Oil shortage Puzzle

Necessity, as I am sure I need not remind you, is the mother of invention. And no economic need is greater than that for energy.

Despite this, the oil and gas industry spends relatively little on research and development. True, it spends vast amounts towing rigs around the world and drilling wells that turn out to be dry. But in terms of actual spending on innovative research and development it spends just 0.3% of its revenues. Compare that to the pharmaceutical industry that spends 15%.

The basic model that oil and gas companies use to replenish their reserves has not changed much over time. Exploratory drilling is done on the basis of seismic surveys and observable geological features. But despite some advances here, about seven out of every eight wells drilled come up dry. And even when they find one that contains hydrocarbons in commercial quantities, the oil companies will only ever bring about 35% of it to the surface.

For an industry that has been around for decades this is not particularly impressive. It represents an enormous waste of money and resources - all of which, of course, we end up paying for through the price of oil and gas. Now, though, there is an acceleration of interest in energy research - research not only into alternative sources of energy but also into how the production of oil and gas can be made more efficient.

The perceived energy shortage is often over-stated. In the 150 years or so that the world has been using oil, we have got through about 1 trillion barrels of oil equivalent (‘boe’). According to the International Energy Agency, there is still another 20 trillion boe to be exploited, of which 5-10 trillion may be considered ‘recoverable.’

However, much of these recoverable reserves are ‘unconventional’. In other words they are locked up either as difficult fluids, such as tar or very viscous oil. Or in very low permeability rocks including shale and coal seams. Much will depend upon our ability to extract these reserves. And while there may be some ‘paradigm shifts’, most of any progress will be incremental.

Progress is being made in energy extraction

As an example of the former, BP’s group vice president for technology, Tony Meggs, explains that ‘there may be ways to extract the energy from a coal seam without mining it, leaving most of the carbon in the ground and delivering clean energy in the process. If we could find a biological process for converting coal into methane underground, it could completely transform the energy business. Useable coal reserves could increase by a factor of ten.’

But while scientists search for this type of breakthrough, steady progress is being made in the extraction of oil and gas. Although the recovery rate of 35% sounds poor, it is an improvement on the 25% seen thirty years ago. This is mainly the result of advances in the ‘secondary’ and ‘tertiary’ phases of oil recovery. The first phase allows the natural pressure of the reservoir to push the oil out. The secondary phase involves the injection of water or the re-injection of produced gas into the reservoir to boost the pressure. The third phase, known as ‘enhanced oil recovery’, includes the injection of steam to heat the reservoir and thin the oil or the addition of surfactants that, explains Meggs, are ‘like adding detergent to a greasy pot’.

These have already helped to raise recovery rates. And another technique that is being evaluated is for microbial ‘EOR’ (enhanced oil recovery). This uses micro-organisms to chase out remaining oil from reservoirs. By injecting ‘bugs’ into reservoirs and feeding them, or adding nutrients to stimulate those naturally occurring in reservoirs, their metabolic activity gives rise to by-products such as polymers, surfactants and gas. These in turn can help trapped oil to move more freely. Micro-organisms can also degrade the oil itself, reducing the viscosity of heavier oil so that it can flow from the rock pores.

Oil: You have to find it first!

All these things help to extract oil. But before they can be of any use, the reservoirs must be discovered in the first place. Seismic technology has been around for decades. Two dimensional seismic (‘2D’) has been succeeded by 3D. And now 4D enables the movement of oil in the reservoir to be tracked over time. New techniques have been developed to survey sub-sea rock formations, countering the fact that salt obscures seismic signals. And controlled source electromagnetic surveys are now being used to confirm the presence of hydrocarbons under the water.

But still seismic surveying is far from ideal. By bombarding the rock formations with gamma rays, and measuring the resistivity, oil companies try to calculate the porosity of the reservoir. They then estimate the type of fluid that may be in it. But all that is really being measured is the time that it takes for energy to be reflected off some subsurface feature and return to the surface.

Seismic surveying is expensive, the data is subject to interpretation, and it requires rocks with a velocity contrast to work. It will not work everywhere. And as the exploration business progresses from looking for large structural traps to smaller stratigraphic traps, it becomes more challenging to acquire and interpret seismic data that can help define a prospect.

This tiny company could help pinpoint oil - and make its shareholders a fortune

But there is one small company I’ve found that believes that it can radically improve the interpretation of seismic data. Its theories are about to be put to the test. If they work, then this stock market minnow could make a huge difference to the ability of oil companies to pinpoint oil and gas reserves. It could help prevent them from drilling so many dry wells. And it could help solve the oil shortage puzzle.

If it does, then this company’s share price could rocket...

I describe this very exciting but virtually unknown company in detail in the September edition of Red Hot Penny Shares. If you would like to discover its identity and why it could be about to make its shareholders a fortune, then I can send you my latest newsletter.

Simply sign up for a no-obligation trial to Red Hot Penny Shares today - and I’ll send you this recommendation by return.

At the same time, I’ll send you an in-depth report on another of my favourite small cap oil plays. The chief executive of this tiny drilling company recently said it is "now within touching distance of realising the potential of what is probably one of the most exciting high impact exploration projects currently being undertaken anywhere in the world."

If it succeeds, I believe this share price could explode higher, delivering gains of up to 233% for investors who buy in now! To discover this company - and to receive your PDF report of my very latest Red Hot Penny Shares issue, with details of the breakthrough seismic technology share I talk about above - read on here.

Regards,

Tom Bulford
for The Penny Sleuth

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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Oil shortage Puzzle

Solving the Oil Shortage Puzzle