Grupo de Economia da Energia

Exploration and production of oil and gas in deep waters: evolution and trends – Part I

In natural gas, oil on 15/08/2011 at 00:30

By Thales Viegas

The offshore exploration and production of hydrocarbons is not new. The first activities would have occurred even at the beginning of last century, in the Gulf of Mexico, USA. They were performed from the adaptation of equipment and onshore exploration techniques. Since then, many technology and operating changes in the oil and gas upstream have occurred. And then, many features previously considered inaccessible or uneconomical have become the object of interest and economically recoverable reserves.

This article will address the potential for discovering resources and the level of reserves in deep waters.

Initially it is important to note that the intense technological development associated with the offshore segment arises from research, technological and operational innovations that have allowed an invariable reduction in exploration and production costs. We have to mention that from offshore exploration the relationships between oil companies, oilfield services companies and research institutions enhanced. This would have caused the increase in R&D activities and a major technological breakthrough since the 1960s to this decade.

Based on technological capabilities developed, the offshore is increasingly contributing to the renewal of oil reserves. In this context, despite several predictions for reducing supply in the last three decades, the oil reserves became plentiful during this period. According to BP (2010) the rate of proved reserves by production R/P (reserves/production) worldwide grew from 31 years in 1973 to 42 years in 2008. Since then, new expectations for discovery and exploration arise continuously. After the first oil crisis, reserves increased about 80%, even with the increasing of production.

Moreover, in the last decade, the oil and gas industry is experiencing a period of intense price volatility. However, the price fluctuations that have occurred over the 2000s followed an upward trend line, which would have increased the amount of viable projects. Even with economic cycles and intense price volatility in recent years, most investment plans in this upstream segment has been kept. On the one hand, this reflects the expectation that prices will not be reduced drastically neither will remain low for long time. On the other hand, it expresses the need for companies to renew their reserves or take advantages of emerging opportunities, even if these are in hard-to-access areas and relatively high cost.

The need to gain access to other sedimentary basins is associated with depletion of opportunities in traditional environments. The North Sea is an example as reference in offshore exploration and production. The region would have reached maturity, as shown in Figure 1. The production had peaked in 1999; however, it would have remained in a sort of plateau between 1995 and 2002. Since then, the production is decreasing and reaching a level that corresponds to half of that historic peak. The North Sea reserves are depleting. Result: companies used to operate or operating there are looking for new exploration frontiers.

Figure 1: Oil Production in the North Sea, in million barrels of oil equivalent

Source: US Energy Information Agency

Thus, new initiatives for offshore projects include greater depths exploration and activities in Africa and North and South Americas, mainly. The operating potential is still large. Resources in the pre-salt layer can increase this potential in the world.

Table 1: Potential for Discovery of Deep Waters Reserves in the World, in billion barrels of oil equivalent (MMbbl)

Resources Gulf of Mexico Mexico Brazil Nigeria Angola Egypt Australia Norway
To be Discovered

50000

45000

35000

37000

20000

18000

17000

8000

Reserves

10000

0

15000

8000

12000

3000

8000

4000

Source: StatoilHydro (2010)

Given the massive investments in South and North Americas, it is expected that Brazil put into production, between 2010 and 2014, fields with totaling approximately 8.5 billion of proven reserves. USA (Gulf of Mexico or GOM) should start the production in fields with about 7.5 billion in reserves, according to Infield Systems data, as expressed in Figure 2.

Figure 2: Total Reserves of Fields to be put into production by 2014, in billion barrels of oil equivalent

*Reserves in depth greater than 500 meters from the surface.

Source: Infield Systems Ld.

The enthusiasm found in technology investments and E&P oil activities in deep waters is not found in investments, technological development and production of various forms of alternative energy, which in many cases depend on government support to materialize. Not even increased costs associated with the offshore upstream segment were able to reduce investments. Offshore investments remain high, so that the supply of rigs and platforms in the 2000s has struggled to monitor the demand for such equipment.

As result, high magnitude discoveries were made in recent years. As example, the recent discovery made by Petrobras and Exxon, announced in June 2011, was the greatest in the last ten years in the Gulf of Mexico. It is estimated that the amount of resources found would be 700 million barrels, located more than 2 km deep. What can be seen from this context is that the E&P initiatives in deep waters and very deep waters continue to grow in importance and quantity.

Brazil continues at the forefront of these activities on the basis of the pioneering and leadership of Petrobras in this upstream segment. The company faces a different problem from most of its competitors. While much of the oil companies have difficulties to achieve an organic growth, with the renewal of their reserves and increasing production capacity, Petrobras faces the opposite problem. It has many profitable investment opportunities, increment of reserves and production. Even with a solid cash flow, boosting its capital and made significant financial inflows, the company still can not raise capital to carry out all strategic projects. We have to mention that the company has one of the biggest capital budgets in the world. In 2011 it will invest US$ 28 billion, close to US$ 30 billion for Exxon, the world’s largest company.

In fact, the pace of offshore investments in deep waters has remained more intense than the other upstream segments. The main elements contributing to this are: i) existence of investment opportunities in this environment, ii) accumulation of knowledge and technological progress that mitigate costs, iii) competition from companies to renew reserves and grow iv) maintaining oil prices at favorable levels and v) availability of oil companies’ cash flow from accrued profits.

Thus, even deep waters activities are more intensive in terms of capital, there are players able to take risks and able to cope with the relevant capital requirements of that activity. Major oil companies have the best conditions to act in this business because they are the ones that invest in technology and training to acquire the necessary skills.

In short, the pace of discovery, renewal of reserves and production in deep waters is increasing, despite current regulatory uncertainties, higher costs and risks involved in this activity. The trend is that the offshore in deep waters is the main frontier, more immediately, the oil exploration in the world. One of the main sources of new reserves for international oil companies. One of the supports of the supply of oil in a world with growing demand and struggling to promote a transition from fossil fuels to renewables.

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