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Perplexities of Ditching Offshore Projects

Research & Analysis

By Salma Essam

Offshore drilling has been full of booms, busts, baulks, and boondoggles. Along with onshore exploration, countries of the Middle East, Africa, North America, and Asia have resorted to drilling in deep waters to boost oil production and to meet domestic as well as international demands.

As these projects expand, the unlocking of the offshore fields potential presents different challenges. Investors are, however, continuously exerting efforts to overcome those, despite everything, as offshore drilling has by now become unavoidable from both the economic and energy sustainability perspectives.

Offshore Geopolitics 

The reasons for international oil companies (IOCs), national oil companies (NOCs), and joint venture companies (JVs) to continue in offshore exploration and production are primarily of geopolitical and economic character.

Many countries mull different options for drilling offshore regardless of the existing amount of crude oil glut in the global market as they need to maintain energy resources replacing the depleted ones, expand energy export capacities, and thus secure their regular inflow of income and thus preserve their geopolitical roles.

Oil Market Competition

In this equation, market competition is a major factor that guides the sector’s dynamics. Most recently, Iran has sparked an unprecedented market competition by boosting the amount of produced oil following the lifting of economic sanctions. The Islamic Republic, which has rejected a recent oil freeze plan and expressed determination to regain its prior position in the markets, has increased its exports to the European market at a level of 970,000 b/d. Tehran is exerting efforts to thrust its total production, and to attract foreign companies to invest in its territory, as Iranian Deputy Oil Minister, Rokneddin Javadi, told Reuters: “We welcome all oil companies, including the Americans that meet Islamic Republic’s requirements to invest in Iran. We welcome competition among foreign oil companies.”

In contrast, Gulf States stay at risk of losing their leverage in the global oil market due to Tehran’s assertively pursued ambitions. They are, therefore, eager to protect their assets. Despite the fall in oil prices and suggestions raised by some OPEC members to freeze oil output, countries of the Gulf Cooperation Council (GCC) remain reluctant to take such a decision. They are instead trying to keep pace with Iran’s rising oil production. Saudi Arabia is clearly defending its position, as country’s new Oil Minister, Khalid El Falih, told The Guardian: “We remain committed to maintaining our role in international energy markets and strengthening our position as the world’s most reliable supplier of energy.”

High Offshore Revenues

High offshore revenue is another incentive for continuing drilling in deep waters, especially for countries whose economies are dependent on the petrol sector. In the case of the US, for instance, annual federal proceeds from offshore leases have ranged up as high as $18 billion in recent years, second only to income taxes as a revenue source, The Wall Street Journal wrote in a 2013 analysis discussing the continuation of offshore drilling in the country.

Similarly, the Kingdom of Saudi Arabia, whose petrol sector accounts for roughly 87% of budget revenues and 90% of export earnings, according to the Central Intelligence Agency factbook, is most likely to continue drilling offshore for the same reasons. It is for the fact that Riyadh owns the world’s largest offshore oil field, Safaniya, which contributes with around 1.2mb/d of crude oil production to a total amount of Aramco’s production at 10.2mb/d, as Saudi Aramco’s key facts and figures show. Therefore, given the scope of offshore contribution to the overall revenues, it is unthinkable for the country to ponder stopping offshore production, if it is to avoid slashing national income at a harmful level.

Onshore Maturity

Furthermore, offshore drilling is believed to be irreplaceable simply because onshore exploration and production activities are seeing more and more constraints due to depleted mature fields, whereas energy demand is still increasing.

Oxford Business group’s analysis has shown that for instance the UAE’s onshore oil fields are reaching their maturity, yet the Gulf state needs to raise its total oil production to 3.5mb/d. Indeed, this necessarily means that the government will have to allow offshore drilling to play a bigger role in the country’s energy scheme, a scenario that many other states in the region may need to seriously consider as well.

Oil Prices

Global oil prices dynamic is undoubtedly another key factor ruling over the offshore sector of the industry. The mathematics is quite straight forward. While the demand for offshore drilling contracts increases when oil prices are expected to rise, contracts demand falls at times of low oil prices.

The statistics prove that as companies have been reducing their spending in the past two years with the oil price drop from above $100 per barrel in June 2014 to merely $60 in April 2015, the number of rigs and daily expenditure of the companies have significantly fallen, primarily due to this oil price shake-up. The world’s rig count dropped to below 2,500 in April 2015, which is considerably lower than the 3,500 rigs drilled in June 2014, according to the calculations by NYM, ICE, and Baker Hughes, cited in the Market Realist’s comprehensive study – Offshore Drilling Unveiled.

As it seems, low oil prices shrink investments as drillers fear that the revenues may not cover the money spent on financially demanding technological solutions such as huge vessels, salaries of workers, and the large scope of other related operational activities. Halting drilling projects until the market prices are stabilized, therefore, may seem to be a viable option for many IOCs, especially for smaller companies. On the other hand, international oil giants may choose a different path. In fact, as the demand for offshore drilling contracts is strongly driven by huge capital budgets, the opportunities seem to rest in the hands of large companies like British Petroleum, Exxon Mobil, and Royal Dutch Shell, as the Market Realist stated.

