Sean O’Reilly: Welcome to Industry Focus, the podcast that dives into a different sector
of the stock market every day. Today is Thursday, May 26, 2016, so we're talking about energy,
materials and industrials. I'm joined by Motley Fool analyst Taylor Muckerman, and following
through on this week’s lifecycle theme, we're going to be talking about the lifetime
journey of light, sweet crude oil. How's it going Mr. Muckerman?
Taylor Muckerman: It's going well, swimmingly. O’Reilly: Swimmingly?
Muckerman: Swimmingly. O’Reilly: Swimmingly. Since this is lifecycle
week and we're talking about the journey that a barrel of oil goes on from being in the
ground to, we probably won't get all the way to the gas tank--
Muckerman: No, that's for another day. O’Reilly: Another day.
O’Reilly: Shall we start in the beginning with a dinosaur dying, 300 million years ago.
Muckerman: If you were to walk us through the biology and the chemistry side of how
it became oil, sure. O’Reilly: I think it took my last chemistry
class about six ... I would have been in high school, I don't know, 14 years ago. We obviously
won't get in to the chemistry or anything like that. Let's just pretend ... Let's talk
about exploration first. There's oil in the ground, it's there, we don't know how deep
it is, how do companies go about finding it? Muckerman: They have data, the seismology,
the geographic regions are conducive to oil; you can target certain areas of certain countries
that you know are more likely to have it than not. Once you get into it, they're using lasers,
they're using-- O’Reilly: They're using lasers?
Muckerman: ...Discover wells-- O’Reilly: Where do I get one of these?
Muckerman: I don't know, if The Fool's paying you enough to buy one of those lasers, I need
to switch jobs. O’Reilly: Wasn't it that Drake's Well in
Pennsylvania? They drilled there because there was a natural pool of oil hanging out somewhere.
That's how they found oil 130 years ago. Muckerman: That was the lowest of the low
hanging fruit. O’Reilly: You know the thing is still pumping,
by the way. Muckerman: Really?
O’Reilly: Yeah, I went there on a road trip, because me and my friend were huge nerds.
It produces like 12 barrels a year. Muckerman: That's the old decline curve for
you. O’Reilly: How much money do ... Let's pretend
you have X dollars of a capex budget, if you have some examples, great. How much of a capex
budget goes to going out and finding the oil? Muckerman: For a producer, let's just say
look at U.S. exploration and production. Looking at just U.S. spending this year, estimates
of $73 billion will be spent on exploration and drilling. The remainder of that will be
from the production side, so you're looking at $73 billion for just exploration and drilling,
and expectations of $87 billion total. O’Reilly: Big chunk, 80%.
Muckerman: That's a big chunk and exploration being the largest of that, drilling it's expensive
but finding this oil is arguably the hardest and most expensive.
O’Reilly: Yeah, it's the riskiest part. Muckerman: Those totals that I gave you are
both down, the $73 billion for-- O’Reilly: Yeah, way down.
Muckerman: ... Exploration and drilling down 40% from last year, and last year 2015 was
down 37% from 2014. O’Reilly: Jeez.
Muckerman: We're seeing big numbers, $73 billion dollars is a lot of money but it's small pittance
compared what we were spending in 2014, 2013, 2012.
O’Reilly: Got it. Has the cost of exploration through technological advances come down at
all? Muckerman: Somewhat, it depends on where you're
exploring. If you're in a familiar area like Texas--
O’Reilly: I was about to say in the Permian-- Muckerman: ... Saudi Arabia, somewhere where
they're already producing a lot of oil. Not necessarily as bad but if you go offshore,
not only is it expensive but it's risky. You have oil fields, but at the same time it costs
a heck of a lot of money to drill that first discovery well, then you have appraisal wells
to see ... Hey maybe discovery wells find the oil, then appraisal wells determine how
much you're going to produce from that well, and in between those two then you determine
"Hey, we're going to go full bore," and drill to the depths of this well and try and extract
as much as we can. In total really isn't that much, because the average around the world
... Really only extracting about 35% of the oil that they're discovering.
O’Reilly: Oh wow. Muckerman: There's a lot left and ... Because
technology. We just don't have it to extract all that. We're trying to extract more, we've
been getting better at that, but the global average is less than 40% coming out of the
ground. O’Reilly: Yeah and not only that, sometimes
wells are duds. Correctly if I'm wrong but they fail, especially the offshore stuff.
I hear all the time that like "Yeah, we drilled here and there's nothing."
Muckerman: They either find it and it produces, just not as much as they were expecting, or
it's a totally dud. I feel like I hear about that less often now, thanks to companies like
Core Labs that can identify where, how and when to produce this oil.
O’Reilly: The science. Mad science. Muckerman: Yeah, science has really taken
over this industry, it's no longer just brute force.
