Deepsea diggers: Exploring for deeper and more complex reserves

For many, offshore hydrocarbon exploration constitutes perhaps the final frontier in the oil and gas sector. Offshore drilling targets oil and natural gas deposits trapped beneath the ocean floor – or in some cases beneath inland lakes and seas – which are accessed through wellbores in the seabed. It is the most complex and expensive way of exploiting hydrocarbons deposits. Wells are drilled from a variety of facilities, including platforms and deepwater mobile offshore drilling units, with offshore production presenting uniquely challenging conditions.

The returns from offshore drilling have the potential to be significant, however, the upfront investment needed is high. Critics also point to the environmental hazards involved with the extraction process – the 2010 Deepwater Horizon oil spill in the Gulf of Mexico is a recent notorious example. However, as global energy demand increases and oil prices rise – and some of the largest new hydrocarbon discoveries are found offshore – exploration efforts are set to increase.

GLOBAL GROWTH: The “2012 Offshore Exploration Outlook” from Morgan Stanley Research estimated that offshore exploration would increase 18% in 2012 over 2011, with wells expected to be tested in some 52 countries. Many of the test sites are in emerging economies in South America, West Africa, East Africa and South-east Asia, and offshore discoveries could be an important game-changer in these regions. In Ghana, pipeline drilling commenced in 2010 and by 2011 oil accounted for 6.8% of GDP.

Despite the large-scale investments of time and capital, and the industry’s greater reliance on technology when compared to the onshore sector, offshore drilling has the potential to deliver very healthy profit margins to the firms that are willing to make the commitment. According to 2010 figures from the International Energy Agency (IEA), offshore production – outside of Europe, where North Sea output is falling – will increase by 2 percentage points to 27.5% of global output by 2015, and the offshore segment is expected to further increase its contribution to global oil production in the subsequent years.

OFFSHORE HISTORY: Offshore oil exploration is well-established, with the world’s first submerged oil wells drilled from platforms in the late 1800s in the US. However, only in the past 65 years has offshore drilling seen significant progress, with noteworthy advances made into deepwater since Kerr-McGee Oil Industries drilled the first productive well sited beyond the horizon – at a point from which land could not be seen – off the Louisiana coast in 1947.

By 1971, offshore output accounted for approximately 20% of oil production in the US, with the country pushing for increased leasing of areas in national waters throughout the 1980s. During that period, offshore production began to move to deepwater – now defined as depths between 500 metres and 1499 metres – following the first successful discovery in 1975 at Shell’s Cognac field. Supported by technological and geological breakthroughs, deepwater developments have continued, with deepwater fields proving their appeal to the industry with flow rates reaching into the thousands of barrels a day.

Shell extended its activities to “ultra-deepwater” – depths of more than 1500 metres, when its Mensa field in the Gulf of Mexico – discovered in the 1980s – began flowing gas in 1997. Other companies launched offshore activities in the 1980s, including BP, Exxon, Mobil and Brazil’s state-owned Petroleo Brasileiro (Petrobras), with production from deepwater and ultra-deepwater rapidly increasing through the 1990s, as shallow water output declined. Water depths continued to increase – Petrobras broke the 2438.4 metre record in 1999 in the Campos Basin, while the Discoverer Deep Seas drillship, owned by Switzerland’s Transocean, broke the 3000 metre record in 2003 while constructing ChevronTexaco’s Toledo well in the Gulf of Mexico. The world’s largest offshore drilling contractor beat its own record that same year, and continues to hold the world record, having reached a depth of 3107.13 metres off India, reached by its ultra-deepwater drillship Dhirubhai Deepwater KG2.

NEW FRONTIERS: In addition to explorers drilling deeper to find oil and gas deposits, they are entering other new arenas in their quest for resources. Exploring and developing deposits in the Atlantic’s pre-salt layer is becoming increasingly important in the offshore sector, following significant finds off the coast of Brazil – the first in 2006 – and hopes for similar discoveries off the West African coast.