The question therefore remains if these limitations in capital, oil prices, and other present challenges may reverse the exponentially increasing trend in offshore drilling globally in the foreseeable future.

Offshore Drilling Challenges

In addition, there are other obstacles that pose a threat to drilling offshore. These are inextricably linked to water complexities defined by pressure, temperature, and other physical properties of deep waters. High costs of operations are also to be considered. The offshore sector is, however, eager to resolve these impediments.

Water Depth

Depth-related issues of extracting oil represent major hurdles for engineers and drilling units designers, who are to analyze geophysical properties and types of rocks on the sea beds as primary steps to launch drilling activities. Furthermore, as operations extend deeper, seismic data interpretation becomes more difficult, because in larger depths, reservoir properties cannot be easily controlled, an oilfield review by Schlumberger – Beyond Deep, The Challenges of Ultra Deep Water, stated.

Water temperature in ultra-deep seas and oceans pose another challenge, because the deeper the drilling is, the higher the water temperature reaches. As a result, the materials used in the drilling processes weaken and engineers are forced to search for sturdier and more expensive exploration devices.

Even though the pressure of the deep water can be controlled by ensuring that the pressure of the drilling fluid in the wellbore is sufficient to counteract the pressure in the oil reservoir itself, in some situations, uncontrolled over-pressure can cause the oil to enter the wellbore. This may cause serious blowouts. Dr. Bob Bea, a former Executive Officer at Shell, who is now an engineering professor at the University of California, Berkeley, told The Dallas Morning News that stopping a blowout at 10,000 ft is a fantasy because of the brutal conditions in the fields determined by pressure, temperature, and inaccessibility. He further noted that “the difficulty is an exponential function of the depth of the water.”

Deep water operators also struggle with the technical issues related to the weight of the hanging drill pipes and the extensive length of riser pipes, which are needed to connect the wellhead to the rig. According to an analytical article Challenges of Deep Water Drilling published by Offshore Technology, deep-water drilling requires long, thick, and heavy pipes to withstand the necessary pumping pressures and motor torques, therefore, requirements for more efficient, and also more expensive materials for undersea exploration further increase the burden on offshore exploration and production companies.

High Operation Costs

High costs of offshore operations, especially amid the fall of oil prices, expose oil and gas firms to further complications. Deep water drilling requires technologies that can function in severe environments and physically complex areas. Exploration in water depth that exceeds 1,500 ft can be performed only with expensive, remotely operated underwater vehicles (ROVs) equipped for deep water conditions. The costs skyrocket even further in areas such as the Barents Sea, where the environment is subject to harsh freezing conditions, as Wilson Center informed in a report on Opportunities and Challenges for Arctic Oil and Gas Development. Heavy expensive structures and tailored technologies are used to extract oil in the extreme weather conditions. But high costs of offshore drilling apply to all reservoirs the world over, not only to those in extreme climate.

Costs are further rising due to the fact that offshore drilling is dependent on a large number of hired personnel that is to undertake costly training program and in return also demands high allowances.

In a study titled Oil Service Contracts dealing with incentive schemes in the drilling sector in Norway, co-authored by P. Osmundsen, T. Sorenes, and A. Toft, and published in the Journal of Petroleum Science and Engineering, University of Stavanger, the authors explained that “through the contract and tendering system, the oil companies seek to attract competent contractors at competitive rates and to achieve good quality and commitment within the framework of a contract. Incentives and bonus systems cannot simply just secure a higher commitment, but must in addition obtain a favorable allocation of personnel and hardware.”

As it seems, these difficulties are not easily avoidable.

Shallow Reservoirs

An option to focus on shallow waters reservoirs may seem attractive. However, drilling in shallow reservoirs proves to be as challenging as ultra-deep waters exploration, according to a research paper named Challenges of Drilling Horizontal Wells in Shallow Viscous Oil Formations published by the Society of Petroleum Engineers.

According to the study, in 2011, Baker Hughes faced a direct challenge in Kuwait’s shallow waters as it had to drill horizontal medium radius wells in extremely soft formations using vertical rigs. These horizontal wells required a kick off from a 150 ft measure depth (MD) in the loose sand formation of shallow viscous oil formations. It has become evident that exploration in low pay thickness areas needs innovative approaches, other than the conventional EOR methods, in order to boost output from subsea fields.

This and many other challenges may further lead some offshore companies to opt for pausing or withdrawing their operations in the deep waters and some countries to seek for alternative solutions. However, despite these complex issues, others seem to have come to an understanding that, in fact, offshore drilling is inevitable, even given the global energy output imbalance.

A Salient Sector

Going beyond offshore geopolitics, it appears that in overall statistics, offshore drilling projects have been continuously mounting, and countries are even now more willing to pour larger investments into the sector. This stems from the fact that the world possesses high proven offshore reserves valued at 280 billion barrels.

