Deepwater oil and gas has established its prominence over the years. But what has the deepwater industry learned from the Macondo incident? Will it evolve with an industry-wide regulation? Pipeline speaks to experts.
As the hunt for future oil supplies bring explorers to deeper and riskier waters, the offshore industry saw the deepwater market emerge, establish and evolve as the future of oil and gas exploration and production.
Exploration and production in water depths greater than 304 metres (1000 feet) came of age in early 1993 predominantly as a research and development play.
Over the years, companies both supermajors and those controlled by governments, have embarked on an energy frontier dictated by economical, technical, and geopolitical forces. As investments poured in, it brought growth and development to the sector.
Deepwater oil production accounts for almost 15 per cent of total offshore oil and gas production, but over the next few years its total share relative to shallow water output will grow rapidly.
“Given the energy equation, deepwater is a very important area for energy security,” said Dr Nansen Saleri, president of US-based Quantum Reservoir Impact (QRI). “It will continue to be a very significant play for future oil and gas supplies.”
Reserves held by the world’s commercial and undiscovered fields in deepwater and in ultra-deepwater (1,824 metres, or 6,000 feet) are estimated at about 250 billion barrels, according to industry estimates.
Deepwater operators were producing two million barrels of oil equivalent per day (mboepd) by 2001. Production doubled in 2004 reaching nearly four mboepd and increased to seven mboepd in 2007 given the high levels of oil price per barrel at that time.
By 2008, when crude prices reached a record US$147 a barrel, more oil and gas was discovered in deep water than in onshore and shallow-water exploration combined.
Production from deepwater fields is now predicted to increase by 99 per cent in the next five years ended 2014 versus the forecast 20 per cent rise in shallow water output.
“Deepwater activity promises to be one of the biggest growth areas for oil and gas in the coming years, specifically off the coasts of Brazil and West Africa,” said Leif André Skare, partner at Energy Ventures.
Both deepwater and ultradeepwater plays are expected to be major contributors to global supply needs in coming decades. Their joint crude oil production of five million bpd is already one-fifth of global offshore output, and barely 13 billion barrels of oil have been produced so far.
According to the offshore energy think-tank Douglas-Westwood, deepwater oil production has soared from under two million barrels per day (bpd) in 2000 to eight million bpd in 2010, almost 10 per cent of global consumption, and must rise further as onshore and shallow offshore production declines.
“The lack of new opportunities onshore or in shallow waters, together with the need to offset decline from existing reservoirs, is driving deepwater investment at a much higher rate than in previous years,” explains Steve Robertson, director at Douglas-Westwood. “In addition, technological advances have improved the economic viability of developments much further offshore.”
The UK-based firm projects that worldwide expenditure within the deepwater sector will total US$167 billion between 2010 and 2014 – equating to a 37 per cent increase on the five preceding years.
“High prices will continue to drive new exploration both on and offshore,” said H. Sterling Burnett, senior fellow at the National Center for Policy Analysis. “In addition, because there is no ready substitute for oil for so many uses, demand will continue to grow.”
The ‘golden triangle’ of deepwater, namely Africa, Gulf of Mexico (GoM) and Brazilian waters, will largely remain the focus for development, while Asia is pacing forward as a sizeable new opportunity.
The growth in deepwater activity is one factor behind the recent scramble for newbuild drilling units – 17 new rigs have been ordered since the start of October – and companies including Brazil’s Petrobras are in the market for many more to sate their drilling appetites.
Brazil, the Latin American deepwater giant, is expected to drive investments over the next decade. CapEx and operating expenditure combined for Petrobras’ pre-salt areas off its native Brazil are forecast at a staggering US$1 trillion.
“That’s why every country with a significant coastline and any indication that they have oil reserves off their coast is actively exploring (or planning to explore for oil), except the US,” Burnett added.
Two years ago, however, the deepwater market was caught off guard when it was hit by an industry-changing double blow. The industry was totally unprepared when the downturn struck and then suffered the most obvious effect of a devastating safety incident.
Weak economic conditions forced companies to scale back exploration spending around the world impacting expansion plans. This is followed by US government-imposed moratorium on deepwater drilling in the Gulf of Mexico which brought activity to a standstill.
The BP Deepwater Horizon blowout accident and the subsequent oil spill stirred a significant environmental disaster to date. The Macondo incident highlighted potential risks of deepwater drilling and gave critics a voice to push for stricter regulations.
Washington imposed the drilling ban in April in response to the BP oil spill in the Gulf of Mexico. The six-month ban was lifted ahead of schedule, after the government gave in to pressure from oil companies and their Gulf state supporters due to its counter-productive measures.
Offshore drillers had been reporting huge drops in revenues following the ban, while energy officials argued that the ban was having a drastic effect on the region’s economy.
And to add insult to injury, the Obama administration recently reversed itself on offshore drilling. In March 2010 – less than a month before the BP oil spill – Obama said they would open up the eastern Gulf and parts of the Atlantic, including off the coast of Virginia, to offshore oil and gas exploration.
