Offshore vs. onshore: Race is on for economical oil production
Competition for oil companies does not solely come from overseas anymore; the fiercest opponents are across the street, or maybe even in the same building.
Executives and engineers responsible for offshore drilling are struggling to compete with their compatriots in the onshore shale oil fields. With the U.S. pumping more than 10 million barrels a day, the competition is Houston vs. Houston to see who can build the simplest, most productive wells.
At the biggest oil companies, offshore engineers on one floor are competing against shale brethren on another for the limited dollars available for drilling. The team that produces the most barrels at the lowest breakeven price wins.
For most of the 150-year history of the oil business, competition was focused on finding accessible oil. If a company could reach the reservoir, the global market would take every
drop produced.
Today, companies are holding back, sitting on large reservoirs because the world has excess capacity and prices are too low. The critical questions are: When will prices rise high enough to justify producing the oil from a particular reservoir? Will they ever?
Shale wells in the early days were notoriously expensive and short-lived. When oil prices were over $100 a barrel, they made economic sense, along with offshore wells.
When prices dropped below $30 a barrel in 2016, onshore and offshore took separate paths. Shale engineers kept drilling and drove down costs by turning their fields into factories. The offshore sector almost stopped drilling and demanded that services companies lower prices rather than help the sector become more efficient.
From 2007 to 2013, oil companies approved 40 deep-water wells a year on average, according to industry analysis firm Wood Mackenzie. In 2015, that number dropped to 10 and only began to recover last year to 32. The industry is expected to approve 30 projects this year, said Julie Wilson, a Wood Mackenzie research director.
The new projects, though, are much smaller than in the past, the majority costing less than $6 billion and accessing reservoirs of less than 1 billion barrels of oil equivalent. The offshore drillers recognize they must learn from onshore’s example, if they expect to survive in a market while oil prices are unlikely to top $80 a barrel for years to come.
“In 2018, we expect to see lower capital intensity, lower overall capital expenditures, lower capital expenditures per barrel of oil equivalent, and phased projects that will give them lower project risk and faster project payback,” Wilson said. “Simpler, faster and improved delivery is what operators are very focused on.”
An early example of this new approach is Royal Dutch Shell’s Appomattox well in the Gulf of Mexico. Executives used it as a case study in a presentation Monday at the Offshore Technology Conference.
“In 2014, oil was $110, and everyone thought it would stay there, and there was an entitlement that the price of projects should be high,” said Lorenzo Simonelli, CEO of Baker Hughes, an oil field services company owned by General Electric. “Now we look at it the other way around. If oil is going to be at $20, how do we get the project to go forward?”
The well’s operator was a major reason for the high costs, refusing to share details of the company’s drilling strategy with services providers, insisting on bespoke engineering and focusing on maximum output rather than cost-effective design, said Harry Brekelmans, project and technology director for Shell.
“We’ve almost made a 180-degree turn. It should all be simpler, it should all be lighter,” Brekelmans said. “There is a lot more of a desire to use standards and specifications that we can draw from the market.”
Services providers are also revamping their business plans, moving away from billable hours, and fees based on cost, to contracts focused on solutions, said Steve Demetriou, CEO of Jacobs, a major engineering and construction firm.
“What investment do we need to put in that will drive a return for both companies, and a return from the project that will create value? That’s a whole different mindset,” he said.
Appomattox was approved in 2015 before executives realized that prices were not going to recover to 2014 levels anytime soon. But Shell, Baker Hughes and Jacobs managed to cut costs 30 percent from the sanctioned price.
Most of the panels at this year’s OTC focus on lowering costs, simplifying processes and establishing standard technologies, things that attendees have talked about for years. The future of the industry depends on these ideas finally sinking in.