US Oil Reserves May Soar with Gulf Find

Chevron has announced that it has found oil more than 28,000 below the ocean surface in the Gulf of Mexico. Analysts say the evidence points to oil reserves much greater than previously believed. One report even says US reserves could rise 50% because of this discovery. However, the well is under 7,000 feet of sea water and 20,000 feet of rock. Getting it out won’t be cheap.

The find is on the so-called “Jack Prospect,” the discovery of which Chevron announced two years ago. It’s 270 miles southwest of New Orleans and 175 miles offshore. Chevron operates the Jack Prospect with a 50% stake, Norway’s Statoil holds a quarter and Devon Energy has the other quarter. The Jack No. 2 well is the important one, with 6,000 barrels of crude a day coming out of it during the recent test reported by Chevron.

Of course, there is oil all over the world, at great depths and in all sorts of unlovable locations. The reason so much oil currently produced comes from Arabia is the ease with which the petro-engineers can pump it from under the deserts sands there. Lower costs of production mean higher margins. No business would operate any other way.

It’s all well and good for the US to get a 50% bonus in its oil reserves, and at a very theoretical level it does have some effect on prices (although at current consumption rates, it will last less than three years). However, oil that costs $100 a barrel to pump won’t replace oil that costs $50 let alone $20. Moreover, until a decent profit is possible, there is no incentive at all to get that oil to market. So, the real question is whether Chevron can make enough money at current prices for the Jack No. 2 to be worth working.

Chevron, Statoil and Devon plan to drill an additional appraisal well next year. This will give them greater certainty that their data are accurate. Geologically, this is a very significant step. Economically, oil touched $68 a barrel earlier this week, and the trend line on the charts appears to be down. At some prices, this discovery is merely a nice demonstration of prospecting. It takes high prices to make it worthwhile, and that is what the experts mean when they say there’s plenty of oil, if one is willing to pay for it.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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