Developers of new deepwater oil projects are looking to keep their operations cheap and simple.  Shell photo.

Some deepwater oil projects rejuvenating existing fields

Royal Dutch Shell says Penguins, its latest British North Sea oil and gas development, represents the company’s new keep-it-clean-and-simple philosophy for deepwater oil projects.

The development of new deepwater oil projects was put on hold following the oil price crash in 2014.  But with new technology available, offshore oil drillers are bringing projects back to life, and, at the same time, challenging US shale.

Penguins is designed to rejuvenate the 44-year old remote oil field.  Shell plans to drill eight new wells 165 metres below surface and connect them to a new production vessel.

The project is expected to be completed by 2021 and is forecast to cost about $1 billion, a fraction of the average of giant developments undertaken earlier in the decade.  It is expected to produce about 45,000 barrels of oil equivalent per day.

“It is another example of how we are unlocking development opportunities, with lower costs,” Andy Brown, head of Shell’s oil and gas production division, told Reuters.

Exxon Mobil, Total and BP have also made radical changes in the way they design offshore fields.  By deploying steel platforms at sea and making them faster and easier to build, companies are able to challenge the economics of the Permian Basin and other shale fields.

Bernstein analysts say they expect about 40 new offshore projects to be approved in 2018, compared to 29 in 2017 and 14 in 2016, the lowest number of projects since at least 1990.

Oil majors have set rigid cost ceilings for the new deepwater oil projects and are requiring them to make a profit at $40/barrel.

To accomplish this, companies are making their new projects significantly smaller, averaging 42,000 barrels of oil equivalent per day.

“You will see more deepwater over time, for sure,” Bernard Looney, head of BP’s oil and gas production division, told Reuters in January. He added that BP is expected to approve a number of deepwater projects this year, including in Senegal, Mauritania, Oman and Azerbaijan.

The leaner projects will mean companies will drill simpler wells and connect them to existing platforms and pipelines.  Companies will also process massive amounts of data to streamline oil field construction as well as swap custom gear for off-the-shelf equipment.

This could mean an 80 per cent drop in rig and services costs, compared to the past three years.

“Much is made of the Permian, its flexibility and the returns there. But actually infill drilling for a decade creates enormous sources of money,” Looney told Reuters.

However, there are some fields that are so vast, they will require a massive investment, but will still be mandated to turn a profit at lower oil prices.

Petrobras’s Libra II in Brazil is expected to cost $10 billion, Shell’s Bonga Southwest in Nigeria is forecast to cost $12.2 billion and Exxon’s Mamba LNG plant in Mozambique is estimated to cost $30 billion.

Shale production currently accounts for about 7 per cent of the world’s supply of crude, while offshore production makes up over 25 per cent.

After years of spending cuts due to low oil prices, oil companies are looking to develop new resources to offset the decline of already operating fields, which can amount to 10 per cent each year.

“When you look at the mix you need offshore, you need deepwater. The onshore by itself won’t be enough to make up for the decline rates that you are seeing globally,” Lorenzo Simonelli, Chief Executive Officer Baker Hughes, told Reuters.

Recent major discoveries in Guyana, the North Sea, the Gulf of Mexico and offshore Cyprus could be developed, but only if costs are kept down.

“Discipline has to stay, we’re very determined in this space. We’re not going to say that now that the oil prices are back up, let’s do more, let’s spend more,” BP’s Looney told Reuters.