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Costs tumble as Shell masters ‘budget’ deepwater drilling

  • The Australian
  • 12:00AM March 22, 2017

Royal Dutch Shell is trying to ­reinvent its business with a concept that sounds oxymoronic: budget deepwater drilling.

On the Mars oil platform, a hulking steel behemoth 200km southeast of New Orleans, more than 170 roughnecks and engineers are working to quickly wring more oil out of a massive field — and keep it profitable even if oil sinks to $US15 a barrel.

Shell, the world’s second-largest publicly traded energy company, is making a high-stakes bet that it can take highly efficient technology and processes per­fected onshore and deploy them in deep-sea production.

It hopes to squeeze more oil out of existing undersea wells, like those that ring the platform, which weighs 37,000 tonnes and floats in 900m of water over the Mars oilfield in the Gulf of Mex­ico. It also wants to make new deepwater projects cheaper and faster, especially in Brazil, where it acquired a bevy of offshore prospects as part of its $US50 billion purchase of BG Group last year.

It is a strategy born of necessity. Big oil companies have traditionally needed prices of $US70 a barrel or more just to break even on new deepwater projects, which take years to begin paying off.

But with onshore shale oil flooding the market, Shell executives aren’t sure when crude, currently around $US50 a barrel, will fetch more again. And with electric cars and other technologies threatening to eat into demand, they believe the world’s thirst for oil may peak as soon as the end of next decade.

So while Shell’s top executives stop short of saying the megadrill era is gone forever, they aren’t comfortable spending as much as $US20 billion ($25.9bn) on moonshot projects. Shell is going lean, focusing on smaller-scale projects that produce “first oil” faster.

The company’s longstanding objective of increasing production and replenishing reserves, costs be damned, has taken a back seat to delivering returns to shareholders on every single barrel pumped. That means deepwater projects have to be able to compete on price with opportunities Shell has in shale and in onshore basins around the world.

Chief executive Ben Van Beurden predicts the company can end the decade with double-digit ­returns as it up-ends its deepwater drilling model, so long as oil prices rebound to $US60. Shell estimates it is now drilling new deep water wells about 30 per cent ­faster than it used to, and has halved drilling costs.

“If the world needs deepwater oil, which it does, it’s going to ­obviously economically make sense to develop the lowest-development-cost oil first,” Mr Van Beurden said.

To do this, Shell is shaking up its corporate culture, appointing “chief irritants” to each division, individuals whose only role is to challenge old ways of doing business. In weekly team meetings, managers have to justify how they are running their units. The result: simpler deepwater operations. In the Gulf division that has meant 200 changes, such as dialling down the amount of equipment Shell will take out to a deepwater rig, now down 40 per cent compared to a couple of years ago.

The company is also adopting techniques from smaller upstart firms and onshore fracking operations for its deepwater projects, such as drilling horizontal water-injection wells to help maximise oil recovery in fields once thought to be played out.

It is also cutting costs. In the Gulf and Brazil, Shell slashed 25 per cent of its workforce and cut the number of support ships ferrying equipment, food and other supplies to platforms to 16 from 61. If equipment breaks, a replacement can now take two weeks to arrive, a far cry from the days when offshore managers thought nothing of overnighting parts on a fast boat, or even the occasional $US10,000 helicopter trip, to keep a rig running. The marine logistics measures will save an estimated $US300 million a year.

“This is not a cut-and-cope ­exercise,” said Kevin McMahon, operations manager for Mars. “This is our new reality.”

When Shell discovered Mars in 1989, it was the largest find in the US since oil was struck in Alaska’s Prudhoe Bay in the 1960s.

It took Shell seven years of ­engineering work before it pumped its first oil from the site, and more than $US1bn — several times more than NASA spent on its Pathfinder probe to the actual Red Planet. Shell brought in BP as a minority investor to help defray costs. Mars eventually became a big cash cow.

But Mars’s production, which peaked at more than 225,000 barrels a day in 2002, fell to 60,000 barrels a day. Now the company’s goal is to capitalise on its extensive infrastructure in the area and squeeze more barrels out of the field, using new know-how and technology. The Mars platform has recently rebounded to pump 75,000 barrels a day.

Shell is going back into old, deep wells and using them to drill out horizontally into shallower layers of oil-bearing rock. It is also using water to flood reservoirs once thought to be played out, hoping to flush more crude to the surface. Shell can also produce oil for $US10 to $US15 a barrel by ­reopening old wells and using water and chemicals to flush more fuel out of the ground, Mr McMahon said.

Despite high crude prices over the past decade, big oil companies have struggled after ploughing billions of dollars into mega-projects from Africa to Australia.

A survey of Shell, ExxonMobil and Chevron found their combined return on capital plunged from 21.5 per cent in 2007 to ­almost nothing over the past decade, according to a Wall Street Journal analysis of data from S&P Global Market Intelligence. Exxon and Chevron say the formulas they use to calculate returns show higher results.

Shell’s BG acquisition was the industry’s largest since Exxon merged with Mobil in 1999. The deal propelled Shell ahead of Chevron to become the world’s No 2 energy company by market value and a huge producer of liquefied natural gas, increasingly used to generate electricity. Most important for its growth prospects, it acquired a host of deepwater targets in Brazil that it believes it can develop economically even when oil sells for $US40 a barrel.

Mr Van Beurden said he was optimistic that Shell’s Brazilian oil output can help boost the company’s worldwide deepwater production past 900,000 barrels a day by 2020. The company’s drive for more oil in the Gulf has already helped boost daily deepwater production by 50 per cent since the end of 2015 to 725,000 barrels.

Additional reporting: Paul Kiernan

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