DEEPWATER DISCOVERY TODAY- FOR TOMORROW : Is it worth the wait?

By Oluwasheyi Nicholas Lisk-Carew

  

In today’s highly competitive oil and gas industry, offshore oil accounts for around 25% of the world’s total reserves (Alazard-Toux, 2004). Majority of the new natural gases are also discovered offshore. Between the period of 1999 and 2003, 60% of gas discoveries were offshore- which included deep-sea regions such as North America (offshore-technology.com, 2009). Hence, it is more than certain that the offshore sector would reflect a growing share of investment, which should aid development and production capacity.

However, due to the very challenging nature of the oil and gas industry, several companies win from deepwater exploration, while some fail. This could simply be as a result of the provision of services, or machinery to aid the E&P (Exploration & Production) process. In this article, I hope to examine a few companies that are significantly involved in e deepwater exploration and production.

A few Oil and Gas Companies and their drilling efforts

Schlumberger N.V play a key role in the exploration and management consulting to other oil and gas companies (Schlumberger Ltd, 2010). They provide very complex equipment, as well as management services to indigenous E&P oil companies (Schlumberger Ltd, 2010). In fact, Schlumberger made moves to increase its capacity to aid the deepwater drilling, E&P and analysis of the oil reserves by acquiring 2 companies (Womack, 2010). Schlumberger financial records however suggest a steady increase in revenue which the CEO Andrew Gould believes is as a result of the acquisitions of other companies, high demand (Gould, 2005) and other factors, such as new Schlumberger products and services- new proprietary full-azimuth marine acquisition technique, StimMAP* LIVE real-time fracture monitoring service, etc (Schlumberger Limited, 2008). The diagram below reflects Schlumberger revenue growth in recent times.

Figure 1 - Schlumberger revenue growth. (Schlumberger Limited, 2008)

Petrobras, a Brazilian company are into the business of E&P, trade, transportation, natural gas, biofuels, downstream, electric energy, etc. The company also records an increment in revenue from 2004 (Petrobras, 2009). Figure 2 below illustrates this significant growth.

Figure 2 - Petrobras Net Operating Revenue in Millions (Petrobras, 2008)

There are other companies such as Trico Marine Services, a small company that specializes in providing vessels for offshore drilling. In 2007 the company had a market capitalization of around $500million, with recorded revenue of $642,200; $556,131; and $256,108 in 2009, 2008 and 2007 respectively. Hence again, there revenue is soaring up.

On the other hand, companies such as Hercules Offshore, Rowan Companies, are not benefiting from offshore as they focus only in shallow water, and not the deep water, hence they do not seem to benefit from the offshore sector (Rowan Companies, 2010).

As a result of the recent discoveries, we are inclined to believe that there is a vast amount of opportunities for oil and gas companies in the offshore deepwater sector. However, the rising revenue from these companies is highly influenced by the discoveries of commercially viable oil in the offshore fields- which are regarded as giant and supergiant fields. They cumulatively sum up to 24Gbbl, which is two thirds of the total volume discovered (Alazard-Toux, 2004). The discoveries between 1999 and 2003, are shown in the table below:

Figure 3 -Giant oil fields discovered between 1999-2003 (Alazard-Toux, 2004)

These findings are scattered around countries such as Nigeria, Kazakhstan, China, Malaysia, Brazil and a few others.

Deepwater on the rise

Furthermore, figures 1 and 2, show that Petrobras and Schlumberger revenue is on the increase yearly, which suggests that the offshore deepwater is good business for them, as it was during the same period their revenues began to soar upwards. However, as the easy oil is running out, oil and gas companies are left with not much room than to look towards deep-sea offshore (hard oil) as a solution to meet growing demand.

In contrast, the problem economists find is that deepwater E&P costs a lot more to drill and would impact on the prices of oil at the pipes; however given inelasticity of oil demand; it might not have much of a significant negative influence. Although, the world economy is just recovering from the financial crisis and it might not be the best to have very high oil prices but this might be the case in the near future.

