Next wave in Gulf may tread water
Shell has big Lower Tertiary project, but oil slump could delay its rivals
A newly minted $1 billion oil production vessel is sailing toward the Gulf of Mexico’s deepest oil fields, as low crude prices threaten to stall Big Oil’s next wave of missions to the bounteous but formidable region.
The Royal Dutch Shell vessel, which is traveling 15,000 miles from a Singa- pore shipyard, is expected to begin producing oil next year in the Gulf’s ultradeepwater Lower Tertiary trend, a geological formation that holds vast amounts of oil and gas. It represents the edge of explored U.S. waters for the oil industry.
But Shell’s rivals may have to put other costly projects in the region on hold if crude prices continue to languish below $45 a barrel, which could keep large, much-needed resources out of reach for multinational oil companies that are pumping oil from diminished reserves — the lifeblood of the industry.
“That’s their bread and butter,” said Michelle Foss, chief energy economist at the University of Texas’ Bureau of Economic Geology.
Even so, major oil companies might delay plans for projects in the Lower Tertiary and smaller, cash- strapped companies could cancel them altogether, she said. Since Shell and other companies operate deepwater projects out of Houston, any delay could further drag on a regional economy that already has lost thousands of jobs and business activity to the oil downturn.
“If they postpone too long without being able to figure out how to move things along, then life will really be interesting,” Foss said.
Energy research firm
Wood Mackenzie estimates that a prolonged downturn could delay up to $48 billion in spending on projects in the Lower Tertiary over the next 15 years and stall production growth of 300,000 barrels of crude a day over the next decade.
Low crude prices may convince some oil companies they can’t make money there unless the market stages a quick recovery — a possibility that looks far less certain than a year ago. And if prices don’t recover, major oil companies could face a combined $37 billion cash flow deficit next year, according to investment banking firm Tudor, Pickering, Holt & Co.
The International Energy Agency recently said it expects global oil demand growth to slow next year — hardly the kind of market that could work off 3 billion barrels in storage worldwide. The year’s most vivid picture of an oversupplied crude market came earlier this month when dozens of huge oil tankers off the Texas coast couldn’t find a place to park their combined 20 million oil barrels, according to the Associated Press.
U.S. crude ended last week’s trading at $40.39 a barrel on the New York Mercantile Exchange.
Deep and costly
Wood Mackenzie believes a barrel of crude would have to fetch between $60 and $80 to justify high costs of drilling ultradeep wells in the Lower Tertiary.
“Capital expenditures are extremely high when you’re talking about wells costing $300 million to drill and complete ,” Wood Mackenzie senior analyst Jackson Sandeen said.
The Shell ship heading for the Gulf is called a floating production, storage and offloading vessel because it produces oil and stores it onboard before transferring it to smaller vessels for transport to shore. Historically such vessels operate in regions without extensive pipeline infrastructure, which laces the Gulf seafloor closer to shore but not in the deeper water. Shell itself has a pipeline system and three production platforms in the shallower Mars-Ursa field, an area in the Gulf outside the Lower Tertiary where it said last week one of its discoveries holds 100 million barrels of oil equivalent.
Shell sanctioned the 2½year construction of the ship in 2013, when crude prices were more than double what they are now. Shell plans to begin pumping oil from two wells drilled in about 9,500 feet of water — the deepest ever.
“That’s never been done before, so it’s a challenge,” said Curtis Lohr, who manages the project, called Stones.
Second act for Shell
The Lower Tertiary has stumped oil producers since the 1990s with high temperature sand pressures and deep-seated reservoirs. But Shell’s latest venture into the region, about 200 miles south of New Orleans, will be a big second act for the company that in 2010 pumped the first barrels from the formation in its Perdido project.
Shell’s Stones project is the industry’s second-tolast major development to receive a corporate goahead for construction in the Lower Tertiary. Statoil and Exxon Mobil Corp.’s project at the deep-water Julia oil field also is expected to start producing oil from the Lower Tertiary next year. But oil companies have yet to reach final investment decisions on at least six others, including Anadarko Petroleum Corp.’s massive Shenandoah discovery. If all of the pre-sanctioned projects were scrubbed, it could cost the region 300,000 barrels a day in production by 2025.
Shell’s Stones project is slated to produce a peak 50,000 barrels a day in a region estimated to hold up to 2 billion barrels in reserves. It’s the first step in what could be a multiphase project spanning several years, depending on production results from the initial operations, which includes bringing two wells online next year and six more after that, Lohr of Shell said.
Shell plans to analyze production results from the first phase of the project before moving forward with a second or third phase.
“This really gives us an opportunity to make a minimal investment and learn more about the reservoir,” hesaid.
Less porosity
The Stones field, like most of the Lower Tertiary, is a tight-rock play, which means it has less of the geological porosity and permeability that allows oil molecules to move freely into a well-bore. Theindustry typically produces 8 percent to 12 percent of the buried oil in the field, which is somewhat lower than the neighboring Miocene play in the Gulf — rock separated by several miles and millions of years of geological change.
Shell says it has saved $1 billion on the Stones project by designing more efficient wells and cutting supply chain costs and the cost of its 49,000-ton production vessel. The ship, named Turritella after a small sea snail species with a conelike shell, will be the first floating production, storage and offloading vessel to breach the Lower Tertiary, and will be out fitted with technology it can use to counter conditions in the region.
For example, it’s the first of its vessel kind with the capability to both disconnect itself from subsea operations, to which it is linked by a massive buoy, and use flexible risers — steel pipes connecting wells to the vessel that can move with the motion of the ship.
“In the environment we’re in, every dollar matters,” Lohr said.
Holding down expenses
Sofar, oil companies have taken a number of measures to reduce costs in the Lower Tertiary. Shell’s effort to break its Stones project up into multiple phases is another prominent example of cost-cutting in the region, said Sandeen of Wood Mackenzie.
For example, Chevron Corp. brought in other oil majors — including Statoil, Petrobras and Eni — to help develop its big Jack/ St. Malo project in the deep Gulf, which came online in 2014. Chevron has also cut weeks out of the time it takes to bring a deep-water well into production after Halliburton Co. helped it develop a well-completion method that targets multiple subterranean zones.
Sandeen noted in deepwater fields, oil companies have to wait years, if not a decade, from first discovering oil in a region to getting the first barrels of crude out of it. That may help them plan projects around the current oil slump, if they’re willing to risk hitting low oil prices again in a few years.
“The silver lining is operators can come up with creative ways of pushing these projects forward,” Sandeen said.
If prices climb back up, the petroleum business could develop projects that would more than double production in the Lower Tertiary to nearly 500,000 barrels a day in a decade. Such a boost could bring the region’s share of output in the Gulf from 11 percent this year to 19 percent in five years and to 30 percent in 10 years.
“It’s a long-term investment in improved technology,” Sandeen said. “They’re banking on massive amounts of oil in place, to the tune of billions of barrels. So if you improve that recovery factor, over time it can be a nice investment.”