O’Reilly: Let's just pretend you and I, we'll call it Muckerman & O'Reilly Produces
of Oil and Gas, or something. We go out, we found some oil in the ground. Our exploration
guys are successful. There's 10 million barrels down there, how long are we going to be leasing
a rig? How does the drilling process work? Because that does seem to be the next step
in the life of a barrel of oil. Muckerman: Companies like Halliburton and
Schlumberger, they've reduced the drilling time significantly. We're looking at a few
days now, where we were several weeks, thanks to pad drilling, where they put these drilling
rigs on tracks and they ... Instead of having to totally disassemble it for each individual
well, they leave it on tracks and drive it to the next site and can start immediately.
O’Reilly: When you say tracks, are you talking like reusable railroad tracks?
Muckerman: Some of them use that, some of them are on glorified bulldozer--
O’Reilly: With the treads? Muckerman: Exactly. A lot of them are on a
system where, the track system, where it's straight line, a lot of cubes, these are aligned
in square plots and they drive this thing around.
O’Reilly: Taking a step back, if we had gone out and we're over there in the Permian
Basin in West Texas, and we're like "We just bought this lease, we think there's oil down
there." When we did the test well for the exploration ... Did Halliburton or Schlumberger
give us that rig too, who did that? Do we own our own?
Muckerman: Some of the bigger companies will own their own rigs, it's probably a small
expenditure. O’Reilly: Do companies do that to be more
flexible? They don't want to put up $50 million dollars for this stupid rig, they'd rather
just pay somebody else. Muckerman: They're expensive and like we've
seen, rig use ebbs and flows. You over expose yourself to ... I would imagine only the super
integrated have-- O’Reilly: Have their own.
Muckerman: ... An impactful number of rigs. O’Reilly: So we drilled, does it ... What
does it look like still? You ever see There Will be Blood and--
Muckerman: The donkeys? O’Reilly: ... They drill the well ... No,
not only the donkeys, it explodes up when you strike oil?
Muckerman: No, it's still dirty, there's still the, the workers are still coin roughnecks,
it's still a very labor intensive dirty job. Thanks to technology and regulations that
necessarily don’t want oil spurting out of the ground willy-nilly, and leaking gas.
You still see gas flaring, so you're still going to see the flames at a lot of these
sites, where they're flaring off the gas that is coming out in increments too small to be
monetized, which the government's cracking down on that as well, because it does release
harmful gas in to the atmosphere. With all these wells, people think they just produce
forever, which they don't. Especially in the U.S. these shale wells you're looking at ... In
the Bakken and in particular, 70 to 80% decline rates in that first year.
We're seeing tremendous initial flows, very impressive initial flows, but you have to
keep drilling which is why we got into the mess we're in because companies had to keep
drilling, because these wells, they don't dry up, but 70% lost production in one year
after four years, you're down to 20%, it's not good.
O’Reilly: It's crazy. How ... It's going to depend on the region we're in, maybe throw
out a few scenarios. Our oil company, for this barrel of oil that we're going out to
find, Muckerman & O'Reilly-- Muckerman: I want more than one barrel though.
O’Reilly: You do? Fine. Stick with the theme, man! Throw out a couple of scenarios for Permian
and the Bakken, and maybe offshore if you feel like it, how long before we actually
have to drill again? I know with fracking you can pull the rig back up and go another
direction and all that stuff, but how long-- Muckerman: Yeah, you have the horizontal drilling
and these bits, they basically ... I can only imagine when virtual reality really sets in,
and you are the drill bit just following along. You can drive these ... They're making gradual
directional changes but-- O’Reilly: Over hundreds upon hundreds of
feet-- Muckerman: ... They're not going in straight
lines anymore. O’Reilly: Right. You and I go out, we got
this field in the Permian and we drill, and there's oil coming up, how long do you think
until we have to drill again? Muckerman: You're looking at, globally, if
you stop drilling, these decline rates are going to impact anywhere from 5 to 10% globally.
Probably on the lower end of that, because the bulk of oil produced is mature fields,
conventional oil like Saudi Arabia, the middle east, has very low decline rates compared
to-- O’Reilly: Like 3%, something like that.
Muckerman: ... And that's where the bulk of oil is coming from. Outside of North America
and shale production, you're probably looking at maybe a 5% drop if no one produced for
a year. O’Reilly: If nobody drilled another well.
Muckerman: If no one drilled another well, yeah. Demand is supposedly increasing and--
O’Reilly: Plus 5% is 5%-- Muckerman: Yeah, that's a lot of oil.
O’Reilly: You're producing 94, 95 million barrels today, 5% of that would be 4--
Muckerman: That's a big crunch. You certainly would see prices spike, which is why I don't
think you're going to see a cease drilling ever. There's a lot of these ... What Americans
producers have been doing is drilling the well, they're just not fracking it. They're
doing the expensive part, which is the spudding, the drilling, then they're just sitting on
it waiting for the right time to-- O’Reilly: They're storing it in the ground.
