Safe Plays in ‘Unsafe’ Oil and Gas

The Jed Clampett days of finding oil — accidentally in the case of the old Beverly Hillbillies clan leader — are a distant past. No longer can an oil company find elephant fields in someone�s backyard and easily pull the crude out.

To meet rising global energy demand and dwindling conventional supplies, energy companies have been scrambling to find new sources of production. With oil�s sustained high prices, the industry has turned to a variety of unconventional sources to met future demand. From offshore fields in Ghana and Mozambique to oil sands deposits in Canada, these finds have become more profitable. And while political, environmental and financial risks to developing these supplies abound, investors who bet on them — carefully — could be handsomely rewarded.

For example offshore Greenland, central Sub-Saharan�Africa and Eastern Siberia�aren’t exactly traditional places to search for crude oil and natural gas, but they could be the best ways to satiate growing energy demand. Analysis done by oil service firm Schlumberger (NYSE:SLB) estimates that an additional 36 million barrels a day of oil will be required over the next two decades. Most of this will have to come from these unconventional assets.

The potential is huge for firms willing to take on the risks inherent in these regions. Geologists at the U.S. Geological Survey estimate that the Arctic Circle contains nearly 25% of the world’s undiscovered energy reserves, or about 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas. Africa’s proven oil reserves have steadily increased by 116%, since 1989, and the region now boasts 13% of the world’s oil reserves. Greenland is home to more than 31 billion barrels of oil-equivalent (BOE), and Southeast Asia is one of the most active areas of offshore exploration in the world, rivaling even the Gulf of Mexico.

Potential Riches With Plenty of Risks

However, tapping these unconventional finds does come with some unconventional risks. Business environments in several of these regions aren�t exactly ideal. After spending billions on equipment and infrastructure, BP (NYSE:BP) saw its investment crumble when Russian natural gas giant Rosneft pulled the plug on their deal.

In Africa, members of the Movement for the Emancipation of the Niger Delta, have continually attacked and kidnapped oil rig crews from explorations and production firms such as Chevron (NYSE:CVX) and London based Afren Oil. Nationalization fears and environmental concerns are highly prevalent as well.

For the average retail investor, the long-term opportunities in tapping these unconventional assets offer a great play. But with the potential risks, betting on one horse may not be a good idea. Van Eck is planning an unconventional oil and gas ETF, which would bet on firms that are associated with the exploration, development, extraction, production and/or refining of these assets. Unfortunately, the filing doesn’t contain any real info on when it�ll begin trading.

Investors can achieve some level of exposure with Guggenheim�s Canadian Energy Income ETF (NYSEARCA:ENY). The fund tracks 30 different Canadian oil sands and heavy oil companies. Investors gain access to some of Canada�s unconventional energy assets, which are also exploding in popularity. Top holdings include Suncor (NYSE:SU) and Enerplus (NYSE:ERF), and the fund yields a healthy 3.54%.

A Familiar Strategy

Perhaps the best way for investors to add some global unconventional oil plays to their portfolio lies in a method they should already be comfortable with: investing in the oil supermajors. For example, Norwegian giant Statoil (NYSE:STO) not only has assets in the frozen North Sea but has added new fields in the deep waters off Surinam and has expanded into Canadian shale.

Exxon (NYSE:XOM) recently negotiated acreage in Kurdistan and Liberia, and it has signed an initial�$3.2 billion agreement to explore for oil in the Russian portion of the Arctic Ocean. By picking the majors, investors can gain valuable diversification benefits and minimize the political risks. The iShares S&P Global Energy (NYSEARCA:IXC) is the easiest way to add a basket of the major integrated energy firms to a portfolio.

With energy demand and prices still rising, the future of energy production is clearly in the many unconventional and hard-to-reach sources of supply. For investors, betting on the supermajors, either individually or through the iShares S&P Global Energy, could be the best way to spread out the risks while drilling for profits.