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Frequently Asked Questions About Oil 101
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| How
was crude oil formed? Is it really the remains of dinosaurs? |
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| What
are hydrocarbons and why is it important that crude oil contains
them? |
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| How
can one substance—crude oil—produce so many different
products? |
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| Hasn't
high technology made it a lot easier to find oil than in years
past? |
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| What
are the chances of hitting a major gusher like the ones I remember
seeing in movies as a kid? |
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| What
is the difference between what you do and wildcatting? |
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| Is
the world running out of oil? |
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Many of your articles focus on the price of oil and the effects of peak oil, yet most of your projects are natural gas-related. What is the relationship between the two, because on some days when oil is up, gas is down, and vice-versa. |
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How
was crude oil formed? Is it really the remains of dinosaurs?
To a degree. Yes, dinosaur remains formed some of the organic material
that eventually became crude oil. But plankton and other ancient sea creatures
contributed far more to our oil stock. When tiny plants and animals (especially
plankton) died in ancient waters between 10 million and 600 million years
ago, they naturally sank to the bottom of the sea. Crude oil, as a fossil
fuel, is a product of decayed plants and animals that had been living in
ancient seas millions of years ago. If you’ve found crude oil, you’ve
found what was once an ancient sea bed. Some dinosaurs were sea creatures,
but they do not account for most of the oil underground today. |
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What
are hydrocarbons and why is it important that crude oil contains
them?
Crude oils are valuable for no other reason than that they contain hydrocarbons.
It is the hydrocarbon element in crude oil which gives it its energy-bearing
properties. Hydrocarbons derive their name from the simple fact that they
contain both hydrogen and carbon; it is the hydrogen in hydrocarbons which
we use for energy, and the carbon is generally emitted as waste. |
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How
can one substance—crude oil—produce so many different
products?
Crude oil contains hundreds of different types of hydrocarbon “chains,” and
the refining process is what separates those chemical chains out to make
the many different petroleum products we use every day. Each different
chemical chain length creates a different petroleum by-product. The different
hydrocarbon chemical chains are separated out by distillation, wherein
crude is heated, and the various chains are derived by their vaporization
temperatures. Some of the best-known petroleum products are:
• Petroleum gas -- heating and cooking fuels like methane, butane and propane
• Kerosene -- fuel for jet engines, tractors and some heaters
• Naphtha or Ligroin -- intermediate compounds used to produce gasoline
• Gas oil or diesel distillate -- diesel fuel and heating oil
• Lubricating oil - used for motor oil, grease, other lubricants
• Residuals - coke, asphalt, tar, waxes |
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Hasn't high technology made it a lot easier to find oil than in years past?
Yes and no. Technology like 3-D seismic imagery has assisted some projects
in some areas of the country where geologic formations are compatible with
that method (Texas and Oklahoma, for example). In other oil-rich areas
of North America, like the Appalachian Basin, 3-D seismic doesn’t
work well at all. But the bottom-line fact is that regardless of location,
there is no silver bullet solution which allows exploration teams to know
with certainty where oil is hiding. There is no escaping the fact that
oil exploration is still a highly speculative activity, and success is
dependant to a significant degree upon knowledge of local rock formations
and the presence of proven wells nearby. |
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What
are the chances of hitting a major gusher like the ones I remember
seeing in movies as a kid?
While it’s still possible, realistically, it’s not nearly as
likely as in the past. That kind of geyser-like oil strike was largely
the result of a combination of immense pressure and huge quantities of
oil extant at that time. In many areas of the country, (especially Texas
and Oklahoma) a great deal of belowground pressure has been released by
extensive drilling over the past century or so. There’s still plenty
of oil in North America, but more often than not, when you find it, that
oil needs to be coaxed out by acid fracture treatments and other methods
which direct the oil which is seeping out of the limestone or sandstone
toward your well. This requires more work and money, but the long-term
rewards can still be significant. At today’s prices, even a modest
50-barrel-a-day producer can return a manifold return over a period of
years. |
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What
is the difference between what you do and wildcatting?
The wildcatter legend is rich in American lore, and like all legends, there
is much that is accurate and much that has been embellished. The truth
is, there aren’t a lot of wildcatters operating anymore. Wildcatters
were men who poked holes in the ground pretty much anywhere they could
gain permission (and sometimes without permission), and there was little
regard for geologic facts or research. Some got incredibly lucky. But then
some folks get incredibly lucky playing roulette in Las Vegas. Most investors
find the slim odds of wildcatting unacceptable today. The fact is, in the
oil discovery game, Mammoth Resource Partners and nearly everyone else
operates within the broad middle ground between the dumb luck of wildcatting
and the silver bullet of technological certainty. Almost all oil discovery
today, from the multi-billion-dollar offshore platforms in the Gulf of
Mexico on down, is dependant largely upon educated guesses based upon geologic
mapping, combined with local experience. With our greater knowledge and
experience, there is no reason for indiscriminate drilling today. |
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Is
the world running out of oil?
Yes. That’s inevitable, given the fact that oil is an inherently
finite resource. There is no dispute about this fact among informed participants
in the energy industry. The question is, how much oil is left and how long
will it last? And, how long will oil remain a viable investment opportunity
for individuals? At Mammoth Resource Partners, we contend that we are entering
the Golden Age of Oil Exploration. Not because oil is more plentiful or
easier to find, but because major developments in the global economy, the
advent of global terrorism and the Peak Oil phenomenon itself are all conspiring
to drive oil prices higher; we can see no reason why these long-term developments
would disappear any time in the foreseeable future. Our confidence in the
future of oil and gas exploration is not based upon the quantity of oil
available, but in its growing value—i.e. price—today and
in the years ahead. For the next two to three decades, there is every
reason to believe that each barrel discovered will carry the potential
to yield ever-greater returns precisely because of its growing scarcity
amid record high demand. |
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Many of your articles focus on the price of oil and the effects of peak oil, yet most of your projects are natural gas-related. What is the relationship between the two, because on some days when oil is up, gas is down, and vice-versa.
While it is true that oil and gas prices do not always track each other on a day-to-day basis, over the long term, they tend to trend together. Over the past year, oil futures were up 385% while natural gas futures were up over 300%. So, both markets have appreciated considerably long-term.
Since direct gas investments (as opposed, say, to futures speculation) are a long-term play, our focus with regard to peak energy is long-term as well. Natural gas plays are known to deliver returns for years, if not decades, to come, and the long-term price trend in gas is clearly higher.
The reasons behind the continuing strength in the gas market due is in part to the ever-increasing amount of natural gas which is being consumed for electrical generation. Reportedly, more than 25% of the electricity generated in the U.S. is now fired by natural gas, and that number is rising every year.
We expect this trend to continue as few new nuclear power plants are being planned in the U.S. and gas remains the cleanest burning fossil fuel alternative.
One final thing to keep in mind: Middle Eastern terrorists have clearly stated their desire to attack oil installations in their homeland in order to hurt Western commerce. Natural gas produced in North America bears less risk of attack. This has given rise to a “terror premium” in the crude oil market which explains much, if not all, of the extra 85% advance in the price of oil vs. gas over the last decade. |
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