Muckerman: ... The best economical time to go ahead and frack the well, which is the
explosion and the influx of sand and water, or CO2 to then separate those fissures and
allow the oil to free itself. There's a lot right there behind the spigot, they just have
to turn it on. O’Reilly: The next step in our journey as
I understand it, is actual production. We went out, we spent all this money and took
all this risk finding the barrel of oil, or the oil in the ground. We drilled for it,
now we have the production which is the fruits of our labors. How hard is it to keep a shale
well going, because it's probably one of the most interesting things we can touch on? What
about one of those huge fields off the coast? How hard is that to keep going? I found this
one company, name escapes me, acompany that specialize in helicoptering oil employees
to these rigs-- Muckerman: Yeah, there's companies that have
really been hurt as far as their stock prices are concerned. That was a big business and
it probably will be one day, unless something magical happens and we no longer rely on oil
because offshore is the next big thing. There's a lot of oil there to be had, but it's expensive.
The production side is relatively easy compared to the exploration and the drilling side.
The intense pressure is what keeps the oil flowing out. All their doing ... It's one
of the more serious sides of the business, because we've all seen the oil leak in the
Gulf of Mexico. Smaller oil leaks around the country happen from time to time during the
production phase. It's equally as serious if not more serious, but it's relatively easy.
The hard work is done, unless you're going to go back and re-frack these wells, which
is about to be a new thing, where they're going to utilize the same wells, try to access
more than just 35% of the oil underground. Also using enhanced oil recovery techniques
like water flooding-- O’Reilly: Pump some carbon dioxide down there--
Muckerman: Pump some water, pump some carbon dioxide, they'll back fill it.
They'll drill a separate hole where they'll only pump the
water or the CO2 in and that'll enter the well they've already drilled and force that
leftover oil there. Even starting to add microbes into this water to somehow attach to the oil
and they make it more fluid, so it moves itself from the well a little bit easier. There's
a lot of these new techniques that people are trying that are working. The production
side still has some maintenance if you want to extract more than just a typical well will
pump out itself. It's really all just about the pressure, which is what created the oil
in the first place, heat and pressure, now you're releasing that. Relative to the finding
and the drilling, it's the easier part. O’Reilly: You're talking about all these
alternative newer methods, all that. Are there any companies come to mind that are at the
forefront of all of that? Muckerman: Devon Energy as a producer is most
certainly; Schlumberger has been talking about 10,000 or so wells that have been drilled
in the last five years that are eligible for re-fracking they think, not eligible like
somebody signed "Yes, this well can be re-fracked," that would benefit from being re-fracked and
have the right geology that would support it. You're looking at the bigger players in
this picture. Core Labs comes to mind as an assistant, they're not going to go out there
and do the drilling, but they do all the core sampling. If you have a well, maybe isn't
producing like you thought it would, you can go in there and give them a core sample of
the earth, 5, 6,000 feet below the surface and they can analyze that and maybe adjust
the grains of sand that you're using in terms of size or the amount of sand that you're
using, or the type of water, of the type of CO2 or whatever. They can analyze that and
give you the ultimate specific nature of what you can drill with.
It's very confusing. We toured Core Labs a couple years ago, and what they're doing there
is quite outstanding. I can't imagine the business without companies like that. You
look at Exxon, Chevron, you would think that they're doing it in-house, but Core Labs actually
had equipment from those companies that they're like "We give up, we'll pay you to do this,
here's our old equipment." Core Labs went in a retrofitted it to make it operate like
theirs. It's funny, the money that they said that those bigger companies were spending
on this, this equipment to analyze wells and things ... Core Labs had built something better
out of a regular washer and dryer. O’Reilly: Oh my gosh. Unbelievable.
Muckerman: Core Labs is just better at it because they specialize in it, which is why
these companies-- O’Reilly: And guys like that are needed
for more advanced stuff. Muckerman: Absolutely. You would think ... Taking
with them, couple years ago, the way that they're levered to offshore drilling, when
offshore drilling picks up, Core Labs might be a company to look at outside of the drillers
like Ensco or Seadrill or Transocean or whatever. O’Reilly: You keep mentioning offshore here
today, do you actually think a couple of years down the road that's going to be big again?
Muckerman: I don't know how many years but I think it will be big in my opinion. I don't
want to say it is, but in my opinion, yes. That offshore will be a very big part of this
industry. O’Reilly: Cool. That is it for the lifecycle
of a barrel of oil-- Muckerman: The upstream. Upstream lifecycle
of a barrel of oil. Maybe we'll get to the pipelines and the chemical refineries, and--
O’Reilly: Gas stations. Muckerman: Gas stations, and the internal
combustion. O’Reilly: The show will culminate with the
purchase of a hot dog at the gas station. Muckerman: I'll take a taquito.
O’Reilly: Three days old. Thanks, man we'll catch you later.
Muckerman: Appreciate it. O’Reilly: That is it for us folks, if you're
a loyal listener and have questions or comments, we would love to hear from you. Just email
us at industryfocus@fool.com, once again that is industryfocus@fool.com. As always, people
in this program may have interest in the stocks that they talk about, and The Motley Fool
may have formal recommendations for or against those stocks, so don't buy or sell anything
based solely on what you hear on this program. For Taylor Muckerman, I'm Sean O'Reilly,
thanks for listening and Fool on!