The Gulf of Mexico Blowout – Impacts, Opportunities and Future Challenges

Home , Blowout (well drilling), Gulf of Mexico

Energy, Utilities and Chemicals the way we see it

The Gulf of Mexico blowout – Impacts, opportunities and future challenges

Point of View by Pat Quinlan Abstract

There is little doubt that oil and gas exploration will become The impact of the Blowout similar offshore regulatory reviews much more difficult following the The GOM accident has extracted a and a great deal of uncertainty Macondo disaster. There is a tremendous financial, environmental remains. The exact outcomes and broad range of opinion as to the and human toll. The immediate efforts impacts of these reviews are unknown long-term impact of the blowout, focused on containing the damage, as yet. There will undoubtedly be a but the consensus view among getting the blowout under control and significant revision of regulations operators, regulators and undertaking the massive cleanup governing deep and all other offshore suppliers is that exploration effort and economic reparations drilling and the industry will face across the globe, and especially required. The ultimate impact of this increased public scrutiny, more in the Gulf of Mexico (GOM), will accident is less clear but its comprehensive controls, higher costs be more restricted and repercussions will certainly be felt, not and delays in future offshore expensive, with increased just in the GOM, but throughout the developments. The subsequent regulatory burdens, higher industry for years to come. The well is changes may be both profound and development costs, and now under control and attention has structural – a true sea change in how anticipated project and turned to the political and regulatory deepwater assets are to be exploited in productions delays. phase of events which may prove to the future. be equally volatile. Compounding these issues is the Such deepwater resources within the fact that the global appetite for The causes of the blowout are still GOM are a critical component of the oil is projected to grow for the being investigated by numerous US oil supply. Any additional foreseeable future. Increased regulatory bodies including the constraints on its development can demand coupled with natural President’s National Commission, the only be detrimental to the US oil declines in existing production is Coast Guard and the Minerals supply and will likely have a creating a formidable challenge Management Board among others. ripple effect on supplies for the industry to bring on new The direct cause of the incident is not globally. production capacity. The known but, like most accidents, it is daunting task ahead is how to expected to entail some combination meet this global demand for new of human error and failure in oil capacity, with its inherent and processes, equipment and / or increasing reliance on offshore systems. developments, in light of these challenges and pending new The US Administration Department of constraints? the Interior has recently lifted its moratorium on deep water drilling; Operators will have to adapt so the various regulatory reviews as to explore successfully and continue and uncertainties on future safely. Many have already regulation are preventing new projects undertaken risk reviews of their to be launched. Already the industry project portfolios, exploration and regulators are at loggerheads processes and safety procedures regarding a requirement to plan for a to assess their exposure and to “worst case discharge” scenario - ensure adherence to the best predicting the potential spill volumes global practices. Moreover, and the amount of response companies are looking to equipment reserved to clean up such technologies which can help a spill. This regulation applies not them both add the additional only to deep water, but to all offshore capacities they require while at drilling operations in the Gulf and a the same time reduce the risk of vigorous debate is underway as to future incidents. how to arrive at those numbers. Many other jurisdictions have undertaken Clearly the era of easy, and most certainly cheap oil, is over.

