Deepwater discoveries show life in offshore sector
Flurry of major finds could provide needed boost to energy industry
Some of the world’s biggest oil companies announced this week that they’ve made major deepwater discoveries in the Gulf of Mexico and North Sea, signaling that the moribund offshore energy sector is coming back to life as rising oil prices and lower development costs hold the promise of new profits.
Chevron, Royal Dutch Shell, BP and the French company Total revealed their discoveries within a 24-hour period Tuesday and Wednesday, shifting attention from the Permian Basin in West Texas, which has become the center of the industry’s rebound from the last oil bust. This new activity offshore could provide a much needed boost to the explorers, drillers and equipment makers that employ tens of thousands of people in the Houston area.
Houston is a major hub for the global offshore oil industry and a base of operations for the Gulf of Mexico. Some of the world’s biggest offshore players are headquartered or have major operations
here, including TechnipFMC, National Oilwell Varco, McDermott International and Transocean.
“It’s great news on the discoveries and it’s an expanding trend. I expect there’s more to come,” said Bob Fryklund, chief upstream strategist for the IHS Markit research and consulting firm. “Deepwater has just about hit bottom on costs, so it’s the start of a long recovery.”
The offshore sector has lagged the industry recovery onshore as crude prices stayed low and the cost of developing oil and gas fields far out in the ocean remained high. But U.S. oil prices, which settled near $65 a barrel Wednesday, are running about $20 a barrel higher than six months ago.
‘Whale’ struck in the Gulf
Meanwhile, in the wake of the oil bust that pushed many offshore specialists into bankruptcy, energy companies have found ways to cut the costs of exploration and production by winning discounts from contractors, standardizing equipment and components and improving technology. Just as horizontal drilling and hydraulic fracturing, better known as fracking, created a boom in areas of the Permian that were considered dried up, better seismic imaging and drilling methods are bringing companies back to proven offshore areas like the Gulf, Fryklund said.
“Deepwater is coming out of a trough,” he said, “but it is still the dominant area for new venture exploration.”
Shell, the Anglo-Dutch oil major, said Wednesday that it struck a potentially major oil payload while drilling to 23,000 feet in the Gulf of Mexico about 200 miles south of Houston. Chevron, the second largest U.S. oil company, owns a 40 percent stake in the well, dubbed the “Whale.”
The discovery is near an area where Shell already has developed wells, about 10 miles from its massive Perdido platform, which is moored at 8,000 feet underwater.
Shell hopes to develop the new well and save money by using the existing platform and equipment, which would be connected underwater to the new discoveries. “The result is another opportunity to think differently about ways we can competitively develop deepwater resources,” said Marc Gerrits, Shell’s executive vice president for exploration.
Attractive opportunities
Shell’s announcement came just a few hours after Chevron, this time partnering with Total, said it made another discovery in the Ballymore field about 75 miles from the Louisiana coast in the Mississippi Canyon portion of the Central Gulf. Total, which owns 40 percent, is saying it’s the company’s largest Gulf discovery ever.
The companies did not report estimates of the reserves.
The Ballymore discovery is about three miles from Chevron’s Blind Faith platform, creating the potential to exploit the field while using the platform, pipelines and equipment that Chevron already has in place. That would result in lower costs that could prove critical to moving multibillion-dollar projects forward.
Total said the opportunities to tie into existing oil production systems is making the Gulf an attractive place to invest. Total acquired its stake in Ballymore in September as part of an exploration agreement with Chevron that included seven prospects in the Eastern Gulf.
BP, meanwhile, said it made two discoveries in the North Sea, striking oil in its Capercaillie prospect in the central North Sea east of Scotland, as well as the northwestern corner of the North Sea in the Achmelvich well. The price of North Sea Brent crude has recently topped $70 a barrel; it settled Wednesday just above $69.
“There is certainly exploration activity taking place worldwide,” said Pavel Molchanov, an energy analyst with financial services company Raymond James. “Even at $55 oil, that’s still a price that supports a fair amount of exploration activity. At $30, nobody does any exploration.”
A recent report by the energy research firm Wood Mackenzie estimated that companies can produce oil profitably in much of the Gulf with prices at $50 a barrel. Gulf oil production is, in fact, booming as companies put to work projects that were developed before the oil crash began in 2014.
Gulf production is expected to average a record 1.9 million barrels a day this year, according to the U.S. Energy Department.
But the new projects needed to revive the offshore sector will almost certainly be undertaken by big companies with deep pockets, including oil majors such as Chevron and Shell, and large independents, such as the Houston area companies, Anadarko Petroleum, Apache Corp. and Noble Energy, analysts said.
“Some of these discoveries appear to be significant, but it’s going to take a lot more to move from a discovery to actual production,” Molchanov said. “It’s not going to be quick.”