Shell vessel heads to deep Gulf waters amid region’s uncertainty

HOUSTON — Royal Dutch Shell’s newest oil-production vessel began a 15,000-mile journey this week from a Singapore shipyard to the world’s deepest underwater oil field, tasked with adding more crude to a worldwide oil glut that could upend industry plans to venture deeper offshore.

The $1 billion globe-trotting ship is bearing toward the Gulf of Mexico, and is set to become the fourth ultra deep-water production facility to extract hydrocarbons from a region called the Lower Tertiary, which for oil companies is at the edge of charted Gulf waters. Shell plans to begin filling barrels next year with oil from two wells drilled in about 9,500 feet of water — the deepest-ever depth.

“That’s never been done before, so it’s a challenge,” said Curtis Lohr, who manages Shell’s so-called Stones project, which is about 200 miles south of New Orleans. “At Stones, the reservoir is just not known. We just don’t have production data.”

Shell executives sanctioned the expedition in 2013, at a time when oil prices were more than twice what they are now. It’s a big second act for the oil major that, with its Perdido project in 2010, opened the first flowing veins in the Lower Tertiary, an oil play that had stumped the industry since the 1990s with its extremely high temperatures and pressures and deep-seated reservoirs.

But the production vessel’s one- to two-month trip, which began on Tuesday, comes amid an industry whiplash from an oil-price collapse that – if prices don’t recover – could force oil companies to scrap up to $48 billion worth of development spending in the Lower Tertiary over the next 15 years, according to energy research firm Wood Mackenzie.

If prices climb back up, the petroleum business could develop projects that would more than double production in the Lower Tertiary to 500,000 barrels a day in a decade, potentially bringing the region’s share of output in the Gulf from 11 percent this year to 19 percent in five years and to 30 percent in a decades.

But Wood Mackenzie believes a barrel of crude would have to fetch between $60 and $80 to justify high costs of drilling ultra-deep wells. At those levels, the oil field investments could return 10 percent to 20 percent. U.S. crude settled at $41.75 a barrel on Thursday.

“Capital expenditures are extremely high when you’re talking about wells costing $300 million to drill and complete,” said Jackson Sandeen, a senior analyst at Wood Mackenzie.

The Shell ship’s voyage to the Gulf also coincides with thick congestion along the Texas coast of oil tankers carrying up to 20 million barrels of crude, waiting in line to unload cargoes, according to the Associated Press. It’s the latest in a string of recent signs there is far more crude available than the market is using. The International Energy Agency on Friday said the world’s stockpile of crude has growth to 3 billion barrels — a figure that grew even with $50 oil.

“Demand growth has risen to a five-year high,” the IEA said. “But gains in demand have been outpaced by vigorous production from (the Organization of Petroleum Exporting Countries) and resilient non-OPEC supply.”

Shell’s Stones project is the industry’s second-to-last major development in the Lower Tertiary that has been approved for construction. Firms have yet to reach final investment decisions on at least six others, including Anadarko Petroleum Corp.’s massive Shenandoah discovery. If all of the pre-sanctioned projects were scrubbed, it could cost the region 300,000 barrels a day in production by 2025.

The Anglo-Dutch oil major’s latest project is slated to produce a peak 50,000 barrels a day in a region estimated to hold up to 2 billion barrels a day in production. It’s the first step in what could be a multi-phase project spanning several years, depending on production results from the initial operations, which includes bringing two wells online next year and six more after that, Lohr of Shell said.

“This really gives us an opportunity to make a minimal investment and learn more about the reservoir,” he said. Shell plans to analyze production results from the first phase of the project before moving forward with a second or third phase.

The Stones field, like the vast majority of the Lower Tertiary, is a tight-rock play, which means it has less of the geological porosity and permeability that allows oil molecules to move freely into a well-bore. The industry typically produces 8 to 12 percent of the buried oil in the field, which is lower than the neighboring Miocene play in the Gulf – rock separated by several miles and millions of years of geological change.

Named after a small sea snail species with a cone-like shell, the Turritella, Shell’s mid-sized floating production storage and offloading vessel, will be the first of its kind to breach the Lower Tertiary. The 49,000-ton ship, which began its one- to two-month trip to the Gulf on Tuesday, will be outfitted with technology it can use to counter the rougher conditions in the deep-water region.

For example, it’s the first floating production vessel with the capabilities to both disconnect itself from subsea operations and use flexible Lazy-wave risers, which are steel pipes connecting the well bore to the production vessel above that, unlike other risers, have buoyancy elements to counter greater tension because of its long length.

In case it needs to sail away from a Gulf hurricane, the vessel can disconnect from a massive buoy – which is being installed now – that connects to underwater equipment like umbilicals. In a recent conference call with investors, Shell executives said the company has improved its well design and cut costs from the vessel and its supply chain, saving $1 billion in capital expenditures on the project.

“In the environment we’re in, every dollar matters,” Lohr said. So far, oil companies have taken a number of measures to reduce costs in the Lower Tertiary.

For example, San Ramon, California-based Chevron Corp. brought in other oil majors – including Statoil, Petrobras and Eni – to help develop its big Jack/St. Malo project in the deep Gulf, which came online in 2014. Chevron has also cut weeks out of the time it takes to bring a deep-water well into production after Halliburton Co. helped it develop a well-completion method that targets multiple subterranean zones.

Shell’s effort to break its Stones project up into multiple phases is another prominent example of cost-cutting in the region, said Sandeen of Wood Mackenzie. In general, operators are trying to figure out how to double their productivity rates in the Lower Tertiary to about 20 percent.

He noted in deep-water fields, oil companies have to wait years, if not a decade, from first discovering oil in a region to getting the first barrels of crude out of it – and that may help them plan projects around current oil slump, if they’re willing to risk hitting low oil prices in a few years. Wood Mackenzie estimates oil companies increase their spending on Lower Tertiary developments from $3 billion this year to more than $8 billion in 2019, if they don’t cancel any projects.

“The silver lining is operators can come up with creative ways of pushing these projects forward,” Sandeen said. “It’s a long-term investment in improved technology. They’re banking on massive amounts of oil in place, to the tune of billions of barrels. So if you improve that recovery factor, over time it can be a nice investment.”

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