NAI Weekly Biz Talk - Can the U.S. become oil independent?

Samson Li's picture

About the Author: Samson Li has ten years of investment experience. He acted as Chief Analyst at Centaline Wealth Management Ltd, a subsidiary of Centaline Group, managing a fund specializing in natural resources and commodities. With an in-depth knowledge of mining, energy and commodities as well as unique analysis of global economic trend, he is often interviewed by NOW TV, TVB, Metro Radio, Hong Kong Daily News, AM730, Economic Digest, China Gold News and various other media. Besides, he is a columnist for Capital CEO, Quam and Away from the Flock on Centaline Group's website.

Due to technology advancement, the production of local shale oil/tight oil helps the U.S.’s average daily production to grow from 2006’s 8,317k to 2012’s 11,114.7k. Many experts, including the International Energy believe at this current rate, by 2020 the U.S. could surpass Saudi Arabia to be the largest oil producer in the world, and by 2030, the U.S. could be a net exporter for both oil & gas, a dramatic change from the current situation.

Similar to the technology developing shale gas, horizontal drilling and water fracking are two of the major technologies used when extracting shale oil. Although these technologies have been implemented on oil fields for over 20-30 years already, only the last few years we see substantial breakthroughs and have become a success. Thus in my opinion there are still many unknows and uncertainties, particular on how much resources are actually recoverable at the end on any particular project? I would not be surprised to see even industry experts would be having a tough time to revise their estimates over and over again, because horizontal drlling and water fracking technology are still relatively new and we are still in the trial and error stage.

First we have to understand that the Natural Resource sector is a different animal when compared to other industries. For example when you are looking at a retail business you might count how much inventories are left with you hands, or when you are analyzing a financial company you can always use some accounting skills. For the resource sector, the most important thing is to determine how much resources could be recovered eventually, and at what price. All else equal, it is a no brainer that the cost of production of an oil field that can produce 10 million barrels of oil is lower than one that can only produce 1 million barrels, due to economics of scale. Unfortunately as all the resources are underground or under seafloor, you will never know exactly know how much you can get unless you finished digging and drilling. To tackle this problem, the industry has always tried to increase its transparency and to become more systematic, for example require companies when publishing resources estimates following the 51-101 reporting standard. However, at the end these resources are based on drillings, experience, and subjective estimation, and it is very difficult to achieve 100% accuracy in terms of estimation. Henceforth the Natural Resource sector possess a higher risk generally compared to other industries.

Back in 2011, the U.S. Energy Information Administration (EIA) has made an estimation on total recoverable shale gas on an area at Pennsylvania at 410 trillion cubic feet. However just one month later, another U.S. government regulation, USEG, made an estimation of only 84 trillion cubic feet of recoverable shale gas for the same area, or only 20% of EIA’s initial estimates.

The truth usually lies between the optimists and the pessimists. In order to gain support from its own people, there is every reason for the U.S. government officials to pump up the oil-independent card, while the Wall Streets would probably need a compelling investment story to attract more investors and tradings. I think it is still too early to think the U.S. can become oil independence despite of the shale revolution, and the reasons fall into the production of shale, something I will mention in the future.