By Lynn Cook in Houston, Sarah Kent in London and Paul Kiernan in Rio de Janeiro | Photographs by William Widmer for The Wall Street Journal
MARS OIL PLATFORM -- Royal Dutch Shell PLC is trying to reinvent
its business with a concept that sounds oxymoronic: budget
deep-water drilling.
Here on a hulking steel behemoth 130 miles southeast of New
Orleans, more than 170 roughnecks and engineers are working to
quickly wring more oil out of a massive old field -- and keep it
profitable even if oil sinks to $15 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 it
in deep-sea production.
It hopes to squeeze more oil out of existing undersea wells,
like those that ring the platform, which weighs 82 million pounds
and floats in 3,000 feet of water over the Mars oil field in the
Gulf of Mexico. It also wants to make new deep-water projects
cheaper and faster, especially in Brazil, where it acquired a bevy
of offshore prospects as part of its $50 billion purchase of BG
Group PLC last year.
It is a strategy born of necessity. Big oil companies have
traditionally needed prices of $70 a barrel or more just to break
even on new deep-water 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 $50 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 $10
billion to $20 billion 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 deep-water 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 upends its deep-water
drilling model, so long as oil prices rebound to $60. Shell
estimates it is now drilling new deep water wells around 30% faster
than it used to, and has cut drilling costs 50%.
"If the world needs deep-water oil, which it does, it's going to
obviously economically make sense to develop the
lowest-development-cost oil first," Mr. Van Beurden said in an
interview.
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 deep-water operations. In the Gulf
division that has meant some 200 changes, such as dialing down the
amount of equipment Shell will take out to a deep-water rig, now
down 40% compared to a couple of years ago.
The company is also adopting techniques from smaller upstart
firms and onshore fracking operations for its deep-water projects,
such as drilling horizontal water-injection wells to help maximize
oil recovery in fields once thought to be played out.
It is also cutting costs. In the Gulf and Brazil, Shell slashed
25% 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, 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 $10,000
helicopter trip, to keep a rig running. The marine logistics
measures will save an estimated $300 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 initially discovered Mars in 1989, it was the largest
find in the U.S. 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 $1 billion -- several
times more than NASA spent on its Pathfinder probe to the actual
Red Planet. Shell brought in BP PLC 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 around 60,000 barrels a day. Now the
company's goal is to capitalize 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.
Onshore, the shale fields of Texas' Permian Basin are known for
having multiple layers of oil-rich rock, likened to stacks of
pancakes. Companies have discovered that they can tap several
layers, raising the total amount of oil the acreage can yield.
Conventional wisdom held that deep-water geology was different.
But Mr. McMahon said studies show the area around Mars also has
many stacked layers of oil, and Shell is now using techniques
pioneered on land to quickly drain them.
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 $10 to $15 a barrel by reopening old wells and using water
and chemicals to flush more fuel out of the ground, Mr. McMahon
said. The company is retapping a dozen wells near Mars in the first
half of 2017, with another dozen tentatively scheduled for the
second half of the year.
But the effort carries risks. Hydrogen sulfide, a colorless gas
that has been known to kill workers at drill sites, can build up
inside old offshore wells that have been shut down and sealed
off.
Tensions can mount between Shell's technical experts, armed with
big ideas about how to squeeze more crude through the aging Mars
platform, and the offshore supervisors on the massive steel erector
set who actually have to oversee the projects. Every weekday at 3
p.m., the two sides meet via a video feed connecting Shell's New
Orleans skyscraper with the platform.
During one recent meeting, Dale Toups, a chemical engineer at
the skyscraper, was adamant about deploying sensitive monitoring
equipment on a well whose geology suggested potential problems with
hydrogen sulfide. Other engineers warned that testing could slow
down work on nearby wells, delaying the other projects, and thus
costing Shell money.
Howard Hill, the offshore installation manager of Mars, sided
with Mr. Toups. Mr. McMahon, the ultimate say, chose caution: The
monitoring system got deployed at the start of February.
BP's Deepwater Horizon rig disaster and oil spill, which killed
11 workers, released 3.2 million barrels of oil into the Gulf and
has cost the company nearly $63 billion so far, occurred less than
100 miles from Mars. Expensive federal safety regulations are going
into effect seven years after that deadly accident, calling for
better real-time monitoring of equipment and more-frequent
inspections, among other things.
