New Horizons in Offshore Energy
It's not just about deepwater drilling
At the end of the nineteenth century the first offshore oil rigs were drilled in a small lake in Ohio. Today, companies have opened new offshore frontiers in shallow and deep water from Papua New Guinea to the Arctic.
Most offshore oil and gas production occurs in shallow water. Deepwater production, which occurs at depths greater than 450 meters and temperatures up to 300oF, accounts for only six percent of global oil production. Yet according to global consultants McKinsey & Company, investment skyrocketed from $16 billion in 2003 to $70 billion in 2013. With the dramatic drop in the price of oil due largely to slackening demand and a supply glut caused by Saudi Arabian and U.S. shale gas production, however, prospects for new investment in offshore oil and gas projects look bleak.
Other offshore energy sources like wind, wave and tidal are in development too, meaning that oil rigs are not the only infrastructure on the ocean’s horizon.
Most deepwater drilling occurs in the U.S. Gulf of Mexico (GOM), the North Sea, and offshore Brazil and West Africa. In the GOM, producers are feeling the squeeze from the oil price plunge and new regulations introduced after the 2010 Deepwater Horizon disaster. Together, these factors have pushed the cost of projects currently in development up 40 percent compared to those already on-stream five to seven years ago, according to a McKinsey report.
Other offshore regions are struggling, too. Julia Weiss, Senior Marketing Manager at Norway’s Rystad Energy, an independent oil and gas consulting firm, explained, “Australia and East Asia are expected to see some of the highest declines in activity in 2015/16.” Offshore production accounts for 90 percent of Australia’s oil and gas. Santos, a major Australian oil and gas producer, has reduced capital expenditures by 25 percent and cut its workforce by 15 percent so far this year.
In contrast with the bleak forecast for the Eastern Hemisphere, Weiss noted that “Activity in South America is expected to be constant over the next several years.” While the majority of that production is off Brazil, companies are moving up the continent’s east coast.
In 2011, after ten years of searching, British company Tullow Oil discovered an oil field off French Guiana estimated to hold 500-850 million barrels of oil. At the time of the discovery, Angus McCoss, Tullow's Exploration Director, remarked that it signaled “the start of a significant and potentially transformational long-term exploration and appraisal campaign in the region.” Demonstrating the momentum of the South American offshore sector, on March 6 of this year ExxonMobil began exploratory drilling in a 26,800-square-kilometer block some 160-320 kilometers off the coast of Guyana, to Venezuela’s southeast.
Just as the price plunge is having differential effects in various regions of the world, its effect on the offshore industry’s complex supply chains is varied too. Some oilfield service sectors will benefit while others will be hurt. “We believe subsea equipment and installation and maintenance services will be robust markets in the short to medium term,” stated Rystad’s Weiss. “Subsea will be robust based on the backlog of projects and the favorable economics in many small subsea tieback projects. Segments that will struggle are those closely linked to new development projects such as engineering, procurement and construction.”
The Closing of Offshore Frontiers?
New projects will thus encounter the greatest obstacles in places that were economically and environmentally challenging even before oil crashed. In 2008, when oil peaked at $145, the world was abuzz at the prospect of untapped oil and gas resources lying beneath the Arctic Ocean. Yet the breakeven price of offshore Arctic oil is around $90. With the price of a barrel of oil now hovering around $50, Arctic oil projects from Greenland to Russia have become more boondoggle than boon, though Shell still plans to carry out its much maligned efforts in Alaska’s Chukchi Sea this summer.
As oil companies sit tight, environmentalists are seizing the opportunity to guarantee that new offshore frontiers won’t be opened now, if ever. Igor Chestin, CEO of Worldwide Wildlife Fund affiliate WWF Russia, explained, “WWF Russia believes that low prices will at least defer development of marginal oil projects including the Arctic and shale gas and tar sands.” In the hope that Arctic fossil fuel production can be delayed – perhaps until renewable energy production is more thoroughly established – Chestin described WWF Russia’s effort to collect web signatures in support of a ten-year moratorium on new Arctic projects.
