Friday, April 1, 2011

Enhanced Oil Recovery Technologies and Higher Energy Prices Enable Economical Production from U.S. Shale Reserves

Point Roberts WA - April 1, 2011�, an investor research portal specialized in sector research including energy stocks, publishes new CFA commentary from Patrick J. Murphy on US Shale Plays, featuring junior oil and gas stock, American Petro-Hunter, Inc. (OTC.BB: AAPH).
Patrick J. Murphy is the owner of Murphy Analytics LLC, a provider of sponsored research coverage on smallcap stocks.
"With horizontal drilling, today's oil and gas industry has an extraordinary capability: the power to navigate three dimensionally through the earth, contacting and economically producing resources while minimizing surface disruption." Newswire This commentary from a DOE report, "Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology”, captures the enormous opportunity made possible by the technological advances pushed forward by Halliburton (NYSE: HAL) and others driven to find an economical approach to tapping into what the U.S. Geological Survey estimates is 2.5 to 3 trillion barrels of proven resources of shale oil throughout the world. Importantly for domestic producers, studies estimate that the U.S. has as much as 73% of the world's recoverable shale oil in contrast to only 5% of the world's recoverable crude oil.
Historically, vertically drilled wells were the most economical method for tapping into the formations that have produced abundant quantities of the world's oil and gas. However, as producers began to comprehend the magnitude of the opportunity in the Barnett Shale, the Woodford Shale and elsewhere, it became clear that exploiting unconventional resources would require unconventional technology.
As explained by the Energy Information Administration of the DOE, because oil and gas reserves are much wider than they are deep, which is particularly true of U.S. shale reserves, horizontal drilling achieves the technical objective of intersecting a reserve in a manner that maximizes contact with the reserve. Developing this expertise took time, however, and this technical evolution is highlighted in a Halliburton white paper that points out the lag between the identification and commercialization of the Barnett Shale opportunity:
"Lacking an efficient means of production, U.S. shale gas reserves were largely ignored so long as market conditions made reserves more costly to produce than conventional sources. In fact, one of the first recognized major shale gas plays, the Barnett Shale of Texas, was under investigation as early as 1981, but not until 1995 was the hydraulic fracturing technology available that successfully brought in the gas at commercial rates. Then, five of the initial six wells each began producing more than two million cubic feet of gas per day and, soon after, introduction of horizontal drilling began to extend the basin where today two percent of all the gas consumed daily in the U.S. is produced.”
The delay in utilizing horizontal drilling and hydraulic fracturing was not solely the result of the lack of technical knowledge, but also a function of the higher relative cost of these technologies, which did not prove to be economical when oil and gas prices were low. Although the cost of drilling a horizontal well can be as much as two to three times higher than the cost of drilling a vertical well, this higher cost must be measured against a higher production factor, which can be 15 - 20 times higher for a horizontal well. However, given that some degree of uncertainty is inherent in all drilling, and in light of the volatility of fossil fuel prices, incurring a drilling expense that is known to be higher is easier to tolerate when oil is bouncing around at $100 per barrel rather than $30 per barrel. The influence of higher fossil fuel prices is highlighted in the previously referenced Halliburton white paper on U.S. shale gas:
"Current increasing demand and lagging supply mean high prices for both oil and gas, making exploitation of North American unconventional gas plays suddenly far more lucrative for producers. One of the most important such plays to emerge has been U.S. shale gas.”
Although drilling techniques must adapt to the unique geological characteristics of each play, success in understanding the Woodford shale opportunity is evidenced by the dramatic increase in the number wells drilled there - American Petro-Hunter (OTCBB: AAPH) CEO Robert McIntosh estimates that there were 1,300 vertical and wells drilled in the Woodford from 2003 - 2010, with Devon Energy (NYSE: Devon) being particularly active.
Citing the success of other exploration and production company's around American Petro-Hunter's properties in Payne County, Oklahoma, CEO McIntosh recently noted that the Company's plans for the balance of 2011 call primarily for the development of horizontal wells. Although AAPH recently commenced operations on a vertical well due to the location's unique characteristics, the Company has noted that horizontal wells in the region have produced upwards of 500 barrels per day, some 2 - 3 times the potential estimated for the vertical well, which is scheduled to be the last vertical test planned by AAPH.
The evolution of horizontal drilling and hydraulic fracturing technology, coupled with higher energy prices has created a domestic exploration and production opportunity that is large enough to meet U.S. energy demand for decades to come. With the success exploitation of the Barnett Shale, attention is moving towards similar opportunity in the Woodford Shale and elsewhere. For those interested in investing in U.S. domestic oil and gas and in the opportunity created by technical evolution and rising energy prices, industry giants like Halliburton and Devon Energy may be of interest, and there also may be opportunity in junior exploration and production companies like American Petro-Hunter, which is working to realize the potential in the Woodford Shale and elsewhere in the U.S.
Patrick Murphy Bio:
Patrick J. Murphy is the owner of Murphy Analytics LLC, a provider of sponsored research coverage on smallcap stocks. Mr. Murphy has over 15 years of capital markets experience providing institutional investment and transaction analysis across a range of asset classes including microcap equities, commercial real estate debt and equity, municipal derivatives and public finance, venture capital, fixed income, CMBS and mortgage REIT's. In addition to his work with Murphy Analytics, Mr. Murphy also serves as a consultant to a municipal derivatives advisory firm. Mr. Murphy is an alumnus of the University of Notre Dame (1991), with an undergraduate degree in Economics, and earned a Masters Degree in Finance from St. Louis University in 1997. Mr. Murphy is a CFA Charterholder and a member of the CFA Society of St. Louis.
Patrick Murphy Disclaimer:
Readers are advised that the above article is solely for information purposes and should not to be construed as an offer to sell or the solicitation of an offer to buy any security. The views expressed herein are based upon the author's analysis of the issuer's public disclosures, and assumes both their accuracy and completeness. The opinions and statements included herein are based on sources (including the companies discussed and public sources) believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. The author has not independently verified the information contained herein. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. You should review a complete information package on all companies, which should include, but not be limited to, the Company's annual report, quarterly reports, press releases and all regulatory filings. The foregoing discussion contains statements which are based on current expectations, estimates and projections, and differences from such expectations, estimates and projections can be expected.
The author, Patrick Murphy, was compensated $350 for writing this article by Mr. Murphy does not own shares of any of the companies mentioned in this article. Mr. Murphy expects his research firm, Murphy Analytics, to be engaged for the provision of a research report on AAPH in March 2011.
More info: American Petro-Hunter, Inc. (OTCBB: AAPH)
The Company is a goal-oriented exploration and production (E&P) Company aiming to become an intermediate level oil and gas producer within 12 months. The Company is in production at the Poston Project in Trego County Kansas with new drilling activity and production underway at the North Oklahoma Oil Project. With the achievable target of becoming a 1000 BOE producer as our goal, American Petro-Hunter is actively on the hunt for domestic petroleum assets.
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