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The Importance of Conventional and Unconventional Oil in Energy Investing

Not all crude is created equal. The most basic division is between conventional and unconventional oil. As you invest in oil companies, you want to know what kind of oil they produce and what the related costs are. Conventional oil costs much less to produce than unconventional, so companies producing conventional oil have a much higher profit margin.

Conventional oil is oil produced using standard drilling techniques. These large pools of oil simply need to be drilled into so the oil can be extracted. This is what typically comes to mind when you think about oil. Jed Clampett’s “Texas tea” was conventional oil. It’s the cheapest and most efficient oil to produce.

For years, the world has relied on the production of conventional oil. But after decades of intense extraction to meet growing demand, finding viable conventional oil reserves is getting harder and harder. In fact, the International Energy Agency has said global production of conventional oil peaked in 2006 at 70 million barrels of oil per day and will plateau around 69 million barrels per day through 2015.

Unconventional oil, by contrast, is any oil produced with nontraditional techniques. Unconventional crude includes the following sources:

  • Oil shales

  • Oil sands

  • Coal-based liquids

  • Biomass-based liquids

  • Natural gas–based liquids

The inclusion of these resources is why you see different numbers when looking at reserves, supply, and demand. Make sure to check whether the numbers you come across are for just crude oil or total oil. These additional resources lumped into the unconventional group are why the world can produce less oil than it consumes. Some of the margin is made up by these other liquids.

As you invest in oil companies, you want to know what kind of oil they produce and what the related costs are. Conventional oil costs much less to produce than unconventional, so companies producing conventional oil have a much higher profit margin.

Saudi Arabia, for example, with its vast reserves of conventional oil, is estimated to have total production costs between $4 and $6 per barrel. Oil shale is estimated to cost between $52 and $113 per barrel to produce. If the current price of oil is lower than a company’s cost of production, there’s no money to be made, and it’s likely not a good investment.

You should be looking for companies that have the highest margin between the price of oil and their production costs.

This table shows various types of oil fields and recovery techniques and their estimated production costs.

Oil Production Costs
Oil Field/Source Estimated Production Costs, in Dollars
Mideast/North Africa $6–$28
Other conventional oil fields $6–$28
CO2 enhanced recovery $30–$80
Deepwater $32–$65
Arctic $32–$100
Heavy oil/bitumen $32–$68
Oil shale $52–$113
Gas to liquids $38–$113
Coal to liquids $60–$113

Because the production of conventional oil has peaked, the world must increasingly rely on more expensive unconventional oil. By 2035, some 30 percent of the world’s supply will be from unconventional sources. This growing dependence on unconventional oil is one of the main drivers behind rising oil prices. Getting oil from hard-to-reach places like oil sands and miles beneath the ocean floor simply costs more.

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