Over the next few years, you will come across news of the discovery of one new giant oil field or another. It’s inevitable.
However, too many people make the mistake of believing there is an endless oil supply.
I know these people aren’t thinking that we have an infinite amount of oil underground — thankfully, I haven’t met anyone gullible enough to believe that.
At least not yet.
So you can imagine my intrigue when an extremely optimistic reader touted the idea, as he put it, that the world has “an endless supply of oil.”
And when he casually made this statement, I couldn’t help but prod him for an explanation.
He was under the impression that no matter how far demand jumped, technology would always come up with an answer.
It’s optimism that I simply can’t share.
Can you?
I’m curious as to how many of you would actually put faith in technology’s ability to keep pace with future demand increases.
Granted, demand has yet to recover from last year’s decline. . . but things are looking tighter for the next few years.
The IEA recently revised their forecast for global demand, which they expect to average 84.4 million barrels per day this year and 85.7 million barrels per day next year. If you’re keeping track, that’s nearly a half-million-barrels-per-day increase over previous estimates.
Drilling to the Ends of the Earth
One of the first things I wanted to convey to readers when I arrived in Baltimore a few years back was how far companies have to go to pump today’s precious crude oil. My outlook hasn’t changed in the slightest — even after the economy hit the fan last year.
Let’s take a look at the three most recent oil discoveries that come immediately to mind.
The first is the latest oil field discovery in California. Most of you already know how underwhelming I found the Kern County oil flop. It’s underwhelming in the sense that the 250 million barrels of oil equivalent satisfies a little more than a few weeks of our oil demand.
(And remember. . . that’s assuming some magical wand is waved, allowing Occidental to produce all of it at once. Also, keep in mind that two-thirds of the discovery is natural gas.)
My optimistic reader made a point to mention BP’s discovery at the Tiber prospect. What he didn’t realize was that he was further proving my point in doing so. The three billion barrels of oil was only reached after drilling deeper than any other rig has ever drilled before in the oil and gas industry. Drilling 35,000 ft. is certainly not an easy task. Furthermore, producing oil from that deepwater discovery may not even happen for another five years.
Finally, the third example we have is the latest Petrobras discovery in the Santos Basin. Unfortunately, the Guara deepwater field isn’t the saving grace we’ve been looking for. The nearly two billion barrels of oil in the Guara deepwater field isn’t expected to start production for another three years.
Furthermore, these new oil supplies will come at a steep cost. Companies like Petrobras will have to pump billions of dollars into developing these new offshore fields.
There aren’t many more places for companies to go. In fact, countries are already setting their sights on the Arctic seabed. Can you think of a more dangerous place to drill?
Offshore Drilling Stocks
If nothing else, the lengths at which we’ve had to go for good news have opened a door for investors.
Many of the offshore stocks that were beaten down in 2008 have been on a roll since the second quarter of 2009.
Some of my favorites, including Hercules Offshore (NASDAQ: HERO), Atwood Oceanics (NYSE: ATW), and Noble (NYSE: NE), have been putting up some hard hitting gains in 2009. Take a look:
Even though we’re currently in one of the weaker periods of the year in terms of demand, this is a perfect time to build up a strong position. It’s not a question of if so much as a question of when these offshore drillers make another run.
Although my aforementioned reader may have been a bit too optimistic concerning our future oil supply, he did make a good point regarding the advancements made in drilling.
For example, the use of horizontal drilling has changed the game completely for some burgeoning plays, including the Bakken formation in North Dakota.
Until next time,
Keith Kohl
Check us out on YouTube!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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