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Shell’s Growth Priority Over The Next Five Years — Deepwater

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Trefis Team SEP 29, 2016 @ 08:42 AM

With the ever-growing energy needs worldwide, the conventional sources of energy are likely to exhaust soon. Having explored the majority of the onshore reserves, oil and gas producers around the globe are now moving to offshore reserves, that are primarily formations in deep waters, containing thick layers of oil and gas in permeable rock. Consequently, Deepwater drilling, often used to categorize drilling in water depths of greater than around 400 meters, has become an attractive alternative to onshore drilling. In line with this growing trend, Royal Dutch Shell (NYSE:RDS.A) has categorized Deepwater as one of its growth priorities for the next five years. (Also Read: Shell’s Growth Priority Over The Next Five Years – Chemicals) In this note, we discuss the growth potential of the deepwater market, Shell’s positioning in this market, and its strategy going forward.

Shell’s Presence In The Deepwater Market

Shell has been present in the deepwater industry for almost four decades. Over the years, the integrated company has accumulated knowledge, experience, and proven deepwater technologies, that can unlock new resources safely and efficiently. As a result, the company has successfully developed and operated deep-water projects globally and currently has more than 20 major ongoing projects. In terms of reach, Shell has major deepwater activities in the Gulf of Mexico, the China Sea, Norwegian continental shelf, and Nigeria.

At the end of 2015, the company produced more than 400 MBOED (thousand barrels of oil equivalent per day) from its deepwater operations. However, the Netherlands-based company has a robust pipeline of deepwater projects, which has a potential to more than double its current production by 2020.

Deepwater Market Outlook

Over the last decade, more than half of the new conventional oil discoveries in the world were in deepwater offshore fields. According to a report – “Resources To Reserves 2013” by the International Energy Agency – almost half of the 2.7 trillion barrels of remaining recoverable conventional oil lies in offshore fields. Of these offshore fields, roughly 25%, or 340 billion barrels, are referred to as deepwater fields. This implies that deepwater fields hold approximately 12.5% of the total remaining recoverable conventional oil resources and will play a crucial role in the growth of oil supply in the long term.

According to industry estimates, global deepwater production accounts for around 7% of the total conventional oil produced worldwide. Keeping in mind, the resource potential and project pipelines of various oil and gas majors, the IEA expects the deepwater production to reach almost 11 million barrels per day, contributing close to 11% of the total conventional oil production by 2040.

Shell’s Strategy Going Forward

Shell has a strong track record in the development and operation of deepwater projects. In order to tap into the huge potential offered by this market, the company has categorized Deepwater as one of its growth priorities over the next five years. Under its new strategy, the energy company will focus on building its assets in distinctive and fundamentally advantaged geologies, such as the Gulf of Mexico, Brazil, Nigeria, and Malaysia. For instance, the Gulf of Mexico offshore oil production contributes about 17% of total US crude oil production. Given the enormous growth potential, coupled with a robust inventory of projects, Shell expects its deepwater production to grow to almost 1,000 MBOED by the end of this decade.

In terms of the ongoing projects, Perdido in the Gulf of Mexico is one of Shell’s major deep-water projects. It is the world’s second-deepest oil and gas production hub, and achieved first commercial production in 2010. The project managed to tackle challenges such as extreme water depth, rugged sea-floor terrain, and low-temperature and low-pressure reservoirs, and has set a water depth record for an offshore oil drilling and production platform of 2,450 metres (8,000 feet). The Perdido production hub has a capacity to handle 100,000 barrels of oil and 200 million cubic feet of gas on a daily basis.

The latest project developed by Shell is the Appomattox deep-water project in the Gulf of Mexico. In 2015, the company made the final investment decision about this project, which is expected to deliver an average peak production of approximately 175 MBOED. The project included advanced project designs, which have enabled the company to reduce the total project cost by 20%. In addition to this project, Shell is also working on developing Stones, an ultra-deep-water oil and gas development project that will host the deepest production facility in the world in about 2,900 metres (9,500 feet) of water.

Operationally, the integrated company has been continuously driving down break-even costs in deep water projects, both on projects under construction as well as pre-FID projects. Historically, total well costs have accounted for almost 50% of total project costs. However, due to Shell’s consistent efforts, these costs have dropped significantly owing to efficiency gains. For example, the company has completed 21 wells in Nigeria, saving more than $1 billion over the last two years. With the world-class technology and expertise, Shell aims to reduce its average break-even price to less than $45 per barrel, so as to survive even in a lower price environment.

In order to maintain its strong deepwater project pipeline, the company plans to spend around $8 billion on its ongoing and planned projects in 2016. Further, it has set a capital spending budget of $6-$7 billion for the next two years. However, this allocation could vary depending upon the recovery of commodity prices and the opportunities in the deepwater markets.

Hence, we believe that Shell has a strong holding in the deepwater markets and is well equipped to capitalize on the growth potential of these markets. However, efficient use of knowledge and technology, and exceptional project execution, along with the recovery in the commodities markets, will play a crucial role in the success of Shell’s growth strategy in the deepwater markets.

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