June 13, 2012 “Little Oil”

JR is Back!  Like it or not, Larry Hagman’s character JR Ewing, the devious mythical oilman from the  1980s iconic Television show is premiering tonight as “Dallas.”  The TV show remade twenty years later that coined such a question to the world as “Who shot JR?” will make us wonder who is sleeping with who and how money corrupts.  But I wonder why we have such the fascination with oil?

Oil.  First there is “Big Oil,” Exxon-Mobil, Shell, BP….then there is “Foreign oil,” Saudi-Aramco, Statoil, Total, Rusneft….I guess there is “mythical oil,” Ewing Oil, and maybe the Beverly Hillbillies….and then there is me….”Little Oil.” You see among my many things I do, I run a small, very small oil company.

Oil!  There is nothing that more powerful that words like …”there is oil in them there hills.”  On Monday, about 40 miles south of Oklahoma City in the ‘Golden Trend’, on a well named Criner Creek 20-1, we struck oil.  That well looks like a good well and after the enthusiasm wore down, yesterday, old Olaf “JR” Danielson, repeated the claim on a second well in west Texas name Guilliams 8A-1.  We’ve hit oil before and we’ve drilled dry holes before but there is not much more exciting than that initial news of a strike.

Oil.  There is nothing more iconic in America than oil and nothing in my opinion that has leveled wealth in this continent than oil.  Unlike my European friends (no offence); in most cases, land owners (or mineral owners if it was spilt off); own the oil rights and between 12 and 25% of all hydrocarbons in the ground.  Starving people in the 1930s in Oklahoma and Texas had their farms and them saved by the discovery of black gold under their land (some weren’t so bright about it and still starved).  If this happens to you in Poland, you get nothing.  In Iran, you get moved, or killed.  There is no incentive in these countries to actually drill for the stuff since the little guy gets nothing and no reason for a small start up operation to get leases and ‘wildcat’ since you have to negotiate with a country and state owned oil companies.

Oil.  Nothing is more mythologized than oil.  There is a myth out there that “Big Oil” finds most of the oil around.  “Big Oil” is well, big and going out scouting around is not worth their time.  A twenty barrel a day well in Kansas has a lot different meaning to me than Exxon.  Exxon could care less and might even cap such a well.  What happened in North Dakota in the “Bakken” and in the “Woodford” in Oklahoma is that a bunch of little guys “little oil” pooled together and drilled some wells.  They found something, usually while looking for something else.  On Criner Creek we were drilling for a zone called the Oil Creek Sand and we hit it, but above it lies a thick shale zone called the Woodford Shale.  The big boys have been buying up miles and miles of that west of there and exploiting it.  They thought it ended a county away. We got it and it obviously doesn’t.  Now we already knew that, but say you didn’t.  What happens then is little guy finds, big oil buys and then exploits and the process repeats itself.  To exploit the Bakken or the Woodford, you need huge tracts of continguous leases and little guys don’t have those resources, so you sell out.

There was big talk in Sweden last year about drilling oil on the island of Gotland.  There is oil all over that area but, the oil is owned by the state, and there hasn’t been a well dug in 40 years.  Nobody is going to make anything if there is oil in their backyard, hence nobody is drilling to find it.  If the land owners would get something out of the deal there would be incentive to drill it and get it out.  Somebody would first drill a well, then a second and pretty soon, ‘big oil’ would come in and buy up everything as it would look like they could make money on it.  In the process, everyone gets rich, and the Saudis don’t (well not so much).  This is how families like the Richardson-Bass, Hunt, and Murchisons, the families copied for the “Ewings”  that made JR famous, made their fortunes.

Oil.  There is nothing more maligned in the lay press than tax breaks for big oil.  Well that is not entirely true.  Oil companies get to “write off” the costs of drilling a well or at least 70%.  They can also depreciate the equipment, and deplete the value of what they paid for the well.  But this is just the same thing as medical companies, railroads, trucking companies, every business…they all get to depreciate all of their assets, too.  Our politicians are being disingenuous when they say we are giving Billions to oil companies, as it is all write-offs in the code they would get to take anyways.  There is something in the tax code though that favors “little oil.”  You can deplete well in excess of basis but for only producers of less than 1000 barrels a day.  Is that Exoon?  No?  Does that cost us that much, no.  Why is it in the tax code?  Not really sure but ‘little oil’ benefits, that is for sure but not the JRs of the world, so don’t grump to Exxon that they get that.  So if you can deduct something in 2012 that you would have deducted in 2013 or 14, is that really such a big deal?  I kind of hate the rhetoric about giveaways….when nothing really being given.

Oil.  The amount of money that has benefited America about oil is staggering.  EOG Resources (a moderately big oil company) sends out royalty checks to 250,000 people.  Towns all around Oklahoma, Texas, Mississippi, Illinois, Kansas, North Dakota, etc. were built on oil jobs, drilling jobs, etc and still are.  Oil built America, oil caused us to win at least one world war, and oil is the reason we have had the pretty good standard of living we’ve enjoyed since the 1940s.  We all talk about solar, wind, whatever, but those products will never transform or enrich Americans as much as oil did and will, despite what the Sierra Club tells you.

So when you watch JR tonight, think about oil and that every American had the opportunity to be JR or could be the next JR Ewing, even Olaf.

Keep drilling

Olaf “JR” Danielson

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