Picture an oil well, and you probably imagine a rig lashed by storms in the North Sea, a derrick bobbing up and down in a Texas field, or huge chimney pipes spouting flames in a Middle East desert. Extracting oil is a tough, frequently dangerous, and very messy business.
It’s also pretty inefficient.
The fact is that only about 30%-35% of all the oil held by the average reservoir is brought to the surface.
But with the oil price heading higher, getting the remaining 70% out of the ground is a major objective – and an increasingly important investment theme.
We all know there’s big money to be made by companies that discover new oil. We saw it recently when one penny share doubled overnight after striking oil.
But there’s also a whole section of the industry dedicated to squeezing those last drops of oil from existing wells. And it’s this enhanced oil recovery or EOR that’s another way you could make a fortune in penny shares.
Profiting from the third stage of oil production
According to Shell’s Chief Scientist of Reservoir Engineering, Willem Schulte, EOR will lift the proportion of oil recovered from a typical well from one third to one half over the next twenty years. This would mean that EOR would account for the production of up 20 million barrels of oil per day, equivalent to almost a quarter of the current global output.
How can this be achieved? Oil men talk of three stages of production. In the primary phase oil rises to the surface under the natural pressure of the reservoir. The secondary phase involves some intervention to maintain the reservoir’s pressure. This is achieved by injecting into the reservoir either water or the gas that has flowed from the well alongside the oil.
But it the third phase beyond this when, according to Schulte, ‘we start doing things very differently’, that is known as EOR.
With EOR, in addition to maintaining the pressure within the reservoir, techniques are deployed that change its characteristics. There are three main methods – thermal, gas injection and chemical.
Thermal methods involve the injection of steam to thin the oil and allow it to flow more freely. The second method is gas injection, which dilutes the oil and loosens it from the host rock. And the third involves the use of chemicals, which work a bit like soap, again loosening the oil and getting it to flow.
These have all proved to be effective, but they also cost money. As with many initiatives in the oil business their deployment depends upon economics and, ultimately, the price at which oil can be sold.
But here’s why this suddenly starts to look more attractive. One gas that can be injected into an oil reservoir in order to boost the flow is carbon dioxide or CO2. Pumping CO2 into oil wells kills two birds with one stone. It generates more oil, and protects the environment from CO2’s damaging impact.
The technique is not new, but what has changed is the possibility of being paid to deal with all that pesky CO2. Take Houston-based Anadarko’s Salt Creek field in the Rocky Mountains as an example…
Oil was first found here in the early 1900s and it has so far yielded 655 million barrels. But production by conventional means is dwindling and Anadarko wants to draw at least another 150 million barrels of oil by injecting CO2. It has built a 125-mile pipeline to bring CO2 to the field and is pumping 125 million cubic feet of it underground each day, equivalent to eliminating the emissions of more than half a million cars per year.
This promises to be a big growth industry and even in the Middle East, where oil is still plentiful, EOR techniques are being adopted. Kuwait wants to boost its output from 3mbpd to 4mbpd and has invited oil companies to suggest ways of doing so through EOR. In Muscat, Petroleum Development Oman has given the go-ahead for the development of two important fields using steam-based EOR that is expected to boost peak production to three times the current rate.
5 oil stocks that could profit from EOR
So investors in the oil sector need to have two-pronged attack. As ever there is money to be made from investing in companies that produce oil in the conventional manner and especially those that find significant new sources.
But there will also be good investments amongst the many companies working to extract more oil from existing wells. There are plenty of candidates that have their shares quoted in Canada and North America – Enhanced Oil Resources Inc (ticker: EOR.CN), Cano Petroleum (ticker: CFW.US), Encana (ticker: ECA.US), and Kinder Morgan (ticker: KMP.US), for example.
Back in the UK market the nearest we come is probably Plexus Holdings (ticker: POS). It makes a uniquely strong well-head grip that permits drilling at greater depths where well pressures can be extremely high.
I’m on the hunt for more companies in this promising area. As energy prices head higher, we need to squeeze more oil from the ground. And the companies that can help achieve this stand to make investors big money.
Good investing,
Tom Bulford
For The Right Side
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