Investing In The Future Of Oil: Offshoot Oil Plays

by: Kevin Quon

There is a finite supply of oil on this world. Even as its population appears to awaken to this reality, there appear to be few viable solutions available in addressing the issue of Peak Oil, the period in which oil production begins to decelerate. One of the greatest problems this generation may soon face is the realization that the crisis over a sustainable future energy supply might be more dire than many might anticipate.

The unleashing of globalization two decades ago helped to play a significant role in the accelerating adaptation of oil's usage around the world. Modernization, after all, uses oil in many ways beyond mere transportation fuels. Plastics, chemicals, lubricants, electricity, and heating oils all serve as integrated parts of modern society, and are often derived from petroleum-based roots.

Finding replacements to cover the basic inputs of these modernized necessities requires a long-term expansion into sustainable alternatives. The default mandate for the present therefore has become abundantly clear: find more oil, develop alternative sources, and innovate sustainable renewables. For the investors of today, tapping into the direction the oil industry's evolution may prove to be a lucrative venture into a trend of long-term growth.

The large corporations that lead the oil industry have already begun to make significant steps in expanding the reach of their drilling operations in order to find more sources. As easy-to-access oil is found more abundant in the oceans, oil titans like Exxon (NYSE:XOM) and BP (NYSE:BP) have already made claims upon ocean floor oil fields as oil drilling moves into ever deeper waters. Despite the dangers made apparent by the incident of the Deepwater Horizon in 2010, there is no denying that the future of oil drilling still rests in Davy Jones' Locker where the return on risk remains most profitable. Pure play drilling rig companies with an emphasis on deepwater operations can be found in the names of Transocean (NYSE:RIG), SeaDrill (NYSE:SDRL) and Ocean Rig (NASDAQ:ORIG). Such companies are bound to become more well known as drilling continues to migrate offshore.

The development of alternative sources of hydrocarbons remains a flawed plan in need of major refinement. Natural gas has easily become the alternative of choice given the ease of transition for drillers. It's abundance and cleaner burning attributes also make for an easier sell to the public. Yet in the end, the output is just not oil. Weaker in energy output, natural gas often requires retrofits and compressions in order to be used as a transport fuel. Infrastructure development alone might range in the billions and trillions of dollars in order for natural gas to be utilized in a meaningful way. Nevertheless, natural gas is starting to become a hedging operation for "Big Oil," the large companies that lead the industry. Exxon Mobil's purchase of XTO Energy in 2010 clearly sent a sign that natural gas would be playing a significant role in the future to come. Natural gas developers like Chesapeake Energy (NYSE:CHK) and Devon Energy (NYSE:DVN) serve as some of the most dominant names in production and exploration.

The same could be said about oil sand extraction. While still producing oil, the problem with this processes remains the low return for the high-energy process. Intense environmental destruction also provides negative publicity for companies needing to walk on softer feet these days when it comes to branding. Yet once again the sources remain abundant, and in a world running out of oil, profitability alone should drive the oil industry into exploring these options more intently. Suncor (NYSE:SU) is by far the largest oil sand producer with large access to the abundant Athabasca oil sands of Canada. Canadian Natural (NYSE:CNQ) is another oil sand giant, although its operations are significantly more diverse.

Ultimately, the drive towards innovating the energy solutions of tomorrow has brought Big Oil to the table of renewable resource providers. Varying from solar power to biofuels, the diversity of these technologies will likely mean specialization down the road. Yet many large oil companies know that the future of energy will ultimately start here. Total SA's (NYSE:TOT) expansion into solar power found itself strengthening its ties to Sunpower (NASDAQ:SPWR) - first by acquiring a 60% stake, and then by selling its subsidiary to Sunpower. Europe-based Total SA also proceeded to partner with biofuel maker Amyris (NASDAQ:AMRS) in a partnership that is sure to intensify over time. Chevron also found its way into the biofuel market with its partnership with Solazyme (SZYM), whose algae-based processes give it access into the chemical market as well. The same could be said about Royal Dutch Shell's maneuver into biofuels with Codexis (NASDAQ:CDXS).

As the world continues to develop, the future of oil remains foreseeable at best, but far from defined. Oil exploration is being pushed into the oceans and into the unconventional sands. All the while, the technologies being created to save us are just beginning to ground their roots. Most opportunities remain a decade away at best, and few might ever fully incorporate the chance to be scaled to a realistic level. Nevertheless, this is the future that Big Oil is counting on for their own survival as seen through their own investments. Investors looking to understand the bigger picture, might do well keep a watchful eye on the companies leading the charge down these offshoot oil plays.

Disclosure: I am long SZYM, RIG.