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The World's Best Investment on High Oil PricesBy Matt Badiali, editor, S&A Resource ReportWednesday, October 24, 2007 In 1996, four of the largest oil companies in the world – Amoco, Mobil, Shell, and Texaco – pooled their resources to tackle the greatest challenge in oil exploration of their day: drilling the Perdido Fold Belt.
Perdido's vast potential tantalized the oil companies, but it lay buried in the Gulf of Mexico beneath 7,000 feet of water and 14,000 feet of marine sediment – far deeper than anyone had drilled oil before.
The first wildcat well found oil at Perdido. But it wasn't until March 2001, when drillers tapped a second well in waters 217 miles due south of Galveston, that the area proved to hold the same oil-bearing rocks as those in Louisiana and Texas. In rapid succession, oil companies announced two significant deepwater Gulf discoveries: Chevron disclosed its 400 million-barrel Trident field in 2001, and a year later, Shell, Chevron, and BP unveiled Great White.
Finding these massive oil deposits underneath all that water and sediment wasn't possible until the mid-'90s. Only rapid advancements in computing allowed explorers to image oil through a mile of water and thick salt layers.
And once the oil companies mastered the seismic difficulties and began finding oil, the drilling companies had to follow suit. Drillers had to learn on the fly how to overcome extreme pressures, how to keep the drill hole open in deep-ocean sediments, and how to recover tools lost in a hole more than three miles deep.
In 2006, Transocean's Deepwater Horizon drilled the Kaskida well to 32,500 feet total depth in 5,860 feet of water. The well hit more than 600 feet of "pay" – oil-bearing sands – twice the amount in Chevron's highly publicized Jack well.
Exploration and drilling technologies rocketed ahead to capitalize on these discoveries. (And investors in drill ships have been well rewarded: The world's biggest deepwater drill ship operator, Transocean, has gained more than 200% in the last three years.) But now that the companies have found and drilled oil in deep water, they need to pump it out... And that creates a completely different set of problems.
Before a well can produce oil and gas, it needs to be "completed." This process includes placing a pressure control system, or "Christmas tree," on the wellhead. Then, the well connects to the production platform with piping and control cables. All these tasks require specialized divers and remote-controlled submersibles. Service companies are just ramping up to meet the challenges of deep water... and some are fantastic investments right now.
The soaring oil price (and oil companies' inflating bank accounts) ensures producers will be anxious to tap the deepwater fields – and that there will be plenty of money out there for companies that can help them do it.
The best investments now are service companies ready to meet the growing demand from regions that are just now exploring their deepwater assets – places in West Africa, Mexico, Brazil, and Southeast Asia. So companies with international fleets will fare better than companies that are locked into a single geographic region. It takes a little work to find undervalued stocks that meet these criteria, but the payoff will be well worth the effort.
Good investing,
Matt Badiali
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