Sunday, August 28, 2005

Deep Water Basins Will Save Us

The Common Misperceptions About Peak Oil – III

Deep Water Basins Will Save Us

When oil companies started jumping from shallow water to deep water to explore for oil depends a lot on your definition of deep and shallow water. However, sometime in the mid to late 70’s decision makers at Shell decided that to find the large accumulations of oil needed to sustain themselves as a company they were going to have to look in places where no one else was looking. One of those places was off the edge of the continental slope in water depths of 600 ft and ultimately, much deeper. At the time they started exploring for oil in these deep waters, there was no available technology to produce the accumulations even if they found them. It was truly a “Field of Dreams” scenario – If you find it, the technology will come.

The success of deepwater exploration and development has been one of the saving graces for big oil. It is an amazing technological success story, and was the result of the confluence of many different technologies – both engineering and geoscience. The advent of three dimensional seismic data (3D) coupled with the ability to use it to actually see hydrocarbons in the sediments a mile below the ocean floor (“bright spot” or DHI technology) gradually opened up whole new areas where oil could be explored for. What was discovered very early on was that 1) bright spot technology worked very well in many deepwater basins; 2) hydrocarbon-bearing clastic reservoirs (sand and sandstone) in deepwater settings could sustain phenomenal flow rates – rates that were only dreamed about except in Saudi Arabia; and 3) horizontal and extended reach drilling, and later, sub-sea well technology would allow for these large areal accumulations to be developed from single floating structures tethered to the sea floor.

From Shell successes in the Gulf of Mexico, this technology spread quickly to the Campos basin in Brazil and to the North Sea. Since then it has spread across the globe to West Africa, the Mediterranean, Northwest Borneo, and everywhere else oil companies can imagine that oil can be found. Many tens of billions or barrels have been found (60+). Billions have already been produced.

That’s the good news. The bad news is that, from an exploration standpoint, this party is over. The only thing that is left is the potato chip crumbs in the bowl, and a couple of half empty beers.

Don’t get me wrong, a lot of discovered volumes throughout the world are not on production yet. Much of this oil will be coming on in the next 5 years (Thunderhorse, Mad Dog, Atlantis, Tahiti, Great White, Bonga, Erha, Plutonio, Platina, Jubarte, Kikei, Gumusut, etc,); but what is being explored for now, and what is being found is of substantially different quality than those projects and the previous projects that are already on production.

In many basins, the fields being found now tend to be small, are in ultra-deep water (9000 ft or more), and/or are very deep below the ocean floor (20,000 ft). Many of the discoveries are in low-permeability reservoirs that won’t flow at high rates and/or contain highly viscous crude oil. Many of the current exploration programs are targeting reservoirs below a thick canopy (5000 ft) of sedimentary salt. These potential sub-salt accumulations are very difficult to image. The salt dramatically distorts the acoustic waves that provide the seismic images. Think of watching TV through four inch thick coke-bottle-lens glasses that got run over by a car.

Effectively everywhere that oil companies can think of to explore for oil on the planet has been tested with a drill bit. Where these deepwater accumulations tend to occur is no mystery – it is outboard of major river deltas where large sediment piles tend to accumulate. Those areas include outboard of the Mississippi, the Congo, the Niger, the Nile, etc. Some sedimentary basins, so far, have been big disappointments (the Amazon for example).

There is a limit to how far out in the ocean one can find this deepwater oil. Once you get too far away from where the sediment source is (mouth of a river) all you will find is a thin veneer of very fine-grained mud on the ocean floor. Below this is oceanic crust (think Hawaiian lava). Modern seismic data can image all of this.

I personally reviewed many deepwater prospects from recent lease bid rounds around the world. Maybe other people are seeing things that I am not, but even in a $60+/bbl world, most of this stuff does not look good. It doesn't matter if the price of oil is $1000/bbl if there are no hydrocarbons there.

Conclusion – Expect substantial ramp-up in deepwater production for the next five years, but then decline will set in. All of this is known by the experts. Deepwater production will not stave off Peak Oil.