Editor's Note: To see an updated chart on the depths of oil drilling today, click here...
If you happen to follow the oil market on a day to day basis, you know it can get pretty frustrating. After all, there's only so many times a person can hear about how a U.S. recession will cause oil prices to plummet back to $60 a barrel.
Yet every time we hear that prediction, prices soon rebound.
Those of you expecting OPEC to swoop in and save the day might want to think again. Any relief from OPEC is out of the question. OPEC officials have repeatedly stated they will not be increasing production in March. The cartel looks determined to defend $90 a barrel oil prices, meaning that a production cut is possible. As the Saudi oil minister put it, "Throwing more oil on the market would be destructive for everybody.
So oil prices are high and OPEC isn't raising production, should we really be surprised?
My readers know that cheap oil is a thing of the past. Throughout 2007, big oil companies have finally started to accept this. If you remember the famous email to Shell employees last month, tighter oil markets have become a reality.
Considering that the world's giant oil fields (nine out of the ten largest) have entered into depletion, it's only a matter of time before we start seeing oil prices breaking more records. I'm not talking about the psychological benchmark of $100 a barrel (we've already reached that). Imagine paying twice that amount for a barrel of crude!
Does this mean investors are supposed to throw in the towel?
I wouldn't do that just yet.
Deep Water Oil Drilling
Recently, Shell Europe's VP, Tom Botts, expressed this concern, "There is no more easy oil, and the subsea industry is critical to unlocking more oil to meet world supply."
One thing is for certain, higher oil prices causing a greater interest in deep water drilling. The U.S. Gulf of Mexico is one of the areas experiencing a boom. Production is projected to increase between 22% and 45% in 2008, with the growth being attributed to new fields.
Considering oil prices are over 50% higher compared to last year, producers are able to work on projects that would have been uneconomical when oil was $30 a barrel, and now more offshore drillers are starting to look deeper. Last year, there were more rigs drilling in the ultra deep waters of the Gulf of Mexico than ever before.
Unfortunately, deep water drilling comes with a price...
In 2007, Brazil reported the discovery of a massive offshore oil field. The Tupi discovery boosted Brazil's proven oil reserves more than 50%. But don't let this ultra-deep field's huge numbers fool you-it's going to take a lot of time and money to bring Tupi into production.
In order to extract the oil, producers have to go through 7,000 feet of water, over 10,000 feet of sand and rocks as well as another 6,000 feet of salt.
Nevertheless, Brazil's state-run oil company, Petrobras, is confident that Tupi could be producing one million barrels a day within 15 years. By that time, it might be a case of, "too little, too late."
Investing in Deep Water Drilling
The Tupi field is a perfect example of the kind of difficulties offshore producers face. The fact is that deep water projects can get extremely expensive. The day rate alone for renting a drilling rig during 2007 upwards of $500,000 or more!
For investors, deep water oil drilling has opened the door wide open for oil service companies. Rig companies like Transocean (NYSE: RIG) have been making a killing off the rising demand for offshore drilling equipment.
Until next time,
P.S. Many of my Energy and Capital readers are taking advantage of today's soaring energy prices, and it wouldn't be fair if I didn't give you the same chance to profit off of our newest plays.