1 Energy, Utilities and Chemicals the way we see it

driver of the increases. By the middle Where will the new oil supply of the next decade it is expected to come from? The shift to surpass the US as the largest oil deepwater exploration consumer and by 2030 some forecasts The demands for additional project that China may require production capacity are significant upwards of 60 MBPD – almost and will be a major challenge to the tripling the current US demand – industry overall, whether under a should it continue its rapid pace of growth or a no growth scenario. economic development. Supply from traditional reservoirs and sources has peaked and new supplies While US demand remains relatively will have to come from new flat at about 20 MBPD, domestic US geographies and harsher operating production accounts for only 5.3 environments, each with its own MBPD of its required supply; 30% specific challenges. Conventional oil comes from the GOM alone and most alternatives and pushes for energy of the new supply and the largest efficiency hold great promise but their potential finds are coming from its impact on global oil demand is deepwater fields. expected to have a minimal impact for the next two decades. Similarly, Appetite for oil is growing while Compounding the challenge of improvements in operational resources are being depleted demand growth is the issue of excellence, the optimization of Despite the economic slowdown, reservoir depletion. In the unlikely existing resources and advances in global demand for oil has continued event that world oil demand was to technology will help but will not be to increase. Recent estimates of the remain flat, projected new production sufficient to close a supply gap of this International Energy Agency (IEA) peg capacity to address current decline magnitude. The oil supply shortfall global oil demand at 86.9 million rates alone will be 45 to 50 MBPD by will have to be made up elsewhere. barrels per day (MBPD) in 2010 and 2030 – more than twice the current 88.2 MBPD in 2011, reflecting Middle East production and four For the US, one obvious source will increases of 1.6 MBPD and 2.2 MBPD times the current output of Saudi be to further exploit Canada’s oil over the 2009 levels 1. Oil demand has Arabia. sands. From a supply and geopolitical remained effectively flat in the risk perspective the oil sands hold developed world but emerging For the US, the impact of production tremendous potential with 178 billion countries are and will be the key long- declines may be felt more barrels of proven oil reserves; only term driver of oil demand. The immediately. The GOM is a primary Saudi Arabia has more proven oil primary factors driving this demand source of US crude supply, reserves. These massive deposits are are economic growth and increased constituting approximately 1.6 MBPD already expected to become the US’ crude based transportation of production. Initial IEA predictions top source of imported oil this year, requirements in the developing world. suggest that an an extended ban on “surpassing conventional Canadian oil Despite advances in vehicle deep water developments could see a imports and roughly equaling the efficiencies - bio-fuels and hybrid near-term shortfall of between 450 combined imports from Saudi Arabia technologies - this is not expected to thousand to 1 MBPD from these and Kuwait” according to IHS change for the foreseeable future. current levels within a two to five year Cambridge Energy Research period. Associates (CERA). 2 While there is no Asia is driving oil demand growth and chance of either a blowout or is conservatively expected to nearly “We have to find ways of bringing deepwater spill in oil sands, these double its current demand by 2030. on stream nearly 50 MBPD of new developments have their own China will continue to be the major capacity between now and 2030” economic, operational and Willy H. Olsen, Senior Advisor environmental challenges in addition INSTOK to mounting political and social activist pressures.

1: International Energy Agency Oil Market Report: http://omrpublic.iea.org/ 2: In: The New York Times: “Reliance on Oil Sands Grows Despite Environmental Risks”; May 18, 2010

The Gulf of Mexico blowout – Impacts, opportunities and future challengess 2 Globally, onshore resources will be other geographies have existing or escalations imposed by any new under renewed pressure to increase planned deepwater developments regulatory regimes, the economic capacity. OPEC remains the primary underway as some of the most prolific feasibility of these large and much source of crude production growth future finds are anticipated to come needed developments will be and the Middle East dependence, in from these offshore areas. challenged. particular, will continue for the foreseeable future. Iraq is now According to IHS CERA research on “Over three quarters of non-OPEC regarded as an increasingly important “The Role of Deepwater Production in supply additions are expected to player with its stated potential of new Global Oil Supply” 3, offshore fields come from offshore fields” productive capacity of 10-12 MBPD. may soon constitute up to 40% of Dr. Faith Berol, IEA Chief Economist Not surprisingly, the country is global oil production. Deepwater drawing considerable attention from developments are where most of the Challenges and Opportunities both Western majors – the remaining “elephants” are to be The blowout and the subsequent International Oil Companies (IOCs)- discovered. On average such fields are moratorium have introduced another and the National Oil Companies much larger than onshore discoveries degree of uncertainty and risk to oil (NOCs) despite its ongoing security with the average size of deepwater and gas exploration. These will prove and infrastructure issues. finds in 2009 being 150 million daunting for some, but for others barrels – about six times the average there should be a beneficial effect in Under any reasonable supply-demand onshore discovery. either the near- or long- term. scenario, offshore environments will have to be a continued source and Across the globe, 14,000 deepwater GOM based operators and drilling focus for new oil additions. On a wells have been drilled to date and in companies have taken the hardest global level, the IEA estimates that recent years, deepwater plays have blow from the mandated cessation of 75% of all future non-OPEC supply is accounted for about half of all new all deepwater drilling. Planned expected to come from offshore discoveries. For the US, a deepwater operations have been set aside and developments, with many of the most drilling program is needed simply to previously contracted equipment has prolific fields in deepwater areas such maintain domestic oil production. been left idle with capital investment as Brazil and West Africa. As Dependent on the degree of stranded for the time being. The illustrated in Figure 1, numerous operational constraints and cost subsequent spin-off effect on regional employment and businesses along the entire supply chain – from seismic, to Figure 1: Shifting into Deep Waters well services through to catering - has been severe.

