COMMODITIES

New technology is opening up shale fields, and there is a lot of opportunity waiting for people willing to work hard...and for smart investors, observes John Mauldin in Thoughts from the Frontline.

I have to take you back to Wise County, Texas, about 60 miles west of Fort Worth. A Greek goat herder named Savas Paraskivoupolis (who changed his name to Mitchell) came to Galveston in 1905.

His son George Mitchell worked his way through Texas A&M and got a degree in petroleum engineering. After the war, George teamed up with his brother Johnnie and Merlyn Christie. They drilled their first well in 1952, in what became known as the Boonesville Field in Wise County, near Bridgeport where I grew up.

They went on to drill hundreds of gas wells, but had to shut them down because they had no way to deliver the natural gas they found in abundance. The work was done at serious financial risk, but they just kept drilling and plugging those wells. Finally, a contract for a pipeline was financed by an Illinois utility, and those wells went into production.

What started as Christie, Mitchell, and Mitchell soon became a major employer in my little hometown and a powerful spur to the local economy. The future father-in-law of my childhood best friend was the first permanent North Texas employee, back in the early 1950s, and he was eventually joined by the fathers of many of my friends.

Over the coming years, Mitchell would drill over 10,000 wells, with over 1,000 of them being wildcat or exploratory wells. He is a legend. His story is reminiscent of Walt Disney, who also lived constantly on the edge of crisis in the early days of his business.

In the late 80s and early 90s, Mitchell pioneered a new drilling method called horizontal drilling. It is still hard for me to imagine that there is a small amount of flexibility in what seems like rigid steel pipe. Over hundreds of feet of drilling, they can turn a pipe inch by inch until it describes a 90-degree arc.

Everyone knew there was more gas deeper in the ground, but it was trapped in very tight shale formations. Mitchell and his engineers figured out how to put water under pressure back into the earth to create very minute fractures that allowed the gas and oil to be freed. This is the process known as hydraulic fracturing, or fracking.

In the 90s and especially the last decade, there has once again been an oil and gas boom in Wise County, in what is called the Barnett Shale. Except, the Barnett Shale is a far more massive formation than the original Boonesville field.

Once again, Texas was at the center of US energy production. The new technology opened up vast new reserves that were impossible to get to just a few years ago.

And then it turned out there were potentially even larger shale oil fields scattered throughout the United States-and, as we are learning, seemingly everywhere in the world. The first modern oil wells were drilled in Poland in 1854 at around 100 feet in depth, and now exploratory wells show that 11,000 to 13,000 feet below the surface there is considerably more oil and gas in Poland and the surrounding region.

In contrast to today's deep wells, the legendary Drake Well was drilled in Titusville, Pennsylvania, in 1859, at a depth of 69 feet. And there is evidence of ancient oil drilling using bamboo pipes in China. Marco Polo remarked on bubbling springs of oil in what is now Azerbaijan.

And that brings us to the Bakken shale oil and gas fields. I was invited to speak to the customers of BNC Bank in North Dakota by its president and CEO, Greg Cleveland, last week. He graciously offered to take me on a helicopter tour of the Bakken Field if I would come a day early, which I of course agreed to do.

As a special bonus, he arranged for Loren Kopseng to be our tour guide. Loren didn't drill the first well in the Bakken, but he was there by the time the third well went in, and he now owns a piece of about 20% of all the wells drilled in the region. (There are over 7,000 wells in the region and counting.)

Today the Bakken overshadows the Barnett. Notice in the graph below how rapid the growth has been. More recently, permits were granted for 904 wells in August, September, and October, with October being the record with 370 wells.

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Click to Enlarge

We flew the 50-odd miles from Bismarck to the edge of the Bakken, over the famous Badlands (which I found quietly beautiful) to what Loren called the line of death. On one side of the line, if you drilled you would get a dry hole. On the other side there is an amazing reported 99% success rate. The field stretches from western North Dakota and eastern Montana up into Saskatchewan, Canada.

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