Offshore Drilling Makes a Quiet Return

Trump has begun making his moves to improve the outlook of both oil and gas… and predictably, his opponents are out in full force.

Today, climate change activists are teaming up with the #ImpeachTrump crowd to bellyache about his latest move: removing many of the regulations on offshore drilling in waters around the U.S.

Now, we’ve stayed away from offshore drilling for a while because, to be blunt, it’s expensive! And with traditional drilling having a hard enough time in today’s energy markets, offshore rigs just weren’t worth our investment attention.

But things changed. Oil’s on its way back up. The U.S. is looking good to be one of the top exporters of both oil and gas within the next few years.

Trump’s executive order, signed on Monday, opens up regions of the Arctic and Pacific Oceans for exploration that had been previously restricted under the Obama administration. And while opponents of Arctic drilling may have a legal leg up on the argument now, certain areas of the Gulf of Mexico might be seeing a new influx of exploration teams very soon.

The Thing About Oil Is…

There’s a lot of oil on the market today — too much for offshore drilling to really be economically feasible.

But that’s the thing: Oil has always been a long-term deal, and offshore drilling is a long-term play, even in the best circumstances.

What we’re looking at now is a bargain on some of the most valuable unconventional resources to date.

Consider this: right now, everyone, and I mean everyone, is looking to make it big in the Permian Basin. And why not? It’s highly productive, and production costs are low to boot.

This onshore shale play is the strongest, most productive source of oil in the U.S. The undeveloped oil plays of Mexico and the exorbitantly expensive oil sands operations of Canada can’t hold a candle to this single shale basin.

And that, dear readers, is where the problem begins…

As more companies buy up land in the space, prime acreage becomes harder and harder to find… and increasingly expensive.

This alone makes offshore operations look a lot more viable.

But there’s one more thing producers are looking for in offshore operations: future supply.

Yes, here we are standing on the brink of another oil glut — though it’s worth keeping in mind that OPEC really can’t afford to let that happen again — and we’re talking about running out?

Well, yes.

There’s this little thing called reserve replacement that producers have to keep in check.

It’s not enough to just be producing at record highs now. That supply will be used up eventually, and if you don’t have another resource to replace it, you’re out of luck.

Now, despite the extra up-front costs of offshore drilling, offshore wells have a much longer lifespan than onshore wells.

A good offshore well can produce pretty consistently for a decade or two. But an onshore well, especially those using updated fracking techniques in shale plays, can reach peak production in a matter of months and can run dry in just a few years.

That means producers in even the most productive plays have to be constantly exploring for the next big well.

Offshore drillers? Not so much…

Taking on Water

Now is the perfect time to be getting back into offshore operations. Onshore operations are getting more expensive by the day, especially in the most productive areas.

Meanwhile, neglected offshore operations are going for rock-bottom prices.

Murphy Oil Corp., a long-time offshore driller, has pulled back from operations in Texas to focus on expanding offshore operations in the Gulf of Mexico, as well as in waters around Malaysia and Vietnam.

“Now’s the time to explore again,” says Murphy CEO Roger Jenkins. He notes that increased operations in the Gulf of Mexico will put his company ahead of the curve in buying up premium offshore acreage while it’s still undervalued.

Getting these operations up and running will take time — but time is something we’ve got plenty of.

Shale oil isn’t going to disappear anytime soon. In fact, it’s putting the U.S. in a unique position as one of the newest swing producers on the market.

Producers stepping back into the offshore space today have the right idea: wells drilled now will almost definitely still be producing when oil finally balances out.

Starting Now

While companies looking into offshore drilling now will be well set for the future, there really is a major advantage to operating in the Permian right now.

It may be getting more expensive to enter the space, but companies already there are making it big even as you read this.

And we’re still just seeing the start of this recovery.

Stay long oil.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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