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Financial Times: Quest for oil goes to ends of the earth

By Sheila McNulty
Published: October 10 2006 03:00 | Last updated: October 10 2006 03:00

One hundred and forty miles out into the Gulf of Mexico, the most high-tech drill ship in the world is drilling a well 4,300ft below the water.

The process is risky, expensive and time-consuming. It takes about 80 days and requires about 350 people to work at least 12-hour days in two-week shifts, monitoring the drilling of a well that reaches 19,000ft below the ocean floor.

The equipment being pushed down into the ocean from Transocean’s Discoverer Deep Seas ship must pass through a canopy of salt, and even the latest seismic technology cannot clearly reveal what is underneath.

An unforeseen pressure surge arising from beneath the salt can force the well to close, requiring Chevron to restart the $500,000-a-day process. Meanwhile, the drill ship must often battle against swift currents to stay steady, and “run” from the hurricanes that sweep through the Gulf every year.

“We’re always pushing the limits, always pushing the frontiers,” says Mickey Driver of Chevron. With unprecedented demand forcing energy prices into record territory this year, international oil and gas companies are going deeper, in increasingly untested areas on both land and in water, to scour the earth for more resources. The most easily accessible fields are fast running out, and growing nationalism over natural resources is blocking international companies’ efforts to replace them in the traditional manner. This forces companies such as Chevron, BP and Shell to turn to innovation, technology and forward-looking management to survive.

Part of the challenge is to get the latest equipment and the right skills in place. Chevron is the largest leaseholder in the deep water section of the Gulf but, likeeveryone else, it is dependent on the oil services industry to get its findings to market. That means competing with the global oil and gas industry for experienced workers and cutting-edge technology.

“We need more of everything,” says Larry Nichols, chief executive of Devon Energy, a US oil and gas company, referring to both experienced workers and the latest drilling and production equipment. “We’re all raiding each other for geologists and other staff because we’re all trying to drill.”

Competition has hit new heights in the rush to capitalise on record oil and gas prices. Brian Smith, general manager of deep water projects for Chevron’s north America exploration and production business, says some service contractors have warned oil companies they are so overstretched they cannot take new orders for three years. Much of the equipment used to service the shallow waters of the Gulf has been bid away by foreign countries with better prospects, such as Saudi Arabia.

This is one reason why Chevron has agreed to pay double the current $245,000a day to hang on to the Discoverer Deep Seas when its lease on it expires within the next two years. The vessel is one of only 10 rigs in the world capable of drilling in 10,000ft of water and the only one that has gone beyond 10,000ft in drilling for oil. That will put the daily cost of drilling with the ship, including everything from feeding its employees to drill bits, to close to $1m a day. And that is only at one location – Chevron is exploring and producing oil and gas throughout the worldat a cost of $40m a day.

“We will spend $1.8bn on this Tahiti project [for which Discoverer Deep Seas is being used] before we get one drop of oil to sell in 2008 – six years after discovering the field,” Mr Driver says. And even then, Chevron will have to spend an additional $1.7bn to bring the field up to full production.

It is all part of the survival process for international oil companies. Despite once dominating the industry, they face the prospect one day of ending as bit players, given that national oil companies own 80 per cent of the world’s remaining oil and gas reserves.

Over the years, national oil companies have learnt the skills of extraction and production that were perfected by the international oil companies. Some have realised the companies are at their mercy and have increasingly cut the foreigners’ physical and financial control over their projects.

“For these companies to survive, they need continuous access to resources,” says Robin West, chairman of PFC Energy, the consultancy. “The international oil companies have to work harder and harder to find resources.”

That goes for on land as well as in the water. Exploring and producing energy on land – where only one in every 10 wells is successful – comes with its own risks. In some places, such as the biggest oilfield in the US at Prudhoe Bay, Alaska, those risks are heightened by temperatures that fall as low as 70 degrees below zero Fahrenheit.

In the 1970s, the American Petroleum Institute gave workers on the 800-mile trans-Alaska pipeline a booklet entitled “Staying Alive in the Arctic”. It described the harsh conditions and gave instructions on how to dress for them, while noting that the booklet itself could be used to start a fire in an emergency.

At Prudhoe Bay, Nicholas Russell, a BP contract worker, says it is sometimes so cold in the winter that workers in the field must return to warming shelters for 15-minute breaks every 30 minutes. The dangers are real: 31 lives were lost in the three years and two months it took to build the trans-Alaska pipeline and accidents have continued over the years.

In Texas, workers arecoping with 100-degree heat as they fracture shale about 8,000ft under the ground beneath them. Three hundred million years ago, the rock trapped and compressed the remains of living organisms that thrived here when it was an ocean. These evolved into natural gas, which oil companies have now discovered they can get out of the solid rock: highly pressurised water is pumped underground to crack the rock, horizontally, across a 2,000ft section. Sand mixed in the water holds the rock open to give the gas a pathway through which to escape up into the pipeline.

The process of developing the Barnett Shale gas field, which underlies 15 counties in the Dallas-Fort Worth area, is more difficult than it sounds, requiring the pumping of 300,000 pounds of sand and 1m-2m gallons of water per job, without tapping into the underlying table of salt water.

“If cracks go into the salt water, it could kill your well,” says George Jackson, Devon’s operations supervisor for the Barnett Shale. “That’s the enemy of the oil field.”

After the rock is fractured – usually a day-long process – it takes up to 90 days to drill and complete a well so that it can be hooked into a pipeline. To save money and prevent gas from venting into the atmosphere, Devon builds the pipeline even before it completes the well.

“This is an unconventional gas play and the only reason it exists is our ability to adapt [using] innovation and technology,” says Chip Minty, Devon spokesman.

Indeed, in 2002, the entire field was producing 300m cubic feet of natural gas a day; now it produces 1.2bn cubic feet a day, with Devon producing half of that. With gas prices at about $2 per thousand cubic feet a few years ago, few considered it worth the investment. But the surge in prices to $7 per thousand cubic feet and spikes as high as $15 per thousand cubic feet have made it economical.

“It wasn’t even on the radar screen six years ago,” Mr Jackson says. Yet, in the second quarter of this year, Devon drilled about 100 wells in a 90-day period in the Barnett Shale. Now that the technology has become economically viable, says Mr Minty, the rush is on to find the new Barnett Shale.

“Technology has opened up a lot of areas,” says Mr Nichols. Before 2000, he explained, the industry did not have seismic technology to see below salt formations. Even though it remains an imperfect technology, it is enough for companies, such as Chevron with its Tahiti field, to exploit the deep seas.

That said, Jim Hackett, chief executive of Anadarko, the leading independent oil company, says the biggest advances took place in the mid-1980s, with 3-D seismic technology and horizontal drilling. “Since then, we have had evolutionary advances, which are magnificent and phenomenal, but they are not revolutionary,” Mr Hackett says.

Those developments include Cano Petroleum’s use of alkaline-surfactant-polymer technology in mature fields to “clean” any remaining oil off the underground rock, and ExxonMobil’s use of technology that simultaneously identifies a target zone, puts holes in a pipe through which rock can be fractured and produces natural gas – in one quick process.

“With conventional fracturing technology, it can take several weeks to complete a few high-quality fracture treatments in one well,” Exxon says, adding its new process “has treated up to 22 zones in a single day”.

Nonetheless, Mr Hackett is eager for the enormously high levels of investment going to technology improvements to produce something revolutionary: “What the world needs is continuous change in the energy cost equation.” With that, the industry can “produce affor-dable energy for the world”.

And, he might have added, the international oil companies can continue to expand the volume of precious oil and gas reserves within their grasp.

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