Real Estate Investor Magazine South Africa October 2013 | Page 58

USA

BY SCOTT PICKEN

Black Gold In The US
Take advantage now

B

lack Gold has been found in USA –
how do you take advantage? 1849 saw
the California Gold Rush. The 1880’s
saw the Witwatersrand Gold Rush. Everyone
stormed to these towns in the hope of making
their fortune! And in most cases they failed.
Some capitalised, but most failed and their
dreams turned into devastation. As is well
documented, those who on average, always
succeeded in any gold rush was not the miners,
it was the store owners selling spades!

So what is the lesson and how does
that impact property?
We recently travelled to North Dakota in USA
where they have discovered oil. They believe it
is one of the biggest oil fields in the world and
will be sustainable for over 80 years. It will allow
USA to become self sufficient by 2017 in terms of
their oil use and actually become a net exporter.
Now considering that USA consumes nearly
55% of the world’s oil, with 3% of the world’s
population, this is astounding. Ted Turner, the
founder of CNN, said in his autobiography that
it is ludicrous to spend over $1 trillion a year
paying money to “our enemies” to get their oil!
They have known about the oil fields since the
1950’s but the technology was not advanced
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October 2013 SA Real Estate Investor

enough to extract the oil. In 2008, Continental
Resource CEO, Harold Ham, launched the
horizontal drilling. Now they could go vertical
and then go horizontal. Where they used to drill
10 wells they would be successful only 2 or 3
times. Now they are successful 10 times. As the
technology improves they are discovering more
and more oil and in The Bakken, they believe
there are 18 layers on oil. The average well costs
$12 million to drill, takes 35 people to run and
creates another 100 indirect jobs. There are 5000
active wells in the country and they need 53 000
just to access the first 3 layers and they are only
able to drill 3000 a year.

However it has changed from a
“energy play” to a “real estate play”
Many developers have gone into these towns
and tried to provide housing. There are
10 000 men staying in “Man-camps”, which
are basically temporary housing. Apartment
complexes which are built have 90% occupancy
on a short-term basis and we could not find a
hotel room. Thus developers are trying to service
this demand as quickly as possible. There are
massive barriers to entry as the temperatures
in winter are -50 degrees Celsius and they can’t
build for nearly 6 months, as the frost is 8 feet

deep. On top of this cost to build is really high
due to the cost of transportation to get the
materials there and also the labour costs. We
looked a solid returns from 15% net yields to
46% net yields and they looked very attractive,
but we had our concerns and believed there were
3 major risks.
1. Sustainability of Oil. Whether the oil price
will go down?
a. Based on where the world is going, even what
is happening in Syria, we do not believe that
the oil price will drop dramatically and to be
honest it can drop substantially and fracking
would still be viable.
2. Whether fracking will be allowed to continue?
a. North Dakota is pro business and pro oil.
They provide an environmental certificate
in less than a month to setup a well. They have
publicly stated they will not be dictated to by
Federal government and most importantly the
whole state relies on fracking (many of the state
are property owners and earn 25% of all profits
on the wells on their land due to their mineral
rights).
3. Whether the property market is sustainable.
a. In any boom, one has to be careful of the cycle
and an oversupply. There are many inexperienced
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