ABB (NYSE:ABB), the Swiss industrial conglomerate, is partnering with Statoil (NYSE:STO) to revolutionize subsea oil and gas production, having recently developed the world's first full-scale subsea gas compression system, and is currently working on a more efficient drive system.
Subsea production is gaining rapid importance in the oil and gas industry; it's more cost-efficient, energy-efficient, and environmentally safe. With the subsea market growing at an annual rate of 18%, reaching $100 billion by 2020, it's a very promising investment for both ABB and Statoil. And Statoil itself already gets half of its oil from subsea wells, with over 500 of them.
The compression system, to be installed in Statoil's Asgard field off the coast of Norway at a depth of 220 meters, will allow for stable oil production to continue. It will boost recovery by 280 million barrels of oil equivalent, or 60%, leaving the industry average of 30% in the dust. In addition to increased recovery rates, the compression systems will require less maintenance and have longer life -- a big leap in oil drilling efficiency. However, this is only one component of the ABB plan to place an entire processing system in subsea wells, turning them into "subsea factories" by 2020.
Another component is a variable speed drive system, which will be able to transmit power over 43 meters. In 2009, ABB created a drive system capable of operating 285 meters underwater, transmitting power over 31 meters -- a world record at the time, the 43 meter system will break that record.
The next big innovation necessary for the 'subsea factory' will be the separation of oil, gas, water, and sands near the well. The separation saves a lot of energy, as the entire stream does not have to be pumped from the seafloor to the platform.
Statoil currently produces 1.852 million barrels of oil equivalent a day. According to Statoil, the revolutionary 'subsea factories' will boost production by well over a quarter to more than 2.5 million barrels of oil equivalent by 2020. Perhaps the most impressive advantage subsea production allows is drilling in deeper, colder, smaller, and more remote fields, so the Norwegian company will have a significant advantage in the coming years finding more resources when other wells become scarce.
Statoil originally planned to start drilling in the Arctic in the Barents Sea, an ideal location. Unfortunately, the company is delaying the $15.5 billion project due to both a tax hike from the Norwegian government and an increased cost of labor. It's a disappointing draw for Statoil, which is facing growing pressure from investors to curb spending as costs are rising, amid predictions by analysts that Statoil will be the largest spender in its industry, as Reuters reported.
It is indeed a setback for the Norwegian group, especially since the potential oil field is in the 'workable' arctic, and not under ice, where Cairn Energy and Royal Dutch Shell spent billions only to come up with nothing. However, in a few years the technology enabling oil companies to drill under ice will exist, thanks to ABB.
With that, the entire stretch of the Arctic will be available to Statoil for drilling, and the failures of Cairn and Royal Dutch Shell will not be repeated. The reality is that investors actually underestimate the growth potential of Statoil. Subsea drilling is the future of the oil industry. It could soon render platform drilling obsolete. The point is that those companies who invest in it now will seriously benefit in the coming years. Statoil, having made that investment, will be able to drill in unimaginably more locations than its competitors, and will experience greater efficiency and better margins.
Despite a relatively rich valuation, ABB is still underestimated by investors. Nevertheless, as the leading pioneer in subsea technologies and equipment, the demand for its equipment will skyrocket, as the subsea market expands to $100 billion. These are the companies first in line for the future, and you don't want to miss them.
Drew Stern has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.