Dear OGIB Reader,How much oil is there in newly economic shale oil deposits around the world?
We won’t know that for 50 years or more, but it’s not stopping energy companies from publicizing some extremely large prospective resource estimates – like, tens of billions of barrels of oil – with almost no data to back it up, and only one similar play on earth with any operating history.
A prospective resource is an estimate of the amount of oil that might be the recoverable volume of oil in an area.
Investors have certainly made tens of billions of dollars in profits on that one (and only producing) shale oil play – the Bakken in North Dakota/Saskatchewan.
And investors need to understand the risks that goes along with the big numbers they read, says Robin Bertram, Vice President at AJM Petroleum Consultants, one of the Big 4 reservoir engineering companies in Canada.
“They need to know what a lot of the contingencies are in shales and unconventional plays, and not just get excited about big volumes. When we talk about prospective resources we have to point out that even though the numbers look big and promising, you could end up with significantly less than the estimate.”
All that Bakken wealth creation has both the industry and investors very excited about finding huge new shale oil plays around the globe now.
And they are being found.
TAG Oil (TAO-TSXv) has an independent report that says the “best case” resource estimate on their shale oil play in New Zealand could be 12 billion barrels of oil with a “high case” of 37 billion barrels – and that’s only on a fraction of their land. There are three historical drill holes here. Oh, and geologically it looks just like the Bakken, and they plan to drill it this year.
The “best case” is also called “P50,” or oil resources that have a 50% chance of actually being in place.
Toreador Resources (TRGL-NASD) has an independent report that says the Paris Basin in France where it is operating has generated 100 billion barrels of oil, 12 billion of which could be on their property. There are 22 drill holes of consequence here. Oh, and geologically it looks like the Bakken, and they plan to drill it this year.
PetroFrontier (PFC-TSX) has an independent report that says it could have 26.4 billion barrels of oil in its “best case” at the Arthur Creek shale play in Australia. There are 15 historical wells which may show the oil charged shale. Oh, and geologically it looks just like the Bakken, and they plan to drill it this year.
Do you see a theme developing in how companies are promoting their early stage projects?
Analysts are getting in on the big numbers too: one analyst said TAG, then $5, could have a Net Asset Value (NAV) of $224 a share in an “unrisked” valuation, which means if they hit oil on 100% of their wells. Another analyst said PetroFrontier could have an NAV of $168/share “unrisked.”
Most intermediate sized oil producers in this energy bull market trade at 1X NAV or a bit better. None of these analysts expect anything close to 100% success, but it’s a figure that shows the size potential of the play.
All these big numbers – in potential resources and potential stock values – is causing some large speculative premiums to enter these stocks. Toreador was trading as high as 6x its NAV recently; TAG trades at least twice its NAV and PetroFrontier is trading just under 3x its NAV.
Now, I own TAG and Toreador, and I don’t want readers to think I’m being negative – I just want everyone to understand what they’re reading. I WANT to invest in juniors that have an unrisked NAV many times higher than the current stock price. That means if they hit on their exploration, the stock is likely to go A LOT higher.
Independent evaluators like AJM take many data points into calculating prospective resource estimates in the early days of a play – mostly from historical drill hole data and any core, that may be available. There is the obvious estimated length and width, or aerial extent of the formation, and the “pay” thickness – how thick is the formation, and the Total Organic Content, which makes up the oil or gas, and the porosity of the formations – how much room is there between the grains of sand or rock.
All this data and more is given to the evaluator, and they also look at what other geologically similar deposits have produced (in these cases, there is ONLY the Bakken), and how much oil was actually recovered out of these deposits (the Bakken) to come up with an early stage prediction of the resource potential of the shale formation.
“Early in the development of a petroleum reservoir we could expect to see a very broad range of estimates of the volume(s) within the reservoir,” Bertram writes. “Understanding that there is a high level of uncertainty in the early life of a reservoir, it would make sense that companies have large volumes in their resource estimates. But investors need to be equally aware of what the minimum volumes could be, as those volumes are just as possible as the high volumes in the early life of a reservoir.”
Bertram says one of the questions that all evaluators wrestle with is – how far can you extend a discovered resource from a drill hole? While these shale plays have shown themselves to be very consistent over tens of kilometres, they can also be patchy and it’s just a statistical guess that will get more refined each passing year with more data. (Geostaticians in the mining sector do the same thing – how far can you extend the grade of the mineral around a drill hole.)
Remember, the very first shale play was the Barnett in Texas, and that only started producing about 12 years ago. Getting oil and gas out of rock is the single largest and most important advancement in the energy industry since the age of oil began 150 years ago, and it’s still in its infancy.
What’s more, the technology that is liberating all the oil and gas from the shale – hydraulic fracturing, or fracking – is still being improved upon every year. So that creates a moving target for evaluators trying to guess a prospective resource.
Bertram has written a slightly more technical and comprehensive article on some of the factors surrounding this issue and well worth the read. One of my favourite topics was – how do you quantify an “undiscovered resource”. It’s a great read and a quick read and here is the link (I read all AJM’s articles):