How to Find Oil as Deep as Everest is Tall

Chevron doesn't drop $100 million to drill a well nearly as deep as Everest is tall without knowing exactly where and how deep to go.

When Chevron tapped its Jack No. 2 oil well last year in the Gulf of Mexico, it did so with more than 28,000 feet of water and seabed between the 3 billion-barrel deposit and the rig. It was like the company stacked pipe after pipe up to the cruising altitude of most airlines.

The discovery was a jackpot, to be sure. But it was no stroke of luck.

The key to finding "the next Jack" is seismic data. It should be no surprise that the company with the best data and analysis capabilities has the best chances.

Seismic, in its basic form, is the reflection of sound waves off different rocks in the ground. A sound source makes a big boom. Then, the sound travels into the earth and rebounds up to a receiver. In the old days, geologists used a stick of dynamite as the sound source and an old-fashioned geophone, similar to the equipment that records earthquakes, as the receiver.

Today, the principle remains the same, but the equipment is much more sophisticated...

Major oil companies project modern seismic data in three dimensions in rooms dedicated to the purpose. Teams of geologists and geophysicists can actually walk through a virtual reconstruction of the sediments and point to exactly the place they want to drill.

To interpret these data, geologists need to know two key things: How fast the sound wave travels through the rocks, and how long it took for that sound to go from the source, bounce off the rocks, and return to the receiver.

I've worked with simple, two-dimensional marine seismic images of the East China Sea. Our source, called a sparker, was basically two naked electrodes that shot current into the sea. The electrical charge blasted a hole in the water, and the water rushing back into that gap created the sound we measured. We collected long lines of seismic data by running the ship along a grid pattern.

The challenge with collecting seismic data is that the more variables you add – such as the speed of the boat, how often you shoot the source, how deep the water is, etc. – the harder it is to get clean data.

Gathering good, clean data today requires powerful computers, especially now that 3D and 4D seismic data are moving from cutting edge to mainstream. These files are huge and require fast processors to manipulate them.

Imagine the computing power required to create and manipulate a detailed cube of sediment two miles on a side.

There are few industries in the world that have used advances in computing power as well as the oil industry, and fewer still that can equal the seismic industry.

Up until the 1950s, complicated seismic calculations required lots of slide-rules and man-hours. The thought of replacing those men with a machine was radical. It took a forward-thinking CEO to grasp that idea and implement the strategy. He bought one of the very first IBM computers in 1954 to process his company's seismic data.

That early IBM computer, believe it or not, was an enormous breakthrough technology for his company. It freed up engineers and eliminated mistakes.

The modern computer revolution catapulted this company forward, and this company continues to rely on powerful computers today to catalog mountains of seismic data.

This company leads the oil service industry in innovative technology and early adoption of prospective techniques. It has continued to grow. Last year, it bought one of my recommended oil plays, giving S&A Oil Reportreaders a triple-digit gain.

This company is now a global oil-service juggernaut. 

The new company is the industry leader for seismic acquisition, processing, interpretation, and monitoring. Its technical capacity is unrivaled by any other company in the industry.

Chevron's success with its Jack oil field shows the future of petroleum exploration lies farther and farther (and deeper and deeper) offshore.

That means the world's major oil companies will depend more and more on seismic tools and data will only increase.

As you might imagine, this company has performed well... Its share price leaped over 100% from January 2006 to January 2007. There is no reason why it won't add another 100% from January 2007 to January 2008. 

Out of respect for my paid subscribers, I can't share with you the name of this company (It is the latest recommendation in my S&A Oil Report.)

But as you should be able to see, the future of finding and getting oil is data and analysis. The companies that have the best technologies and people to find and get to the oil – companies like the one I've talked about – will no doubt trade at huge premiums soon.

Good investing,

Matt