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FeedsHome: Issue 7 2012 › Cover Story › Deepwater and beyond
Deepwater and beyond
22/08/2012 | Channel: Exploration & Production, Drilling, Environmental
Peter Kiernan discusses d eepwater exploration and production post-Macondo
It has been two years since Macondo, a disaster that effectively shutdown deepwater oil and gas production in the Gulf of Mexico and has subsequently changed the way in which the industry operates in that sector, as well as influencing a general change in consciousness in the wider industry.
As major development projects were stopped in their tracks as operators couldn’t obtain drilling permits, the regulations were diligently and thoroughly looked over and changed where necessary and many of the major service companies changed their development strategies in the aftermath, some believed that this would represent a significant blow for deepwater exploration.
The deepwater drilling moratorium that was enforced was lifted in October 2010 and the Bureau of Ocean Energy Management, Regulation and Enforcement began granting drilling permits a few months later, at which point many expected deepwater drilling and production to quickly return to pre-Macondo levels of activity, where over 30 rigs were in operation.
To discover more about how the deepwater industry, both in the Gulf of Mexico and beyond, has developed since that time European Oil and Gas recently spoke with Peter Kiernan, lead analyst of energy at the Economist Intelligence Unit (EIU).
Can you give me some context of the deepwater E&P market pre-Macondo?
Compared to other parts of the industry, in terms of exploration and production, deepwater E&P is a relatively recent development, but it has also been fast growing since oneit commenced. As far as the energy market is concerned deepwater exploration has been a highly valuable addition to global oil supply, particularly when you consider that regions such as the North Sea are in decline and that much of the shallow water production in the Gulf of Mexico is also declining. Particularly with the latter, if you look at E&P in the Gulf of Mexico, the discoveries that have been made are increasingly moving further and further out and into much deeper waters.
Do you think that the rapid pace of development of deepwater E&P was a contributing factor to Macondo?
Of course accidents can and do happen in any industry, and naturally the further out to sea you go into harsher conditions, and the deeper you drill, the more technological risks you are bound to take. So, in that respect you could look at it with the view that maybe something like this was bound to happen unfortunately.
In essence you could say that perhaps we weren’t really prepared for what happened, the technology to drill the oil was certainly there but the technology to deal with incidents like this had perhaps not caught up at the pace at which it was needed. So, you had the ability to drill moving a lot quicker than the ability to deal with any incidents that were a result of that drilling, and ultimately that turned out to be pretty crucial. Thankfully it was the one incident that has ever happened on this scale, when you consider that there are several hundred deepwater rigs in operation around the world, but unfortunately you only need one incident like this when the stakes are so high.
The immediate result was that all deepwater E&P in the Gulf of Mexico was put on hold, how has the market changed and developed since that decision?
It certainly didn’t have as much effect outside the US as it did within the immediate vicinity of Macondo, where there was the moratorium on exploration drilling and no more permits issued while the administration analysed the regulations and overhauled them for the better. So, you had a temporary pause before the moratorium was lifted and, about a year after, permits were tentatively starting to be issued again for deepwater drilling. More recently of course the new regulatory environment has come into place for companies to adhere to.
Naturally there were more wide-ranging outcomes after. Chief among those is that the industry in general has looked at the way that it has been engaging in deepwater drilling and has addressed many of the key issues concerned with relief wells, the ongoing maintenance of rigs, what to do in the event of failures of blowout preventors and many of the other technical variables.
As far as more recently, we can just now begin to see that the deepwater sector is getting back on its feet in the Gulf of Mexico. In 2010 for example, the region was producing about 1.5 million barrels a day, with roughly 1.2 million barrels a day of that from deepwater fields. As a result of Macondo and the various changes production decreased to about 1.3 million barrels per day in 2011, but it has stayed at this level for the first half of this year and it will start to go back up again.
I do think that you will start to see an increase from now on, particularly now that the operators have a more in-depth knowledge of the new regulatory environment. I believe the sector has gone through the worst in terms of production decline and that we should start to see a steady rise again.
As I’ve already mentioned, and as a reflection of the deepwater industry as a whole, before 2010 the Gulf of Mexico was growing very quickly and now, more promisingly, the US Department of Energy in its annual energy outlook reported that deepwater Gulf of Mexico production will be one of the main sources of production growth going forward to 2020.
Bearing that report in mind, and considering the market conditions you have described, do you think that the Gulf of Mexico will continue to be one of the main resources for deepwater oil and gas moving forwards?
There’s little doubt in my mind that it will be one of the main regions for sure. There were a great many discoveries made prior to Macondo that haven’t been developed and which are in the development pipeline for a lot of the major operators. There has been a delay, the overall costs will have increased because the standards will be higher and the regulations stricter, but the companies want to go ahead and the discoveries have been pretty prolific, so while it won’t be the only area that we will see growth in deepwater production I think that it will be one of the major ones.
Aside from the Gulf of Mexico, what do you see as being the other key growth areas at present?
