It's “Drill, baby, drill” in Sarah Palin's home state. After years of battles with environmental groups, Royal Dutch Shell (RDS-A) was given final approval by the federal government to drill an exploratory well for oil and natural gas in the Arctic Ocean near Alaska. It’s a major win for big oil, and one that has environmental groups vowing to keep fighting.
In the near term, however, Shell is one step closer to tapping into a huge reserve located in the remote Arctic. However, one need only look at the currently sliding price of oil to ask whether the industry really needs to drill for more oil when a supply glut currently exists.
Yahoo Finance Senior Columnist Michael Santoli believes the big energy exploration and production companies are playing the long game here. “The big oil majors, the multinationals like Royal Dutch Shell, they constantly need to replace their reserves - they actually do not have enough in place in terms of what they're pumping to replace those maturing fields and wells that are going out of production,” he says in the attached video. “So in a large, big picture way, if the company expects to be in business in ten years, when this might be a producing well, it certainly needs to look for the oil and gas first.”
While the opening of fields like those in the Arctic are a huge boon for big energy, Santoli surmises that won’t have an effect on their slumping stock prices. What they will do, however, is keep dividend investors happy.
“When it comes to Royal Dutch Shell, Exxon (XOM), Chevron (CVX), these big guys - they are just dividend machines right now for investors,” he notes. “And they will do almost anything at their disposal to protect those dividends - Royal Dutch Shell has paid a dividend every year back to World War II, I believe.” Developing massive, long-term production fields allows the big oil majors to figure out their cap-ex budgets, and whether the companies can afford paying dividends over the long haul.
And those cap-ex budgets have been ballooning recently, because the Shells and Exxons of the world are having to scrape every inch of the earth to replenish dwindling reserves. “The easy reserves have been found and they’re being exhausted,” Santoli says. “That's the reason why the Arctic was considered to be one of these tremendous opportunities, potentially, because so much of the rest of the world has been exploited.”
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