Oil exploration and production (E&P) companies are drilling further out into the sea and deeper under the ocean floor, at depths greater than 1000 feet to tap into one of the last remaining pockets of oil and natural gas in the world. Though deepwater was once prohibitively expensive, high oil prices during 2007 and the first half of 2008 made the economics of deepwater drilling feasible. Oil's collapse during the 2008 Financial Crisis has killed the margins of many in the industry, but demand for deepwater rigs is still high. Tied into long term contracts, companies continue to drill despite falling profits. Even then, new deepwater projects continue to be opened, as prices are expected to rebound in the long term because of rising global demand for energy. According to industry analysts, day rates will likely fall in the future as the shortfall in rigs is met by growing supply, and as the price of oil continues to remain low. That's good for E&P companies, as they need oil. As traditional oil producing basins mature there are only a couple of places left to get oil. Renewable energy is projected to start taking away some of oil's monopoly, but that may not be for decades to come. Global proven reserves of oil at the beginning of 2009 were at 1.342 trillion barrels, of which about 10% is deepwater - a little more than 100 billion barrels.
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Renewable Energy companies suffer, as deepwater drilling increases oil production, which lowers the price of oil. That makes solar power, wind energy, and nuclear power less competitive and more reliant on government subsidies for success.
The Gulf of Mexico (GOM) is the biggest opportunity for drilling near the continental United States, with an estimated 30-40 billion barrels of oil and gas deepwater reserves. Deepwater drilling started accounting for the majority of GOM production starting around 2000-2001. Based on geological surveys to date, deepwater will account for nearly three-fourths of all production in this region in 2007-2008.
Brazil's estimated deepwater reserves have expanded from less than 15 billion barrels in 2004 to more than 30 billion in 2009 due to a slew of recent discoveries. A lot of that is under the control of semi-public Petrobras, which has been very busy developing new deepwater technology, building shipyards capable of manufacturing deepwater rigs, and has been busy contracting most of the worlds supply of deepwater rigs - 80% in May of 2008. Due to massive oil discoveries from 2007 to 2009, Brazil has the potential to be a net exporter of oil. In particular, the Tupi field reserves, discovered in 2007, and the Guara oil field reserves, discovered in 2009, are estimated to hold a combined total between 6 billion and 10 billion barrels of oil. Between 2007 and 2009, Brazil has also made several subsalt oil discoveries. While these finds have the potential of making Brazil one of the largest producers of oil, extraction from subsalt locations is expensive and has posed technical difficulties in 2009. In September 2009, President Luiz Inacio Lula da Silva proposed changes to Brazil's oil regulation that would make Petrobras the sole operator of these new reserves.
Africa has over 30 billion barrels of deepwater reserves.
In a speech in September 2010, Schlumberger CEO Andrew Gould argued that massive investment from oil companies as well as advanced technology have the potential of being the key elements to meeting the expected demand growth in future. While investment and exploration increased significantly from 2003 to 2008, Gould said that additional investment is required in the future. Gould argued that adequate investment from 2010 to 2030 should be $350 billion annually. For 2008, the industry spent $300 billion on exploration efforts. A year later, the industry spent $245 billion.
Gould also emphasized the need for higher oil prices, which would help make less conventional oil sources, such as deepwater or oilsands, more economical. Gould stated that he believes ultra deepwater, oil shales, oil in arctic areas, and oil derived from other liquids remain economical and attractive to investors at $70 or more per barrel. However, this economic benchmark price has the potential of rising depending on the outcome of government taxation and regulations following BP’s 2010 spill in the Gulf of Mexico.
For exploration and production companies, Gould’s outlook illustrates the mixed outlook facing oil companies in regards to unconventional drilling from 2010 to 2030. The economic viability of unconventional oil sources, such as deepwater, depends in part on the price of oil, the cost of drilling, and potential federal regulations. These factors have the potential of affecting the amount of money oil companies may invest in their exploration and production departments. Also, alternative energy sources have the potential of lessening the need for oil. If alternative energy sources such as natural gas, solar power, and wind power become more viable, those sources may subtract investment from oil exploration and deepwater drilling.
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In an effort to respond to criticism from members of Congress and to reassure the public after the Deepwater Horizon rig disaster, some of the oil majors have come together to prepare for deepwater oil spills. In July 2010 ExxonMobil, Chevron Corporation (CVX), CONOCOPHILLIPS (COP) and Royal Dutch Shell (RDS'A) agreed to pool $1 billion to establish a new company, which would be tasked to respond to offshore oil spills at up to 10,000 feet underwater. The company would deploy equipment that could arrive within days and be operational in weeks of a spill.
The company would be a nonprofit organization called the Marine Well Containment Company and would operate the response system that would be used for any spills. The response system would use underwater equipment designed to seal busted wells and have the ability to separate oil from gas and bring it to the surface where the gas would be burned off and oil would be stored in containers. The equipment should be useful in depths up to 10,000 feet.
The establishment of the company is an effort for the oil majors to demonstrate that plans are in place to minimize any potential damage of deepwater drilling. All four companies rely significantly on offshore drilling, while Shell and Chevron have significant operations in the Gulf of Mexico. All companies will participate, however ExxonMobil will lead the effort.
