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Deepwater Will Soon Challenge Shale

Offshore

Just when the focus in oil seemed to be firmly fixed on shale as the cheapest kind of crude, Wood Mackenzie went and ruined it for shale producers with a report claiming that deepwater developments are turning increasingly competitive.

According to the report, Big Oil, which seems to be the only kind of oil remaining in deepwater exploration, has done some impressive work regarding costs, such as improving project designs and well performance, aiming for fewer wells and more subsea tiebacks. Thanks to this, output may be lower than it would otherwise be, but costs are also lower—in some cases falling below $50 a barrel.

According to Wood Mac’s upstream oil and gas research director Angus Rodger, this shift is essentially a shift in the mindset of Big Oil rather than a shift in innovation, with producers foregoing maximum profits for a more stable revenue stream.

Still, innovation has its part to play when it comes to deepwater developments. Two engineering majors, Siemens and ABB, are working on a new type of offshore platform that is entirely built on the seafloor. These self-sufficient oil and gas extraction factories, as Siemens calls them, will have no crew and will not be subject to weather changes, which is expected to save a lot of money that would normally be paid out in wages and on maintenance, not to mention the savings on safety expenses. This would be on top of boosting well yields.

Shell is boasting future profitability at $15 a barrel from its Mars platform in the Gulf of Mexico. The company is adopting drilling techniques from smaller, independent energy firms, which have left the Gulf after finding themselves unable to withstand the investment pressure, and is also transforming its corporate structure, which has already borne fruit. Related: Russia Reaches 2/3 Of Oil Output Cut Target

As the Australian reports, Shell’s new team of “chief irritants”—those whose sole purpose is to challenge old ways of doing things to ensure they still make sense—has already enabled a simplification of offshore drilling operations and reduced the amount of equipment Shell uses on its offshore rigs. Result: lower production costs. In fact, a Shell executive told media at this year’s CERAWeek that in some locations, production costs in the deepwater have dropped to $40 a barrel.

Meanwhile, shale-patch costs are rising, and Rodger expects an even playing field for deepwater and shale projects soon. Oilfield service providers have seen their chance in the recovering market with a huge demand for their services and are raising their prices in a not-too-subtle way, after years of being forced to discount everything in order to stay in business.

One difference, however, remains between deepwater and shale projects. The latter are still viable for small independents. The former – hardly. As Rodger puts it, “deepwater remains a big boys’ game, it’s not for everyone.”

The great majority – 70 percent – of 45 deepwater projects awaiting a final investment decision and approval from the relevant authorities are part of Big Oil’s portfolio: Exxon, Chevron, Shell, BP, Total, Eni, Statoil, and Petrobras. After all, as per Wood Mac figures, deepwater project costs have fallen by 20 percent since 2014, which although impressive, is still 20 percent of a quite massive investment per project.

By Irina Slav for Oilprice.com

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