So You Want to Drill an Oil Well?

As oil prices skyrocketed on the heels of the Russian invasion of Ukraine, President Biden and his minions sought to deflect any responsibility in the matter.

As their story went, the oil industry was already holding over 9,000 approved drilling permits on Federal land. And that if the oil industry wanted to, they could start tapping some of those wells and take some pressure off the little guy at the pump.

By spinning that narrative, they basically confirmed that they don’t have a clue how the energy industry works.

Having traded the energy markets for about 20 years, I do have a little insight into that. Here’s what the government is not telling you (or just doesn’t understand):

So You Want to Drill an Oil Well?

There’s a massive amount of work that goes into producing gas or oil before a drill bit ever hits the ground. First there’s the process of finding the oil — what’s known as the exploration phase. Companies must do initial evaluations of potential sources of oil performing geological and geophysical surveys. 

This process, on its own, is hugely time consuming… and high risk. Exploration efforts can take up to four or five years and in the event an effort is unsuccessful, it can cost a company anywhere from $5 to $20 million for nothing.

Once you find potential well sites, you have to obtain a lease with the owner of the land where you want to drill. This is another complex step in the process that can run into the millions of dollars. 

Then you have to deal with the government. Every state, as well as the federal government, requires numerous permits before drilling can begin. And it’s not just permits that need to be approved. Rights of way (ROWs) need to be obtained to access the leases — and they can potentially take years to acquire as well. Mineral rights also have to be secured. 

Once a company is done with all that, it can finally start drilling. 

And drilling is no small task. Before you can even bring in your drilling rig, the site has to be excavated, leveled and access roads have to be built. Weeks or months more. Then, and only then, can you set up your actual rig and start drilling. 

A modern drilling project can require contracting upwards of 30 to 40 independent companies working together to complete it. Costs will vary depending on the depth and complexity of the well but they can easily run into the millions just to reach the oil.

After you’ve brought your well online, there are still other risks involved… Not all wells are created equal. Some are blessed with better geologic reserves that result in greater production, i.e. more oil!  

And there is always the risk that oil prices could drop unexpectedly resulting in lower margins or possibly even producing at a loss.

You can’t tweak production when this happens. There’s no “volume control” where wells are concerned. Once a well is drilled and in production, it basically has two settings: on and off. 

And pausing a well is enormously risky as well. It basically requires capping the well. Then eventually re-drilling through the cap to restart the flow. And then there’s no guarantee that the oil flow will resume — capped wells can easily become clogged. 

The Investment (and Risk) are Substantial

President Biden would like to have you believe that all oil company executives do is roll around in piles of cash all day. The truth is a little further from that.

Producing and transporting energy is a risky business with huge associated costs. Something the folks in Washington don’t seem to grasp.

And the bottom line is just developing oil permits is no simple task. They need to be developed (or not) based on the economics of the lease and the favorability of the overall economy.

So you can see how not having a working knowledge about how an industry works should disqualify you from making major decisions within that industry… But that never stopped our government before.

But the other reason energy inflation will be long-term is even more unbelievable. We’ll dive in in your next letter.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily