Can deepwater drilling survive in $40 oil?

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.)

Drilling those oil and gas wells deep below the surface of the ocean has become a non-starter for most oil companies since the drop in commodity prices.

But Martijn Dekker, a vice president with European giant Shell, doesn’t believe $40 a barrel necessarily means the end of deepwater projects.

“If the price stays where it is the break even price will come down,” he said Wednesday at the Offshore Technology Conference in Houston. “We’re already seeing things where we can get to a $40 to $50 break even, but we probably want to go lower.”

What needs to happen, said Dekker and other oil executives,  is a dramatic reduction in the price of the costly equipment used to drill thousands of feet below the surface of the ocean.

Kassia Yanosek, a consultant with McKinsey & Co., said that a company could save between 15 and 20 percent of its deepwater costs if it used standardized equipment across its operations – as opposed to the custom piece engineers like to use now.

Standardization has been a golden ring for oil companies for years. But little progress has been made, experts say.

“It needs to come at the CEO level. You need a cultural change,” said Yanosek.

Some success has already been seen onshore.

Hess, the Houston-based oil company, has seen more than a 50 percent reduction in production costs in North Dakota, at least in part following discussions with suppliers to standardize, said Jason Olson, a project manager at Hess.

“We sat down with them and said we all need to share in this pain together,” he said. “It starts in taking little bites out of this elephant.”

But skepticism reigns.

During the panel discussion Wednesday, an audience of close to 200 people was asked if they believed deepwater projects would continue if oil remained around $40 a barrel.

The results were split 50-50.

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