Without doubt Brazil is going to be a major player in the next ten years. It’s production profile turned around over the last decade with a lot of deepwater discoveries - just about all of Brazil’s oil production is offshore and most of that is in deeper waters. Then about three or four years ago they discovered huge deposits of oil – so large that we are unsure of the full extent yet – in ultra-deep water areas below the subsea presalt layer, which is basically huge fields of oil that lie beneath a layer of salt that could be as much as one kilometer thick below the sea bed. So not only are these in ultra-deep water, some of them are 2500 metres below sea level, but they also lie another few kilometres or so under the sea bed in addition to that, so its quite an undertaking.
As a result, now that there have been these discoveries, which could conceivably run into tens of billions of barrels, Brazil is going to be a major driver of production growth globally and most of that will be in ultra-deep water presalt areas.
On the other side of the Atlantic you’ll find a growing deepwater market in Angola, which is also starting to make presalt discoveries as well. There has been one confirmed one in Angola, which has been a major deepwater producer and there are several prospective resources that are yet to be developed.
Technology was one of the factors we discussed in relation to Macondo, considering the sheer depth and complexity of producing presalt resources, is the industry ready for this development?
It is. Petrobras will be the key driver with the government in Brazil making sure with various legislations to make the company the operator of all presalt developments, as well as a new authority being set up specifically to award licenses for presalt blocks. Petrobras is going to have the minimum 30 per cent equity stake in these blocks and will act as the local operator. The company has been drilling in deep waters for a long time so it has a great deal of experience, so while presalt is new, the company has the technical capability and very ambitious business plans for the next ten years.
Looking ahead the, the forecast looks promising for deepwater E&P. How would you summarise the coming years and do you foresee any challenges?
One possible challenge is that because of the advanced technologies and equipment required there is a higher break-even price at which these developments start to become profitable. It is possible that this could contribute to oil having a higher price than we have seen historically.
In terms of the future, that still lies in what is known as ‘the Golden Triangle’, which is the Gulf of Mexico, Brazil and West Africa. More recently there have been discoveries in other parts of the world. Nigeria has a lot of untapped potential in the deepwater sector, as well as further alongthe West African coast in countries like Ghana, which has not been explored as much. This market will continue to grow as there are going to be two main drivers of global oil production growth for the next ten years: one will be unconventional onshore oil, such as shale oil and tar sands and the other, without a doubt, will be deepwater offshore oil. It is interesting this will impact the supply outlook in Brazil, US, and Canada, all of which are in the Western Hemisphere.
Economist Intelligence Unit
Peter Kiernan is lead analyst for energy at the Economist Intelligence Unit, a leading organisation that helps business leaders prepare for opportunity, empowering them to act with confidence when making strategic decisions.
For further information please visit: www.eiu.com
As major development projects were stopped in their tracks as operators couldn’t obtain drilling permits, the regulations were diligently and thoroughly looked over and changed where necessary and many of the major service companies changed their development strategies in the aftermath, some believed that this would represent a significant blow for deepwater exploration.
The deepwater drilling moratorium that was enforced was lifted in October 2010 and the Bureau of Ocean Energy Management, Regulation and Enforcement began granting drilling permits a few months later, at which point many expected deepwater drilling and production to quickly return to pre-Macondo levels of activity, where over 30 rigs were in operation.
To discover more about how the deepwater industry, both in the Gulf of Mexico and beyond, has developed since that time European Oil and Gas recently spoke with Peter Kiernan, lead analyst of energy at the Economist Intelligence Unit (EIU).
Can you give me some context of the deepwater E&P market pre-Macondo?
Compared to other parts of the industry, in terms of exploration and production, deepwater E&P is a relatively recent development, but it has also been fast growing since oneit commenced. As far as the energy market is concerned deepwater exploration has been a highly valuable addition to global oil supply, particularly when you consider that regions such as the North Sea are in decline and that much of the shallow water production in the Gulf of Mexico is also declining. Particularly with the latter, if you look at E&P in the Gulf of Mexico, the discoveries that have been made are increasingly moving further and further out and into much deeper waters.
Do you think that the rapid pace of development of deepwater E&P was a contributing factor to Macondo?
Of course accidents can and do happen in any industry, and naturally the further out to sea you go into harsher conditions, and the deeper you drill, the more technological risks you are bound to take. So, in that respect you could look at it with the view that maybe something like this was bound to happen unfortunately.
In essence you could say that perhaps we weren’t really prepared for what happened, the technology to drill the oil was certainly there but the technology to deal with incidents like this had perhaps not caught up at the pace at which it was needed. So, you had the ability to drill moving a lot quicker than the ability to deal with any incidents that were a result of that drilling, and ultimately that turned out to be pretty crucial. Thankfully it was the one incident that has ever happened on this scale, when you consider that there are several hundred deepwater rigs in operation around the world, but unfortunately you only need one incident like this when the stakes are so high.
The immediate result was that all deepwater E&P in the Gulf of Mexico was put on hold, how has the market changed and developed since that decision?