A study – Global Trends in Oil and Gas Markets to 2025 – published by Lukoil estimates that by 2020, 62% of new global oil production will come from offshore, and will generate $65 billion. The generated revenues are likely linked to the fact that the global offshore drilling rigs market value is expected to reach $102,473 million by 2019, growing at a compound annual growth rate (CAGR) of 9.27% from 2014 to 2019, as a research on Offshore Drilling Rigs Market conducted by Markets and Markets demonstrated.

Large revenues are not related merely to deep water drilling, but include also shelf reservoirs. Currently, shelf production amounts to 30% of the global oil output, reveals the above-cited Lukoil study, where about 27% of shelf production is currently at a depth of 300 meters. With time, this share is set to grow, according to the estimates.

It can, therefore, be expected that investments in offshore drilling will appear more attractive.


The Middle Eastern region is perceived prone to enthusiastically boost investments in the offshore sector. As Amec’s Head of Southern Europe, Africa, the Middle East and Asia, Roberto Penno, put it in a statement quoted by The National, in the Middle East market, “the operating companies are producing oil and gas at the lowest prices in the world and have decided to continue with longer-term investments, when in other parts of the world investments have been stopped.” Several major investments in offshore drilling have already followed suit.

The UAE is to witness more than $25 billion in investments in offshore production in the next five years. Currently, the Abu Dhabi Marine Operating Company (ADMA-OPCO), a subsidiary of ADNOC, is operating two of the world’s largest offshore oil field – Umm Shaif and Lower Zakum west field, with a production level of 120,000 b/d and 345,000 b/d, respectively. Yet, further financial inputs are needed for the country to meet its energy demands and related challenges.

Efforts to boost investments in offshore drilling revolve around elaborated plans to develop the second largest offshore field, Upper Zakum, located approximately 84km off the north-west of Abu Dhabi islands’ coasts. At present, production in the Upper Zakum offshore field project, developed by Zakum Development Company (ZADCO) and managed by Amec Foster Wheeler, amounts at 500,000 b/d from the country’s total amount of production at 3.09mb/d. There are determined plans to increase output from the field to the level of 750,000 b/d in the near future, as cited by Offshore Technology, for which massive investments are needed.

The UAE is also taking huge steps towards offshore explorations facilitated and enhanced by technology, in efforts to meet its capacity targets. According to the Khaleej Times, it is estimated that the offshore reserves will account for approximately 50% of total oil production in Abu Dhabi by 2018, as a result of these investments.

Similarly, in Iran, a total investment of $762.5 billion has been made for drilling wells of Phase 14 at the South Pars gas field to be operated by the Iranian Offshore Engineering and Construction Company (IOEC) in mid June 2016. Phase 14 is to produce 56.5mcm/d of sour gas, 75,000 b/d of gas condensate, 1 million tons a year of liquefied gas, 1 million tons a year of ethane, and 400 tons a day of sulfur, according to the Iranian news agency, Shana.

Cost Efficiency

A decisive factor that may help materialize ambitious investments plans is that drilling operations have become cost-effective thanks to the increasing technological advancements in offshore equipment used in the recent discoveries in remote areas, as the above-cited study Offshore Drilling Rigs Market compiled by Markets and Markets revealed.

The UAE owned company, ADNOC, has recently developed a new offshore technology called ‘technology qualification process,’ which is utilized to assess the maturity of offshore fields and measure inherent risks associated with new technology being applied there. President of DMG Global Energy, Christopher Hudson, underpinned the impact of technology on offshore exploration at the Abu Dhabi International Petroleum Conference (ADIPEC) saying that “with about one-third of the world’s oil supplies coming from offshore wells, technology and innovation will continue to play a pivotal role in driving efficiency and best practice in the offshore sector.”

Similarly, demand for offshore oil services that promise a cost efficient approach has also markedly increased with new deals being signed such as the one between Saudi Aramco and Lamprell, a corporation specialized in the oil rig construction business to develop Ras El Khair maritime yard in the eastern part of the country.

Smart Projections

Estimated rise in the volume of offshore reserves guides many involved players in boosting investments in the exploitation of oil and gas in deep waters from the energy, economic, and geopolitical standpoints. However, there are several other risks related to offshore drilling that remain to be addressed with an enormous urgency.

The negative impact of deep-water drilling on the environment requires our intensive attention, most alarmingly in relation the recent global climate change obligations as defined by the Paris Agreement (COP21). While this poses large restrictions on the companies to invest in offshore drilling with additional commitments in mind, it cannot be a recipe for cutting drilling in deep waters altogether, or ignoring the necessity for preserving the environment.

Instead, new offshore technologies, that would eliminate the environmental risks at a fast pace, alleviate economic burden, and help mitigate other obstacles, should become a part of a smart investment rationale, necessarily with long-term projections.


offshore GCC onshore maturity OPEC