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Page added on July 21, 2012

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The oil industry’s lure of the deep (waters)

If you thought 2008 was a heyday for deepwater drilling, you ain’t seen nothin’ yet.

At least that’s the message suggested by the first two drillers, Noble Corporation and Diamond Offshore, that reported second-quarter earnings this week. While earnings were healthy, it was the commentary by the drillers’ managers that made Wall Street sit up and take notice.

Both companies say they expect the global ultra-deepwater segment to carry the ball for them going forward. And that “forward” looks pretty darn good.

Between bidding rounds this year in places as diverse as Tanzania, New Zealand and Colombia, planned marine seismic surveys and new discoveries in places both familiar (such as the US Gulf of Mexico and West Africa), and not so familiar (such as Kenya and Liberia), a lot of drilling is going to need doing in the next few years.

An already tight rig market that has driven up demand due to continued exploration successes worldwide over the last couple of years has pushed up typical rig dayrates near the $600,000 mark. While that isn’t a record–some time back, ExxonMobil inked a deal for $703,000/d for an expensive state-of-the-art ultra-deepwater floater–today’s rates in the high-fives are an average. Recently at least one deal was inked for well over $600,000. And earlier this year, Morgan Stanley analyst Ole Storer predicted that later in the year, rig rates could climb to $714,000/d.

But oil and gas finds really tell the story. So far this year, upstream operators have made 22 announcements of oil and natural gas discoveries in water depths of 4,000 feet and greater, compared to 37 such discoveries in all of 2010, Simon Johnson, vice president of marketing and contracts for Noble, said during the company’s earnings call July 19. The average water depth of the finds is 6,400 feet, although the deepest this year so far is offshore Mozambique in 7,400 feet of water.

Those finds will all need to be appraised and developed, meaning more drilling. And then produced. And after that, they will need more drilling to keep up production, necessitating more drilling still. It adds up to a whole lotta rig-years. And each new discovery adds to the need for rigs.

The newest ultra-deepwater rigs coming into the market these days are equipped to drill in 10,000 feet of water, and can gear up for waters 12,000 feet deep with some added equipment. The most state-of-the-art rigs can also drill 40,000 feet below the mud line. That is well past current needs; the deepest well ever drilled so far in the US Gulf, for example, lies in about 10,000 feet of water and the deepest total depth has been about 35,000 feet. And so far, 10,000 feet is about the water depth limit of US areas now open to leasing.

But ultra-deepwater–loosely definfed as water depths of 7,000 feet and greater–isn’t the only market segment doing well. Deepwater–again, loosely defined as water depths around 4,000 to 7,000 feet–also is doing well. Michael Acuff, senior vice president of contracts and marketing for driller Diamond, said rigs for that class are fetching dayrates in the high $400,000s to low $500,000s.

And even the midwater market for rigs that can drill in no more than 1,000-4,000 feet of water is performing well, and dayrates there also continue to increase, he said.

For example, Diamond revealed this week that the midwater Ocean Vanguard, confined to work in waters no deeper than 1,500 feet in Norway, was signed to a 20-month extension with Statoil for $450,000/d. That is “higher than our forecast of $300,000/d and its prior dayrate of $352,000/d,” UBS analyst Angie Sedita said.

But that relatively high rate may not be all that surprising, given that the number of such rigs is limited. Most were built during the mid-1970s to the early 1980s when 1,500 or 2,000 feet was considered the ne plus ultra in water depths. But drillers today aren’t building rigs that can only navigate 2,000 or 3,000 feet of water; they are chasing customers that are chasing what ultra-deepwater Gulf operator Anadarko Petroleum called the “big boys” in complex subsalt reservoirs which are found in 6,000-plus feet of water, not to mention five or six miles under the sea.

Even while ultra-deepwater garners all the recent attention, midwater depths do continue to lure operators to areas of the North Sea and Gulf of Mexico where infrastructure is abundant, well costs reasonable and smaller independents can get a leg up on offshore expertise. In fact, even ultra-deep players such as Anadarko at one time were major midwater operators; Anadarko still has producing fields there, for example, the Nansen-Boomvang fields, in the US Gulf’s East Breaks area in 3,600 feet of water.

One thing is certain: be it mid-, deep- or ultradeep waters, offshore looks set to be a bright star in a universe with room for a lot of ingenuity and success.


5 Comments on "The oil industry’s lure of the deep (waters)"

  1. Mandy Meikle on Sat, 21st Jul 2012 11:48 am 

    And not a word on net energy returns, I’ll bet. People know that if they spend 2/3rds of their annual wage on communiting, say, then their take-home pay is only 1/3rd of what they earn. Why isn’t it equally clear that if the energy invested in unconventional oil/gas extraction is 2/3rds of output, that unconventionals can’t possibly yield the amounts of eneregy required to replace that from conventional oil? I’d swap logic and common sense for ‘ingenuity and success’ any day!

  2. Mandy Meikle on Sat, 21st Jul 2012 11:50 am 

    Obviously that new verb I invented was ‘commuting’ but the theory works regardless…

  3. BillT on Sat, 21st Jul 2012 1:31 pm 

    Yep! NET energy is decreasing no matter what they call oil these days. All they are saying is that it ain’t agonna get easier or cheaper.

  4. Hugh Culliton on Sat, 21st Jul 2012 2:15 pm 

    I’m quite sure that if we wanted, we could figure out how to drill at the bottom of the Challenger Deep, that still won’t solve our peak oil problems. EROEI is what it is, and our current way of life still requires an EROEI no less than 8:1. We still have to face the fact that the cheap oil age is over. As well, there are some serious safty problems with these plans. First is location. West Africa is not the most stable of locations and piracy and insurgency are a large problem. Rigs and their logistical bases ashore will have to be defended, and that’s expensive. Finally, what if there’s another Deep Water Horizon, but at 10 or 20,000 feet? Plugging a well at that depth would be orders of magnatude more difficult.

  5. DMyers on Sun, 22nd Jul 2012 12:05 am 

    Desperation goes deep.

    When all the world’s metals have been mined to build the miles long drilling paraphernalia required for deep water ventures, we just won’t be able to muster that last mile to the mother-lode gusher.

    Down thar, thar’s never gonna be as much as we think there is down thar.

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