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Jon Sterling

Jon Sterling

Jon Sterling is a New York based writer formerly working in the marine transportation, petroleum and construction industries

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Oil Majors Should Invest In Deepwater Drilling

Following a record year for production, deepwater drilling may be bound for another round of investment. All the oil and gas exploration financed in the decade of high prices that culminated in 2009’s $100 per barrel prices, has come into production or is soon to come online. From here, without further investment, the major oil companies will be looking at declining output. These big companies, the household names such as Exxon and BP, play the long game when it comes to oil production. They are, for all intents and purposes, the only players in deepwater drilling and must commit to investment soon if they want to avoid production declines.

Oil prices have now been above sixty dollars a barrel for over a full quarter. Not only are prices higher but deepwater drillers have slimmed down production, looking at lean and efficient plays rather than focusing on volume. Whereas the former price point for profitable deepwater drilling may have been in the seventy dollar a barrel range, the oil price crash forced companies to lower profitable production to fifty dollars per barrel, going as low as thirty-five dollars per barrel in some cases. Based on the recent price stability and with the possibility of prices going even higher with geopolitical flashpoints such as Venezuela and Iran, it might be time to go back to the “bad old days” of big fields and volume plays.

Shell, the deepwater leader, seems to have a coherent plan, bidding for deepwater leases in an area contiguous with its Perdido Basin leases all the way to and beyond the undersea border with Mexico, where it has snapped up newly opened leases potentially worth billions. Much of the reason for Mexico opening leasing to foreign companies was national oil company Pemex’s lack of deepwater expertise. But is Mexico ready for deepwater drilling? Political roadblocks could come up as soon as July, as the leading candidate in this year’s presidential race is Andres-Manuel Obrador, the perennial also ran who may finally have such an overwhelming lead that he will end up in Los Pinos, and complicate deepwater drilling by restrictions on foreign companies.

In contrast to Mexico, Brazil has long been a leader in deepwater development. However, it only opened up to independent foreign oilfield development in 2016. The past year has seen bidding from twenty companies on leases in the Copacabana waters, with Exxon the big winner, and over a billion dollars put into Brazilian government coffers. Each of the sixteen big blocks are estimated to contain over a billion barrels of recoverable oil. Related: The End Of The Status Quo In LNG Markets

Norway’s national petroleum company, Statoil, partnered with Exxon in many of its Brazilian bids, but deepwater drilling could not be more complicated than in Norway’s Statoil’s last Great Hope at home, Johan Castberg, the largest untapped field in Norway. The field is north of the Arctic Circle, in depths of up to 400 meters, and situated adjacent to the cod breeding grounds, Norway’s leading fishery, and a powerful lobby who will be sure to make sure the drilling is done with heavy safety oversight or not at all.

The majors may be looking in another direction, seeking to diversify, but ignoring the deepwater sector could be a grave error. The two top players, Shell and Exxonmobil, have both been making moves into alternative energy and electric cars. The question is whether they will continue hedging their bets with further investments into alternative energy or whether high oil prices will give them confidence to put money on what is the most challenging play in the petroleum field, deepwater exploration and development.

By Jon Sterling for Oilprice.com

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