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Alexander Khurshudov: They will have to wait until the oil prices rise to increase the US offshore production

May 05/ 13:02

Moscow. The US President Donald Trump’s order to expand oil and gas production in the US offshore means the end of the shale oil production era. This is what Sergey Donskoy, the Natural Reserves and Ecology minister claimed... It means that the new administration are placing stakes on the offshore production, despite the much bigger investment compared to the shale production projects.        

Alexander Khurshudov comments on the news to the Oil and Gas Information Agency.

I think Trump’s administration don’t even know they are “placing stakes”, otherwise they wouldn’t be teasing the Congress with such questionable maneuvers. Trump’s abrupt moves run into strong opposition from the Parliament every time; none of them has ever been accomplished in its initial form.    

We are talking about the offshore areas 300 to 3000 meters deep, because the shallower parts have been explored for a long time, some have already been depleted. It takes floating platforms to produce oil from subsea wells in such depths. Drilling and completing such a well costs about $40-50 mln. During further producing the deepwater offshore imposes a lot of restrictions: it is next to impossible to do workover in such wells, because its cost is almost equal to the cost of drilling. Production has to be stopped during hurricane period. The most hazardous part is the riser, the long pipe which connects the well-head or a group of wells to the floating platform; it was the riser failure after the blowout in the Gulf of Mexico that cost BP $54 billion. It is also impossible to repair the subsea pipelines, they have to be duplicated; in case of failure they are simply cut off and new ones are constructed. 

According to estimates, this oil is economic to produce with the price of over $70 for a barrel. There is no experience in long-term operation so far, but the fact that deepwater projects are getting extensively postponed under the current $50 only proves the estimates. Keeping in mind that accidents here cause severe damage to the environment, in my point of view, this shelf must not be developed without considerable financial backup, which means additional costs.

Companies don’t demonstrate much interest in deepwater leases under the current oil prices. Last year Statoil, Shell and ConocoPhillips refused from almost 80% of the drilling licenses to the North of Alaska in the Chukchee Sea. In August the auction of lease sales in the Gulf of Mexico ended in a total failure: out of 4,399 (!!!) blocks put for sale (see the picture) only 24 were purchased, including 2 acquired by ExxonMobil, 10 by BP and 12 by an Australian company BHP Billiton. The companies paid the total of $18 mln for all the bids, which is three times less than the cost of ONE subsea well.           

Curiously, Russian mass-media eagerly published their announcements on the coming auction, though NONE reported its results. What a false mirror the Russian press is. 

However, the latest auction this March proved to be more efficient. 9,118 blocks covering the total of 76.8 thousand square km in the central, the most productive part of the Gulf were put for sale. 28 companies purchased 168 blocks for the total of $275 mln. Shell Offshore Inc. led all companies in sum of bids ($55.9 mln), the most promising blocks were sold for $6-24 mln. Almost half of the leases cover the areas 800-1600 m deep, a third go even deeper.  

The results of the latest auction turned out to be better than last year, but worse than in 2015. No wonder, since the American companies desperately lack new reserves; besides, the price increase in the first quarter inspires hope that it will continue. If it does, the new construction will support the companies, if it doesn’t it will shake them.

Deepwater projects have a longer investment cycle, the highest capital expenses rate, so the oil prices have to grow first to make their implementation possible. The prices have to steadily establish over $80 for 1.5-2 year for the investors to be safe from losses to some extent. As for now, the new administration is so enthusiastic in their claims that I can help thinking “good words without deeds are rushes and reeds”…

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