Making Sense of America’s Domestic Oil and Gas Industry

Making Sense of America’s Domestic Oil and Gas Industry

Our domestic oil and gas industry is that part of the global energy market where Allied Resource Partners has found investment opportunities to share with investors, and we take a long-term view.  Like you, we follow Wall Street Journal articles reporting how computer-trading and investor uncertainty roil financial markets and oil spot-pricing. But we also know what is actually happening in targeted domestic oil and gas plays. Smart investors know our domestic market is the place to diversity some of their wealth, so we want to provide a useful overview.      

Some Background

The U.S. has been producing oil since the 1859 discovery near Titusville, Pennsylvania. The petroleum industry includes exploration for, production, processing (refining), transportation, and marketing of natural gas and petroleum products.  As of 2018, the U.S. was among the world’s top three producers (Saudi Arabia and Russia the other two), producing over 9 million barrels of oil and natural gas liquids per day. The leading oil-producing areas in the United States in 2018 are Texas, Louisiana, Oklahoma, Kansas, and offshore Gulf of Mexico. North Dakota and California are minor producers.

The oil and gas industry can be broken down into three key areas: Upstream, midstream, and downstream. Allied operates only in conventional (the safest!) upstream drilling and production, but here is a brief summary of each.

  • Upstream – The upstream component is also referred to as the E&P (exploration and exploration). This involves the search for underwater and underground natural gas fields or crude oil fields and the drilling of exploration wells and drilling into established wells to recover oil and gas.
  • Midstream – Midstream entails the transportation, storage and processing of oil and gas. Once resources are recovered, it has to be transported to a refinery, which is often in a completely different geographic region compared to the oil and gas reserves.  Transportation can include anything from tanker ships to pipelines and trucking fleets.
  • Downstream –  Downstream refers to the filtering of the raw materials obtained during the upstream phase. This means refining crude oil and purifying natural gas. The marketing and commercial distribution of these products to consumers and end users in a number of forms including natural gas, diesel oil, petrol, gasoline, lubricants, kerosene, jet fuel, asphalt, heating oil, LPG (liquefied petroleum gas) as well as a number of other types of petrochemicals.

U.S production has been driven by American ingenuity and technology that unlocks more oil at lower lifting costs.  Shale fracking has unleashed a stream of oil and natural gas, helping America approach energy independence.

Natural gas production has climbed nearly 50 percent since 2005. Petroleum and natural gas are the two largest sources of energy in the U.S., together providing 63 percent of the energy consumed (oil provided 35 percent and gas 28 percent). They will continue to provide the lion’s share of our energy needs in the 21st century.  Significant contributions from alternative or renewable energy supplies are still on the horizon. And the good news for America is that domestic oil and gas supplies are the safest, most reliable on the world market.  We cannot depend on Saudia Arabia, Russia, or South America.

Historically, international oil has been synonymous with the Middle East.  Production began in Iran (Persia back then) by the turn of the 20th century. The British were looking for energy sources and found oil there, making Persia their reliable supplier. After World War I, oil was seen as a strategic resource. The European powers competed for the control over areas where it was suspected to exist. The Great Depression put Saudi Arabia and other nations of the Persian Gulf in trouble and motivated the search for water sources in the desert. Not much water was found but oil was, and lots of it. American and European companies acquired concessions to exploit this resource.

After World War II, the American economic boom and the world recovery from the war pushed the demand, increasing exploration and production in the Middle East. Iran started the process of nationalization of oil production in the 1950s, meaning the local government assumed control over oil resources. Eventually, most nations did the same, and foreign companies lost the hegemony and had to adapt to the rules of the different governments. That led to the rise of OPEC.

The Organization of Petroleum Exporting Countries, OPEC, was founded in 1960 by Venezuela, Saudi Arabia, Iran, Iraq and Kuwait. Although the goal was to unify local policies for keeping market shares stable, OPEC began to realize its political and economic power, which led to a decades-long “energy crisis” and unprecedented control by the OPEC consortium. But in spite of our Government’s wavering energy policies, hard work by America’s domestic oil and gas production and service companies finally cracked OPEC.  Its supremacy on oil production and pricing has been broken. Russia and the collective power of our domestic producers now have a say.

