NEW OIL BOOM
Aboard the Olympus platform, Gulf of Mexico—Four years after the Deepwater Horizon disaster, giant new oil projects are returning to the Gulf—bigger and more expensive than ever.
This platform, owned by Royal Dutch Shell PLC, is a floating hive of human activity, 130 miles off the Louisiana coast. Larger than a New York City block and weighing more than an aircraft carrier, Olympus is among roughly a dozen new multibillion-dollar platforms that are or will be pumping oil in the deep waters of the Gulf by the end of next year.
The resurgence could be short-lived if the decline in crude-oil prices, down about 30% since June, continues and prompts companies to delay substantial investments in the Gulf.
For the near term, though, the activity promises to return the Gulf to prominence as a major source of U.S. energy. In 2001, the waters produced about a quarter of all American oil and gas. Since then, production has fallen by half as wells petered out and the government issued fewer permits in the aftermath of the 2010 Deepwater Horizon explosion and oil spill. Last year, the Gulf accounted for less than 10% of the country's energy production, in part because of soaring output from wells drilled in onshore shale formations.
The new projects here, from such companies as Hess Corp. , Exxon Mobil Corp. and Chevron Corp. , have the combined capacity to pump about 900,000 barrels a day—more than the oil and gas output of California. And that doesn't include supplies from two projects led by BP PLC, which declined to provide details on output.
Costs here have been jumping, in part because companies are drilling farther from shore and in deeper waters. Deep-water wells are up to 25% more expensive today than in 2010, according to Shell and Chevron, and can cost $300 million each. New regulations have prompted companies to add safety features such as an extra stack of valves designed to stop an out-of-control well. The failure of such a device was a cause of the Deepwater Horizon disaster.
Drilling the average deep-water well takes 13% longer than it did before the 2010 disaster, according to research firm Kessler Energy LLC, partly because rigs are idle longer for inspections and maintenance. Offshore drillers also must compete for skilled hands who can find jobs closer to home in shale fields, where the workers don't have to spend weeks away from their families.
"There are fewer projects moving forward as a result, or they're moving more slowly than they otherwise would," Robert Kessler, the research firm's chief executive, says regarding higher costs.
So while new projects under way will push energy production in the Gulf's deep waters to a record 1.9 million barrels a day in 2016, analysts at Wood Mackenzie forecast, growth is likely to stall afterward because of high costs and technological limitations.
"The current slide in oil prices does not help the long-term outlook, either, especially if the downward trend continues for a prolonged period," says Imran Khan, an analyst at the energy research firm.
Executives say that there will be great demand for fuels pumped from oil fields off the coasts of Louisiana and Texas. Costs aside, "the projects are robust, even under these conditions," John Hollowell, a Shell executive vice president, says aboard the Olympus platform.
Hess said Monday that it had started pumping crude from its deep-water Tubular Bells installation about 135 miles southeast of New Orleans. Exxon Mobil and Anadarko Petroleum Corp. plan to start up two more major Gulf projects in the coming months. Hess, Chevron and other partners recently gave the green light for a $6 billion development in the Gulf, even though U.S. oil prices are below $80 a barrel at a four-year low.
Even BP has returned to making big offshore bets. The company, which pleaded guilty to criminal charges and has taken a $43 billion hit related to the Deepwater Horizon explosion and oil spill, is developing technology to drill at greater depths. It said last year that it planned to spend $4 billion a year in the Gulf for the next decade and said recently that it was continuing its "multibillion-dollar investment program."
For big energy companies, exploring the Gulf's waters is attractive compared with other parts of the world. Many petroleum-rich nations from the Middle East to Latin America limit the amount of profit that energy companies can make. Deep-water wells are also more prolific than shale wells, making it easier for the biggest companies to sustain their output.
Unlike many projects that Shell and other oil companies have developed in recent years, the Olympus platform came online ahead of schedule and under budget. It began tapping oil and gas in February. The company decided to build Olympus in 2010, just months after the Deepwater Horizon exploded, as a way to get more oil and gas from a field that the company had pumped for decades.
To bring down costs for the project, Shell used components made from polyethylene, a corrosion-resistant material that is less expensive than what Shell had used, according to RMB Products Inc., which made the new parts.
Today Olympus sits in 3,000 feet of water and can process up to 100,000 barrels a day of oil, or roughly 3% of Shell's current global production.
Now Shell is aiming for an even more remote prize. The company is working on a new Gulf project that will tap an oil field under 9,500 feet of water—three times deeper than Olympus.
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