Five oil stocks to watch

published 21 August 2009

Today I want to talk about the huge opportunities in "enhanced oil recovery". The idea of squeezing the last drops of oil from the well. It's going to be big business.

Oil is one of the biggest investment stories of right now especially for penny share investors...

There are massive amounts of oil still in existing fields

In response to the question 'what are the most significant opportunities for exploration and production companies in the North Sea?' 61% of respondents to a recent survey replied 'Using enhanced oil recovery techniques to maximise production from existing fields'.

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For sure there will be new oil discoveries in the future, but the focus is increasingly upon the extraction of more oil from existing fields. There is certainly scope to do so. Currently only about 30%-35% of all the oil held by the average reservoir is brought to the surface.

If the oil is light and the surfaces of the reservoir are smooth and clean, as much as 65% can be recovered. But where the oil is thick and sluggish, and the reservoir is rough and fractured, just 10% might be recovered before the well is abandoned.

According to Shell's chief scientist of reservoir engineering, Willem Schulte, enhanced oil recovery (EOR) will lift the proportion of oil recovered from a typical well from one third to one half over the next 20 years. This would mean that EOR would account for the production of up 20m barrels of oil per day (mbpd), equivalent to almost a quarter of the current global output.

How can this be achieved? Oil men talk of three stages of production.

In the primary phase oil rises to the surface under the natural pressure of the reservoir.

The secondary phase involves some intervention to maintain the reservoir's pressure. This is achieved by injecting into the reservoir either water or the gas that has flowed from the well alongside the oil.

But it's the phase beyond this when, according to Shulte, 'we start doing things very differently', that is known as Enhanced Oil Recovery.

In addition to maintaining the pressure within the reservoir, techniques are deployed that change its characteristics. There are three main methods thermal, gas injection and chemical. Thermal methods involve the injection of steam to thin the oil and allow it to flow more freely. The second method is gas injection, which dilutes the oil and loosens it from the host rock, and the third involves the use of chemicals, which work a bit like soap, again loosening the oil and getting it to flow.

These have all proved to be effective, but they also cost money. As with many initiatives in the oil business their deployment depends upon economics and, ultimately, the price at which oil can be sold.

But now there is one reason why the sums look a bit more attractive. One gas that can be injected into an oil reservoir in order to boost the flow is CO2. Pumping CO2 into oil wells kills two birds with one stone. It generates more oil, and protects the environment from CO2's damaging impact.

The technique is not new, but what has changed is the possibility of being paid to deal with all that pesky CO2. Take Houston-based Anadarko's Salt Creek field in the Rocky Mountains as an example

Oil was first found here in the early 1900s and it has so far yielded 655m barrels. But production by conventional means is dwindling, and Anadarko wants to draw at least another 150m barrels of oil by injecting CO2. It has built a 125-mile pipeline to bring CO2 to the field and is pumping 125m cubic feet of it under ground each day, equivalent to eliminating the emissions of more that half a million cars per year.

This promises to be a big growth industry and even in the Middle East, where oil is still plentiful, EOR techniques are being adopted. Kuwait wants to boost its output from 3mbpd to 4mbpd and has invited oil companies to suggest ways of doing so through EOR. In Muscat, Petroleum Development Oman has given the go-ahead for the development of two important fields using steam-based EOR that is expected to boost peak production to three times the current rate.

Five oil stocks to watch

So investors in the oil sector need to have two-pronged attack. As ever, there is money to be made from investing in companies that produce oil in the conventional manner and - especially those that find significant new sources.

But there will also be good investments amongst the many companies working to extract more oil from existing wells. There are plenty of candidates that have their shares quoted in North America Enhanced Oil Resources Inc (CVE: EOR), Cano Petroleum (AMEX: CFW), Encana (TSE: ECA) , and Kinder Morgan, (NYSE: KMP) for example.

Back in the UK market the nearest we come is probably Plexus Holdings (LSE: POS), which makes a uniquely strong well-head grip that permits drilling at greater depths where well pressures can be extremely high. I am on the hunt for more companies in this promising area.

This article was written by Tom Bulford, author of the Red Hot Penny Shares newsletter, and is taken from his free daily email the Penny Sleuth .

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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