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Maya Crude Output, Frack to the Future, and More Damn Statistics

by | published December 28th, 2011

[With Kent on vacation this week, I thought it'd be valuable to go back and revisit some of best questions we received and published in 2011.

From time to time, Kent answers your questions on both major events and stories that are on no one else's radar.

Here are three that really stand out for their ongoing timeliness and the likelihood that we will be revisiting the issues addressed moving forward.

In 2012, we plan to answer more Oil & Energy Investor questions. So, remember, if you have a question or comment, we'd love to hear from you.

Just remember to register at the bottom of the page, and leave your comment.

And have a safe and happy New Year.

~ James Baldwin]

Okay… Let's get to it…

Q: Kent, I believe Mexico is the eight-largest producer of oil, and its output equals Libya's and Iraq's combined. What is the quality of Mexico's oil, and whom does it supply? Thanks. ~ Kirk (February 2011)

A: Kirk, the Mexican national oil monopoly, Petroleos Mexicanos (Pemex), is currently producing about 2.6 million barrels a day (mbd), while Libya (before its slide into civil war) and Iraq combined come in at around 4.3 mbd. So not quite equal.

That's because Mexican production has experienced more than a 25% decline since reaching its peak in 2004. And there remain serious questions about the ability of Pemex to increase volume due to the lack of finding new fields of any size and a heavy debt load.

Mexico has been a major supplier to the U.S. market. However, given the problems south of the border, there are widespread opinions that Mexico will become a net importerof oil by 2020, with any guarantee of export flows to the U.S. fading by as early as 2017.

While production levels have appeared to stabilize over the last several months, prospects for any additional volume are not good.

Most of Pemex's production comes from the huge offshore Cantarell field in the Gulf of Mexico. When discovered in 1976, it was the third-largest field in the world. Today, it is in rapid decline. From 1.2 mbd in January 2008, the field is now producing barely 480,000 barrels per day. And Pemex has nothing new coming in to replace any of this loss.

Libya provides light, sweet crude (with low sulfur content). Over half of the export flow from Mexico – including virtually all that comes into to the U.S. – is heavier, sourer oil (with higher sulfur content). Called Maya benchmark crude, this is roughly equivalent to Saudi exports, but more expensive to refine.

Bottom line here: no increase in U.S. imports from Mexico; rather, a virtual certainty that imports willdecline appreciably.

Even if that situation were to reverse, Maya crude remains more expensive to process than the Libyan crude it would replace.

Q: Kent, can you address the “fracking” issue one more time?

The 2010 documentary Gasland showed how bad things can get when 600+ chemicals are used to get the oil out of the ground, especially in close proximity to water resources. What companies employ this technique?

Also, the French recently revoked the licenses of one company – Toreador Resources in Paris – because fracking would have been their preferred method of oil extraction. The stock plummeted on the news. Will other companies (and countries) that use fracking find it difficult to lease land where the water table may be affected? ~ R. J. (July 2011)

A: Actually, several of you have written in with similar questions surrounding the French decision on fracking. But R.J. asks several questions here, so let me address them in order.

First, all companies that utilize horizontal drilling for shale gas extraction use hydrofracking.

Second, the French decision results from where the drilling would be located.

To date, significant shale gas deposits have been determined at Bassin d'Ales, Plaine d'Ales, Montélimar, and Moselle (where there is also coal bed methane). The first three are most advanced in terms of exploration; unfortunately, they are also in the Paris region and have population density concerns.

This has become a political issue in the days before an election… and that is rarely a good time to get an objective appraisal.

Still, the environmentalists do have it right – if a company cannot provide sufficient guarantees that drilling poses no danger to water tables, it should not receive a license.

And these French companies will have a hard time providing the required guarantee. France has no history of combining hydrofracking and horizontal drilling. There have been no environmental baseline studies completed and no previous unconventional drilling as a basis.

Third, there is shale drilling under development in other European countries: Lower Saxony (Germany), Alum (Sweden), the Makó Trough/Szolnok Formation (Hungary), the Vienna Basin (Austria/Slovakia), as well as four very promising basins in Poland.

