Deep water boom


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Dr Michael Smith, Energyfiles CEO, reveals the offshore drilling market will be worth US $80 billion by 2012.

Deep water drilling has grown from less than 50, mostly exploratory wells, drilled each year at the beginning of the 1990s to nearly 600, mostly development wells, being drilled each year today.

And numbers are still rising. Such expanding drilling levels have been responsible for increasing oil and gas production - production that is vitally needed to maintain global supplies.

Offshore drilling represents a substantial part of CAPEX in all operating regions. The latest edition of the ‘World Offshore Drilling Spend Forecast 2008-2012' estimates that drilling now attracts over 50% of offshore capital expenditure and that by 2012 the market will be worth around US $80 billion, having grown from US $34 billion in 2003.

Of course it has been excessive inflation of especially rig prices in the last three years that has been the main driver to growth in expenditure. This allied to expensive deep water drilling that is focusing the R&D efforts of the industry. Along with more complex development wells, deep waters represent the real physical growth area within this part of the service sector.

Evolution of deep water drilling

The first deep water well was drilled in 1966 by Pan American in water depths of 710m off Newfoundland. Two years later Shell drilled a well in 1,610m in the same area. The first discovery (of non-commercial gas) was Esso's well W9-B-1 drilled in the Andaman Sea in 1976 in 802m of water. But it was in Brazil and the Gulf of Mexico where deep water drilling really took off.

Shell drilled its record breaking Coulomb-1 well in the Gulf of Mexico in 1987 at a depth of 2,292m. That record was only broken nine years later, again by Shell, when it drilled Baha-1 in 2,320m followed in 2003 by the deepest well anywhere, drilled by ChevronTexaco in 3,053m of water. Wells off Brazil and Angola are also now regularly drilled above 2,000m.

Back in the 1980s it was not lack of drilling technology that held back drilling in deep waters, or a failure to recognise the hydrocarbon potential of deep water reservoirs. It was production technology that lagged behind and even in technically feasible areas, fields had to be very large to be commercial.

However, now that many of the production challenges have been, at least partly, overcome with newly designed floating production units, deep and ultra deep water drilling is dominating demand levels for both semi-submersibles and drillships, which themselves have seen great improvements in design and capability.

All this drilling has, of course, led to growing output and shows how oil production in particular has expanded since 1990. The figure shows projected growth in oil production to 2015 when deep waters will perhaps be delivering nearly 10 million barrels per day to refineries, representing around 10% of our global output.

Drilling and spending

To realise these new volumes, many deep water wells have been and will be required. It is estimated around 4 500 deep water wells have been drilled globally in the 18 years since 1990, when production first began to rise. It is expected that almost as many will be drilled over the next five years.

The number of deep water exploratory wells is still increasing in most regions where potential exists. However, in most regions numbers are likely to flatten off soon.Conversely, the number of deep development wells will continue to increase everywhere that fields have been discovered, although outside of West Africa the other key regions could see a plateau in drilling numbers within the next few years.

Meanwhile, whilst the overall number of shallow water wells is projected to decline, total spending is projected to rise everywhere, by nearly 50% over the next five years compared to the last five.

In view of the much smaller rise that is forecast for drilling numbers, the bulk of this can be ascribed to increased costs through inflation and higher specification wells.

The increase in numbers of higher cost, especially deep water wells, is driven by a global shortage of prospects and development opportunities in shallower waters within an environment of growing oil and gas demand.

There will therefore be an increasing disconnect between well numbers and well spend. Full details of identified service spends are contained in the 'World Offshore Drilling Spend Forecast 2008-2012' with trends through 2003 to 2012.

The oil industry is putting capital into expensive, technologically demanding, deep water projects since shallower water ones cannot offer the same profitability. Shallow water prospects are either too small or are simply unavailable outside NOC-operated regions.

But this is not necessarily a government-driven shortage - there are simply fewer and smaller undiscovered or undeveloped oil and gas fields in all regions. Very small accumulations can now be exploited at higher prevailing prices and with subsea technology.

But small fields require fewer wells. In today's environment the only government-constrained lack of opportunity offshore is within OPEC and even here activity is increasing.

Nigeria, Indonesia and now Angola - the three OPEC countries with deep water potential - are promoting outside investment into their deep water basins. And the OPEC members in the Persian Gulf are drilling many more shallow water wells, as well as encouraging foreign companies to develop their huge gas reserves.

Will deep waters maintain oil output?

The aim of new technologies is to reduce drilling costs per well or to reduce the numbers of wells required to achieve a given amount of production.

However, generally speaking, the equipment, tools and materials used in new techniques do not in themselves reduce costs - indeed they are usually very expensive and require more supervision - but they do improve drilling and development economics, enhancing the overall profitability of a project.

At the moment cost reductions are outweighed by cost increases created from more difficult fields, shortages of equipment and personnel, and inflationary pressures from higher energy prices.The profitability of the oil industry at high oil prices has ensured that even the most expensive of offshore projects go ahead.

Except where geological or other risk is unacceptable, high well costs are rarely a deterrent and drilling in ever deeper waters is testament to that.

It was back in 1897 when the first well to tap a reservoir directly beneath the sea was drilled from a wharf in California but it was not until 1937 when the first fully offshore field was developed.

The earliest modern mobile drilling rig did not start operating until 1954.

Drilling then increased through the 1960s and 1970s reaching a peak in 1982 in line with the oil price peak of that period. Deep water drilling only began to increase rapidly in the 1990s when effective production systems had been developed. Barring some of the extreme locations within the Arctic and Antarctic, every offshore basin is now accessible.

Thus offshore drilling has only been around for half a century but it has developed and spread very rapidly indeed.

The consequential increase in offshore production through these years has also been very rapid and full details are contained in the 'World Offshore Oil and Gas Production and Spend Forecast 2008-2012'.

Deep waters have allowed oil output to grow at a faster rate since 2002, meeting increased oil demand growth from China and elsewhere. After 2012, when output elsewhere could reach a peak, deep waters should maintain production for perhaps five to ten years.

But before 2020 it is to be expected that it will be unable to replace declines elsewhere.

We have entered a new era. Oil companies are pursuing a smaller pool of higher cost opportunities. Scarce resources are likely to maintain upward pressure on pricing and with little spare production capacity volatility in oil prices is likely to increase.

Deep water production can maintain global oil production - but for how long?

Background to forecasts‘The World Offshore Drilling Spend Forecast 2008-2012' and 'The World Offshore Oil and Gas Production and Spend Forecast 2008-2012' provide overviews of future prospects for offshore drilling, production and spends, quantitatively forecasting the world market by region and type of activity.

The reports include essential information for decision-makers in oil companies, the contracting and supply industries, and government departments.

For more information call +44 1227 780999 or visit www.energyfiles.com

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