3 stocks for the coming oil shortage

By Jim Jubak

Devon Energy's (DVN, news, msgs) decision to sell its expensive-to-develop deep-water assets in the Gulf of Mexico in order to concentrate on its onshore natural-gas reserves makes perfect sense.

For that one company.

For the oil industry, and for the global economy, it could make the predicted energy crisis of 2015 or so that much worse.

In the short term, there's plenty of oil. The slowdown in the global economy and the addition of supplies from countries such as Angola ensure that. The Organization of Petroleum Exporting Countries has a sizable surplus of production capacity.

In the long term, the story is very different. By, say, 2030, oil could face a serious shortage. And that shortage might happen much sooner because of perfectly reasonable decisions by individual oil companies to maximize their profits. Maybe as soon as 2015.

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If you are a genuinely long-term investor, I've got a few stocks to suggest for how to profit from what is admittedly a distant trend. Even if you're not interested in putting money to work on prospects that are several years away, I think knowing about this trend will give you potentially profitable context for all your investments.

A completely logical move

In my Nov. 30 column, I explained the logic of Devon Energy's decision to sell its promising Gulf of Mexico deep-water and international assets and concentrate on producing more natural gas from its huge reserves in the U.S. -- even though there is a glut of natural gas on the U.S. market right now.

The decision comes down to cost and time. Exploration and development costs for the onshore North American wells are roughly $6.86 a barrel of oil equivalent, Deutsche Bank has calculated. Working backward from the Deutsche Bank figures, I estimate Devon's exploration and development costs for the assets it wants to sell at $31.13 a barrel.

Video: Is a sell-off in crude oil ahead?

The result was a situation in which the "tail" of Gulf of Mexico and international assets wagged the dog. These assets have eaten up 29% of the company's capital spending in 2009 but equaled just 7% of the company's proven reserves of 2.8 billion barrels of oil equivalent. For the year, they'll contribute just 11% to the company's estimated 248 million barrels of production.

The payback on these new deep-water or overseas fields is painfully slow. Investments in developing such fields can take five years before they generate significant cash flow. In contrast, drilling wells in existing natural-gas fields in the U.S. produces cash flow within months.

So Devon's decision about the Gulf assets is completely logical.

But follow out the consequences of that logical decision if it is adopted by more companies than just Devon. You'd have oil companies around the world abandoning expensive-to-develop, long-lead-time oil projects and concentrating instead on cheap-to-develop, shorter-lead-time oil and natural-gas projects.

That seems to be what has happened in the energy industry, especially the part of the industry inhabited by the investor-owned publicly traded international oil majors. In this shift Devon Energy isn't a pioneer. The company is, in fact, following a path conspicuously traveled by Exxon Mobil (XOM, news, msgs) and other bigger companies.

Take a look at the breakdown in Exxon Mobil's 2008 annual report of the 120 projects under way that are forecast to produce 24 billion oil-equivalent barrels. The pie chart is dominated by the kind of projects that Devon Energy announced it would focus on after selling off its international and deep-water Gulf of Mexico assets. By far the biggest category for projects is liquefied natural gas. Alone that makes up about 25% of Exxon's projects. Add in unconventional gas (such as the Barnett Shale that Devon owns so much of), acid and sour gas, and heavy oil/oil sands and you've accounted for roughly 75% of all the company's projects. Conventional oil and gas, deep-water oil and gas, and Arctic oil and gas add up to just 25%.

There are lots of good reasons for this emphasis. National governments with big undeveloped oil reserves have largely frozen out the international majors. Liquefied natural gas looked like a rapidly growing -- and underdeveloped -- market years ago, when many of these projects were launched. Nobody predicted today's natural-gas glut. (For more on the glut, its causes, and when it might be over, see this blog post.) And all these projects -- yes, even oil sands -- are more predictable in their results (although not always cheaper, as in the case of oil sands) than searching for oil in the Arctic or deeper and deeper deep-water.

Continued: Like it or not, we need oil

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