The French have a valid concern about heavy populations in proximity to drilling. True, the Barnett in Texas was initially an urban-based play (Fort Worth to Denton)… but France's density distribution is different.

Now let's return to the documentary…

The episodes portrayed in Gasland were the results of early drilling in Colorado, where, in my judgment, the companies were clearly at fault. There have been some questions raised about more recent drilling in the Marcellus on the East Coast, but these are quite infrequent.

Shale gas wells are at least 5,500 to 7,000 feet below the surface. Some – such as the Eagle Ford in Texas and the deep Utica, currently under evaluation below the Marcellus – are more than 12,000 feet down.

These are well below any water resources.

The problems arise in two other ways.

  1. Gas contamination on its way up to the surface, and
  2. The use of fracking fluid.

Gas contamination is a standard problem for both traditional – vertical – drilling and the newer unconventional drilling. It is not, therefore, something that has emerged only with the advent of shale gas development.

In passing, gas contamination is what caused the igniting water shown in Gasland.

Yet the problem can be resolved with the use of concentric pipe strings. Range Resources Corp. (NYSE:RRC) has an excellent system used in the Marcellus.

Regulators need to require the usage of the better pipe strings. Most of them do already.

The other matter, fracking fluid, is more contentious

Of the hundreds of chemicals used for fracking, most are of no consequence to health or environment.

The problems emerge with the danger of leakage from the use of ethylene glycol (to inhibit the formation of scaling; also used in antifreeze), petroleum distillates (to reduce friction), and especially glutaraldehyde (as an antibacterial agent).

Once again, a secure system of returning the fluids (along with the flowback water) to the surface, and safe disposal of that water, is essential. Today this is accomplished by injecting it into deep disposal wells after processing.

However, new developments are already in field use in the Fayetteville in Arkansas and the Woodford in Oklahoma that eliminate the use of chemicals altogether… and even reduce overall operational costs per well at the same time.

Q:There is a report that current and future crude production here in the USA could handle all our energy needs well into the 25th century…. Out here in Kansas, we have fields of untapped crude. The same exists in eastern Colorado, Oklahoma, Texas, Nebraska, the Dakotas, as well as along the Mississippi River, and especially near the field of shale gas in western Mississippi. So why do we need foreign crude? ~Phaedra (March 2011)

A: Phaedra, the primary reason we depend upon foreign sources for almost 70% of our crude isprice. Foreign oil is cheaper than much of the untapped oil available within the U.S.

The U.S. is the most mature oil-producing region in the world. Traditional fields have been declining for some time. When “Hubbert's Peak” hit in 1971 and 1972, the American market was producing about 9.2 million barrels a day.

In 2011, conventional production may not hit even five million barrels daily.

Yes, there are reserves remaining, but the volume extractable at a competitive price is not increasing significantly.

As counterintuitive as it sounds, having supply available locally does not automatically mean it is the preferred option, especially if the cost of extracting it still exceeds the cost of importing equivalent volume from elsewhere.

Now, security of supply is another matter.

One may choose to produce at home to offset the uncertainty of events abroad. Combining North American sources of unconventional with the dwindling supply of conventional crude will address this issue. But it will also significantly increase the price to end users of the oil products.

Sincerely,

Kent

[P.S. As we've said before, we're entering a time where there will be an unprecedented opportunity to make money in the energy markets.

That's why you should check out Kent's latest warning right here...

And don't delay. This is huge news for investors.]

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  1. George Hildebrand
    December 28th, 2011 at 12:49 | #1

    Leave it all in the ground, I say. The horror is global warming.
    geo

  2. December 28th, 2011 at 13:31 | #2

    Kent,
    I have been a member of the money map report for about 2 years or so.
    And one recommendation I heeded was to buy Toreador Resources, which I did. When did they find out their license application had been rejected? Where was their any alert to SELL? I was surprised, to say the least, of your Q&A above mentioning this revelation.
    Frank

  3. Jerry Harmon
    December 28th, 2011 at 13:53 | #3

    @Frank DeMoss

    Kent obviously is a very learned man in the area of fossil energy. However, I’m growing in the belief that as an investment adviser he leaves something to be desired. He has made many recommendations without any follow up. Recently I was involved in an option trade that was a loser, but was reported in his next suggestion as a 50% winner. I have called to complain. We’ll see.

