Understanding Energy Sector: The history of oil and fracking

2015 is over and my challenge of 2015 was to acquire knowledge outside the software industry. In my opinion the energy sector is the most important sector of all, so I want to understand more of it. Without oil, no warm houses, no fertilizer (= less food), no transport, no travel (beyond a couple of miles). I felt like Alice in Wonderland going deep the rabbit hole and I want to share some of my insights.

Grand Canyon
First I studied oil history, than fracking oil industry, than the coal industry. Fracking is a very interesting topic by itself. 10 years ago nobody though the US will ever produce > 10M barrels a day - now it does. This is a huge game changer economically and geopolitically. The political debate in Europe to allow fracking made me very interested. Is there an hidden opportunity? Therefore I wanted to understand this (1) fracking revolution as well as (2) its impact on doing business. After the crash of the oil price in August I did research into the market structure of oil.

After oil the second most important fuel is coal. Its used primarily for electricity and steel production. As developing and emerging economies industrialize, they need more electricity and steel to build up infrastructure. Betting on coal is a bet on developing countries.

Here comes the first part of the series.

History of Oil and Seven Sisters

The oil access was and is controlled by a few. After WW2 the oil access was controlled by the Seven Sisters. The Seven Sisters are the successors oil companies of the WW2, the successors of today's Chevron, Exxon Mobile, BP, Shell and Total. (The east was communist and did not have oil companies.)

Controlling the oil was a major cause for WW2. Before Japan attacked Pearl Harbour, the US sanctioned Japan by prohibiting oil exports to Japan. Therefore Japan's empire had to expand into oil / resource rich region like Dutch East Indies just to keep its empire running. Dutch East Indies lies on today's Indonesia. This move would have caused one way or another to a war with the USA, so Japan did the first strike. Dutch East Indies oil exploitation was operated by the successor of Royal Dutch Shell.

On the other side of the globe Hitler's main reason of invasion of Soviet Russia was to get access to oil rich Caucasus - and therefore energy independence from the Communists. Caucasus is a land piece between today's Ukrain-Russia and Russia-Georgia border on Russian territory. Hitler's attempt was not successful.

Its no coincidence that Germany and Japan do not have their own "Sister" big oil company. After loosing WW2 the allies prevented them to secure their access to oil, so that any potential military threat can be countered by cutting their oil supply lines. Without oil no tank drives - no fighter plane flies.

In reverse, the major strategy of global powers is to secure oil access, so that they can use it as a weapon in economic and military conflicts as well as establishing economically and political independence.

History does not repeat, but it does rime

Looking at today's conflicts, we see the US-China Conflict in the South China Sea (neighbours former Dutch East Indies) and growing tensions between Sunni extremists and secular Indonesian government.

Today's conflicts in the Caucasus region on Russian territory is between Russia-Georgia (2008) and Chechen Wars (Islamists-Russia) (1999, 2009) might have the same underlying reason of securing oil access. Also the Russia-Ukraine conflict (2014) neighbours the Caucasus.

After WW2

As western oil resources depleted their traditional oil fields while large oil reserves were discovered in the middle east, the Seven Sisters moved out, supported by their governments, to secure the oil access. Billions upon billions are earned with oil. Oil is extremely important for economic development and military reasons. In my opinion the trouble in the middle east is caused by the oil. Everyone wants to secure their fair and not-so-fair share of the oil pie.

With the emergence of developing nations, new members of the Seven Sisters occurred and other lost their importance. Saudi Aramco (Saudi Arabian-American Oil Company), China National Petroleum Corporation, Gazprom (Russian), National Iranian Oil Company (Former Iranian parts of BP) to name the most important.

Oil shale, shale oil and fracking

Basically all oil was bounded in oil shale. Oil shale is a rock, which contains organic material. These rock formations can be pushed down nearer to earth's hot core.

In the case of conventional oil and gas exploitation as these oil shale formations get cooked by the cores heat and cracked by pressure the hydrocarbons (oil and gas) is released. Through rifts hydrocarbons can escape upwards and flow into sand stone (basically a sponge) which is surrounded by non-permeable stone in bell-like form. If someone drills a whole in the top of the bell, hydrocarbons can escape the bell. As a lot of hydrocarbons can be stored in sandstone a traditional oil and gas well produces as long as the sponge is filled. Think of the Grand Canyon Sandstone stuffed with oil, multiple size the Grand Canyon. The problem is that this special bell formation filled with hydrocarbons is seldom.

The earth has excessive amounts of oil shale but the bounded oil is hard to extract. Fracking is a technology to crack and extract oil and gas from oil shale directly. This oil is called tight oil or shale oil. Fracking uses water, pressure and chemicals to crack and extract the hydrocarbons. It is able to extract hydrocarbons nearby the drilled whole. Everytime this whole is depleted a new whole has to be drilled and fracked. Over 50% of hydrocarbons is extracted within the first year of production, than flow of hydrocarbons decreases rapidly. The big problem of fracking is that fracking requires constant drilling.

Comparing conventional extraction with fracking is a huge mistake. The conventional cost structure is drill a whole and operate the whole over 40 year. While fracking drills constantly new wholes just to substitute depleting wells. Fracking is CapEx expensive and the cost grow exponentially the deeper the whole gets. As long as CapEx can be financed cheaply, through low interest rates and easy credit as well as high oil price, fracking is economical.

In Europe few oil shale formations lie in economically exploitable depth, where as Ukraine has the largest economically exploitable oil shale formations.


Oil and gas investing: https://www.reddit.com/r/SecurityAnalysis/comments/3yr98r/resources_for_oil_and_gas_investing/


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