Shell hails bounceback towards deepwater drilling

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Head of exploration says break-even prices are now $30 a barrel

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Anjli Raval, Senior Energy Correspondent

Royal Dutch Shell is doubling down on drilling for oil far beneath the oceans, as the energy group eyes a cash bonanza from traditional deepwater projects despite a growing focus on new US shale investments.

Andy Brown, Shell’s head of exploration and production, said the industry was seeing a “bounceback” towards deepwater after a dramatic fall in investment during the market downturn.

“The most excitement at the moment is from the deepwater,” Mr Brown told the Financial Times, saying projects in Brazil, the Gulf of Mexico and West of Shetland in the North Sea were among the most attractive.

His comments come even as Shell and its peers have diverted more funds into short-cycle output, such as investments in US shale fields, aiming to yield production faster and more cheaply than so-called conventional output.

Mr Brown said that while the energy industry liked the flexibility that US shale offered, sentiment had “flipped” back in favour of deepwater — defined as a depth greater than 300m.

Deepwater can compete if not demonstrate higher returns because of fundamental cost reduction

Andy Brown, Shell head of exploration and production
The economics of some projects, which once required high crude prices to be profitable, had seen a “transformation”, with cash generation far surpassing that of US shale.

“Deepwater can compete if not demonstrate higher returns because of fundamental cost reduction,” he said. “Break-even prices in deepwater — we are now talking $30 per barrel.”

Shell seeks to generate $6bn to $7bn annual organic free cash flow by 2020 in its upstream business — an important metric for assessing the company’s ability to finance generous dividends.

“It’s great to have both in the portfolio and we are growing our shales business . . . but in terms of sheer cash flow delivery our deepwater has significantly more cash flow potential,” said Mr Brown.

Shell secured nine of the 19 Gulf of Mexico oil and gas blocks awarded in a Mexican auction, shortly after it won blocks in Brazil’s Atlantic waters. Both countries have attracted its rivals, with BP also looking to Mauritania and Senegal while ExxonMobil has made a big bet on Guyana.

Even as energy groups have sold off some North Sea holdings, they are refocusing efforts on the West of Shetland. Speaking as Shell marks 50 years of production in the UK North Sea, Mr Brown said the company saw “future running room” in the mature basin.

Shell, like other energy majors, has pared down costs and boosted productivity across the business by turning to advanced technology and using existing infrastructure more efficiently.

The cost of drilling a well in the Appomattox, a deepwater oil and gas development that is Shell’s largest floating platform in the US Gulf of Mexico, had fallen two-thirds in the past four years, said Mr Brown.

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He said shale oil projects were “more volatile”, pointing to bottlenecks in the Permian basin and rising costs as crude prices rebound. These types of problems can have “a dampening effect” on returns.

Energy analysts have said only the biggest energy companies, equipped with the balance sheet and technological prowess to extract resources from deep underwater, stand to benefit from a revival.

“There are a limited number of energy majors who can excel at this sort of work,” said Sarp Ozkan of Drillinginfo, a research firm.

They also say crude from such big offshore projects will be necessary to meet global oil demand in the coming years, after lower levels of spending have been increasingly focused on short-cycle output.

Naija247news
Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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