Deep water and shale: Not so different anymore
For a long time, deep-water projects were as complex as rocket ships, requiring years and billions of dollars to develop. Shale drilling, once the secret of releasing oil from the rock formations was discovered, became faster, cheap and simpler.
In other words, drilling for oil in deep oceans and extracting it from onshore shale plays couldn’t be more different.
That, however, is changing. The two sectors of the oil and gas industry are finding they have more in common as they adapt to a new landscape shaped by the last, brutal oil bust, which ended in 2016.
The two sectors are meeting in the middle as shale oil becomes larger-scale and switches to a repeatable manufacturing mode, while the offshore industry has slimmed down with smaller, cheaper and faster projects that can compete with onshore operations.
Deep water is becoming almost as cost-efficient as shale, said Angus Rodger, an analyst at the energy research firm Wood Mackenzie. Many offshore developments are now profitable under $50 per barrel.
Shale, also called tight oil, remains the preferred investment, especially in the Permian Basin in West Texas, which accounts for about one-third of all U.S. production. But the size of those investments is growing as the biggest players in the industry move into manufacturing mode, requiring larger holdings, more equipment and more complex operations.
Size matters
“Engineers discovered that bigger really is better,” Rodger said. “Now scale is the key differentiator. New tight oil is industrialized, and that requires more capital and infrastructure, and longer cycle times.”
At the same time, the deepwater industry has reinvented itself, cutting costs and project times. The main beneficiaries of this trend are a handful of advantaged sweet spots, such as the Gulf of Mexico, Brazil and Guyana, where the Texas oil major Exxon Mobil is focusing much of its investment.
A lot of offshore projects involve drilling wells and connecting them to existing platforms via pipelines and umbilicals to save costs. These are called subsea tieback projects.
The common thread is that both onshore and offshore trends play into the hands of the biggest companies, such as Exxon Mobil and Chevron of San Ramon, Calif. They were already leaders in the deep-water industry, and they have the scale, money and patience to lead the industrialization of the Permian and potentially other basins.
“Big Oil will be the big winner from the convergence of tight oil and deep water,” Rodger said. “The majors’ longer-term investment horizon also allows them to invest through the cycle in both deep water and tight oil.”
Getting better
In shale oil, drilling and extraction techniques have shifted from experimental to repeatable. Companies used to drill fewer wells per site. Horizontal wells weren’t drilled as long. Hydraulic fracturing, or fracking, was less intense, using less water, sand and horsepower. Modeling underground reservoirs of oil and gas was more speculative.
But after drilling more than 10,000 horizontal wells in the play, the industry knows where the most productive formations are and how to repeat the process to exploiting them.
“The Permian will be central to driving corporate strategies for players of all sizes,” Rodger said. “Many U.S. independents will need to scale up to compete as industrialization gathers pace, but not all have the skills and capital to do so.”