Shell (NYSE: RDS-A) to Develop World's Deepest Oil Well

Shell's New Milestone


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By Swagato Chakravorty
Friday, May 10th, 2013

Royal Dutch Shell Plc (NYSE: RDS-A) has stated it will be moving forward with an ambitious project to develop the deepest offshore oil and gas production facility thus far. We’re talking about oil and gas production from depths nearly 2 miles beneath the waters of the Gulf of Mexico.

It’s certainly a big-thinking move, considering that memories of the Macondo oil spill three years ago and BP’s (NYSE: BP) infamous Deepwater fiasco are still rather fresh.

offshore drilling rig 7-30But deepwater drilling seems to be making a comeback. Reuters reports that Exxon Mobil Corp. (NYSE: XOM) is moving ahead with a proposed $4 billion project concerning the Julia oilfield located deep beneath the Gulf.

BP, however, appears to be a bit more skittish – it's postponed work on the Mad Dog Phase 2 project (BP’s biggest in the Gulf region now). The company has indicated that present market conditions and spiraling costs are the main culprits.

Shell owns the Stones field outright. It was discovered back in 2005 and comprises of eight leased blocks in the Lower Tertiary trend within the Gulf of Mexico.

That area happens to be some of the most difficult territory; however, it is also among the most promising plays in the entire Gulf. It could hold as much as 15 billion barrels of oil.

According to Shell, early production levels from the Stones project should reach around 50,000 barrels of oil equivalent per day. And that’s just the first phase – there are more to come. At its peak, Shell expects the Stones project to produce at a much higher volume.

Deepwater Drilling Today

Such “ultra-deep” wells can, on average, add 140 million barrels of oil equivalent to existing reserves, which makes them a lot more effective than onshore operations. Given that each barrel is worth about $100, that’s nearly $14 billion a discovery.

Following Shell’s recent move, the development of floating production, storage, and offloading (FPSO) vessel and sub-sea infrastructure can now commence. Two sub-sea production wells are envisioned, both linked to the FPSO vessel.

Further down the line, Shell intends to add six more wells. Of the more than 250 million barrels of oil equivalent that is estimated as recoverable resources, the first phase of development will top out at the aforementioned 50,000 barrels.

The Sacramento Bee excerpts Shell’s press release:

"This important investment demonstrates our ongoing commitment to usher in the next generation of deepwater developments, which will deliver more production growth in the Americas," said John Hollowell, Executive Vice President for Deepwater, Shell Upstream Americas. "We will continue our leadership in safe, innovative deepwater operations to help meet the growing demand for energy in the US."

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FPSOs

FPSOs typically operate by having tankers transport oil from the FPSO vessels onshore to U.S. refineries, from where gas is then transported elsewhere via pipeline networks.

It’s worth noting that Shell’s proposed facility will not only be much further offshore than BP’s Deepwater well; it will also run nearly twice as deep.

When Deepwater went out of control, it took several months to get the oil leaks under control. The charges against BP took a long time to litigate, and we just recently saw some verdicts handed down. The inherent problem with deep-water operations is that in case of disaster, the damage occurs rapidly and extensively.

However, after the Obama administration lifted a moratorium it had imposed on deepwater drilling following the BP incident, interest and renewed activity in deepwater operations have picked up swiftly.

The Gulf of Mexico is a hotbed of deep water operations, mostly because there is a well-developed and localized pipeline infrastructure, which makes it convenient for developers to get their precious product routed efficiently. Shell’s proposed FPSO will be on top of the seven that it already operates around the world.

The increased focus on FPSOs as a viable model for deepwater operations may represent an advance over the conventional model, which calls for moored platforms. However, FPSOs are more mobile and flexible, and it’s this storage-and-tanker mode of operations that is attracting wider attention today.

Unlike platforms, FPSOs can quickly detach from connector pipes (leading to the seabed wells) and easily move away if danger threatens. In general, FPSOs just offer several advantages over traditional moored platforms, and it seems Shell is intent on exploring these possibilities. 

 

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