It is always good to have a plan.
It's not, however, good to have a bad plan. That was my initial reaction last month when the President gave Congress several steps to reduce gas prices and foreign oil dependence.
What was his plan?
Two of the steps involved the developing oil shales and opening up ANWR. Well, you know how we feel about those two. For starters, both will take decades to develop. I've already cautioned readers about how complicated the Colorado oil shales can get. As far as ANWR production is concerned, let's just chalk it up as a case of too little, too late. Due to a lack of infrastructure and development, production from ANWR wouldn't begin for about a decade.
One of the other recommendations was to open up more of the Outer Continental Shelf (OCS). Drilling in the OCS has been restricted by Congress for over two decades.
Drilling the Outer Continental Shelf
This week, President Bush came out swinging.
On Monday, he lifted the presidential ban on offshore oil drilling.
Unfortunately, the move won't have the effect a few believed it would. Naturally, the act alone does nothing more than pressure Congress to lift its own offshore drilling ban. Don't hold your breath if you're waiting for Congress to do the same.
So what was the reason for the President's action?
Are they expecting oil prices to go down tomorrow because a few billion barrels of oil (which will take years to even start production) was opened up? Perhaps they thought that lifting the ban would begin a long-term strategy for energy independence?
The Energy Information Administration (EIA) doesn't exactly agree with those excuses to open up more of the OCS. For their Annual Energy Outlook 2007, the EIA looked at the impacts of increased access to oil and natural gas resources in the Lower 48 federal Outer Continental Shelf. As you would expect, the EIA concluded that more access to the OCS would have a limited impact on our domestic production. It would take nearly five years before production would begin. Sure, someone could point out the billions of barrels of oil companies could add to their reserves, but what good is oil in the ground if you can only produce a small amount of it at a time?
The Only Way to Invest in Offshore Oil Drilling
Even if the Outer Continental Shelf and ANWR aren't opened up for exploration, offshore production is becoming an increasingly important source for crude oil. As onshore fields decline, producers are pushing farther and deeper than ever before.
Most of my Energy and Capital readers know my position. Personally, I only see one opportunity for investing in offshore oil drilling. Let's say an oil company just hit a bullseye with a massive offshore discovery. That may be a reason for excitement, but even though they're sitting on a huge amount of oil, it could take years before that company extracts one drop of oil.
The reason?
The fact is that the company might not be able to secure a drilling rig to pull their precious oil from the ground. I'm not talking about a tight regional market, but rather a global crunch for available rigs. Furthermore, shipbuilders can't keep up with demand. The cost of a ship can run as high as half a billion dollars.
And while we're talking about costs, contracting a rig can cost upwards of $600,000 per day!
For us, oil rig companies are an attractive long-term investment. Many of the rigs out there are backlogged with contracts. Out of all the rig companies that have come across my path, one in particular has been on a roll lately.
Transocean—Go Long on this Offshore Oil Investment
I've mentioned Transocean Inc. (NYSE: RIG) before as a strong long-term investment. Not only is Transocean one of the largest offshore drilling contractors, but also prove that the scarcity of drilling rigs is a reality. Last week, the company was awarded a contract for its drillship Deepwater Pathfinder worth approximately $1.19 billion. That means the five year contract comes out to more than $652,000 per day. Furthermore, the contract isn't set to begin until March, 2010, because the ship is already under contract.
Today, the company extended another set of contracts (worth $3 billion) with Petrobras. Four of Transocean's rigs will be drilling under the new contracts until 2016.
Look, we know that oil prices are going to remain at record levels. There are just too many variables driving crude higher. In fact, the selling we saw during trading today dropped oil prices to as low as $135.96 per barrel was expected. We need to remember that prices just reached a record $147.27 per barrel merely four days ago. Of course we're going to see people taking a profit.
Regardless of your views on peak oil, the chances of oil prices dropping below $100 a barrel seem impossible. Naturally, higher prices will ensure that companies continue to explore and develop unconventional sources (such as deep water drilling).
Until next time,
Keith Kohl
Here's what it comes down to: Even with the full support of the federal government, the problem is that we won't see production from these new offshore leases for at least a few years. Assuming Congress eventually lifts the ban on ANWR drilling, production there wouldn't be available for nearly a decade. If you're interested in finding where some of these old-fashioned oil booms are taking place right now, feel free to learn more about the $20 Trillion Report here.
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