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An Oil Deposit to Die For

By Matt Badiali, editor, S&A Resource Report
Tuesday, December 12, 2006

Colonel Edwin Drake might have had a heart attack today if he heard about Jack.

About 150 years ago, in the hills of northwestern Pennsylvania, Drake was the man who struck America's first oil well. The drill depth for the well that helped launched the hydrocarbon age? 69 feet.

That's why Drake would be shocked stiff if he were alive to hear about Chevron's record-setting deepwater oil field in the Gulf of Mexico, creatively named “Jack.”

Sitting 175 miles off the coast of Louisiana, Jack is a giant oil deposit under 7,000 feet of water. The well was completed to a total depth of 28,175 feet. To put that in perspective, Mount Everest is 29,035 feet tall.

That is an incredible feat of engineering. Heck, just turning 28,000 feet of drilling pipe is impressive. Actually hitting a target at a specific depth and location, that's incredible. Science is a wonderful thing.

I take two things away from Chevron’s discovery.

One, the Jack deposit - just like the tar sand deposits in Canada and Venezuela - is proof that science and new technology are going to bail us out of the Peak Oil “problem.”

When I was studying how oil basins are formed, our understanding of the distribution of source and reservoir rocks led us to dismiss deep-sea sediments. We were taught that reservoir sands couldn't get carried out that far. A mere decade ago, Jack was technically impossible. In fact, I’m not sure that five years ago we could even imagine an oil deposit such as Jack.

We now know that hypothesis was incorrect.

Technological advances will provide the answer to the end of cheap oil, whether it’s how to recover more oil from old fields, how to find oil in inhospitable places, or how to efficiently process tar sands into light sweet crude.

Two, this discovery opens up thousands of square miles of potential acreage all over the world. It also indicates that investments related to deepwater drilling have long-term appeal.

For instance, the products used to drill in the world’s deepest waters requires uniquely rugged steel. The equipment must resist corrosion and be extremely light and super strong. Tapping and producing oil deposits that are 30,000 feet beneath the sea takes special tools and equipment made out of post-Space Age materials.

My favorite idea in this sector - and the October recommendation of my S&A Oil Report - is a pure play on the demand for the unusual alloys used in deepwater drilling. Other ideas you can check out on this theme include Tenaris (steel), Transocean (drilling ships), and Jack’s discoverer, Chevron (diversified oil).

Let Jack be a lesson to all of us. There are huge amounts of oil to be found in deepwater deposits, and we have the know-how to tap them. Opportunity abounds.

Good investing,

Matt





Market Notes


RESOURCE SHORTAGES AND THE BATTLE FOR PHELPS DODGE

The battle for copper giant Phelps Dodge is heating up…

In one corner is SAC Capital, one of the world’s most powerful hedge funds. In the other corner sits miner Freeport McMoRan and its bankers. Freeport wants to takeover Phelps Dodge for approximately $125 a share. SAC owns 5% of Phelps. It claims the shares are worth at least $150.

Whatever the outcome, the Phelps Dodge battle is the result of mining’s biggest problem: Shortage.

Shortages are plaguing nearly every aspect of raw material production right now: Truck tires, skilled workers, heavy equipment, large discoveries of new reserves. Resource companies are short everything.

And here’s where Economics 101 comes in: When demand is strong and supply is short, prices soar. Phelps Dodge is up 45% in the past two months because the world’s biggest miners are replacing their reserves with stock buyouts instead of drilling in jungles. 


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