The recovery in energy prices won’t produce a mad rush into deep-water fields anytime soon, but drillers are still spending billions this year on more cost-efficient projects that can outlast cheap oil, says the executive who leads Shell’s deep-water business.
Over the next two years, Royal Dutch Shell plans to spend up to $14 billion developing new and existing deep-water projects in places like the Gulf of Mexico and Brazil, but it’s trying to keep costs nailed down with myriad initiatives that have, for example, reduced its offshore staff by nearly a third.
“It’s the most resilient projects that will survive,” said Wael Sawan, executive vice president of deep-water at Shell, in a recent interview.
For Shell, that means turning its focus to projects that can profit in deep-water fields even if oil prices fall again. It cut costs in half for its latest venture in the Gulf of Mexico, the Kaikias deep-water project about 130 miles south of the Louisiana shoreline, and expects it will be able pump oil profitably there even if prices fall below $40 a barrel.
Sawan spoke to the Houston Chronicle about how Shell has whittled down costs on a variety of deep-water projects.
Q: Shell gave the green light to start work on the Kaikias field in February. What steps did Shell take to cut costs on the project?
A: There’s no one silver bullet. We moved toward simplified designs, using industry standards versus tailor-making wells, which inherently adds a lot of costs. We converted the two appraisal wells we drilled to discover the resource into producer wells, which means we didn’t have to drill two new wells. We’ve also right-sized our operating footprint in the Gulf, bringing down our operating costs by 30 percent.
Q: How has the downturn in oil prices changed Shell’s deep-water strategy?
A: We used to have a lot more focus on the deeper, the bigger. But much of our technology spend is now geared toward more capital-efficient, lower-cost projects. For the Appomattox project in the Gulf of Mexico, we continue to deploy cutting-edge technologies to accommodate its higher-pressure, higher-temperature profile. Standardization has clearly accelerated with the downturn as the underlying need to cut costs has so quickly come in. With our group that designs wells, we’ve tried to have a manufacturing mindset.
Q: What else is in Shell’s deep-water pipeline?
A: We’ve said we’ll leverage deep-water projects to be our growth engine. They’re a big chunk of the capital we’re investing at the moment, and we have investments that will hopefully see first oil by the end of the decade, including the Appomattox project in the Gulf of Mexico, a material investment with 175,000 barrels a day of oil production capacity. We’ll also have a lot of tie back wells in the Gulf of Mexico, irrespective of the price of oil. In Brazil, we’ll have another six floating production, storage and offloading facilities running between now and the end of this decade, including two this year.
Q: What kind of technological advances has Shell used to bring down costs?
A: We’re deploying digital technologies that give us half a billion data points from our facilities in the Gulf — things like flow rates, pressures and temperatures. We run our own proprietary algorithms to anticipate when failures might occur so we can avoid them. We also use robotic technology that inspects areas that otherwise we’d need to shut down the facility to inspect.
Q: How active do you expect the industry to be in deep-water fields this year?
A: What you won’t see is a flurry of activity. You’ll see only the best and most robust projects come through — projects that break even with sub-$40 oil, you’ll see that activity pick up. We’ll still need the supply chain to be active. Fifty-dollar oil will encourage more tie-back wells. You’ll see a step up in 2017, but more so in 2018. We need to make sure the projects that come through are resilient at any oil