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Oil producers try to go deep, cheap for subsea wells

Oil companies are trying new ways to cut costs to make subsea crude reserves that are bigger than Saudi Arabia's economically feasible, following a price crash that ended 10 years of spiraling spending.

[HOUSTON] Oil companies are trying new ways to cut costs to make subsea crude reserves that are bigger than Saudi Arabia's economically feasible, following a price crash that ended 10 years of spiraling spending.

Trimming costs 20 per cent from last year's levels would make the majority of deep-water projects viable at US$70 oil, said John Gremp, chairman and chief executive officer of FMC Technologies. FMC, based in Houston, announced plans this week to form a joint venture with France's Technip SA in a bid to reduce equipment costs for its customers.

"This is the primary challenge the industry faces today," Gremp said Tuesday at the Howard Weil energy conference in New Orleans. "That large portfolio of deep-water discoveries in inventory won't be developed unless there's significant improvement in the returns." The International Energy Agency has estimated there are more than 300 billion barrels of oil buried deep under the ocean, larger than the unextracted reserves of Saudi Arabia or Venezuela. Deep-water oil, defined as being more than 2 miles (3 kilometers) below the sea, accounted for 6 percent of global output in 2013 and is expected to almost double to 9 million barrels a day by 2035, according to the Paris-based agency.

Deep-water discoveries now make up about two-thirds of oil found, Schlumberger CEO Paal Kibsgaard said Monday.

"The magnitude of deep-water reserves and production potential is simply too large for the industry to ignore," MR Kibsgaard said at the New Orleans conference.

Drilling for and producing oil under miles of water is more complicated an endeavour than onshore wells. A blowout at BP Plc's Macondo well in 2010 led to the biggest offshore oil spill in US history. Regulatory changes as a result of that incident meant higher costs for an industry that has struggled to make deep-water projects profitable, even when oil was US$100 a barrel.

With prices now less than half that, the era of higher spending to reach ever deeper wells is being reconsidered. Rig owner Diamond Offshore Drilling. is predicting that offshore spending will drop 20 per cent this year as other oil services and equipment makers team up to share knowledge and cut costs.

The average cost for subsea equipment on a deep-water well climbed 325 per cent from 2004 to 2014, according to data compiled by Bloomberg. In some cases, a single deep-water well can cost more than US$100 million, compared with about US$7 million for an onshore well in the Permian or Eagle Ford shale areas of Texas.

While most of the offshore projects are larger, longer-term investments than onshore wells, new projects may be put off while oil prices are low.

"The slowdown in subsea projects may prove more pronounced than some analysts and companies are anticipating," Andrew Cosgrove and William Foiles wrote in a Feb 19 Bloomberg report.

FMC says its answer is the Technip joint venture, which will tackle the cost of subsea equipment that handles and processes crude emerging from the well. That's the second- largest cost for deep-water wells, after drilling the actual hole.

Service companies are also pushing to get involved in projects earlier to help prevent costly re-design work. Equipment makers want to standardise wells, since more challenging environments like deep water often require custom- made gear for a single project.

"You don't have a cookie cutter project out there; they're all snowflakes," said Caitlin Shaw-Traver, senior director of subsea market research at Quest Offshore Resources. "We're at a pivotal point in terms of the evolution of subsea."

Producers have already wrung concessions from contractors, cutting offshore-rig fees that usually account for about half the cost of drilling a well. BP is now leasing a deep-water rig in the Gulf of Mexico from Transocean for US$399,000 a day - that same vessel went for US$610,000 as recently as last year.

"The industry had an issue before US$50 oil," Mr Gremp said in an interview last month in Oslo. "We need more than incremental change, we need fundamental change."


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