Under the sea: Offshore drilling continues to grow

For many, offshore hydrocarbons exploration constitutes perhaps the final oil and gas frontier. Offshore drilling targets 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 oil and gas deposits. Wells are drilled from a variety of facilities, including platforms and deepwater mobile offshore drilling units, with offshore production presenting challenging conditions.

Returns from offshore drilling have the potential to be significant, but the upfront investment needed is high. Critics also point to the possible environmental hazards involved with the process, the 2010 Deepwater Horizon oil spill in the Gulf of Mexico being the most notorious example. But as global energy demand increases and oil prices rise – and some of the largest new hydrocarbons discoveries are found offshore – exploration for these hard-to-reach deposits is poised for a major increase.

GROWTH PROJECTIONS: The “2012 Offshore Exploration Outlook” published by Morgan Stanley Research estimates that offshore exploration will rise by about 18% in 2012 over the previous year, with wells expected to be tested across 52 countries. Many of these projects are based in emerging economies in South America, West Africa, East Africa and South-east Asia, for which offshore discoveries could be an important economic game-changer.

Despite the large-scale investments of time and capital as well as the need for a greater reliance on technology, offshore drilling has the potential to deliver healthy profit margins to the companies that are willing to make the commitment. According to 2010 data provided by the International Energy Agency, offshore production – excluding Europe, where North Sea output is falling – will rise by two percentage points to 27.5% of global output by 2015. Moreover, offshore is expected to increase its contribution to global oil production in subsequent years.

LONG 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.

But only in the last 65 years or so has offshore drilling seen significant progress, with noteworthy advances made into deepwater since Kerr-McGee Oil Industries drilled the first productive well that was sited beyond the horizon, off the Louisiana coast in 1947.

By 1971, offshore production accounted for around 20% of oil output in the US, with oil companies pushing for increased leasing of areas in national waters throughout the 1980s. During that decade, offshore production began to move to deepwater – often defined as depths greater than 305 metres – following the first successful deepwater discovery in 1975 at Royal Dutch Shell’s Cognac field. Supported by technological breakthroughs, developments in this arena continued, with deepwater fields proving their appeal to the industry thanks to flow rates that reached thousands of barrels a day.

ULTRA-DEEP: Shell extended its activities to “ultra-deepwater” – that is, depths of more than 1524 metres – with the development of its Mensa field in the Gulf of Mexico, discovered in the 1980s. Other companies launched offshore activities during that decade, including BP, Exxon, Mobil and Brazil’s state-owned Petroleo Brasileiro (Petrobras). Production from deepwater and ultra-deepwater projects rapidly rose through the 1990s, while at the same time shallow-water output declined.

Water depths continued to increase. Petrobras broke the 2438-metre record in 1999 in the Campos Basin, while the Discoverer Deep Seas drillship, owned by Switzerland’s Transocean, passed the 3048-metre mark in 2003 during construction of ChevronTexaco’s Toledo well. The world’s largest offshore drilling contractor, Transocean holds the current record for the deepest offshore well, at 3107 metres.

NEW FRONTIERS: In addition to explorers drilling deeper to find deposits, they are entering other new arenas in their quest for resources. Exploring and developing deposits in the Atlantic Ocean’s pre-salt layer is becoming increasingly important in the offshore sector, following significant finds off the coast of Brazil in 2006. 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 as much as 2000 metres of post-salt rock, up to 3000 metres below the Atlantic Ocean. Extraction of these deposits can be very expensive, given the extreme depths and complexities of drilling, but leading explorers are prepared to invest.

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. The Santos Basin is home to one of the most significant oil discoveries in the Western hemisphere in the past three decades. Indeed, the 2006 discovery of the Tupi oilfield – which has been estimated to contain up to 8bn barrels of recoverable light oil – by Britain’s BG Group helped catapult the country into the top rankings of target destinations for investment into exploration and production.

FINDS CONTINUE: Supported by Petrobras’ technological advances, which make pre-salt production more profitable, further discoveries have been made offshore 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. The value of the block has been estimated at $60bn.

Also located in the Santos Basin are the Sugar Loaf field and the Jupiter natural gas field, discovered in December 2007 and January 2008, respectively. 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, which suggest that it could yield results as impressive as those of Santos Basin. The string of discoveries not only heralds an impressive future for Brazil and Petrobras, but also presents ample opportunities for both exploration partners and contractors, including shipping firms, oilfield services companies, and rig and drillship hire firms.

MIRROR STAGE: Successful deepwater activities offshore Brazil have led explorers to cast their eyes further afield. Indeed, geological similarities between the continental shelves off South America and West Africa have given rise to the “Atlantic Mirror” theory, with its proponents suggesting that pre-salt hydrocarbons deposits may exist in similar quantities off the coast of 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”.

International oil and gas majors such as Britain’s BP, France’s Total and Norway’s Statoil are exploring off the coasts of countries including Angola, Gabon and the Republic of Congo (Brazzaville), with finds expected to mirror those of Campos and Santos Basins. A total of 15 wells are expected to be drilled in pre-salt plays in the region through 2012. Announcements of oil discoveries offshore Angola have further 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, significant 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 are located in the North Sea and the Gulf of Mexico, as well as offshore Canada, California, Brazil, Indonesia and Russia. While these existing producers are benefitting from further discoveries, and the Gulf of Mexico from its ongoing recovery from the Deepwater Horizon spill, it is the new players – including some of the world’s poorest countries – that may prove the most interesting.

