Awash in Oil!

Exxon recently published its annual Outlook for Energy issue, in which it projects trends of the world’s energy supply and demand needs to 2040. It makes for interesting reading.

According to Exxon, the world’s population will rise by more than 25 percent from 2010 to 2040, reaching nearly 9 billion. An expanding population, as well as economic growth will require increases in energy sources and uses. At the same time, modern technology is developing new resources and making energy more affordable.

With global energy demand increasing around 35 percent from 2010 to 2040, a more diverse and affordable fuel mix will be needed. Nevertheless, oil and natural gas will supply about 60 percent of global energy demand in 2040, up from 55 percent in 2010. Oil will remain the largest single source of energy to 2040, growing around 25 percent. Production of natural gas is expected to grow faster than any other major fuel source, with demand up 65 percent by 2040. Because they are abundant in supply and more economical to develop than other fuel sources, oil, natural gas, and coal will provide approximately 80 percent of total global energy by 2040.

Thanks to the combined technological developments of 3-D seismic, horizontal drilling and multi-staged hydraulic fracturing, the United States is experiencing an astonishing resurgence of its oil and natural gas industries, the results of which can hardly be overstated. The global energy map is being redrawn…away from the unstable Middle East and to the West.

Most people in the US do not understand the role that energy plays in our economy. They don’t understand that the boom from 1900 to 1925 was fueled primarily by the oil found at Spindletop in Texas in 1901. They don’t understand that much of the success of the US and its Allies in World War II was fueled by oil from the East Texas field and discoveries in the Permian Basin, as were the economic booms that followed in the 1950s and 1960s. The boom in the 1990s was also stimulated by oil and natural gas prices that were well below replacement costs. Literally, the energy that drove all of that productive capacity was initiated with the East Texas discovery of 1930. The East Texas field is the second largest in the US, exceeded only by Alaska’s Prudhoe Bay. However, having yielded more than 5 billion barrels to date, it is still the larger producer.

The size of the discoveries found recently could dwarf both. More than 20 new major shale plays are currently being drilled in the US Each one of these could contain 20 billion or more barrels of recoverable oil, four times that of East Texas. In fact, some experts are projecting that the one most recently recognized, the Cline shale in west-central Texas, could contain 3.6 million barrels of recoverable oil per square mile, or about 30 billion barrels for the entire shale play.

We are sitting on the biggest economic and financial opportunity in the history of our country. Yet even as the discoveries mount and production increases, all the new oil is creating some current difficulties for producers, as well as opportunities for groups such as Five States.

Lack of local infrastructure is costly. Many of the new oil and gas plays are in areas that do not have the transportation facilities that exist in the more mature producing areas. For example, a new discovery well in North Dakota might be capable of initially producing 1,000 barrels of oil per day. However if the well is located 40 miles from the nearest paved road, and if no pipelines are available, the oil may have to be trucked 1,200 miles to Cushing, Oklahoma in 160-barrel tank trucks for delivery. Hauling charges could be as much as $30 per barrel, easily absorbing much of what otherwise would be profit.

Cushing, Oklahoma, is the point of delivery where the price of West Texas Intermediate (WTI) or oil of equivalent quality is determined. The difference between the price a producer in the Permian Basin receives for his oil has typically been about 85 cents less than the NYMEX posted price. This “differential” is the imputed cost of delivering the oil via pipeline to Cushing. Today, because storage facilities at Cushing are full, the oil coming out of Texas and other producing areas is being penalized by a differential of about ten percent. In other words, with WTI posted at $90 per barrel, the operator receives only about $80 per barrel, less imposed taxes and landowner royalties.

Because of transportation and storage arbitrage, the opportunity exists for Five States to provide funding for gathering and storage facilities, rail terminals, pipelines, and transportation equipment and materials. . . . We are currently reviewing dozens of fund requests to find the few that meet our requirements of those having solid principals, strong collateral and good economics.

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