because they do not need them any longer.



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