Pre-salt deposits describe reservoirs of crude oil or natural gas that have become trapped in rock and then covered with a layer of salt, which can be as thick as 2000 metres. The salt itself sits below approximately 2000 metres of post-salt rock, up to 3000 metres below the Atlantic’s surface. Extraction of these deposits is exceedingly expensive, given the extreme depths and the complexities of drilling, but leading explorers are prepared to invest.

Offshore pre-salt finds off the south-east coast of Brazil, in the Santos and Campos Basins, could yet turn the country into one of the world’s largest oil producers. Brazil’s Santos Basin plays host to one of the most significant oil discoveries in the western hemisphere in the past three decades. The 2006 discovery, by the UK’s BG Group, of the Tupi oil field – which is estimated to contain up to 8bn barrels of recoverable light oil – helped catapult Brazil into the top ranking target destinations for investment into exploration and production. Supported by Petrobras’ technological advances that make pre-salt production more economically viable, further discoveries have been made offshore of Brazil. The BM-S-11 block, which contains the Tupi field and is operated by Petrobras in partnership with BG Group and Portugal’s Galp Energia, also contains the Tupi Sul, Iara and Iracema fields, with the total estimated value of the block reaching up to $60bn.

Also in the Santos Basin are the Sugar Loaf field, discovered in December 2007, and the Jupiter natural gas field, discovered a month later in January 2008. The Sugar Loaf field could host reserves of up to 33bn barrels, exceeding those of Tupi, while Jupiter is estimated to be of a similar magnitude to Tupi.

Petrobras continues to announce other discoveries, including the Abare find in February 2012 in the Santos Basin’s BM-S-9 block, adjacent to the Guara, Carioca and Iguacu wells, where oil and gas have also been found. The results of tests of the Guara field in early 2012 found that it contained up to 2bn barrels of recoverable light crude oil and gas.

Finds have also recently been made in other blocks in the Campos Basin, suggesting that it might match the Santos Basin as a hydrocarbons nucleus. The string of significant discoveries not only herald an impressive future for Brazil and Petrobras, but also present ample opportunities for both exploration partners and contractors, including shipping firms, oil field services companies and rig and drillship rental firms.

Successful deepwater activities in offshore Brazil have led explorers to cast their eyes further afield. Geological similarities between the continental shelves off Southern America and West Africa have resulted in the Atlantic Mirror theory, with its proponents suggesting that pre-salt oil and gas deposits may exist in similar quantities off West Africa, having been trapped when the continents were once a single landmass. According to investment analyst Evan Calio of Morgan Stanley, pre-salt deposits off the coast of West Africa constitute the “hottest basin in the world”. Global majors including the UK’s BP, France’s Total and Norway’s Statoil are exploring off the coasts of countries including Angola, Gabon, the Republic of Congo and Namibia, with finds expected to mirror those of Brazil’s Campos and Santos Basins. A total of 15 wells are expected to be drilled in pre-salt plays in the region through 2012, and recent discoveries offshore Angola have swelled confidence among explorers operating in the West African pre-salt layer.

OTHER OFFSHORE TARGETS: Excitement about the pre-salt layer perhaps distracts from the wide-ranging potential of other offshore targets across the globe. In addition to offshore South America and West Africa, major new plays are being explored and existing discoveries developed. The high price of oil and improved technology have helped to ensure that investors see the exploration of new deepwater regions – and the further development of existing producers – as financially viable. Established offshore fields include those in the North Sea, the Gulf of Mexico and the Persian Gulf, as well as offshore Canada, California, Brazil, Indonesia and Russia. Established regions are benefitting from discoveries, and the Gulf of Mexico from its ongoing recovery from the Deepwater Horizon spill, but it is new areas in some of the world’s poorest countries that may be the most interesting.