Despite the high E&P costs, as stated above, we have seen a marked increase in offshore production. The big onshore fields are depleting and production from them is declining.  Especially as the technology to aid enhanced recovery of such depleted fields is not cheap- and if it doesn’t cover the costs it becomes non-commercial. As such the cost of offshore drilling is quite expensive despite the availability of new technology in that area. 

Recent trends seem to suggest that many oil and gas companies tend to focus on that sector despite the high costs involved not only because of the amount of oil, but because they are favored with better fiscal systems as you would find in the United States- and generally, more suitable business conditions. For example, the recent move of Transocean- by moving its headquarters from Delaware to the Caymans, and now to Switzerland in search of tax havens (Jordans, 2010) confirms this trend. Also, the counterproductive nature of tax deductions and repeals in the US are significant considerations (offshore-technology.com, 2009).

The Impact of Deep Water Drilling on Oil Demand and Supply dynamics

As reflected in the IEA market report published on the 13^th of April 2010 speculations suggest that global crude demand would rise to around 86.6 million barrels per day in 2010 (IEA, 2009). However, the demand in 2008 was more than that of 2007, and research indicates that this was as a result of the high oil prices during the financial crisis. Presently, the world demand for oil is around 86.6 Mbbl/d as speculated. The world supply for oil is around 86.6 Mb/d although, this figure fell by 220 kb/d between February and March 2010 (IEA, 2010), hence supply did overshoot demand slightly.

Therefore, we can see that as the demand for oil is increasing, supply has to equal demand. However, due to the fact that with onshore resources are running out on land, oil and gas companies are left with no option than to go offshore which results to higher costs, considering  the fact that it is much more technical and requires state of the art technology. The diagram below illustrates the world oil consumption as against world oil production and price changes for the past 25 years.

Figure 4 – World Oil Supply and Demand and Crude oil Brent price (BP, 2009)

Figure 5 below also illustrates the breakdown of production. We notice that the EU production started to decline around 2000. However, companies as shown in figure 1 and 2 also had soaring revenue around the same time as the price of oil increases (figure 4) and it is around this period that major discoveries where made, from which around 60% were offshore.

Figure 5 - World Breakdown Production

As we have also observed in recent times, non-OPEC oil is in serious decline, and the oil and gas companies are finding it very hard to find large-scale deposits. As suggested by the world’s largest financial firm UBS, the easy to find cheap oil is gone, and the only way to meet demand is by undertaking much more risky and expensive ventures, such as the deepwater offshore drillings.

Hence, oil and gas companies particularly in the offshore sector seem to be focusing on the size of the reserves. It doesn’t matter whether the new offshore discoveries have 5bn recoverable reserves or 8bn barrels of recoverable reserves. What is important is how quick production can commence.  For example, Petrobras, expect the new Tupee field to come online in 2017, and expect to produce around 1Mbbl/d. However, the world consumes in excess of 86Mbbl/d today. Is it worth the wait? How would the meet demand? This goes for other offshore deepwater big discoveries.  It is crucial oil and gas companies focus on production and not the size of the reserve.

Nutshell:

Oluwasheyi opines that, undoubtedly, offshore deepwater drilling is much more complex and very expensive which only affect the consumers because they have to pay more. But since it seems the only options, consumers are left with is no choice except for the  recent proliferation of green energy.  

Yes, technology has aided the discovery of offshore deepwater fields, but has not really made the process of extraction and production offshore less risky and cheaper. Therefore, it cannot be the main reason that accounts for an increase in  offshore drilling and production.  A more compelling reason for increased offshore drilling and production is because easy oil is fast running out and has become less commercially expedient because of the depletion rates in production of the big onshore fields, the increasing political risk involved and the less favourable tax regimes available onshore. In my opinion, technology has only improved marginally in onshore production hence it enables better management of more complex fields. With more research and development in the technology available for offshore deepwater projects, the costs of production might be reduced and easier methods of production implemented; then again I reckon it would take another 12 years or so.

In the final analysis, Oluwasheyi opines that oil and gas companies simply go offshore because the easy to extract oil has all been drained. This is the major reason for their turn towards high costs and risk of oil exploration in deepwater. For more information on this article and to view Oluwasheyi's professional profile, click here.-->