But in December, US said it would not allow "scoping" of areas off the Atlantic coast or in the eastern Gulf of Mexico for future exploration. A five-year ban on new offshore drilling locations such as the state of Florida is now in place.
“The challenge in the US is politics,” said Burnett. “Politics is trumping common sense and national need.”
Now, the industry – particularly in the US – fears reform efforts in deepwater will lead to a big rise in operational and insurance costs, making the US Gulf a less attractive place to invest.
GoM’s deepwater drilling restart was expected to be slow as oil companies will need to comply with the new regulations and demonstrate they can adequately respond to major blowouts before drilling can resume.
The new rules will require companies to get independent certification of the safety of their rig operations. The companies must also have plans in place for recognising potential hazards to help prevent human errors in all phases of activity.
Likely the most costly of the new rules is one requiring rig owners to be responsible for paying for audits, which will oversee the reliability of blowout preventers (BOP).
Though the Gulf of Mexico incident may have created a bad PR for deepwater drilling, it is a turning point for the industry – triggering a new level of safety and environment awareness and much-appreciation for risk management.
“You could not afford another Macondo to happen,” said Dr Saleri, a former head of reservoir management in Saudi Aramco. “The best solutions for deepwater producers will come from the industry and not from the government legislations.”
Two months after the incident, four supermajors have already joined forces to create a standard oil spill response system. ExxonMobil, Royal Dutch Shell, ConocoPhillips and Chevron are building a new system that will be able to respond to a spill within 24 hours, and can be used on a wide range of well designs and equipment, oil and natural gas flow rates and weather conditions.
The partnership aims to pool together their capabilities in the wake of the BP disaster and to reassure members of the US Congress worried about future drilling.
“The pendulum has swung to over-reaction but I think the industry will auto-correct soon,” the Dr Saleri of QRI said. “The industry should take a harder look on the technical, economic, and geopolitical aspects to mitigate risks – they go hand in hand.”
Energy Ventures, which invest in and foster technologies that will allow the industry to operate more efficiently, effectively and safely, said development is underway across the industry in IOCs NOCs, and service companies and with entrepreneurs and venture capital investors.
“We expect to see specific requirements for the design and construction of BOPs that may outline issues such as requirements for control systems and how many shear rams must be included,” said Skare of Energy Ventures.
Stressing on risk management, Dr Saleri said the deepwater business should be approached in a holistic fashion to make it a more viable and efficient business.
Shawn Davis of Akin Gump agrees that venture partners in large offshore projects, risk sharing and the specifics of contractually managing those risks are more important than ever.
“These create a desire to share risks via joint ventures and consortiums – risk management and contractual obligations are becoming ever more important with multiple stakeholders,” Davis said.
“Deepwater drilling and production involves a complicated and interconnected chain of engineering planning and design, mechanical expertise, contractor interfacing and operational execution in an inhospitable environment, which makes management of risk allocation crucial,” he said.
Asked if the industry will see an industry-wide legislation on safety and environment in the long run, experts told Pipeline it is unlikely.
Sterling Burnett of NCPA said: “I don’t see in the offing anytime soon as it would take international regulations and on oil countries have different interests and varying constituencies.”
He said environmentalists in the US hold some degree of power over exploration but they do not have as powerful a voice in China, Cuba or in Africa for instance.
“It is not clear that Western concerns about environmental harm are going to be allowed to interfere with the short-term development needs of these and other developing countries with regards to oil and gas development,” Burnett explains. “This type of green colonialism just won’t fly.”
Leif André Skare of Energy Ventures said: “Industry-wide legislation on safety and environmental issues is not likely. If you look at the current regulatory landscape you see that some countries, Norway for example, have much stricter regulatory requirements than others, yet that this hasn’t driven industry-wide requirements to date.
“What is more likely is a slower ripple effect whereby certain countries will pass regulations that, if successful, will potential serve as the basis for new regulations in other parts of the world,” Skare added.
Shawn Davis of Akin Gump said: “These markets, geopolitically, are quite diverse. The Gulf of Mexico will be handled quite differently from West Africa and Brazil. Note that the industry actually has a strong safety record on the whole and the economic costs are a strong incentive to improve.”
Commenting on what the industry has learnt in the BP incident last year, experts said:
Burnett said: “The key thing to learn for governments is not to delay offered help simply due to domestic labour concerns and do not overreact before you know the full problem.” He believes it is likely that the coast guards response contributed to the problem.
“Industry has to follow best practices,” he stressed. “No corner cutting in materials, not expedited timelines, no short-cuts whatsoever.”
“Production is a long-term prospect with long-term profits, and shouldn’t be driven by quarterly reports and short-term stock prices and concerns by executives about their bonus,” Burnett said.
Akin Gump’s Davis said: “Chain of responsibility is becoming more important to regulators. Reputational risks, as opposed to the limits of legal and financial risks, are becoming an important part of the cost-benefit of a contemplated project.”
Skare added: “The industry has clearly seen the importance of having reliable technology and processes in place to protect the safety of its people, operations and the public.”
With the tragic events at Macondo have come increased public and governmental scrutiny and now, more than ever, every industry player must focus on the integrity and transparency of its operations.”
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