  4. Tom
    December 28th, 2011 at 13:56 | #4

    @George Hildebrand
    Sir,

    WE can’t have our cake and eat it too. No coal, no nucs, no oil or gas. Opposition to wind farms, hydro electric, and possible envionmental impact of solar. Maybe there are other solutions, and maybe the powers that be should haved planned decades ago. But that was then and this is now. Something has to power up this computer that we all communicate on.

  5. Dumb American
    December 28th, 2011 at 14:09 | #5

    Yes, says Gore, owner of the 3rd largest oil company. Gore, who bought the entire U.S. Navy Pacific Fleet oil reserve, for an undisclosed amount (i.e. $1.00).
    Let’s not forget Billary & OGay who each promised $100B/yr, to the U.N, from U.S. suckers, I mean tax payers.@George Hildebrand

  6. Tom K.
    December 28th, 2011 at 15:08 | #6

    Global warming is only of interest because we have not lived long enough to see it before…How do you think the Great Lakes were formed? They froze into glaciers, then thawed, 5 times..People hate change, but there’s nothing we can do about it…Mother nature is in charge of this, not some environmentalist, or even Obama the Mesiah..Some day we’ll be blamed for global cooling..People use energy, natural resouces, etc. Always have, always will…

  7. Donald Bellm
    December 28th, 2011 at 15:29 | #7

    I would like to know why we are now NET exporters of refined products. . .all the while domestic prices of efined products are still substantially higher than year ago.

    DGB

  8. william tehoy
    December 28th, 2011 at 16:32 | #8

    Hi

    I’ve noticed that your service recommends stocks that frequently are over $1,000.00 to buy 100 shares…not really enough to offset commissions, fees, and taxes…do you have any recos that are more affordable for the small invester, who might not be able to afford to buy more than 50 shares of a $30 stock?

    Thank you

  9. Sandy Fleischmann
    December 28th, 2011 at 16:40 | #9

    For Frank DeMoss re Toreador, I haven’t been following it, but a quick search for an investment news article shows the French permit news in early October 2011. I don’t recall if Kent Moors mentioned Toreador, but I remember reading re Toreador in ads for other newsletters and Stock Gumshoe’s website. It hasn’t been in Money Map’s portfolio during 2011, per my issues.

  10. Sandy Fleischmann
    December 28th, 2011 at 16:50 | #10

    For Frank DeMoss, a check on the Money Map archives shows an email sent from Keith Fitz-Gerald being stopped out of Toredor in May 2010

  11. Chuck S
    December 28th, 2011 at 22:07 | #11

    @George Hildebrand
    Then you should not use electricity or cars. You shouldn’t use any products delivered by truck, train, or ship. You shouldn’t have any food grown with tractors. How about at least observing all that you use that comes from fossil fuel.

  12. enthusceptic
    February 10th, 2012 at 05:27 | #12

    A question about oil and gas fields: How does the practical divvying up of oil fields happen? Governments give or sell drilling rights to companies, I think, and then what happens? How can we know who is extracting how much for how long?
    I must defend Mr Moors and he other gurus: Throwing darts involves body coordination affected by intake of beer. Investing involves brain, computer, reading, research and more money than needed to buy beer.
    Did I just now answer my own question? Nevertheless a general overview of how the oil and gas industry works would be welcome. Ignorance is rife out there!

  13. enthusceptic
    February 10th, 2012 at 06:08 | #13

    Price will always be the decider. Forget expensive oil.Nat. gas is cheap in North America, go for it! Can you hear my broken record turning? Show me anything other than ships, trains, planes and other extremely large and power hungry machines that need oil!? I can think of only lubricants that can’t be made from nat. gas.
    Environmental concerns will always be difficult. Shouting matches never solve anything. Facts are needeed. Politicians don’t think long term. We need leaders who do, but the need of the moment will always rule.

  14. enthusceptic
    March 28th, 2012 at 14:56 | #14

    Now my broken record is almost worn out: Is “The American way of life” upheld by stupidity?
    Gasoline is cheap in the US. Those who do serious mileage can travel dirt cheap by using NG. Stop complaining!

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