While BP (NYSE:BP) has come a long way since the Deepwater Horizon disaster a few years back, it has never quite regained the glory it had before the disaster. Some of this can be attributed to new natural gas entrepreneurs who have been producing so much natural gas that even they cannot turn decent profits on it. This new energy revolution is ushering in a new energy mix, one that has potential to drive many from oil to natural gas, at least in the United States.
The oil giant has certainly not been helping itself out lately as in two days it reported two different outages. First, in Blaine, Washington, BP accidentally sent sulfur dioxide into the refinery's flare, which caused a malfunction, and consequently an outage. Only one day later at a refinery in Texas, it reported another instance of flaring which again caused a shut down. While neither of these two situations was a major malfunction, they both happen during restarts at the respective refineries. Rest assured BP will not let this become a trend.
However, even with the malfunction at its refinery in Blaine, Washington, futures fell once production at this plant came online. With another refinery up and running, there will be more oil on the market, and being that demand is less than expected, this increase was not entirely soaked up. Analysts are consequently expecting the price of oil to drop due to this low demand.
Additionally, gas prices in California have been falling and are said to continue falling with the national average. This is in part due to the increase in production with bringing more refineries on line. Due to the shutdown at refineries such as the one in Blaine, Washington, gas prices have remained high on the West Coast. With maintenance work finished, consumers will be able to save at the pump.
The drop in gas prices might actually be a plus for BP as consumers might be willing to use more gas with a drop in price. Even a moderate drop in gas prices has the potential to increase demand by quite a bit, so a drop in gas prices could actually increase profitability for many oil companies.
As mentioned earlier, the biggest threat to BP and other oil companies is the potential of natural gas. With natural gas prices low, many large trucking companies are considering switching to natural gas, a switch that could save them $1 per gallon. Since natural gas is cleaner and more environmentally friendly than oil, I would expect current government incentives to increase when demand increase, at least at the beginning. Currently natural gas stations are few and far between, so vehicles that could use natural gas are held back by the logistics of refueling. However, trucking companies and government fleets could save tremendous amounts of money by switching from oil to natural gas, a prospect that many natural gas companies are trying to accelerate.
But don't expect oil companies to sit around idly and be replaced. New drilling explorations are in place throughout the globe and every major oil company has been making new investments. For BP, the hope is that new deep water explorations around Trinidad and Tobago will become a major source of production. As Trinidad is offering blocks to companies to drill off its coast, BP has gotten this contract at a steal. For Exxon Mobil (NYSE:XOM), new investment lies in Liberia, who offered it 70% control of its offshore oil blocks. This is in addition to its deal with Rosneft to develop Arctic reserves in Russia.
The development of Arctic reserves will likely attract many of the top oil companies, as these Russian reserves are essentially untapped and have incredible potential.
Similar in nature, Royal Dutch Shell (NYSE:RDS.A) is investing billions to drill for oil off of the coast of Alaska. With an estimated 27 billion barrels of oil, a major investment could bring massive returns. Obviously this is what Shell is banking on. In addition, Nigeria has just renewed the drilling licenses of it and Chevron (NYSE:CVX), a deal said to be worth trillions. These two companies also share the same fate in Ukraine, which just awarded both companies exploration rights for shale gas.
This also comes at a time when competitors like Marathon Oil (NYSE:MRO) are still reeling from first quarter losses and trying to play catch-up. The further the big guns can separate, the better. This is another reason why these oil giants are investing in more huge drilling operations with hopes of returns. The time to do so is now.
Shell, Chevron, and Exxon, much more so than BP, have been diversifying product lines and expanding into shale gas. As mentioned earlier, natural gas has the potential to drastically change the energy portfolio in the United States. Needless to say, these companies want a piece of the developing market and do not want to be left behind.
However, for companies like BP that are heavier in oil, there is little doubt that the demand will run out. While the United States energy portfolio is changing, the rest of the world is increasing in oil consumption. With developing economies such as India and Brazil sucking up oil for cars, utilities, and factories to name a few, oil production actually needs to increase. Unless there is a breakthrough in entrepreneurship leading to huge supplies of a different type of energy, oil is here to stay, at least for now. Even with natural gas being used more frequently and commonly, oil is here to stay.
This leaves BP in a great situation. If it can keep its refineries up and running, which I believe it will, BP will continue to bring in profits hand over fist. However, like many of its competitors I expect to see it put money into developing natural gas. Right now natural gas is not very profitable and it cannot remain this way. I think smaller producers of natural gas will leave the industry, returning it to profitability. With the smaller companies out of the way, the market will be ready for the major players to divide. Until then, expect the likes of BP to do what it does best, bringing profit along the way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.