The Year Ahead in Energy

New Horizons

The continued quest for new sources of oil and natural gas should lead exploration-and-production companies to new arenas of exploration. The recent increase in activity in the deep-water Gulf of Mexico is an example. Chevron's discovery, and increased interest from companies such as Devon (DVN Quote), Hess (HES Quote) and Anadarko (APC Quote), all bode well for continued development.

Increased offshore development will certainly benefit offshore drilling companies such as Transocean (RIG Quote), GlobalSantaFe (GSF Quote) and Ensco (ESV Quote) as well as companies that provide subsea production systems, such as FMC Technologies (FTI Quote) and Cameron (CAM Quote).

Moreover, new technologies such as subsea separation could increase efficiency and productivity, providing even more opportunities for growth in offshore exploration. FMC Technologies is emerging as a leader in this technology, which helps increase oil recovery from offshore fields. Statoil (STO Quote) is installing the first subsea separation system from FMC in 2007 at a cost of $100 million. Consultants suggest the separation market could be as large as $15 billion over the next decade, providing a potential windfall for FMC and other companies that pursue the business.

New horizons aren't limited to offshore. Unconventional gas resources -- shale plays such as the Barnett and Fayetteville regions -- will also become more important in the production mix in 2007. Companies such as Southwestern Energy (SWN Quote) -- a dominant player in the Fayetteville Shale -- are improving drilling efficiency and using new technologies to make new production techniques more productive and less expensive. The same is true in the more developed Barnett Shale and newer shale plays such as the New Albany region and the vastly unexplored Floyd Shale in Mississippi and Alabama. All of these areas will play an important role in new exploration into the new year.

Surprises

Like any other year, 2007 will have its share of surprises in store for the energy sector. There's already been plenty of talk about possible merger-and-acquisition activity, and that chatter will likely continue.

The recently announced merger of Norsk Hydro's (NHY Quote) offshore oil and gas assets into Statoil has escalated talk of megamergers in the energy sector. However, don't ignore the likely plethora of smaller deals that are happening all the time.