Opening offshore for deep drilling

The president's easing stance on oil exploration is a good sign for Transocean.

By Jim J. Jubak Mar 31, 2010 6:53PM

Jim JubakShares of Transocean (RIG) were up more than 3% Wednesday on news that President Barack Obama has proposed permitting exploration in the Atlantic Ocean from Delaware to Florida and in the Gulf of Mexico 125 miles off the west coast of Florida if Congress lifts its moratorium on drilling in the area.


Very little is expected to happen very quickly. An area 50 miles off the coast of Virginia would be opened up for immediate exploration. Further south, areas would be opened for study with a decision on drilling pushed off into 2013.


And all this is just a proposal by the Obama administration anyway. But even if this is all just words now, they're important words.


To permit or not to permit drilling in this area and other offshore locations has been one of the sticking points in any effort to draft a national energy policy. 


This proposal from the administration is an effort to get that legislation moving by throwing the administration's support behind a potential compromise. (At the same time as President Obama proposed allowing drilling in this area, he reversed a Bush administration decision to allow drilling in the Bristol Bay region of Alaska.)


I don't see any reason to change my current target price on Transocean of $105 by November on this news. (It closed above $86 Wednesday.) But the proposal is important in the long-run for the big multinational oil companies -- and the drilling and service companies that they support with their capital spending.


These companies have been increasingly locked out of the world's most promising geologies for oil exploration by governments that favor their national oil companies. (For more on the problems this poses for Western oil companies, see this post).

   

The major international oil companies have plenty of money for exploration and development but relatively few places to put it to use. And while the United States faces a glut of domestically produced natural gas, U.S. oil production continues to fall behind demand and one of our most politically reliable suppliers of foreign oil, Mexico, is facing its own production crisis.


I think you can bet, given that context, that if the U.S. opens these areas to drilling, the oil companies will come. And that would be especially positive for drilling companies such as Transocean that specialize in mid-depth and deep-water drilling.


At the time of this writing, Jim Jubak owned shares of Transocean in his personal portfolio. 

 

Tags: oil
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