Thursday, June 3, 2010

Oil industry goes deep in search of more finds

Oil industry goes deep in search of more finds

Tapped out fields in easy-to-reach areas leave industry with little choice

NEW YORK (MarketWatch) - The Deepwater Horizon oil spill, the worst in U.S. industry, has exposed the petroleum industry to disgrace, triggered a criminal investigation of one of the world's biggest oil companies, led to calls for increased regulation and fouled one of the globe's precious marine resources.

But it may not fundamentally alter the way the industry drills for oil or is overseen by governments around the world.

Burgeoning demand for oil and natural gas, global competition for dwindling supplies combined with tapped-out wells in easy-to-reach locations mean the industry has little choice but to look in ever-deeper water and ever-more-remote locations on land for new discoveries.

"The only place to find oil is to look in ever-deeper waters," said Professor Cutler Cleveland, director of the Boston University Center for Energy and Environmental Studies.

Studies suggest oil companies are right to focus on deepwater wells. Although they have begun to explore only half of the known deepwater basins, they have already found the equivalent of more than 40 billion barrels of oil. Geoscientists predict that well over 100 billion barrels remain to be found, according to a study by Exxon Mobil.

The Mississippi Canyon, where BP drilled the now-leaking Macondo well with Transocean's (RIG 49.44, +1.09, +2.25%) Deepwater Horizon rig, offers
many examples of the riches to be found in the ocean's depths. For instance, the Thunder Hawk Field, discovered in the Mississippi Canyon in 2004, is estimated to hold 50 million to 80 million barrels of oil. At $70 a barrel, the discovery is worth more than a half billion dollars worth of crude.
To the Gulf, and beyond

Riches like these push oil companies around the world to continue their search for new discoveries in ever-deeper water. All told deepwater accounted for 80% of the oil production in the Gulf, up from 74% in 2008, according to the Energy Information Administration.

Tina Vital, an S&P Equity Research analyst who covers the U.S.-based oil majors, said hot areas for oil exploration outside of the Gulf include offshore Brazil, Angola, West Africa, Australia, the Black Sea, and elsewhere. Click here to see a graphic illustrating the depth of modern deepwater drilling.

Deep water opportunities have been touted more frequently by oil majors and oil service firms in recent years.

Exxon Mobil (XOM 60.78, +0.01, +0.02%) said it holds interests in more than 135 million
gross acres in waters deeper than 400 meters. It participated in more than 30 major discoveries and it's the largest multinational holder of deepwater acreage in West Africa, Brazil and the Gulf of Mexico.

Chevron Corp. (CVX 74.05, -0.08, -0.11%) Chief Executive John Watson said at the
company's annual meeting that offshore drilling remained a necessary part of the energy equation in the U.S.

"It's not an either/or. We need to drill safely, and we need to produce the supplies that are needed," he said in an interview with the Houston Chronicle.

There is no evidence that the industry is slowing the pace of its exploration of the world's remote places in its never-ending search for oil.

Transocean (RIG 49.44, +1.09, +2.25%) , the owner of the Deepwater Horizon rig that
exploded on April 20 and killed 11 workers, said this week it still has a backlog of $29 billion worth of business, about 62% of which is in deep water.

"The ultra-deepwater, it remains strong," Transocean director of marketing Terry Bonno said at a recent presentation.
Moratorium

President Barack Obama has imposed a six-month moratorium on new offshore drilling, and the industry is likely to some face changes to the way it is regulated. But more deepwater drilling in the U.S. is likely, Cleveland said.

"What's lost in much of current focus on this disaster is the fact that the U.S. has a tremendous appetite for oil and it has to come from somewhere," he said. "All politicians believe it's better to come from U.S. sources than foreign sources. Where is the oil going to come from? Deep water is one of the few place left where we have a chance of making new finds."

Meanwhile, overseas activity has not slowed at all.

"None of the super majors have reported any inquiries on deepwater drilling practices outside the U.S.," Vital said. "I would have thought there would be a little more comment on what other countries might change. No overseas projects are being delayed."

Transocean's Bonno said he agreed.

"As we look across the rest of the world, all of these discoveries in Africa and in Eastern Africa have been quite amazing and there's lots of resources out there that needs to be drilled up."

And even in the U.S. analysts said there is almost no chance that the Deepwater Horizon disaster will significantly slow the push to find oil below the ocean floor.

"It is a setback because of the drilling moratorium but it's hardly the end of deep water drilling," Vital said. "We need the oil and that's where it is."

Steve Gelsi is a reporter for MarketWatch in New York.

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