Shell executives said they aren't worried about the additional
costs because their internal safety protocols are already tougher
than what the regulations require. Still, dangers abound in deep
water, and Shell has had its share of missteps.
The company's recent foray into the Arctic waters off the coast
of Alaska was marred when a drilling rig ran aground while
traveling back to the Port of Seattle. The company pulled the plug
on the project two years ago after the $7 billion endeavor resulted
in a dry hole -- one of the most expensive in the history of oil
exploration.
Last March, Shell narrowly avoided an environmental disaster off
the east coast of Canada when intense waves made a supply ship list
so far to one side that a piece of heavy machinery in tow snapped
loose and plunged to the sea floor, landing a few yards from an
underwater oil well head.
"We are a high-risk business," said Wael Sawan, Shell's vice
president for deep water in Houston. "This is just the nature of
deep water."
But Shell, like other major oil companies, has little choice but
to adapt its methods.
Despite high crude prices over much of the past decade, big oil
companies have struggled after plowing billions of dollars into
megaprojects from Africa to Australia.
A survey of Shell, Exxon Mobil Corp. and Chevron Corp. found
that their combined return on capital plunged from 21.5% 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 Corp. 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
new deep-water targets in Brazil that it believes it can develop
economically even when oil sells for $40 a barrel.
Brazil's offshore geology is so rich that experts rank it as one
of the lowest-cost places to develop new oil finds. Shell plans to
invest $10 billion in Brazil over the next five years, making it
the largest foreign investor, according to Mr. Sawan.
But Brazil remains a politically challenging place to operate,
with complex environmental licensing procedures and requirements
that a lot of equipment and labor be made and hired locally.
Oil companies were rattled in 2011 when a minor oil spill by
Chevron prompted Brazilian prosecutors to seek nearly $20 billion
in damages and file criminal charges against executives. The
charges were ultimately dropped, and Chevron agreed to pay $42
million to settle the suits in 2013.
Shell points to its 103-year presence in Brazil as evidence it
can navigate the nation's risks. Its partner in dozens of
deep-water prospects is Brazil's state-controlled oil company
Petróleo Brasileiro SA, also known as Petrobras.
The company has been mired in a sweeping corruption scandal for
almost three years. Now, burdened with the global oil industry's
largest debt pile, it has been forced to cut capital spending by
more than two-thirds for the 2017-2021 period.
Even so, Petrobras has steadily brought down development costs,
an important consideration for Shell as it looks to capitalize on
its Brazilian assets on the cheap.
The first well Petrobras drilled in the oil-rich pre-salt layer
on Brazil's continental shelf took 310 days. Now it can drill and
develop a well in fewer than 90. Rigs can cost around $400,000 a
day.
"It is huge savings," Petrobras Chief Executive Pedro Parente
said in an interview.
Shell executives note that Petrobras brought more than a million
barrels a day of oil-pumping capacity online within a decade of
discovering reserves -- something no other company has done.
"They are the leading deep-water operator in the world," Mr. Van
Beurden said. "We are No. 2, but they are No. 1."
Shell is part of a consortium developing the giant Libra
discovery in 6,500 feet of water 105 miles southeast of Rio de
Janeiro, estimated to hold up to 12 billion barrels of oil. Instead
of tackling it and other enormous oil deposits with a 20-year view
to their lifespan, Shell and its partners are plotting how fields
can be pumped in stages as a way to produce oil faster.
Since Brazil's colossal deep-water potential is already
surpassing expectations -- wells in the most-promising areas are
yielding around 30% more than predicted -- fewer wells need to be
drilled. Rather than erecting a giant steel platform to pump new
wells there, Shell is helping fund half a dozen midsize floating
platforms that will start to launch later this year.
Mr. Van Beurden said he is optimistic that Shell's Brazilian oil
output can help boost the company's world-wide deep-water
production past 900,000 barrels a day by around 2020. The company's
drive for more oil in the Gulf has already helped boost deep-water
production by 50% since the end of 2015 to 725,000 barrels a
day.
"We are sitting on the best acreage in the world," he said.
"These are the cash engines for the next decade."
Write to Sarah Kent at sarah.kent@wsj.com and Paul Kiernan at
paul.kiernan@wsj.com
(END) Dow Jones Newswires
March 20, 2017 11:51 ET (15:51 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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