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The Great Oil Debate: Deepwater vs. Shale

Without a doubt, the United States is enjoying a major oil renaissance.

And it’s occurring both onshore (with shale plays) and offshore (with deepwater operations).

Now, I’ve recommended opportunities in both shale and deepwater, since each one boasts certain benefits over the other.

But since many readers have been writing in to ask which opportunity is better to focus on, I thought I’d review the key differences between the two types of operations – and how they affect the companies involved.

Key Difference #1: Location and Complications

Shale operations, which we commonly refer to as fracking plays, involve pumping liquids into the ground at high pressure to release the oil or gas from the underground rock formations.

Shale wells aren’t very prolific. So in order to produce commercial quantities of energy, each shale operation requires multiple wells – sometimes hundreds – over a vast amount of land. And since these wells are located near population centers, it presents a few problems – like cost of land, environmental issues, permitting, etc.

Deepwater wells, on the other hand, benefit from being removed from population centers.

Of course, that doesn’t mean people can’t be affected from accidents – like what happened to the Macondo Well in the Gulf of Mexico, which cost British Petroleum (BP) tens of billions of dollars. But these accidents are few and far between.

Deepwater plays are also more productive and tap into reservoirs of oil and gas, therefore requiring fewer wells.

Key Difference #2: Costs

Deepwater players might need fewer wells, but they’re not cheap! It costs about $180 million a year to run a single operation, so many small companies can’t afford it. That’s why you’ll see companies like BP, Royal Dutch Shell (RDS), Petrobras (PBR) and Statoil (STO) involved in deepwater drilling.

Each shale well, however, can be put into action for around $10 million.

Key Difference #3: Production Output

How much payoff do producers get for their troubles?

Well, the payout from shale is relatively small. Wells often produce about 4,000 barrels a day, according to the latest Bakken statistics.

A deepwater well can produce more than 50,000 barrels a day.

Key Difference #4: Profit Margins

Deepwater plays benefit from much stronger profit margins.

The upfront cost per well might be higher for deepwater. But the 50,000-barrel-per-day production rate I mentioned above can last for years. So these operations can pump out tens of millions – sometimes hundreds of millions – of barrels of oil over their lifespans. And that means a longer payout.

With shale plays, however, that 4,000-barrel-per-day production amount is pretty short lived. In fact, about 65% of each well’s production is exhausted after the first year.

So there’s much higher risk involved with shale, especially if operators run into a series of low-producing formations or if oil prices move lower.

In the end, deepwater costs per barrel can be as little as half that of shale oil.

Bottom line: Even though shale is getting a ton of attention right now, it’s important to know that it isn’t the only game in town. In fact, if you’re looking for longer-term profits, deepwater plays shouldn’t be ignored. Especially considering that companies like BP and Statoil not only pay dividends, but they’re setting new highs daily.

And “the chase” continues,

Karim Rahemtulla