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This article is from the In-Depth Report Containing and Cleaning Up the Deepwater Oil Rig Disaster

The Future of Oil Is in Deep Water

That's not just because of the economic crisis slowing demand, remaining unexplored oil reservoirs are in deep waters offshore



FLICKR/JURVESTON

Big Oil is bracing for modest operating budgets this year and next, but weak global demand and $50 per barrel crude will not keep the industry from developing expensive deepwater offshore and unconventional oil and gas plays, industry officials and experts say.

Leaders of energy companies, including ConocoPhillips, EOG Resources and National Oilwell Varco Inc., which builds and maintains drilling rigs, this week told energy investors and analysts at the Howard Weil Energy Conference in New Orleans that they expect global economic and oil price recoveries to be sluggish.

Nonetheless, deepwater investment and activity will remain strong, they said, in part due to long lead projects that are now coming to fruition.

"Even though development of new wells may have slowed somewhat, there is still a lot of activity in the wells in place, producing wells that are making money at today's 1980 prices," said Allan Pulsipher, executive director of the Center for Energy Studies at Louisiana State University.

"[Development may] not be as enthusiastic or as aggressive as it would be if prices were $100 [a barrel] ... but keep in mind there's stuff coming on line now and in the pipeline. And a lot of that, the decisions to develop those wells were based on prices lower than today," Pulsipher said.

Late last week, oil-field services provider Schlumberger said it was opening a new $50 million facility that would bring 650 jobs to Shreveport, La., in the heart of the Haynesville Shale -- an unconventional natural gas reservoir that could hold as much as 500 trillion cubic feet of natural gas. The announcement comes even as natural gas prices dip as low as $4 per million British thermal units and the company's CEO, Andrew Gould, indicated today at the energy conference that job cuts in other sectors of the company were likely.

A bet on economic recovery

Industry's enthusiasm does seem to be waning. At last week's federal Gulf of Mexico offshore lease sale, high bids dropped 80 percent from their record high of $3.67 billion in 2008 to $703 million.

But the vast majority of the tracts that were bid on are in deep water, indicating a commitment to continue exploring the region even in tough economic times.

Deepwater wells can cost hundreds of millions of dollars to drill, and offer less confidence of a strong return on the investment. The deepwater Gulf of Mexico region has far fewer wells drilled, and accompanying exploration data, than areas closer to shore, making it more difficult to predict where the largest pockets of oil and gas might lie.

Pulsipher said companies will remain committed to those more expensive drilling ventures even in the current economy because the potential payoff is so great.

"It does take some time to develop those plays, certainly longer than in shallow water. But the other side of the coin, the reason to do it: You get a lot more oil and gas, and the results have been very good in getting large volumes of production," he said. "Plus, the technology is such that the exploratory risk is much less than it has been in the past."

Some analysts are uncertain about the impact of the current economic downturn on development of more expensive offshore ventures, though.

Morgan Stanley issued a report last week forecasting that low oil prices and tight global credit markets would cut into offshore activity.

"In August, we estimated oil companies would need 139 deepwater production platforms in years ahead to realize their field development plans," the report says. "However, since then, no contracts for new platforms have been awarded, 11 have been canceled and 46 have been delayed, on average by 15 months."

The report adds that because of the delays and cancellations, additional potential production for 2011 has been cut by 2.4 million barrels of oil a day.

And oil-field service provider Baker Hughes Inc. said last week that the total number of active rigs currently operating in North America, both onshore and off, is lower than at any point since January 2004.

Despite the statistics, industry officials say they are committed to developing the fields.

"Deep water is going to be where it is," said Pete Miller, CEO of National Oilwell Varco, yesterday at the Howard Weil Energy Conference, according to the Associated Press.

Pulsipher agreed, describing Miller's statement as a common industry understanding.

"The conventional wisdom is that if and when the economy recovers, oil prices will continue to rise, and [the companies] expect to – and will – make money on the plays coming on line," he said.

Reprinted from Greenwire with permission from Environment & Energy Publishing, LLC. www.eenews.net, 202-628-6500

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