On both sides of the African continent, pioneering exploration firms – including the UK’s Tullow Oil and the US-based Anadarko – have announced discoveries offshore Ghana, Sierra Leone, Mozambique and Tanzania, with new finds also made in countries with established offshore industries such as Nigeria and Gabon. Ghana’s Jubilee field, operated by Tullow and discovered in 2007, is one of the region’s biggest oil finds in recent years, with estimated recoverable reserves of 1.2bn barrels of oil equivalent.

Frontier wells are expected through 2012 in countries such as Liberia, Côte d’Ivoire, Guinea and Mauritania. Tullow is also working 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. 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 areas such as 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 in 2012. The North Sea is also the site of increasing activity, 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.

FINDING FUNDS: Financing for offshore exploration is coming from a variety 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 US 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 the 28 commissioned by Petrobras.

Financial institutions including local lender Banco Bradesco and Spain’s Banco Santander are also helping to promote Petrobras’ $224bn business plan and Brazil’s future as a major oil producer by shouldering some of the financial burden of developing the country’s oil services sector.

RESOURCES: Exploration of the pre-salt layer and of greater water depths have both emerged as possibilities, partly 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 they are obscured by the salt – has become more sophisticated, including through improved ocean-bottom survey acquisition. Deepwater drilling techniques have 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 production costs and improving efficiency while at the same time also permitting longer casing strings and larger diameters. Advances in dynamic positioning devices, used by many rigs, and navigation systems have contributed to the development of the burgeoning industry.

TOOLS OF THE TRADE: Different types of platforms and other facilities 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 – are typically deployed.

Semi-submersible platforms have a hull that floats but is still of sufficient weight to remain upright; they can be used in water at depths of up to 3048 metres and are stable enough for use even in rough seas. For depths greater than this, a variety of floating and subsea facilities are used. The most advanced drill-ships, including members of Transocean’s record-breaking fleet, can reach up to 3658 metres in deep and ultra-deep waters, with a drill pipe mounted at the centre of the ship. The drill pipe can extend up to 12.9 km in length at the limits of its capacity, while the vessel to which it is attached remains in place 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 often need to withstand hostile conditions, meaning that they are extremely expensive to build. A range of platforms are available 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 an underwater structure of concrete and steel that is stabilised by its weight, while for deeper water, semi-submersible and floating platforms are used, moored to the seabed with anchors or tension cables. For wells in the deepest waters, a spar platform is deployed, which is stabilised by a cylindrical hull that descends some 213 metres and from which tension cables extend to the ocean floor.

POSSIBLE RIG SHORTAGE: As of April 2012, there were a total of 680 drilling rigs available for service internationally, of which 78 were drillships, 374 were jack-ups and 185 were semi-subs. While approximately 80% of these rigs were in use, the industry is warning of a global rig shortage through 2012.

According to Gabriel Oramasionwu, the managing director of Transocean’s Gulf of Guinea division, the availability of ultra-deepwater rigs for 2012 is presently constrained. The cost of hiring a rig has been driven up, and the market rate for some facilities has reportedly jumped to $600,000 per day. Oilfield service companies are seeking to capitalise on market interest by commissioning new rigs, with at least 100 rigs reportedly ordered since late 2010. In Brazil, state-led Petrobras is commissioning 28 deepwater rigs from domestic shipyards, as part of an attempt to boost local industry.

OTHER CHALLENGES: Despite rapid advances in technology and deepening expertise among the industry’s actors, many challenges remain. Offshore drilling is extremely costly – developing a sub-salt well in the waters of Brazil, for example, costs up to $150m, with the Tupi oilfield likely to require as many as 200 wells. Drilling a deepwater dry hole – a well with no oil – is known in the industry to cost $100m. Upfront investment is high, but long-term commitment is also necessary, with rising rig rental rates boosting costs. Indeed, “The future of technology development projects will hinge on the financial and technical participation of the private sector,” Muttaqha Rabe Darma, executive secretary of the Petroleum Technology Development Fund, told OBG in an interview.

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 48 km of 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 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. These and other accidents have prompted governments and oil companies to adopt more stringent safety standards to regulate the industry.

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

When the Gulf of Mexico moratorium was lifted, new regulations in the US were to add $183m per year to total drilling cost on the outer continental shelf. The Deepwater Horizon accident also prompted global attention to industry standards. Offshore drilling regulations are currently under scrutiny elsewhere, including in the EU, where a proposed draft regulation covering the entire lifecycle of exploration and production and unifying national policy is in the process of being reviewed.

Offshore oil exploration – while still facing down its critics – is without a doubt one of the most exciting branches of the global energy industry. If confidence in the sector continues to recover following the Deepwater Horizon spill, offshore deepwater reserves have the potential to become major contributors to the world’s energy supply, and their exploitation to be a vital part of the industry’s future.