The Payoff for Allied and our Investors

Make no mistake; Russia and Saudi Arabia will continue to influence oil pricing and will try to set a level satisfying their economic and political agendas.  The longer-term price trajectory will undoubtedly be upward-sloping, though it will always have peaks and valleys.  And here is how Allied and our investors benefit:

  1. We live under a pricing umbrella meant to be profitable for Russia and Saudi Arabia because they have their own agendas requiring money.
  2. Domestic independent oil and gas companies like Allied employ technologies that lower operating costs. These are sometimes called lifting costs.  We can produce a barrel of oil cheaper than the “big players.”
  3. We are faster, more agile than the big players, and we can make money getting more oil out of proven undeveloped reserves (PUDs) abandoned by the major oil companies. Our risks are consequently lower!

Many smart analysts have studied in great depth the scenario depicted above, as well as other outcomes.  Neither we nor they have an oil and gas crystal ball, but smart money would say our summary makes sense.  And we plan to make dollars and cents for ourselves and our investors.

 The term ‘Middle East’ is not without problems. First, it has colonial connotations, as the phrase first appeared in the mid-nineteenth century as part of the Europe-centred division of the East into the Near, Middle and Far East. Second, there is no consensus on the geographical extent of the Middle East. Some define it as the region between India and Egypt, in which case it has been aptly designated by the United Nations as Western Asia. Other definitions also add North Africa or central Asia.

For the purpose of this article, the term ‘Middle East’ focuses on the oil-rich countries in south-west Asia including Iran, Iraq, Syria, Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab Emirates (UAE), Oman, and Yemen. These ten countries together have an area of 5.1 million square kilometres, or about 3.4% of the Earth’s land surface, but they possess according to BP’s 2012 Statistical Review of World Energy, 48% of world’s known oil reserves and 38% of natural gas reserves.

Oil in the Middle East

When people think about Saudi Arabia, Kuwait and other areas of the Middle East, they often think about oil. The association is a reasonable one, as this region is the largest oil producer and holds enormous reserves.

For decades, the Middle East has been supplying a big part of the oil consumed around the world. Much of the economic development and wealth of these countries is thanks to generous income coming from oil exportation.

Saudi Arabia has led the production for decades. Other nations of the region have also become large producers; Iran, Iraq, Kuwait, the United Arab Emirates and Qatar are some of them. Although Egypt, Libya and Algeria are geographically in North Africa, they are often considered part of the Middle East when it comes to oil.

History of Oil

Oil continues to be an important energy source despite the fact that it’s non-renewable and has negative environmental effects.

The history of oil started in the United States in the mid-19th century. It was initially a product for lighting lamps, but its energetic potential was soon discovered. The United States dominated the early market. When Russia found oil in the Caspian Sea, they soon started to pump it into Europe.

Early Fields in the Middle East

The production in the Middle East began in Iran (Persia back then) by the turn of the 20th century. The British were looking for energy sources and found oil there, making Persia their reliable supplier.

Oil Drill in Saudi Arabia (1948)

After World War I, oil was seen as a strategic resource. The European powers competed for the control over areas where it was suspected to exist. The Great Depression put Saudi Arabia and other nations of the Persian Gulf in trouble and motivated the search for water sources in the desert. Not much water was found but oil was, and lots of it. American and European companies acquired concessions to exploit this resource.

After World War II, the American economic boom and the world recovery from the war pushed the demand, increasing exploration and production in the Middle East.

Nationalization

Iran started the process of nationalization of oil production in the 1950s, meaning the local government assumed control over oil resources. Eventually, most nations did the same, and foreign companies lost the hegemony and had to adapt to the rules of the different governments. However, profits were still high so they carried on, often partnered with newly-established local companies.

Oil Refinery in Asaluyeh, Iran

The OPEC

Venezuela, in South America, was the largest exporter until the 1950s, when Saudi Arabia took the lead.

The Organization of Petroleum Exporting Countries, OPEC, was founded in 1960 by Venezuela, Saudi Arabia, Iran, Iraq and Kuwait. Today, 14 countries are members. The goal was to unify local policies for keeping market shares stable.

For the Middle East, the OPEC was also an opportunity to ally with the experienced South American producer and reduce the dependence on European and North American companies.

The OPEC Countries

The Energy Crisis

Oil was used as a political instrument during the 1970’s, when the OPEC and Middle Eastern nations stopped exporting to the United States, in response to the Israeli attacks on Egypt and Syria. This caused prices to rise and remain high for years, making the oil producers wealthy and providing them with a surplus of money that was often used for transforming poor desert areas into modern nations.

Recent Years

During the last period of high prices between the 2000’s and 2014, the main producers in the Middle East began to invest vast resources in the diversification of their economies. Scientific research, agriculture in the desert, tourism, and renewable energies are just some of the developing areas as these nations prepare themselves for a time when oil will no longer fuel the world.

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