It certainly didn’t have as much effect outside the US as it did within the immediate vicinity of Macondo, where there was the moratorium on exploration drilling and no more permits issued while the administration analysed the regulations and overhauled them for the better. So, you had a temporary pause before the moratorium was lifted and, about a year after, permits were tentatively starting to be issued again for deepwater drilling. More recently of course the new regulatory environment has come into place for companies to adhere to.
Naturally there were more wide-ranging outcomes after. Chief among those is that the industry in general has looked at the way that it has been engaging in deepwater drilling and has addressed many of the key issues concerned with relief wells, the ongoing maintenance of rigs, what to do in the event of failures of blowout preventors and many of the other technical variables.
As far as more recently, we can just now begin to see that the deepwater sector is getting back on its feet in the Gulf of Mexico. In 2010 for example, the region was producing about 1.5 million barrels a day, with roughly 1.2 million barrels a day of that from deepwater fields. As a result of Macondo and the various changes production decreased to about 1.3 million barrels per day in 2011, but it has stayed at this level for the first half of this year and it will start to go back up again.
I do think that you will start to see an increase from now on, particularly now that the operators have a more in-depth knowledge of the new regulatory environment. I believe the sector has gone through the worst in terms of production decline and that we should start to see a steady rise again.
As I’ve already mentioned, and as a reflection of the deepwater industry as a whole, before 2010 the Gulf of Mexico was growing very quickly and now, more promisingly, the US Department of Energy in its annual energy outlook reported that deepwater Gulf of Mexico production will be one of the main sources of production growth going forward to 2020.
Bearing that report in mind, and considering the market conditions you have described, do you think that the Gulf of Mexico will continue to be one of the main resources for deepwater oil and gas moving forwards?
There’s little doubt in my mind that it will be one of the main regions for sure. There were a great many discoveries made prior to Macondo that haven’t been developed and which are in the development pipeline for a lot of the major operators. There has been a delay, the overall costs will have increased because the standards will be higher and the regulations stricter, but the companies want to go ahead and the discoveries have been pretty prolific, so while it won’t be the only area that we will see growth in deepwater production I think that it will be one of the major ones.
Aside from the Gulf of Mexico, what do you see as being the other key growth areas at present?
Without doubt Brazil is going to be a major player in the next ten years. It’s production profile turned around over the last decade with a lot of deepwater discoveries - just about all of Brazil’s oil production is offshore and most of that is in deeper waters. Then about three or four years ago they discovered huge deposits of oil – so large that we are unsure of the full extent yet – in ultra-deep water areas below the subsea presalt layer, which is basically huge fields of oil that lie beneath a layer of salt that could be as much as one kilometer thick below the sea bed. So not only are these in ultra-deep water, some of them are 2500 metres below sea level, but they also lie another few kilometres or so under the sea bed in addition to that, so its quite an undertaking.
As a result, now that there have been these discoveries, which could conceivably run into tens of billions of barrels, Brazil is going to be a major driver of production growth globally and most of that will be in ultra-deep water presalt areas.
On the other side of the Atlantic you’ll find a growing deepwater market in Angola, which is also starting to make presalt discoveries as well. There has been one confirmed one in Angola, which has been a major deepwater producer and there are several prospective resources that are yet to be developed.
Technology was one of the factors we discussed in relation to Macondo, considering the sheer depth and complexity of producing presalt resources, is the industry ready for this development?
It is. Petrobras will be the key driver with the government in Brazil making sure with various legislations to make the company the operator of all presalt developments, as well as a new authority being set up specifically to award licenses for presalt blocks. Petrobras is going to have the minimum 30 per cent equity stake in these blocks and will act as the local operator. The company has been drilling in deep waters for a long time so it has a great deal of experience, so while presalt is new, the company has the technical capability and very ambitious business plans for the next ten years.
Looking ahead the, the forecast looks promising for deepwater E&P. How would you summarise the coming years and do you foresee any challenges?
One possible challenge is that because of the advanced technologies and equipment required there is a higher break-even price at which these developments start to become profitable. It is possible that this could contribute to oil having a higher price than we have seen historically.
In terms of the future, that still lies in what is known as ‘the Golden Triangle’, which is the Gulf of Mexico, Brazil and West Africa. More recently there have been discoveries in other parts of the world. Nigeria has a lot of untapped potential in the deepwater sector, as well as further alongthe West African coast in countries like Ghana, which has not been explored as much. This market will continue to grow as there are going to be two main drivers of global oil production growth for the next ten years: one will be unconventional onshore oil, such as shale oil and tar sands and the other, without a doubt, will be deepwater offshore oil. It is interesting this will impact the supply outlook in Brazil, US, and Canada, all of which are in the Western Hemisphere.
Economist Intelligence Unit
Peter Kiernan is lead analyst for energy at the Economist Intelligence Unit, a leading organisation that helps business leaders prepare for opportunity, empowering them to act with confidence when making strategic decisions.
For further information please visit: www.eiu.com
