Pitfalls And Profits In The Wake Of The BP Spill
August 11, 2010 by John Myers
“I think we should expand domestic exploration. My chances of doing that now are zero because of the oil spill.” Senator Lindsey Graham (R-S.C.)
The climate is changing. I am not talking about the record heat wave in the Northeast but rather the political climate in Washington, D.C., where the Greens are just beginning to capitalize on the Gulf Coast oil spill crisis.
The well that rests below the spot BP’s Deepwater Horizon once stood has spewed out almost 5 million barrels of oil into the Gulf of Mexico. That makes the BP oil spill the biggest ever, surpassing the Ixtoc I rig that gushed 3.3 million barrels into Mexico’s Bay of Campeche in 1979. For the environmentalists, the Gulf crisis is a once in a lifetime opportunity to re-shape Federal policies.
President Barack Obama has used the spill as a call to arms for clean energy. And he has put a freeze on new deepwater drilling; the result of which has nearly halted exploration in the Gulf of Mexico, including shallow water projects.
The Louisiana Department of Natural Resources reports that approved shallow water drilling permits in the Gulf have dropped significantly since the Federal moratorium was instituted. In fact, only four shallow-water permits have been issued since the Obama administration blocked deepwater drilling following the accident four months ago. Just four permits have been granted from May through July and those were for wells less than 500 feet deep. That compares to an average of 14 permits issued per month for the year before the moratorium.
The Obama administration is not going to let a little thing like the courts get in the way of its Green objectives. After a ruling against the six-month moratorium, the Obama administration issued a second ban on July 12 which won’t expire until December.
The oil industry is saying that Obama’s “keen to be Green” policies could eradicate hundreds of thousands of jobs in the Gulf and will start a mass exodus of rigs out of the region.
Louisiana Governor Bobby Jindal has said the drilling ban only adds insult to an area already injured.
“New requirements for shallow-water drilling are causing permitting delays that could lead to significant additional economic impacts on top of those caused by the deepwater drilling moratorium,” Jindal said.
The Governor is worried about Louisiana’s economy, but a more pressing worry for Americans could soon be the price of gasoline. That is because the Gulf of Mexico supplies nearly 30 percent of United States domestic oil and gas production. As wells in the Gulf age and are not replaced, the U.S. will experience an accelerated decline in petroleum production. This is bad news for a nation which has already seen its energy output fall steeply. The U.S. is producing less than 5 million barrels of oil per day, the lowest production levels in 60 years
You may recall the dire warnings from President Jimmy Carter’s sweater clad Oval Office chats. It is worth noting that back then the U.S. was pumping almost twice the amount of oil as is being produced today. That Democratic President fussed that the nation wasn’t producing enough oil.
Decades later and with billions of barrels in reserves spent, President Obama is preoccupied with how to limit U.S. oil and gas exploration. This despite the fact that the U.S. is importing 13 million barrels of oil per day. That is almost 60 percent of U.S. oil consumption and it costs America $300 billion per year. That is just the fixed cost which will only increase as the price of petroleum rises.
Then there are additional costs. The U.S. military spends an estimated $100 billion a year to protect the flow of oil out of the Middle East. With higher crude prices the U.S. could soon be spending half a trillion dollars per year on imported oil. And that doesn’t account for two Middle East wars this past decade which have cost a trillion dollars and counting.
Furthermore, America’s involvement in the Middle East appears to only be deepening despite Obama’s claim to the contrary. While the President has withdrawn more than 90,000 troops from Iraq, he has tripled the U.S. contingent in Afghanistan to almost 100,000 soldiers. Meanwhile more U.S. troops died in Afghanistan last month than any month since the nine-year conflict began.
The move by Obama and Democrats to reduce oil exploration in the United States—offshore or otherwise—will only deepen America’s involvement in Middle East conflicts, and could perhaps lead to a war with Iran. The results of such a foray would destabilize the nation’s energy supplies and send the price of crude oil sharply higher.
With crisis can come opportunities and such is the case with the BP spill. Crude oil prices have moved above the $80 per barrel mark and price momentum is on the upswing. Meanwhile President Obama promises to the Green lobby to restrict drilling will not only hamper domestic petroleum production; it will also deepen America’s involvement in the Middle East. That is a mix that could send crude oil prices above $100 per barrel before the end of this year.
With the exception of BP, I would buy and hold shares in Big Oil. One company that is moving in the right direction and has a lot of leverage to higher oil and gas prices is Talisman Energy Inc. (NYSE: TLM, $17.00).
Talisman is a large upstream oil and gas company headquartered right in here in Calgary, Canada. In fact Talisman is one of Canada’s largest petroleum companies and it is well insulated from the Middle East. The company’s three major operating areas are Canada, the North Sea and Southeast Asia.
Talisman has a market capitalization of just under $18 billion, which makes its shares very liquid. Yet Talisman is better leveraged to rising energy prices than a giant concern like Exxon Mobil Corp (NYSE: XOM, $63.00), which has a market cap of $320 billion.
Talisman was originally part of BP, but in 1992 it became an independent company. Three years ago Talisman’s longtime President and CEO James Buckee retired and John Manzoni, a former BP executive, took over. There is one further connection between the companies. Last month as BP was liquidating assets to pay for the massive Gulf spill, Talisman stepped in and cut a deal, paying C$858 million for a 49 percent stake in BP’s Colombian operations. This purchase is in keeping with Talisman’s strategy of staying out of the Middle East and investing heavily in exploration plays.
And there is more good news: last month Talisman reported a near 10-fold increase in second-quarter profits. And the company expects oil and gas production to grow as much as 10 percent in 2011.
What impresses me most is that last year Talisman replaced 162 percent of its oil and gas production. That makes Talisman is one of the few large oil and gas companies that is growing its reserve base while slashing liabilities. At the end of March the company’s liabilities declined to $1.8 billion, just half what they were the year before.
Talisman’s emphasis on growth through exploration along with the relative safety of its vast reserves of oil and gas makes it an excellent investment. To learn more go to the Talisman’s Web site by clicking here.
Action To Take
Call your stock broker and buy Talisman Energy (NYSE: TLM) at market.
Yours for real wealth and good health,
Myers’ Energy and Gold Report