Drilling Deep for Black Gold

02/18/2008 12:00 am EST

Focus: COMMODITIES

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Strategic Advantage, says the world's largest offshore oil and gas company can go to the bottom of the sea, beyond the boundaries of any government.

Demand for crude is surging and prices continue to flirt with record highs, yet all the easy-to-find reserves of crude oil are gone and mature fields are drying up. Mexico's Cantarell Field is a perfect example of this, as crude production there is declining 15% annually.

So, the search for untapped crude is frantic. And since the politically stable areas of the world have been thoroughly scoured and searched, the unexplored frontiers lie within unfriendly sovereign boundaries like Iran, Nigeria and Russia.

But there is one other location that many oil companies have yet to tap into-the bottom of Earth's oceans. These magnificent oceans are great opportunities for oil exploration, as they are not ruled by despots, theocrats, and armed rebels, but instead by schools of tuna. At least in a manner of speaking.

With the state-owned oil companies dominating the remaining dry-land crude reserves, the competitive realm of the multinationals will thus naturally shift towards offshore and deep water exploration and production.

This situation plays to the strengths of StatoilHydro ASA (NYSE: STO), the world's largest offshore oil and natural gas company. Based in Norway, StatoilHydro was formed last year when Statoil bought Hydro Oil & Gas. The combined entity dominates the Norwegian continental shelf, one of the most productive areas of the North Sea. With over $76 billion in revenues, StatoilHydro is also the largest enterprise in the Nordic region.

STO now has operations in more than 28 nations from Azerbaijan to Venezuela. Still, the Norwegian shelf makes up around 60% of the company's total production. In all, STO's total reserves stand at nearly 1,700 million barrels of crude and 400 billion cubic meters of natural gas.

Since it's been working in the frigid North Sea waters for the last 40 years, StatoilHydro has developed innovative drilling, 3D mapping, and gas-injection technologies that have helped uncover new crude reserves and maximize output from existing fields.

Another initiative for the company is its natural gas business. It is currently developing a liquefied natural gas facility in the Barents Sea called the Snohvit project, which involves extracting and transporting natural gas through a 90-mile pipeline, and then liquefying and shipping the gas to Europe and the United States.

StatoilHydro is also making a big move into the deep water Gulf of Mexico, an especially lucrative area due to its proximity to the United States. The company currently delivers about 600,000 barrels of crude oil, petrol, propane, and butane from this area, and this amount is likely to increase as STO grows its assets there.

Looking forward, I expect STO to remain the leader of the pack. Its accumulated know-how, along with new technologies like under-water oil-water filtering installations that boost production while limiting environmental disturbance, will be in high demand as the race for resources reaches ever-greater depths. Buy STO. (The ADSs closed Friday below $29-Editor.)

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