Challenges of offshore Oil

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Costs

The proliferation of the shale / tight oil plays has put a squeeze on offshore drilling. It becomes increasingly difficult to justify spending billions of dollars in addition to many years of work for one well when the payouts from inland wells can bring a project into the black within a year. A shale well can be drilled in a matter of weeks with a total cost of under $10 million with an almost guaranteed return on the investment. An offshore well can take years to get the product to a refinery and costs can run into the billions, and this does not include the much higher risk of missing the performing zone. Companies large and small are much more willing to risk a dry hole when the costs are miniscule in comparison.

These are not the only things to consider about offshore drilling. While 22 million barrels of oil are produced from offshore wells each day, offshore wells have decline rates that are double of the rates of onshore vertical wells. It is estimated that this would put the rates of decline at about 15-20 percent per year or about 3.3 million barrels of oil per year. If that amount of production were taken from the world’s supply, then an undersupply problem would be evident very quickly.

Many large companies have decided not to continue their work in offshore leases and instead focus more on the shale plays that are found in areas closer to existing infrastructure. In August of 2015, the United States Federal government held an auction for offshore drilling leases where only 5 companies were represented and 33 leases were sold. This was the worst turnout for leases in the Western Gulf of Mexico in 30 years. ConocoPhillips released a statement that they will never go back into deep water drilling. ExxonMobil paid an offshore drilling contractor the equivalent of $370,000 per day, or $125 million, not to drill any wells and release them from a contract that expired in April of 2017 (Crippled).

Offshore wells do have a place in the oil and gas economy, but with their high associated barriers to entry, and higher costs relative to onshore shale wells, their days may be numbered. The U.S. now finds itself in a much better position with regards to global oil supply, and I predict that offshore well production will slowly fade.

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References

The Challenges of Drilling for Offshore Oil

http://oilprice.com/Energy/Energy-General/The-Challenges-Of-Drilling-For-Offshore-Oil.html

Shallow Offshore

http://www.vallourec.com/DRILLINGPRODUCTS/EN/Application/Pages/ShallowOffshore.aspx

Risky Business: Challenges of Deepwater Drilling in the North Sea

http://www.offshore-technology.com/features/featurerisky-business-deepwater-drilling-north-sea/

Global Oil Accounted for 30% of Global Output in 2015

http://oilprice.com/Energy/Crude-Oil/Offshore-Oil-Accounted-For-30-Of-Global-Output-In-2015.html

Accidents show depth of danger in shallow waters

http://fuelfix.com/blog/2013/08/04/accidents-show-depth-of-danger-in-shallow-waters/

Response to the Exxon Valdez Spill

http://response.restoration.noaa.gov/oil-and-chemical-spills/significant-incidents/exxon-valdez-oil-spill/response-exxon-valdez.html

Exxon Valdez Spill

http://response.restoration.noaa.gov/oil-and-chemical-spills/significant-incidents/exxon-valdez-oil-spill

Response to the Exxon Valdez Spill

http://response.restoration.noaa.gov/oil-and-chemical-spills/significant-incidents/exxon-valdez-oil-spill/response-exxon-valdez.html

Gulf Oil Spill

http://ocean.si.edu/gulf-oil-spill

BP’s $20 billion Deepwater Horizon settlement is a Justice Department record

http://fortune.com/2015/10/05/bp-deepwater-horizon-settlement/

The Offshore Oil Business is Crippled and It May Never Recover

http://oilprice.com/Energy/Crude-Oil/The-Offshore-Oil-Business-Is-Crippled-And-It-May-Never-Recover.html