Oil & Gas News

Deep-water drilling squeezed by oil busts, climate change

Offshore, Deep Water, oil, transition, energy

By: Paul Takahashi – Houston Chronicle – Since the first oil rig in the Gulf of Mexico was built in 14 feet of water off the coast of Louisiana in 1938, offshore oil and gas companies have drilled in ever deeper waters to prospect for black gold.

Oil companies employ large floating platforms and drillships to bore under thousands of feet of water, battling high pressure and extreme temperatures. In 2016, Total and Maersk Drilling bored a well off the coast of Uruguay in more than 11,140 feet of water, the equivalent of 11 Chase Towers stacked end to end and the the deepest water in which a well has ever been drilled.

But the tide is turning for deep water drilling as offshore companies are squeezed by two oil busts in five years and as the outlook for crude demand sours with the rise of electric vehicles and policies aimed at combating climate change. The coronavirus pandemic, which brought the worst oil bust in generations, is expected to accelerate the shift from deep water to shallow water.

“I wouldn’t be surprised if companies are going away from deep water because of the long-term risks and the absolute cost of projects,” said Tom Kellock, director of offshore rig market consulting for IHS Markit. “As the environment becomes more uncertain, we could see a trend to more shallow water.”

A move from deep water drilling would have major implications for the offshore industry along the Gulf Coast, which employs tens of thousands of workers. Deep water drilling is generally more complex, time-consuming and costly, requiring three times the expense of its shallow water counterpart. Therefore, a decline in deep water drilling would mean smaller investments, shorter projects and ultimately fewer jobs.

The shift to shallow water started long before the coronavirus pandemic wreaked havoc on the industry. Over the past decade, the share of offshore rigs under contract for deep water projects globally has been falling while those under contract for shallow water projects have been rising, according to IHS Markit, an energy research firm.

The share of floating rigs used in deep waters under contract globally has fallen to 24 percent this year, down from 41 percent in 2012. On the other hand, the share of shallow water rigs under contract globally has risen to 76 percent, up from 59 percent in 2012.

Shallow water drilling occurs in less than 1,000 feet of water, while deep water drilling occurs in 1,000 feet to 2,500 feet of water. Offshore production in 2,500 feet to 12,000 feet of water is known as ultra deep water drilling.

‘Driven by economics’

Offshore oil and gas companies have been drilling in deeper waters over the past two decades as older oil reserves in shallow waters were depleted and as seismic and drilling technology improved.

The share of oil production from ultra deep water wells in the Gulf of Mexico has risen to 52 percent in 2017 from 15 percent in 2000. Last year, the Gulf of Mexico produced a record 2 million barrels of oil per day, second only to shale in the U.S.

Though far more expensive to drill in deep water, the billions of dollars spent upfront paid off for oil and gas companies that could expect stable, decadeslong production. When oil prices are high, deep water production can be highly profitable.

However, deep-water production has been challenged in recent years by the shale boom that sapped resources from offshore projects and recent oil busts that put pressure on the sector.

“Deep water is driven by economics,” said Ed Hirs, an energy economist at the University of Houston. “North of $70 a barrel, it made a lot of sense to pursue deep-water projects. At $40 a barrel, not so much.”

By the time oil fell to $40 in March, the number of contracted floating rigs around the globe was 131, about half of the number at its peak in January 2014, when oil was priced above $100 a barrel. After the pandemic swept the U.S. in spring, that number fell to 102, according to IHS Markit data.

By contrast, the number of contracted rigs used in shallow water was 354 in March, down from a peak of 427 in September 2014. Since March, the number has fallen to 325 rigs, IHS Markit said.

Nevertheless, well-capitalized oil companies, such as Exxon, Chevron and Total, remain bullish on deep water production, particularly from large untapped reserves off the coast of South America, Africa and in the Eastern Mediterranean Sea. In January, Total tapped Maersk Drilling to drill in more than 11,900 feet of water, a record depth, off the coast of Angola and Namibia.

Despite the recent oil bust, offshore companies continue to drill in deep waters. Hess this month said it discovered oil under more than 6,000 feet of water off the coast of Guyana, adding to the area’s projected 8 billion barrels of oil and gas reserves. Apache and its partner Total this year made an oil discovery in 3,281 feet of water off the coast of Suriname.

The future of deep-water drilling, however, like that of the industry overall, looks uncertain as countries push to curb carbon emissions and reduce fossil fuel use.

“I think there has to be increasing reluctance to invest in long-term projects when you don’t know what the payout is,” IHS Markit’s Kellock said. “When you start on these deep water projects, you have no idea what your return is going to be when you start producing. You can’t hedge that far in advance. It’s safer to go for a project that has a shorter payback time. Who knows how much oil people may want in 30 year’s time.”

‘Significantly cheaper’

For now though, offshore oil and gas companies are fighting to survive the economic fallout of the coronavirus pandemic. They are idling offshore rigs, cutting spending for new projects and restructuring debt.

Offshore spending this year is expected to plunge by 80 percent to $20 billion from $104 billion in 2019 commitments, according to Rystad, a Norwegian energy research firm. At the worst of the 2014-16 oil bust, offshore spending dropped to $38 billion.

There are 15 offshore rigs operating in the Gulf of Mexico, down from 25 rigs a year ago, according to oil-field services firm Baker Hughes and research firm Enverus.

Offshore oil and gas companies are increasingly looking for oil in untapped shallow waters they passed over in favor of deep water projects. Improved seismic technology in shallow waters is helping to usher in a new wave of shallow water projects.

“Shallow water is significantly cheaper than deep water,” Hirs with UH said. “And right now, you’re going to get really good prices on rigs and crews.”

EOG Resources is looking to build new production platforms next year in shallow waters off the coast of Trinidad, where the Houston company has been in business for 27 years. EOG expects about a fifth of its natural gas production will come from the shallow waters in the shallow Columbus Basin in the Caribbean Sea.

“Production from this drilling campaign will more than offset natural declines from existing wells and provide a foundation of growth for EOG’s total production in Trinidad,” Ezra Yacob, EOG’s executive vice president of exploration and production, told investors last month.

Talos Energy is looking to produce oil from its Zama and Xaxamani projects in the shallow waters off the gulf coast of Mexico, which are estimated to have more than 800 million barrels of oil and gas combined. The Houston offshore company is working with Mexico’s state oil company Pemex to come to an agreement on how they will jointly develop the projects.

Zama, discovered by a Talos-led consortium in 2017, is the first major discovery in Mexico waters after the country ended its 75-year-old oil monopoly and opened the country to foreign oil and gas investment. The Zama discovery was made in the Talos-operated section in the Gulf of Mexico but extends into the neighboring section owned by Pemex. Talos is now caught in the middle of geopolitical tensions as Mexico President Andres Manuel Lopez Obrador seeks to take back control of the country’s oil resources.

Despite the geopolitical challenges, Talos said it is optimistic about shallow oil prospects off the coast of Mexico. Zama is located in about 550 feet of water while Xaxamini is in just 60 feet of water.

“Shallow oil, similar to the stuff we would find years ago as we were developing the U.S. Gulf of Mexico, seems to be all over the contract area not only where we’ve discovered it, but in other areas as well,” Talos CEO Tim Duncan told investors during its most recent earnings call in July. “(This geologic section) we really believe is underexplored and underexploited here in offshore Mexico.”

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