Plunging oil prices will not have the kind of effect in the U.S. that they have had in Russia

Fracking Investment Opportunities While Oil Prices Are Down

The Energy Report interviews Richard Masterson, a geologist in private practice with more than 40 years of experience.

The Energy Report . Rich, youre a consulting independent geologist. What do you do for your clientele?

Rich Masterson. Basically, I find oil and gas by being a prospector. I originate ideas and come up with new ways of looking at prospects and drilling projects—and use some old-school ways as well. I review scientific data, and may go into the field to make sure the electric logging, coring and sample collection is done in the proper manner. I also perform economic reviews with risk/reward evaluations and make recommendations on how to reduce risk for drilling projects.

Torchlight Energy Resources Inc.s Orogrande offers great potential for reward.

TER. The drop in oil prices has been in the news a lot lately. On Dec. 17, Federal Reserve chief Janet Yellen said plunging oil prices would not have the kind of effect in the U.S. that they have had in Russia, which is experiencing a depressed ruble and economic disruption. In fact, she said the drop would be a net positive for the U.S. economy. Would you agree with that assessment?

RM. I agree, especially with regard to goods and transportation. We have $2/gallon gas out here in Midland, so for individual consumers in the U.S. the price drop is also a positive. We wont be quite as dependent on overseas sources. The U.S. wont be hurt as badly as Russia because were a democratic state, and we dont have all of our eggs in one basket.

That said, I think this very low pricing is going to be rather short-lived. But overall, lower pricing is going to be a common occurrence going forward because we have so many reserves in the ground.

TER. Interestingly, Yellen specifically singled out the service industry as being vulnerable to current low oil prices. Do you agree?

RM. Yes, those companies will be hurt immediately. The service industry has been doing well over the last several years, so if margins are reduced, they can still stay in business through the downturn. The service industry is usually the first to adjust to the changes in pricing, and they must be more competitive because there will be a limited amount of drilling in a downturn. We saw this in 2008–2009, when service companies reacted very quickly to the bust and laid off workers. At that time, the industry had just gotten into a decent working situation, with experienced workers in all the various jobs that go into drilling a well. The price bounced back fairly quickly, and then companies had to train new personnel.

TER. What about the exploration and production (E&P) companies?

RM. E&Ps will take a hit. We see that in all the boom/bust situations, but we also see it with smaller drops in oil and gas prices. Companies with large debt loads are going to be in trouble, obviously. Companies holding acreage with leases with expiration dates will be hurt as well. Its going to be very difficult to allow that acreage to expire without drilling wells, because the acreage values are huge. Smaller companies, especially, are going to be under the gun to hold those very expensive leases. Also, E&Ps with large overheads, which have hired new people or that may have hired people to expand quickly for their acreage positions, are going to have a rougher time.

TER. Will the smaller companies have to go for the low-hanging fruit—the easiest-to-reach fossil fuels? I should also ask if any low-hanging fruit is left.

RM. There is plenty of low-hanging fruit, but its pretty tightly held. These are held-by-production (HBP) leases, as we call them, and are hard to get a hold of.

The U.S. wont be hurt as badly as Russia by the drop in oil prices because were a democratic state, and we dont have all of our eggs in one basket.

But when prices drop enough, companies that have HBP leases may need to let them go. Others will be able to get the service industry to work on some of the shallower low-hanging fruit. They have had to compete with the profit-making service work on big frack (hydraulic fracturing) jobs, but this situation could help small companies because they may be able to get service companies to drill the low-hanging fruit now.

TER. Rich, what is different about the current recession in energy prices compared to past boom/bust cycles?

RM. One thing thats different is that reserves are in the ground now. Weve found them. They are proven. Using the science thats been developed and the data retrieved over the last couple of years, we are perfecting the ability to get these reserves out of the ground more efficiently. The productivity of the wells has quadrupled, and the fracking techniques are still getting better—cheaper and more environmentally friendly. There are billions of barrels of oil out here. If this drop happened a couple of years ago, it would have hammered production activity.