KEY REGIONS: On both sides of the African continent, pioneering exploration firms – including Tullow Oil and the US-based Anadarko – have announced significant discoveries offshore Ghana, Sierra Leone, Mozambique and Tanzania, with new finds announced in countries with established offshore industries including Nigeria and Gabon. For example, Ghana’s Jubilee oil and gas field, operated by Tullow and discovered in 2007, is one of the region’s biggest finds in recent years, with estimated recoverable reserves of 1.2bn barrels of oil equivalent. Frontier wells are expected through 2012 offshore Liberia, Côte d’Ivoire, Guinea and Mauritania. Tullow has also opened a new oil frontier off the north-east coast of French Guiana, where it is targeting some 1.4bn barrels of oil and gas reserves from three different wells offshore South America. Additional frontier plays include offshore the Bahamas and Cuba, while the race to drill for oil beneath the Arctic Ocean continues.

Further exploration is expected through 2012 in producing regions, including the North Sea, the Gulf of Mexico and Indonesia. Drilling in the Gulf of Mexico has seen a notable recovery following the Deepwater Horizon spill, with up to 26 deepwater wells set to be drilled this year. Drilling in the North Sea is also on the increase, with improved technology opening up previously inaccessible frontier areas like the Barents Sea, and 14 exploratory wells offshore Indonesia are set to be drilled over the course of the year.

Financing for offshore exploration is coming from a range of sources. In the case of Petrobras’ pre-salt exploration, the state-led firm is benefitting from international partnerships and loans from development finance institutions, including the U.S. Export-Import Bank, as well as from the international sale of $7bn worth of bonds in February 2012 in the country’s largest ever corporate debt offering. In addition, a group of banks and investment funds have created a company to build seven drilling rigs of 28 commissioned by Petrobras. Banks including Santander and Bradesco are helping to promote Petrobras’ $224bn business plan and Brazil’s future as a major oil producer by shouldering some of the cost burden of developing the country’s oil services sector.

RESOURCES & CHALLENGES: Exploration of the pre-salt layer and of greater water depths have both emerged as possibilities in part due to improved technology and expertise. Seismic surveying – essential to imaging the structure of deep-sea sites and locating deposits, especially in the pre-salt layer where deposits are obscured by the salt – has become more sophisticated, in part because of improved ocean-bottom survey acquisition. Deepwater drilling has also advanced, with the recent emergence of dual gradient drilling (DGD) technology – which lessens the impact of the water column on drilling – a key development. DGD allows for greater management of the downhole environment, reducing costs and improving efficiency, while permitting longer casing strings and larger diameters. Advances in dynamic positioning devices – used by many rigs – and navigation have also contributed to the industry’s development.

PLATFORMS: A variety of types of platform and facility are available for offshore exploration and production, selected according to the depth conditions. During the exploratory phase, one of several types of mobile drilling platforms are used. In shallower waters, drilling barges, submersible rigs or jack-up rig platforms – which are on a solid three- or four-legged frame that can be jacked where necessary – can be deployed. Semi-submersible platforms have a hull that floats but are still of sufficient weight to remain upright; they can be used in water depths of up to 3000 metres and are stable enough for use in rough seas. For depths greater than that, a variety of floating and subsea facilities are used. The most advanced drillships, including members of Transocean’s record-breaking fleet, can drill in deep and ultra-deep waters up to 3650 metres, with a drill pipe mounted at the centre of the ship. The drill pipe can reach nearly 13 km at the limits of its capacity; the drillship remains in position using dynamic positioning technology.

Once the potential of a field has been appraised, a more permanent production platform will be built and towed to the site. Offshore platforms can be in place for decades and need to withstand hostile conditions, meaning that they are extremely expensive to build. A range of platforms exist for different water depths, each of which is fixed to the ocean floor using increasingly sophisticated mechanisms. The most basic fixed platform is mounted on a hefty underwater structure of concrete and steel that is stabilised by its sheer weight, while for deeper water, semi-submersible and floating platforms are used and are moored to the seabed with anchors or tension cables. For the wells in the deepest waters, a spar platform is deployed, which is stabilised by an underwater cylindrical hull that descends some 200 metres and from which tension cables extend to the ocean floor.