Speaking separately but echoing her colleague’s comments, WWF’s Managing Director of U.S. Arctic Programs, Margaret Williams, argued, “Rather than opening offshore areas to drilling – and further imperiling climate-stressed ecosystems and wildlife, and risking community health with toxic pollution – we need to be doing all we can to transition the U.S. to a future based on clean, renewable energy sources.” Her statement comes on the heels of the U.S. Department of the Interior’s proposal to open the Atlantic Coast to offshore drilling by 2021.
But in a handful of places in Europe and the U.S., projects are already underway to harness the offshore environment’s renewable rather than non-renewable energy.
From Legos to Wind Turbines
Offshore energy can come from more places than just the deep seabed. In the past several decades, some governments have provided subsidies to firms to promote the construction of offshore wind farms, taking advantage of the fact that offshore winds are stronger and more consistent than on-shore winds.
The blustery nations of Scotland, England and Denmark are leading the way in offshore wind farm construction. After building an additional 100 offshore wind turbines in 2013, Denmark, which also brought the world Legos, set the world record for wind production in 2014, generating some 39 percent of its electricity from the resource that once powered Christopher Columbus’ caravels across the Atlantic.
The U.S. is trying to catch up. The Department of Energy’s Wind Program is funding a number of demonstration projects in New Jersey, Virginia and Oregon to overcome barriers to offshore wind development, including the high costs of capital investment, which are not helped by the current situation. The drop in the price of gas, for which the Henry Hub spot price now sits around $3 per million British thermal units (MMBtu), could actually stymie the development of wind power, which averages $13/MMBtu.
Still, if the cost of wind production is brought down, the U.S. could be poised to take advantage of an offshore resource that, when all the state and federal waters of the continental U.S., Hawaii and the Great Lakes are included, could provide an estimated 4,150 gigawatts of power according to a 2010 report by the National Renewable Energy Laboratory.
Of course, to do that would require a huge investment in infrastructure. Harnessing all that energy would require one 5-MW wind turbine on every square kilometer of water where wind speeds average above seven meters per second. If this were to ever happen, tiny Denmark would surely capitalize, as it currently manufactures nine out of every ten offshore turbines that are installed worldwide.
Catching the Waves
Wave and tidal energy represents another unconventional offshore energy source. When appropriately harnessed, the roiling ocean’s marine hydrokinetic energy can rotate the blades of a turbine fixed to the seabed (or floating, in the case of set-ups in deep water).
Alaska, where offshore oil and gas production has a decades-long history, holds enormous potential for tidal and wave energy generation thanks to its long coastline and tidal ranges that rank among the world’s biggest. Portland, Maine-based Ocean Renewable Power Company (ORPC) is focusing on providing remote Alaskan communities with affordable renewable energy from turbine generator units installed offshore or in nearby rivers. These could one day substitute for the generators powered by expensive diesel that has to be shipped in.
That doesn’t mean wave and tidal energy is directly competing with oil and gas: In fact, as ORPC’s CEO, Chris Sauer, noted, there’s lots of room for collaboration. In Cook Inlet there are approximately 30 natural gas and oil platforms whose electricity loads are supplied by diesel generators or by burning their own product. Instead of wasting a resource that could fetch a higher value in the market, Sauer suggested, “There are opportunities for tidal energy to provide the electricity needed by these platforms, which are sitting right smack dab in the middle of the resource.” The oil majors aren’t really biting yet, but some interest exists.
Companies with offshore oil and gas operations have traditionally sought to avoid powerful winds and waves from damaging their platforms and rigs. Yet when channeled correctly they can serve as resources to both people and industry. And whereas oil and gas could one day run out, the wind will keep blowing, the waves pounding, and the tides rolling for generations to come. The offshore environment may be harsh, but it is energy-rich no matter how you harness it. – MarEx
Mia Bennett is a frequent contributor to the magazine.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.