Oil services - An overview

Oil industry can categorized into two major sectors - upstream and downstream. Upstream is the process of extracting the oil and refining it. Downstream is the commercial side of the business such as refining and delivery of usable petroleum products and retail.

Down Stream services: Conventional oil production in North America peaked, starting with the peaking of oil production in the lower 48 states of USA, followed by Canada and then Mexico recently. Most of the new oil coming online are heavy crude from the oil sands of Canada and the deep waters in the gulf of Mexico. The existing refining facilities are not geared to handle heavy sour crude. Valero has been a big exception. Their success in recent years has been based on its ability to refine cheaper sour crude. Most refineries still need light sweet crude for refining.

This sector is dominated by a handful of giants. In fact, much of the energy industry is ruled by major 'integrated' oil companies. Integrated meaning – these companies do both upstream and downstream side of the business.

Upstream Services : Unlike many people think, oil fields do not resemble an underground lake of dark viscous liquid. Instead, if you were to draw an analogy, oil fields look more like wet sponges. Oil is trapped inside small pores of underground rocks. Porosity of the rock is what determines the amount of oil that can be recovered. As the oil fields age ( most US oil fields are in their twilight), the difficult to reach oil needs to be reached through more well bores both vertical and horizontal. Secondary and tertiary recovery processes needs to be employed. This is where the expertise of oil service companies come handy.

There are two major types of upstream Services - Drilling services and oil field services. Drilling service companies offer their expertise with land rigs, offshore rigs, drill Ships etc. While, the oil field service companies offer services in areas of Seismic testing, Directional Services ( drilling angles ), transport services ( moving rigs ).

In his latest book "The Coming Economic Collapse", Stephen Leeb goes on to say "1970 to 1980, oil service company shares rose more than twenty-fold, almost exactly matching the gains in oil itself. Similarly, during the initial stage of the current bull market - from the end of 1998 to August 2000, when oil prices climbed threefold before reaching an interim peak - the gains in oil service companies nearly equaled those of oil. We conclude that, in bull markets, oil service companies typically rise as much as oil".

As the price of oil increases, with declining production from aging fields, it becomes critical to squeeze out every possible drop of oil from these fields. This is where the expertise of these service companies become invaluable. Engineering services depend on highly skilled man power. Years of engineering expertise that these firms and their talent pool provide, will not be replaced in the marketplace overnight. Majors and independent producers will be paying top dollar for the services offered by these service firms.

As civilization goes on its quest for more oil, service companies that provides expertise in areas of deep water drilling, oil sand upgrading and heavy crude refining might see some of the biggest growth, in the coming years.

© 2006 Oil Shock for TheViewFromThePeak.com

Disclaimer : Oil Shock is neither a petroleum engineer nor an oil industry insider. If any of the information provided in the above write up is wrong, any one is welcome to post their comments.

Its running out!

To quote Matt Damon's character from the movie Syriana, "Its running out and 90% of whats left is in the middle-east. It is a fight to the death". That 90% figure is an exaggeration. It is more like 60-65%, based on who you believe. Doesn't that give you a lot of comfort ?

The Oil supply situation in the world is dire and the Arabs and Persians know this better than we do. Whether Iran impasse gets solved peacefully or not ( evidence overwhelmingly points to a confrontation ), oil is headed higher, much higher. Crude oil inventory may have risen in the US, but it did not rise on a glut of new supply - instead it rose on falling demand, thanks to mild winter weather in most of North America.

I just came across this article titled "Running Out of Oil? History, Technology and Abundance" by Max Schulz - a fellow at Manhattan Institute. Thinking must be too painful for these so called experts. He brushes aside "peak oil" on the basis of how the whistleblowers have been wrong in the past!! Article goes on to say "The good news about this bad news is that, historically, the doomsayers have always been wrong". Coming from an energy expert who served in the upper echelons of our Nations administration, that statement bewilders me. Pinning the future of a nation and the world on a mere hope that some really smart geologists are wrong ?

Mr. Schulz then strikes at "peak oil" as a nonissue on the basis of technological advancement. Oh, we lumpen worry warts, we could never think of that, could we ? Either inadvertantly or by design, he failed to explain why three and a half decades of technological advancement could not reverse the 1971 peak in US oil production.

Abundance - Strike three and peak oil is out. "Questions about energy supply shouldn't be thought of in terms of how much is available, but in terms of how good mankind is at finding and extracting it" says the article. It doesn't surprise me at all, that, these abundance theorists time and again fail to explain, why the peak year for oil discovery was 1965 and not 2005( figure-1). Didn't the high oil prices that lasted for a decade, starting from the early 1970s, provide the incentive for mankind to find these abundant sources ? I will let you answer that question for yourself. Technology sure didn't stop Pemex from announcing that the giant cantarell field has entered an irreversible decline.