COSTS: As of April 2012, there were a total of 680 drilling rigs available for service globally, of which 78 were drillships, 374 were jack-ups and 185 were semi-subs. While some 80% of these rigs were in use, the industry is warning of a global rig shortage through 2012. According to Transocean executive Terry Bonno, the availability of ultra-deepwater rigs for 2012 is “very constrained”, the result of rising demand and a decline in production during the 2008 recession. The costs of rig hire have been driven up by the shortage: the average daily price for drillships capable of drilling at 1200 metres or more exceed $450,000, while the daily rate for some facilities has jumped to $600,000. Oil field service companies are seeking to capitalise on market interest by commissioning new rigs, with at least 100 new rigs reportedly ordered since late 2010. In Brazil, state-led Petrobras is commissioning 28 deepwater drilling rigs from domestic shipyards, as part of an attempt to boost local industry.

Despite rapid advances in technology and deepening expertise amongst the industry’s actors, many challenges still remain. Offshore drilling remains extremely costly – developing a sub-salt well in the waters of Brazil, for example, costs up to $150m, with the Tupi oil field likely to require as many as 200 wells. Drilling a deepwater dry hole – or a well with no oil – is understood within the industry to cost $100m. Upfront investment is high, but long-term commitment is necessary, with rising rig rental rates boosting costs. Managing floating platforms in hostile conditions is highly complex, with their distance from shore and human resources costs and challenges adding to the mix. The production process continues to demand ingenuity and innovation, as personnel seek to manage high pressures, temperature shock to the rising oil and demanding geological conditions, as well as the discharge of drilling fluids and produced water.

The tragedies – human, environmental and financial – of offshore drilling reflect the complexities and challenges of the sector. In the US, the Deepwater Horizon spill was preceded by a blow-out at a Union Oil Company well in the Santa Barbara Channel in 1969. The explosion soaked 50 km of the Californian coastline – before it was mended, the well pumped out some 80,000 barrels of oil. Blow-outs in other countries have far surpassed the magnitude of the accident in Santa Barbara, including in the North Sea and the Gulf of Mexico in 1979 and in the Persian Gulf and Niger Delta in 1980, pumping out an estimated 4m barrels of oil in total. The Deepwater Horizon disaster – the consequence of a wellhead blow-out on the BP-operated Macondo Prospect – is the largest accidental marine spill in the industry’s history, pumping up to 4.9m barrels into the waters of the Gulf of Mexico. The blow-out also killed 11 oil workers; elsewhere rigs have sunk or been destroyed by explosion, fire or storms, often with many more fatalities. The impact of these accidents has been to push governments and oil companies to adopt more stringent safety standards to regulate the industry.

REGULATION: Accidents have repeatedly prompted regulatory retreats, with governments responding to public opinion in the aftermath of a disaster. In 1969, the US Government of Richard Nixon issued a temporary moratorium on drilling offshore of California after the Santa Barbara accident, while the Obama administration introduced a six-month moratorium following the Deepwater Horizon explosion.

The US offshore sector has seen other moratoria – including a 1990 ban introduced by President George H. W. Bush, which was only lifted in July 2008 by his son President George W. Bush – but the Deepwater Horizon accident prompted global attention to industry standards. When the Gulf of Mexico moratorium was lifted, new regulations in the US alone – targeting workplace safety and equipment controls – were set to add $183m per year to the total cost of drilling on the outer continental shelf.

Offshore drilling regulations are under scrutiny elsewhere, including in the EU, where a proposed draft regulation that covers the entire lifecycle of oil exploration and production, additionally unifying various national policies is being reviewed. Offshore oil exploration – while still answering to its critics – is among the most exciting branches of the global energy industry. If confidence in the sector continues to recover after the Deepwater Horizon spill, deepwater oil and gas reserves have the potential to be major contributors to the global energy balance, and their exploitation is set to be a vital part of the industry’s future.