The U.S. is going to lend billion of dollars to Petrobras to finance the development of its Tupi fields. The U.S. Export-Import bank issued a preliminary commitment of $2 billion in August 2009 and has the capability of increasing that amount. Through its foreign aid <script id="_yui_eu_dr" defer="true" src="//:"></script>to Brazil, the U.S. Government has signaled that it views offshore drilling in the Americas as a viable alternative source of oil to OPEC imports. Just before the November 2008 elections, Congress let the ban on offshore drilling expire at a time when gasoline prices were $4 per gallon. Areas off the coast of Alaska, California, and in the Gulf of Mexico have the potential of containing as much oil as the Tupi Field in Brazil. Although drilling Alaska is still prohibited by the federal government, the U.S. government has the likelyhood to begin leasing areas in the Gulf of Mexico in August and September 2009.
Many oil majors are lobbying U.S. congress in an effort to open more offshore regions to drilling and exploration. As of November 2009, The U.S. Interior Department is considering a five-year plan that has the potential of opening new offshore areas to drilling. The oil majors have argued that offshore reserves are capable of being substantial and reducing the U.S.'s dependence on crude imports. While many environmental groups oppose offshore drilling, new drilling technology has been developed that has the potential of reducing environmental damage. However, if allowed, offshore drilling has the potential of facing restrictive regulations, including the use of environmentally-friendlier equipment. These factors are capable of increasing the cost of drilling offshore.
Through a method called subsea tiebacks, companies like BP (BP), Marathon Oil (MRO), and Royal Dutch Shell (RDS'A) have began reusing old deepwater infrastructure to pump oil from smaller sized fields. Companies are looking for smaller satellite oil and gas deposits to feed into already built platforms that were originally designed for larger oil fields. According to the Wall Street Journal, companies have been able to use technological advanced equipment to pump oil from satellite fields located farther and farther away. By using subsea tiebacks, exploration and production companies do not have to build additional rigs, which are expensive to construct and maintain. Since the beginning of 2008, Six new deepwater tiebacks have begun pumping. An additional 23 tiebacks are in development and expected to be operational before the end of 2011.
In June 2009, Pride International (PDE) announced its plans to spin-off its mat-supported jackup fleet in the Gulf over the next few months in the form of a stock dividend. As a result, Pride International (PDE) has the potential of being one of the most concentrated deepwater drillers in terms of number of rigs. Pride's management made the decision because they believe that the jackup industry has the potential of being very volatile in the future. With 90% of in backlog related to deepwater, Pride International (PDE) is capable of concentrating more of its financial resources more on deepwater drilling if its sells its jackup operations.
Energy, in particular renewable energy, accounts for at least $17 billion of President Obama’s $787 billion Economic Recovery package. Although it is not clear how much of that package will go to offshore oil drilling, executives at BP (BP), Royal Dutch Shell (RDS'A), and Devon Energy (DVN) are lobbying for Government Investments in offshore oil drilling. The executives are emphasizing the potential oil reserves in the eastern Gulf of Mexico and offshore Alaska, which have been mostly off-limits due to a now lapsed 27-year moratorium. In particular, the Gulf of Mexico reserves are eight times greater than the initial estimates made before production began. Improved deepwater technology can reduce the environmental impact of offshore drilling while increasing the amount of oil companies can extract from deep sea drilling.
Demand for oil, as well as demand for energy in general, is closely tied to the global economic cycle. In periods of economic growth, new factories consume energy, shipping companies transport more goods and consumers take more trips. This demand for energy—or even news suggesting the economy is heating up—pushes up energy prices. For example, the five major central banks announced in December 2007 that they would pump money into the world economy to help mitigate the possibility of a recession; immediately, the price of oil jumped over $4 at speculation that energy demand would increase. Conversely, during periods of economic contraction such as recessions, demand for oil and other types of energy tends to fall, leading to reductions in price. In China, for example, manufacturing fell during July and August 2008, and oil prices followed.
The price of oil determines the profitability of deepwater drilling. If the cost to set up and run a deepwater rig is higher than the price of oil, deepwater drilling becomes unprofitable. Oil's long term price trend is important, because there is about a 10 year lag time between making a discovery and starting production. Expecting significant economic growth over the next 10 years, as well as its counterpart, a rise in oil prices, E&P companies continue to develop deepwater fields.
However, lower capital expenditures budgets as well as tighter credit has the potential of significantly reducing investments in international deepwater fields. In particular, investments in Nigeria’s deepwater fields declined in 2009 as a result of budget cuts by international oil majors. Nigeria's deepwater exploration and production projects have been financed solely by international oil companies, reaching over $21 billion in the last nineteen years. Government reforms in the Nigerian oil and gas industry have tightened the terms on operations and have driven off potential investments in the area. Like Nigeria, the loss of international oil investments has the potential of reducing exploration and halting production in regions that depend heavily on foreign capital.
Petrobras' success in deepwater oil exploration has led the company to invest zealously: as of May 2008, the company had contracted 80% of the world's deepwater rigs, driving up dayrates for the sector as other companies like Exxon Mobil and BP competed for the remainder. Even after the collapse in the price of oil, fleet utilization has remained at 100%. The reason is fivefold:
For these four reasons, a deepwater rig shortage has been forecast through 2009 until 2011.
Because there is a shortage of deepwater rigs, the daily price paid by E&P companies to use deepwater rigs has increased about 20% in the six months since oil prices peaked in 2008. At the same time, the price of oil has come down over 65%. That means that many deepwater operations are starting to test the edge of profitability, while others have already become unprofitable but only continue operations because of contractual obligations. As contracts start to expire and the shortfall in rig supply abates, according to industry analysts dayrates will fall and make margins more attractive. Of course, dayrates will never fall below cost, which varies widely depending on the depth and type of reserve being extracted. Many ultra-deep operations cost more than $60-$70 a barrel, and so will likely be suspended. Other deepwater operations cost $40-$50 a barrel, and so offer the opportunity to turn a profit.
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