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Deep Water Oil Well Drilling

The Next Generation of Conventional Oil

Written by Keith Kohl
Posted December 13, 2007 at 8:42PM

Editor's Note: To see how deep we now drill for oil, click here...


If there's one thing I wanted to hammer into the minds of my readers, it's that the oil markets are extremely tight. Not only are they tight right now, but oil supplies are going to keep getting tighter. In fact, I've been saying this over and over throughout the year.

On Tuesday, the Energy Information Administration (EIA) released their short-term energy outlook. I kept shaking my head while reading it. The report was predicting that oil prices would fall to around $86 per barrel by the end of winter. Word from the trading pit is that oil prices will push over $100 a barrel soon. Breaking through that benchmark price wouldn't surprise me.

But it's not this winter I'm worried about.

Let's say that oil drops (however unlikely) to $80 a barrel this winter. If we see the same jump in 2008 that we did this year, that would result in a $40-$50 rise in prices between January and July-the peak of the driving season. We're talking about oil costing $120-$130 a barrel by July, 2008.

And that's assuming, of course, that oil prices retreat to $80 a barrel.

That could have serious repurcussions at the pumps. Trust me, gas costing $5 a gallon will be a reality in 2008. I'd like to extend my sympathies for my UK readers, they've already shared enough horror stories from the pump to make me feel blessed with $3 a gallon.

After OPEC's refusal to increase output last week, it looks like we'll have to wait until February for another chance. The first question that comes to mind is, "Didn't they already raise output in November?" Unfortunately, the lag in shipping oil means that their November increase wouldn't have an effect until late December.

So why are we more worried about oil supplies more than other volatility factors?

Well, one reason is that the world's oil demand is growing at a much faster rate than the oil supply. The problem is that we can't expect OPEC to increase production. The cartel has their hands full. For example, producing countries are struggling to make up for the loss of production from field depletion.

But I don't want to go off on another doom and gloom tangent. Rather, I wanted to focus on where we're going to go to help offset this supply crisis.

Most of my readers don't ready my column for their health. On occasion it might be for enjoyment or even just to argue and point out any errors (sometimes it's both). Judging from the countless emails I get on a daily basis, the majority of my readers are looking for a place to invest their hard earned money. To that end, let's get into deep water oil drilling.

Offshore Profits in Deep Water Oil Wells

Last month, I briefly went into the boom happening in offshore oil drilling. At that time, I told you to keep an eye out for producers in the Gulf of Mexico, Africa and Brazil. Those three areas make up almost 50% of offshore spending.

In November, Brazil struck black gold off its shores at the Tupi field. The Tupi field could hold between five and eight billion barrels of oil equivalent (BOE). In terms of size, think about this: That discovery accounts for about 40% of all the oil ever found in Brazil.

I imagine they're quite pleased. The problem now facing Petrobras (Brazil's government-run oil company) is developing the resource. If Petrobras is going to have to save up for developing the Tupi field, that'll open up new opportunities in other offshore leases.

Investors looking to get into offshore plays have several options. Many offshore oil drillers have had some tremendous success so far in 2007, no doubt aided by the record oil prices.

Personally, I like the success that contract drillers have had this year. Offshore drilling rig day rates have been hitting record highs all year, and I don't see demand weakening in 2008:

rig day rate index

We've all seen Transocean's performance this year, but they aren't the only offshore driller making some serious gains in this industry...

Take a look at how Noble Corp. (NE) has been climbing in 2007:

Noble Corp. chart

The fact is that there are numerous plays in the offshore industry right now, and I always suggest investors do their homework before putting any money into any company. In the end, it comes down to your own decisions, so choose wisely.

Until next time,

keith kohl

Keith Kohl


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