Oil Industry Renews Deepwater Quest

File Image: The Harvey Deepsea, operated by Harvey Gulf International, a firm focused on servicing the offshore oil industry. (CREDIT: Harvey Gulf)

Posted by Joseph Keefe

Oil price recovery, low service cost boost offshore
exploration; firms slash costs of deepwater projects by 50
pct.

Deepwater oil drilling can be expensive, time-consuming and a
hard sell to investors. But the world's top energy firms are
restarting their search for giant oilfields under the ocean after
a two-year lull.

A recovery in oil prices to about $50 a barrel from a 12-year low
in 2016 is reviving oil majors' appetite for risk.

Reductions in offshore production costs mean that some projects
may be able to compete with North American shale fields,
executives said at an energy conference in Houston this week.

The recovery in the industry has so far been focused on onshore
shale output from the largest U.S. oilfield, the Permian Basin.

"Our competition over the past years has evolved from 'we want to
be the best in deepwater' to 'we want to compete with shale' to
'we want to beat the Permian'," Wael Sawan, Royal Dutch Shell's
executive vice president for deepwater, said in an interview.

Shell is the largest deepwater producer among the world's top
publicly traded oil companies and is set to pump 900,000 barrels
per day (bpd) from such projects by the end of the decade.

Firms such as Shell and Exxon Mobil, who specialize in complex
offshore exploration, slashed budgets after oil prices collapsed
in 2014. Spending cuts were so drastic that the Paris-based
International Energy Agency warned this week of a looming supply
crunch beyond 2020.

Shell has cut well costs by at least 50 percent, reduced
logistics cost by three quarters and cut staff by nearly a third
to make developments in areas such as the Gulf of Mexico and
Nigeria profitable at oil prices below $40 a barrel, on par with
the most profitable shale wells, Sawan said.

Other companies such as France's Total have seen similar cost
cuts.

SNIPER FOCUS

After cutting the cost of deepwater development, companies are
also reviving the search for new resources.

They are focusing exploration efforts on areas close to existing
fields to maximize the chances of discovery and minimize costs.
Many such areas are in Brazil, the Gulf of Mexico and Southeast
Asia.

"It is a very selective, sniper focus," Sawan said.

Some firms are poised to benefit from decreased competition,
lower costs of marine seismic studies and drilling rigs, and
cheaper opportunities to acquire exploration licences from
governments eager to attract investment.

"Right now, we've entered the best time in the last decade to be
in the exploration business," Gregory Hebertson, who heads
Murphy's western hemisphere exploration, said at the CERAWeek
conference in Houston. "There is probably a two- or three-year
window that we can capture the cost efficiency in the market."

Discovering new resources is essential for oil firms to grow and
to offset natural decline of fields. But deepwater exploration
requires money, time, expertise - and luck.

Some shareholders would prefer that oil firms stick to other,
less risky growth options, said Federico Arisi Rota, executive
vice president Americas for Italy's Eni, which operates major
offshore drilling projects.

"We must compete with alternative growth options that might be
considered more attractive," such as growth through mergers and
acquisitions or investing in shale oil production, Rota said.

Pressure to limit company spending amid a slow recovery in oil
prices is also putting a break on big exploration campaigns.

"We know exploration spending is not always appreciated by
investors," Kevin McLachlan, head of exploration for Total said.

RISKIER PLANS AHEAD

Eni is considered one of the most successful explorers after the
discovery of giant gas fields in Egypt in recent years. It aims
at discovering 2 to 3 billion barrels of oil and gas this year
through drilling 115 offshore wells near Africa, Mexico, Norway
and Asia, Rota said.

A "more aggressive" exploration program is planned to start in
2018 in riskier and more expensive regions such as the Arctic,
which offer the potential big discoveries, he said.

Deepwater resources will be required to keep up with the growing
demand, regardless of output growth in shale oil fields, Total's
McLachlan said.

Such projects are "key to our long-term plan, and we believe it
is the same for the industry no matter the near-term focus on the
Permian," McLachlan said, referring to the largest U.S. oilfield
in west Texas.

Hess Corp Chief Executive John Hess said the company's Liza
development, off the coast of Guyana, was crucial to his
company's growth potential and estimated to have as much as 2
billion barrels of oil.

"This is one of the largest oil discoveries in the last 10
years," Hess said in an interview.

By Ernest Scheyder and Ron Bousso

Mar 10, 2017

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