BP Strikes Black Gold: A Boon for Energy ETFs?

Last week, BP PLC (BP) announced the discovery of a “giant” new oil field about 200 miles off the coast of Louisiana. The oil field is an an area that was once known as the “Dead Sea” in the oil industry, but has since witnessed several discoveries of massive reserves and become one of the most exciting oil exploration regions. Of the Tiber well, a BP spokesman noted, “we believe it’s the deepest well ever drilled by the oil and gas industry.”

The amount of oil that will ultimately be pulled from the Tiber well and other recent discoveries is extremely difficult to predict with any degree of accuracy, given the significant infrastructure requirements that must first be put in place. Each well requires miles of pipeline, floating facilities, and other expensive materials. And the drilling process in incredibly complex given the depths at which the oil is located.

But the oil finds have renewed hope of a thriving oil exploration and production industry in the Gulf of Mexico. According to the U.S. Minerals Management Service, production from this region could approach 1.9 million barrels per day by 2013, compared to just over 1.1 million barrels last year. This amount is really just a drop in the bucket to global supplies, but it could have big impacts on certain sectors.

According to the Wall Street Journal’s Russell Gold, the Gulf of Mexico region is appealing to western oil companies for a number of reasons. First, these companies have been shut out of major discoveries in other parts of the world, such as the Middle East and Russia. And discoveries to which U.S. companies may have access, such as those in Uganda, Kurdistan, and Ghana, pale in comparison to the size of the recent Gulf finds.

Gulf oil fields have the potential to be significantly more profitable for oil companies since taxes to the U.S. are significantly less than the combination of royalties, levies, and other payments that foreign governments typically require of western firms. Earlier this year, western companies flowed into Iraq and Brazil to pursue opportunities offered by these governments to develop the oil industries in these countries. But the Brazilian and Iraqi governments impose various restrictions on western companies, limiting their ability to make a profit in these environments.

In addition to BP, major oil companies including Exxon, Royal Dutch Shell, and Chevron are beginning to turn their attentions towards the Gulf of Mexico, in hopes of finding a way to efficiently extract the massive reserves buried beneath the sea floor.

ETF Plays on the BP Oil Discovery

There are several ETFs that offer investors exposure to the U.S. and global energy sectors. Here’s a look at three funds that could be most significantly impacted by the recent Tiber oil discovery in the Gulf of Mexico.

• iShares Dow Jones U.S. Oil & Gas Exploration and Production Index Fund (IEO): IEO tracks an index comprised of companies engaged in the exploration for and extraction, production, refining, and supply of oil and gas products. Although the stocks held by this ETF have operations worldwide, they derive a significant portion of revenues from offshore U.S. areas.

• iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ): IEZ tracks an index that holds companies that are suppliers of equipment or services to oil fields and offshore platforms, such as drilling, exploration, engineering, logistics, seismic information services, and platform construction. IEZ has gained about 40% to date in 2009.

• Vanguard Energy ETF (VDE): VDE tracks the return of the MSCI U.S. Investable Market Energy Index, and its largest holdings include many of the companies expected to ramp up drilling activities in the Gulf of Mexico in the coming years. Exxon, Chevron, and ConocoPhillips are the three largest holdings of this ETF.

Disclosure: No positions at time of writing.

Comments

[Joseph L. S...:]

Becoming enamored of the dynamics of natural gas, coal, oil, nuclear, solar and wind as a young stockbroker, I have been on the right side of the energy trade for 40 years. But I can tell you that running to embrace broad-based energy ETFs because of one discovery is foolhardy.

When Petrobras announced their elephant find offshore Brazil, the same excitement ensued. It will be the same with BP's elephant at Tiber. Now comes the reality. Environmental regulation costs, pioneering deep drilling costs, defining the field costs, transportation costs, hurricane protection costs, etc.

Make no mistake -- Tiber will add significantly to BP's cash flow. But, like all things in "the business" it will add incrementally. It's a slow steady slog toward success, not a sprint. Buy BP -- and any other energy ETF -- when it is cheap, not when it is in the full flush of a big discovery. Buy when it's cheap, sell when it's dear...

Sep 08 12:14 PM

[Jrbarnes:]

BP's find at 25k feet is hardly likely to be oil. At that depth, the termperature and pressure cook the hydocarbons into natural gas, not oil. BP carefull refer to BOE, or barrels of oil equivalent in their press release. Natural gas in in oversupply, and selling for $3 per mcf or less at the well head. It is hghly unlikely that wells like BP's can be affordably drilled and produced at these natural gas prices.

Sep 08 02:34 PM

[whisperonth...:]

If the automotive industry decides to go with natural gas as a fuel, natural gas will not be in oversupply. I can deal with natural gas.

If BP's find IS oil, it brings to question what other 'finds' there may be on American soil. But of course, they won't want to drill here, will they?


On Sep 08 02:34 PM Jrbarnes wrote:

> BP's find at 25k feet is hardly likely to be oil. At that depth,
> the termperature and pressure cook the hydocarbons into natural gas,
> not oil. BP carefull refer to BOE, or barrels of oil equivalent in
> their press release. Natural gas in in oversupply, and selling for
> $3 per mcf or less at the well head. It is hghly unlikely that wells
> like BP's can be affordably drilled and produced at these natural
> gas prices.

Sep 09 09:50 AM

[Alan von Al...:]

Jr doesn't understand young sands and rapid subsidence.


On Sep 08 02:34 PM Jrbarnes wrote:

> BP's find at 25k feet is hardly likely to be oil. At that depth,
> the termperature and pressure cook the hydocarbons into natural gas,
> not oil. BP carefull refer to BOE, or barrels of oil equivalent in
> their press release. Natural gas in in oversupply, and selling for
> $3 per mcf or less at the well head. It is hghly unlikely that wells
> like BP's can be affordably drilled and produced at these natural
> gas prices.

Sep 13 12:23 PM