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Oil Majors Pushing Offshore, but Obstacles Remain

Oil Majors Pushing Offshore, but Obstacles Remain

Major oil companies continue an aggressive push into deeper water as the memory of the 2010 Deepwater Horizon blowout recedes. Spurred on by consistently high prices for crude oil, the decline of conventional oil fields, and the advent of new drilling technologies, companies like BP plan bigger investments in offshore oil in the coming years.

BP is still not out of the woods in terms of its legal liabilities stemming from the 2010 disaster, but they are pushing into deeper waters. In August 2013 BP began appraising its Tiber field, a “giant” oil field that could hold between 4 to 6 billion barrels of oil. The Bureau of Ocean Energy Management (BOEM) estimates that the Gulf of Mexico holds 48 billion barrels of undiscovered technically recoverable oil reserves.

But at 35,000 feet, the field is more than twice as deep as the Macondo well. The high pressure and temperatures makes drilling in the Lower Tertiary extremely difficult and costly. BP is investing big in its “Project 20K,” named for technologies that need to be developed that can withstand 20,000 pounds of pressure per square inch at 350 degrees Fahrenheit – pressure and temperatures that occur at such drilling depths.

Related article: Louisiana Loses ‘Millions’ in Oil Extraction Tax Glitch

Although ultra-deep water drilling is expensive, BP and other oil companies are pushing forward. BOEM’s auctions for offshore drilling acreage in 2013 received strong interest. Sale 227 in March 2013 attracted 407 bids from 52 companies, netting the federal government $1.2 billion. Rig counts are on the rise in the Gulf, jumping from 41 to 56 from the beginning of 2012 to November 2013.

Still, drilling at such depths is incredibly risky. Oil companies are drilling at such depths because they are struggling to replace natural decline of other fields. If they had easier onshore resources, they would be drilling them instead. As NPR reports, BP’s oil production is down 21% since its 2010 disaster in the Gulf. BP is betting its future on oil that is seven miles below the surface of the ocean. Deepwater Horizon cost BP over $42 billion and counting, and another mishap in the Gulf could end the company. Similarly, Shell is going to great lengths to get oil out of the Arctic. After $5 billion and nothing to show for it, Shell appears undaunted. On November 26, it submitted its “integrated operations plan,” which details how it plans on safely operating in harsh Arctic conditions.

Moreover, even if ultra-deep oil can be safely produced, it will not be a game changer.  Despite the billions of dollars pouring into the outer continental shelf, offshore production is still fairly modest. For example, the 1.3 million barrels per day being produced in the Gulf as of September 2013 is still below pre-Hurricane Katrina levels (see chart).

Related article: Higher U.S. Oil Drilling Has An Unexpected Effect

Gulf of Mexico Oil Production

And that may not change much. The Energy Information Administration predicts that by 2020, offshore oil production in the Lower 48 will remain between 1.4 million and 1.8 million barrels per day. That is pretty much in the range of where production is at today.

By. Nick Cummingham




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