Figure-1: Oil discovery from 1930s.source: ASPO

Then there are others who think that the Russian Oil Miracle has put the peak oil theory to rest for good. But the russian energy minister thinks otherwise.

Peak Oil is for real, sooner we accept that fact, better it is for humanity.

Until later,

Oil Shock

© 2006 Oil Shock for TheViewFromThePeak.com

Gas is cheap!!!

At the time my writing this, natural gas futures are trading for $6.65 per cubic feet. Less than 3 months ago, the price had spiked upwards to more than $15, anticipating a cold winter. But fortunately for most Americans, their heating bills did not go up 400% as predicted during the turbulent days of Hurricanes. Instead, the prices declined due to an unusually mild winter. We may not be so lucky next winter.

Natural gas futures might continue to trade, in and around their current price for some more time, but not very long. Unlike a lot of people think, natural gas demand is not confined to the winter. Many electric power plants in the nation are powered by natural gas. People turn on their A/C during the summer causing spikes in electricity demand. Here in Californian we have gotten used to rolling black outs in the summer. There is no reason to believe that this coming summer is not going to stress the electric grid system.

Figure 1 – Source : hubbertpeak.com

Gulf of Mexico has experienced some active hurricane seasons over the last couple of years and if experts are to be believed, this could be another year of high hurricane activity. A repeat Hurricane Katrina or Rita could knock out much of the natural gas output from the Gulf of Mexico. Though most of the Natural gas consumed in the US is produced locally, we have become increasingly dependent on imports. US natural gas production peaked in 1972 at 21.4 TCFG. In 1998, US natural gas production was at 18.4 TCFG. US has been importing increasing quantities of natural gas to meet growing domestic demand. Canada has been the biggest source of our natural gas import . There are indications that natural gas production in Canada might have peaked already. Hence the natural gas situation in North America looks rather grim. The public aversion to building LNG facilities, has not been helping the situation.

Source: Dave Russum, Geo-Help, Inc. Calgary

Our neighbor to the north has been experiencing a boom, based on rising interest in vast amounts of hydrocarbons locked in Alberta's oil sands. Many of the ongoing projects are scheduled to start production over the next 1-3 years. Unlike conventional oil wells, crude mined from oil sands are heavy and highly viscous. Heavy oil needs to be converted to light synthetic crude before it can be transported through pipelines to refineries all around the world. The process of converting heavy oil to lighter crude is known as upgrading. This upgrading process uses large amounts of natural gas. Demand for natural gas from these oil sands projects are expected surge in the coming years.

On the other hand, there has been an increased interest in Ethanol, since the “Addicted to Oil” state of the Union speech by President Bush. This could lead to an increased demand for natural gas based petrochemicals used in agriculture. Whether Ethanol is the answer to our energy woes is a discussion for another time.

At current prices, natural gas is a great value.

© 2006 Oil Shock for TheViewFromThePeak.com

Oil is headed higher, Big Oil - may be not

If you can accept that all the easy to find oil has been discovered and oil production is on the cusp of a precipitous decline, it is easy to understand why crude oil price is headed higher. The bull market in crude over the last few years has been driven by surging demand from a growing world economy - especially the newly industrializing giants like China & India. Sheer size of their population puts tremendous pressure on resources, especially energy. This trend will continue at least into the near future. Many major oil fields the world over, are in decline. New production coming online will not come close to replacing the declining production from existing fields, let alone fulfill growing demand. So we find ourselves in this dire situation with staggering demand growth and flat to declining supplies.

Big oil companies are struggling to replace their reserves. These giants have been enjoying the current bull market in oil. Hardly any of their surging profits are directed back into finding new fields. The execs who run these Goliaths know better than we do, that new exploration may not be a worthwhile investment. The way these giants have been replacing their reserve is through acquiring other oil companies - with substantial reserves. Case in point is Chevron. But, for the controversial acquisition of UNOCAL, Chevron would have hardly replaced what they produced last year. These behemoths will have to pay higher and higher price to acquire new reserves. Profitability of producing from reserves acquired when oil was trading for $15 will soon disappear.

Valuation of these companies are based on reserves as much as it is based on profitability. So dwindling reserves and higher oil prices may mean that the growth in stock price may not be as much as other midsized companies. So investors looking for growth need to look elsewhere. It is my opinion that, mid-sized oil producers will turn out to be a better investment bet in the coming years. These nimble midsized oil production companies would be good acquisition targets, currently trading at a big discount compared to their reserves.

Another area that investors could consider is Canadian Oil sand companies. They can profitably operate their business with Oil trading upwards of $35. Oil sand companies have the potential to increase production unlike US oil giants.

Until later,
Oil Shock

© 2006 Oil Shock for TheViewFromThePeak.com