Deepsea diggers: In search of deeper and more diverse reserves

Offshore hydrocarbons exploration constitutes the final frontier in the oil and gas sector. Offshore drilling involves targeting hydrocarbons deposits trapped beneath the ocean floor – or in some cases beneath inland lakes and seas – is the most complex and expensive way of exploiting deposits. And while the returns have the potential to be significant, upfront investment tends to be high. Further, there are 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, 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.

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 healthy profit margins. As per 2010 figures from the International Energy Agency, offshore production – outside of Europe, where North Sea output is falling – will rise by two percentage points to 27.5% of global output by 2015, and the offshore segment is set to further increase its contribution to global oil production in the subsequent years.

NEW FRONTIERS: Explorers are entering other new arenas in their quest for more 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 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 very expensive, given the depths and the complexities of drilling, but explorers are prepared to invest.

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 lift Brazil into the top-ranking target destinations for investment into exploration and production.

Successful deepwater activities in offshore Brazil have led explorers to cast their eyes further afield. Geological similarities between the continental shelves off South 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. A total of 15 wells are estimated to have been drilled in pre-salt plays in the region in 2012, and recent discoveries offshore Angola have enhanced confidence among explorers operating in the West African pre-salt layer.

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. Frontier wells are expected through 2012 offshore Liberia, Côte d’Ivoire, Guinea and Mauritania.

RESOURCES & CHALLENGES: Exploration of the presalt 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 far 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 platforms and 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 – 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 drill-ships can drill in deep and ultra-deep waters up to 3650 metres.

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 expensive to build. There are a range of platforms different water depths.

COSTS: As of April 2012, there were a total of 680 drilling rigs available for service globally, of which 78 were drill-ships, 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 in the near term. The costs of rig hire have been driven up by the shortage: the average daily price for drill-ships 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 over 100 new rigs ordered since late 2010.

Despite rapid advances in technology and growing expertise within the industry, many challenges still remain. Offshore drilling is extremely costly: developing a sub-salt well in the waters of Brazil, for example, costs up to $150m. 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 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.

The Obama administration introduced a six-month moratorium in the aftermath of the Deepwater Horizon explosion and the accident prompted global attention to industry standards. Offshore drilling regulations are under scrutiny elsewhere as well, including within the EU, where a proposed draft regulation that covers the entire lifecycle of oil exploration and production.