As U.S. production soars, oil companies eye far horizons

The Deepwater Millennium drillship  works on an Anadarko Petroleum Corp. project in the Rovuma Basin off the coast of Mozambique. (Anadarko Petroleum Corp.)

The Deepwater Millennium drillship works on an Anadarko Petroleum Corp. project in the Rovuma Basin off the coast of Mozambique. (Anadarko Petroleum Corp.)

Even as much attention focuses on the Gulf of Mexico and U.S. onshore production from shale plays, new frontiers for exploration are taking drillers, engineers, geologists and services firms to Brazil, the Arctic, Africa, Australia and parts of the Middle East and Asia.

Advanced drilling techniques, including hydraulic fracturing combined with horizontal drilling, have heightened the buzz surrounding shale and other unconventional petroleum sources.

But conventional oil and gas wells will still be in high demand years from now, especially in the deep sea.

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And Houston-area companies including Anadarko Petroleum Corp., which struck gas off Mozambique, and Noble Energy, which made big finds in the Mediterranean, will be part of that.

“What you’re really seeing is all about the deep water going forward,” said Bob Fryklund, chief upstream strategist at IHS.

One sign that the future runs deep: Last year, Swiss drilling contractor Transocean, the world’s largest offshore driller, announced plans to sell off its shallow-water rigs and invest up to $3 billion in ultradeep-water rigs capable of working in waters deeper than 7,500 feet. With deeper waters come higher lease rates for rig owners.

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Fryklund said that internationally, the independents — pure-play oil and gas producers like Anadarko and Noble — have been driving a lot of the new horizon plays because they have been willing to take a little more risk up front, while major integrated oil companies have focused on mega projects like big production facilities in established plays.

Long-term investment

Lately, though, he said the majors “have started to get back into the frontier exploration game,” motivated by the desire not to be the odd-man out in tapping oil-rich fields that hold the promise of producing a lot of oil for many years.

Money will drive a lot of the decisions about where to explore, how much to produce and how long to stay.

“If you’re going to play in deep water, where the average well is $250 million, you’ve got to have a big wallet to make an impact,” Fryklund said. “If you are going to play in the Arctic, that goes up even more.”

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It’s about risk versus reward. In the U.S., drillers may face less risk because of a stable regulatory environment and state-of-the-art infrastructure that makes it easier to produce the oil and gas and deliver it to market.

Outside the U.S., those elements aren’t uniform across the world. It may take years to see big rewards from some overseas plays.

“There’s no doubt countries like Colombia, Brazil, Argentina, Indonesia, China, Algeria and even in the Middle East have the resources,” Fryklund said. “The question is, can they get them out economically, because when you’re playing the resource game, it’s about playing the economics.

Across the globe

Here are some of the places where the economics seem to be prompting big bets on the future offshore:

East Africa: Anadarko, based in The Woodlands, and Italian oil and gas firm Eni have discovered more than 100 trillion cubic feet of gas off Mozambique in southeast Africa.

Mediterranean Sea: Houston-based Noble Energy made a new deep-water natural gas discovery off Israel, the seventh consecutive field discovery for Noble and its partners in the Levant Basin. Discovered gross resources, combined with those in an adjacent block, are estimated to range from 1.6 trillion to 2 trillion cubic feet of natural gas, the company says.

Brazil: The South American country is the site of some of the biggest crude discoveries this century. Bloomberg reports Brazil is relying on the pre-salt region, so named because significant amounts of oil and gas are believed to lie below a deep layer of salt, to double production by 2020.

The Arctic: Irving-based Exxon Mobil Corp. plans to pump $200 million into a research center in Russia, where it is partnering with Russia’s Rosneft to explore of more than 180 million acres in the country’s Arctic region. Norway has issued licenses to companies including its own Statoil, Royal Dutch Shell and Paris-based Total, to explore for oil and gas in the Barents Sea.

Australia: British oil giant BP is eyeing deep-water drilling operations off the southern coast of the country, in what is known as the Great Australian Bight.

Tudor, Pickering, Holt & Co. analyst Robert Kessler said he sees opportunities in the new frontier for firms of all sizes and geographic locations. He also sees the majors playing catch-up in some riskier, more time-consuming plays.

“In some cases, you have early entrants that are not the majors,” he said. “But the majors are so big. They are everywhere. They need to be everywhere to have the options to maintain their portfolios over time. If they are not always the first participant in a given market, they are likely to keep their eye on that market. There is a need to keep the hopper full.”

And even with so much focus in the deep-water frontier, the U.S. will still be a key driver for many years from an overall production standpoint.

Gulf still in play

The U.S. Energy Information Administration estimates that U.S. crude oil production could climb to 10 million barrels per day by 2040 from a range over the coming years of 6 million to 8 million barrels per day. So, the Gulf is not to be discounted.

“There’s a certain amount of new life that has come back to the Gulf of Mexico,” Kessler said.

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