News that Shell’s Perdido platform has begun to produce oil is a significant moment for the companies who are renewing their efforts to extract oil from deep below the Gulf of Mexico’s waters.
These companies – many of them oil ‘supermajors’ including Chevron, BP, Exxon, and Total – have been making huge investments in new ultra-deepwater technology to retrieve crude oil from depths that would previously have been impossible, or uneconomic, to exploit. The Perdido facility sits on the seabed below 2.45km of water – which Shell helpfully explains is equivalent to six Empire Buildings stacked on top of each other and is more than 50 per cent deeper than any other commercial facility.
US domestic oil production notoriously began to decline in the 1970s and the hope is that these renewed efforts will lead to something of a resurgence for the country’s output – although it will be fairly fleeting.
Despite the challenges, plays like this are popular with the majors – numerous other ‘lower tertiary’ projects, backed by operators such as Chevron and BP, are expected to begin production in the next few years. Barclays Capital analyst James West wrote in his 2010 exploration outlook in January that deepwater plays in general, such as those in the Gulf of Mexico and off the coasts of Brazil and West Africa, would be the central theme of a new cycle in oil, adding:
Deepwater may be the last frontier, as this is the area with the most geological potential; however, while we do not discount the reality that most of the world’s undiscovered reserves probably rest in deepwater, we think the expansion in deepwater is more complicated.
It will also be expensive and technically challenging. In Shell’s statement, the company’s US chief Marvin Odum says:
“Perdido presented technical challenges unlike we’ve ever seen in the Gulf of Mexico. Shell’s team used its expertise to open this new frontier and confront complex reservoir characteristics, extreme marine conditions, and record water depth pressures.”
BarCap’s West says there are three drivers to pursuing this somewhat challenging strategy: technology, geological success and resource nationalism. The technology for both exploration and production has increased at a rapid pace, and the success of discoveries has been impressive, West writes. On those points, it’s logical opportunism. The third point is a little less comfortable:
In addition to the first two drivers, resource nationalism and difficult terms and restrictions for western companies operating in the Middle East, Central Asia and parts of Southeast Asia are driving the international majors and supermajors further into the deepwater. This represents one of the few plays in the world where these companies can hope to grow or replace reserves and is the most likely area where they can target “gorilla” prospects.
Neil McMahon, senior analyst at Bernstein Research, argues that the focus on deepwater exploration suggests the majors are giving up on new exploration and focusing on areas with less risk. Many of the new, significant discoveries, such as West Africa, he notes, have been made by smaller exploration companies.
“The flow rate is the critical thing,” he said in an interview with FT Energy Source last month. BP’s Thunderhorse, which operates in 1.9km of water, has ‘fantastic’ flow rates of around 50,000 barrels per day per well, McMahon says. But with newer discoveries often requiring much deepwater subsea drilling – such as BP’s very-publicised new Tiber discovery – the question will be how fast the production comes online, and how good the flow rates are.
To put that discovery in context, the exploration well was drilled in 1.26km of water to depths of 10.85km below the sea bed. If its recoverable reserves are in the middle range of the giant field size (a technical term) BP alluded to, it would equate to around two weeks of total world crude consumption.