BP casts off a costly tradition
British oil giant takes standardized approach to deep-water expansion in Gulf
BP broke with decades of Big Oil tradition with its new $1 billion expansion in the Gulf of Mexico, and the move paid off.
Rather than drawing up project plans from scratch, the British oil company pulled from equipment designs used in previous ventures, utilized standard rather than customized equipment and accelerated the southern expansion of its Thunder Horse field by nearly a year, saving $150 million.
That’s no small chunk of change in the aftermath of a two-year oil bust and an example of what industry analysts is the future of offshore oil and gas development, now struggling to compete with lower-cost onshore projects during a period of low prices.
For years, major oil companies have relied on teams of engineers to come up with customized designs for everything they use in deep-water oil fields — from giant floating production facilities to
the valves and pumps that control crude flows on the ocean floor. But that’s expensive.
The oil bust has forced companies to think differently and adopt, albeit slowly, a new approach, called standardization, to save cash that has become more precious than oil.
“You’re building something off of existing drawings,” said Richard Morrison, BP’s regional president of the Gulf of Mexico in Houston. “That saves a lot of time and effort. The engineering work is done. The quality assurance work is done. We pulled one (major piece of subsea production equipment) right off the shelf, in terms of design.”
BP installed 2-mile-long flowlines, subsea trees and a manifold — a 155-ton device that sits three-stories above the seabed to regulate oil production — near a well it drilled 2 miles south of existing equipment at its deep-water Thunder Horse field. The new system, which began collecting crude in December, was hooked up to a well that hit 500 feet of oil and gas-soaked sand, its biggest find in the region so far. It’s the first of three southern wells BP plans to bring into production there. It has yet to drill the other two wells.
BP said it believes the project could raise its output by 50,000 barrels a day in the Thunder Horse field, which it discovered in 1999. It began pumping oil there in 2008. Raising production by that amount would increase the company’s deep-water Gulf of Mexico output by one-fifth.
For the past five years, subsea equipment makers like TechnipFMC, GE and Schlumberger, which recently acquired manufacturer Cameron, have pushed operators to use a one-size-fits-all approach for equipment and technology used in new projects, arguing the so-called standardization of equipment would lower the oil recovery price at which deepwater ventures break even.
Anadarko Petroleum Corp., for example, adopted this approach in assembling its massive Heidelberg truss spar in the Gulf last year. The Woodlands oil explorer copied designs for it from another Gulf project, the Lucius spar, which began producing oil and gas in 2015. It also employed the same contractors in the Finnish shipyards where its other facility was built. Both can produce 80,000 barrels of oil equivalent a day.
Some other operators in the Gulf of Mexico have also taken steps to standardize equipment and designs, though it is less common among deepwater drillers than onshore land operators at the moment, analysts said. That’s because deep-water wells have a wider range of pressures and temperatures at various ocean depths, and they need to make certain adjustments in their equipment to counter those forces.
“A lot of companies are getting religion and saying they cannot afford one-off designs anymore,” said Bill Ebanks, managing director at AlixPartners in Houston. “You’ll see this happen more and more. These strategies make a huge difference in the economics of projects.”
Some companies, Ebanks said, have been able to save as much as 20 percent of the cost of bringing a well to life by simplifying and standardizing designs, and they’ve been able to cut down on as much as 40 percent of the time it takes to complete a project.
Before the oil market crash, the cost of deepwater projects had soared. Oil hovered above $100 a barrel for years, and the cost of steel and transporting materials by ship steadily rose alongside fuel costs.
Energy service companies charged higher prices for drilling rigs and oilproduction equipment; demand was high as long as oil prices were, too. But costs grew so quickly that some major oil companies earned smaller profits from projects at $100-a-barrel oil than they did a decade earlier at $20 a barrel.
Over the past two years, break-even drilling costs in deep-water regions have slowly come down to about $65 a barrel on average, energy research firm Wood Mackenzie said in a report last year. U.S. crude settled at $52.75 a barrel on the New York Mercantile Exchange on Monday.
Costs have come down as service companies lower prices for equipment and drillers innovate. But for most companies, it’s still not enough to spur a recovery in deep-water drilling this year. BP’s Morrison said his company estimates a major project it recently approved, the second phase of its Mad Dog field in the Gulf, could break even at $40 a barrel oil.
“The Gulf of Mexico is competitive for the right projects and the right approach in the $50 a barrel range,” Morrison said. “We can make money at that level, but it takes a ton of discipline.”
Jim Wicklund, an analyst at Credit Suisse in Dallas, said he doesn’t expect major oil companies to approve a lot of large deepwater projects this year largely because the price of oil hasn’t climbed enough to make them profitable. Even if oil rises above $60 a barrel, he added, companies will likely favor expanding operations in more lucrative areas like the Permian Basin in West Texas before they venture back to the ocean depths.
As for cost savings from standardization, Wickland said, “it’s good, but not good enough. It doesn’t look like a whole lot of deep-water projects got put into their budget plans for 2017, and if they’re not in the budget plans now, they’re not going to happen in 2017.”