Offshore Oil Drilling

Keith Kohl

Written By Keith Kohl

Posted April 20, 2009

There’s one thing that gives me pause on my way to work. . .

Sitting across the street is a building that has captured my attention each and every morning for the last three years. And no matter what kind of hurry I’m in, I absolutely have to take a moment to stop and admire it.

Built back in the 1940s, it’s a landmark for anyone in the area. You can instantly tell it was made with care. From a distance it looks like a massive castle, turrets and all.

But as you get closer, you can see how well every nook and cranny was delicately carved out with purpose. The detail is simply amazing. And although I find some new aspect to admire whenever I walk by, I’ve never had the opportunity to go inside it. . . until today.

I found myself in a similar situation when I stopped to look at it early this morning. The dark clouds weren’t enough of a warning, and a torrential downpour came down in a heartbeat. I quickly took refuge from the rain at the entrance and came face-to-face with the building’s doorman.

Not wanting to waste an opportunity to ask, finally, whether the interior was just as stunning, I struck up a conversation with him.

Looking back, I wish I hadn’t asked.

According to him, the building has deteriorated quite a bit. The plumbing was a disaster, and there was always something wrong with the pipes. For him, it felt like the walls were crumbling. During the last few years, the price to repair everything has been extremely costly.

No matter what they replace, something else falls apart.

I think some of you will be able to see a striking similarity my building has with our oil industry. . .

It’s not just the oil fields that are aging; let’s not discount the growing number of rigs and miles of pipelines that need to be maintained. Of course, the fact that oil prices have drastically fallen over the last 10 months doesn’t give me much comfort that those expensive ventures can even be afforded.

The times, dear reader, they are a-changing.

Ten Billion Barrels Busted

When the IEA released their 2008 energy report, there were some disturbing facts that came out. One problem, specifically, is how vital a handful of fields are to our global production.

Over a quarter of the world’s oil production came from just 20 giant oilfields. Don’t forget that most of these fields are more than 50 years old and in decline. Overall, a little more than one hundred fields make up half of the world’s total production (the remaining production is made up of approximately 70,000 oilfields).

As production at those super giant fields wanes, we’re going to have to rely more on smaller fields to make up the difference. One would conclude that it’s important to continue developing new areas for exploration.

Apparently that’s not the case.

Last week, a federal court of appeals tossed out the Department of the Interior’s 2007-2012 five-year oil and natural gas leasing plan, citing concern for the environmental impact.

My longtime readers might remember when I talked about the Department of Interior’s lease plan back in 2007. As I recall, they expected their plan to generate $170 billion dollars from developing oil targets off the coasts of Alaska and the Gulf of Mexico.

Well, so much for that plan.

As you probably expected, the decision is being both hailed and condemned.

So let me ask you, "Do you think the move was justified?" Please feel free to let us know how you feel about the situation by leaving a comment below. I don’t expect my readers to pull any punches on the court’s decision.

The Future of Offshore Drilling

What this does mean, however, is that preventing development in these offshore waters will have a detrimental affect on our future production.

Although the effect on longterm prices is still to be determined, I wouldn’t expect it to sway current oil prices. Actual production from these lease areas wouldn’t have been pumped for several years.

There’s another reason I’m not too worried. As I just mentioned, offshore production is playing an increasingly important part in global production. While the giant onshore fields age and decline, we’re going to have to drill further and deeper than ever before—simply to make up lost production.

Like the rest of the oil industry, lower oil prices have had an effect on the offshore drillers. They certainly weren’t spared the volatility. At the height of $147/bbl oil, day-rates for new contracts could reach up to half a million dollars. We can also add fewer available contracts on top of the declining day-rates.

Here’s the thing. . .

Even with the court’s decision to put the kibosh on the DOI’s offshore lease plan, I’m still banking on the offshore drillers to pull through, especially over the next few years.

I’m not suggesting you blindly throw your hard earned money at any company, praying you hit the big one. I could just as easily torch my cash. As I’ve said to my readers before, hopes and dreams don’t pay the bills.

Instead, I would focus my attention on which of those offshore companies have a strong fleet under contract. How much of their drilling fleet is sitting idle? Which ones have a backlog of work?

Don’t think for a second that there’s no money to be made in today’s markets. For example, I know that most of my readers recently banked a solid 30% gain from just one of these beaten down offshore drillers.

More importantly, however, is that they’re a few days away from making another move. It’s not fair to my newer readers if I didn’t offer you the same chance. Maybe it’s time you joined their success.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

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