More and more oil found in Texas - we have not even begun to produce the Cline oil found and now add 20bil bbls more in the Permian basin wolfcamp shale- could be epic, as if the Permian Basin has not been epic already
On the Cline the best procedures for production have not arrived and low oil stopped this exploration all together but I think we see oil back up in 2017 -good for everyone
Tim Worstall ,
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There is much excitement at the USGS announcement of their discovery of vast shale oil resources in the Wolfcamp area of the Midland Basin in Texas. At 20 billion barrels it’s said to be the largest continuous field ever discovered. It most certainly has a value and we are all of us richer as a result of the discovery of this most useful material. However, this isn’t worth $900 billion, that’s just not how resource economics works. But that is the insistence at The Guardian:
A huge deposit of untapped oil, possibly the largest ever discovered in the US, has been identified by the US Geological Survey (USGS) in west Texas.
The USGS estimated that 20bn barrels of oil was contained within layers of shale in the Permian Basin, a vast geological formation that stretches across western Texas and an area of New Mexico. The discovery is three times larger than the Bakken oilfields of North Dakota and is worth around $900bn.
The enormous deposit, in the Midland Basin Wolfcamp shale area that includes the cities of Lubbock and Midland in Texas, is the largest continuous oilfield ever discovered by the USGS. The area also includes 16tn cubic feet of natural gas and 1.6bn barrel of natural gas liquids.
Everything except that valuation there is just fine. But that valuation is horribly wrong. Because what they’ve done is just look at the market price of oil, multiply by the volume and say that’s the worth of it, the value.
Except there are certain costs associated with getting that oil up out of the ground. Thus the value of an oil, or indeed any mineral, deposit in situ, in the ground, is very different from the value once extracted, processed and ready for use. Just because all of those things, extraction, processing, making ready for use, cost money. So much so that the actual net value of this deposit could be anything from $899 billion to nothing, possibly even negative.
As a scientific publication points out, no one has actually done this testing as yet:
Undiscovered resources are those that are estimated to exist based on geologic knowledge and theory, while technically recoverable resources are those that can be produced using currently available technology and industry practices. Whether or not it is profitable to produce these resources has not been evaluated.
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And as USGS itself says:
USGS is the only provider of publicly available estimates of undiscovered technically recoverable oil and gas resources of onshore lands and offshore state waters. The USGS Wolfcamp shale assessment was undertaken as part of a nationwide project assessing domestic petroleum basins using standardized methodology and protocol.
I have actually written an entire, if short, book on this very subject. I used other minerals rather than fossil fuels but the point still stands. A deposit of something is not an economic asset. It is only once we have worked out whether we can extract that resource, using current technology, and at current prices, and make a profit, that we can call it a mineral reserve (a resource is where we’re pretty sure we can, a reserve is where we’re sure we can). And we can only properly apply a positive valuation to something which is a mineral reserve.
Currently, we could, and in fact probably should, apply a valuation of zero to this deposit. Just to invent some numbers as examples, although they’re not far from the current truth. Say the price of crude oil is $45 a barrel. And the cost of extracting from this shale field is $45 a barrel. Those numbers are actually pretty close to today’s numbers. Well, sure, there’s something that people will pay $900 billion for after we’ve got it out of the ground then. And it will cost us $900 billion to get it out of the ground. The value of the stuff sitting in the ground is thus zero, isn’t it?
Yes, we can get more complex about this, there might be some option value. Someone willing to bet that the oil price will rise, or extraction costs fall.
But we really do have to remember this about mineral and resource valuations. The only thing that matters is the net value here, that’s the value once processed minus the cost of processing. And there are vast, huge, resources out there which have no value whatsoever. It is said, for example, that the North Sea has $5 trillion of gold in it. But it would cost $20 trillion to extract it, which is why we don’t and we use it to grow cod in, not as a gold mine. Net value matters, gross value doesn’t.