Gr eenland Major IOCs and large US Norway Russia UK independents have the largest Alaska North Sea operational exposure in the GOM and East Coast were the most immediately impacted Canada China by the blowout. For these operators, the GOM represents one of the few Myanmar Gulf of Mexico remaining prolific fields accessible to Liberia Nigeria India Philippines Trinidad Cameroon Vietnam them. Reserve replacement is the and Tobago Ghana Malaysia Indonesia chronic issue faced by these companies due to the dominant Brazil Angola Mozambique Australia control of global resources by the NOCs. At present 85 to 90% of Ar gentina known reserves are under NOC control and many oil and gas producing regions are effectively Potential Deep water Exploration Ar eas Deep water Players

3: IHS CERA: The Role of Deepwater Production in Global Oil Supply; June 30, 2010

3 Energy, Utilities and Chemicals the way we see it

inaccessible to many Western most in demand by other regions. The reach and adept partnering operators. Some IOCs have shifted net effect will be that the overall arrangements, should fare well their attention to alternative sources quality of the equipment and especially those that are well such as oil sands and shale gas. expertise in the GOM will ultimately established with NOC clients. Certain However, in order to replenish their deteriorate. niche Oil Field Services companies oil reserves many will have to rely on will benefit as well; those focused on challenging frontier areas and Restrictions on deepwater drilling will onshore, unconventional and shallow deepwater assets to secure future increase the risk of further US plays should benefit from a shift of supplies. dependence on foreign oil; this is investment away from the GOM to raising a broad range of domestic these other plays. Similarly, offshore The post Macondo economic realities concerns - from a political, economic inspection and maintenance services and accompanying risks may demand and even a domestic security and established equipment suppliers that only companies with significant perspective. Some environmental targeting remediation and equipment capitalization will be able to carry out groups are raising fears about the replacement should see an upturn in deepwater drilling. For the increased risk of spills due to the activity both domestically and abroad. independents with deepwater additional tanker transport required to exposure or ambitions the impact may offset any related losses in domestic Oil prices, mid- to long-term should be greater as they simply may not production. This coupled with the benefit due to the expected increase in have the necessary capital required to potential loss of the best equipment global oil demand with most forecasts carry the risk of dealing with the and people, may have one unintended predicting pricing with a baseline well financial consequences and liabilities consequence that could be to actually above the US$80 mark. of a major spill. Not only are the create a higher risk of environmental development costs expected to be incidents. The Macondo blowout has certainly higher but the US Congress is brought a high degree of public currently considering raising the Among those who stand to benefit are attention to these complex and present liability cap of US$75 million. the NOCs. Although they already intertwined energy and environmental If it is raised dramatically, this would control the bulk of the remaining issues. This can only serve to benefit undoubtedly price many of the global reserve base, they need the best those advocating a shift to a much smaller companies out of the technology and expertise to optimally greener energy policy in the US; it is deepwater plays altogether. develop these assets and deepwater expected that the Obama assets in particular. The immediate administration will soon announce Smaller and newer entrants into benefit will be felt by those that several energy initiatives - particularly drilling services and offshore require deepwater drilling services given that Congress failed to pass a equipment markets may no longer and the requisite expertise to exploit comprehensive climate change bill have the financial means, track record those resources. Regions like Brazil this year - in response to growing or corporate appetite to play the and West Africa should more readily public awareness and deepwater offshore game. access the better quality capacity and pressure. Consolidation among operators and personnel they need. In addition, among contractors, whether through should the independents be forced to mergers or asset acquisition purchase, withdraw from deepwater plays due is likely to continue or accelerate. to structurally higher costs, well funded NOCs (and select IOCs) will The prospects of more demanding be in advantageous position to secure regulatory and technical requirements deepwater assets on favorable terms. will slow drilling activity and drilling contractors will have to look further Global demand for services, afield from the GOM to utilize their technology and expertise will remain assets. In this event, it will be the best high and Oil Field Service “majors”, equipment and people that will be with their large capitalization, global

The Gulf of Mexico blowout – Impacts, opportunities and future challenges 4 communications and decision making cables, allows onshore based between offshore operations and specialists to continually monitor onshore drilling centers. The common operations, assist or even to lead the principle is to improve the drilling operation during critical drilling operation by creating both real and phases. The human experts are virtual arenas for collaboration among supported in their decisions by expert various technical disciplines and alert systems that are able to detect service providers involved in the variations in patterns earlier than any planning and execution of a drilling human potentially could. At a program. It uses technology to bring minimum, such capability allows for people together in truly integrated increased surveillance and scrutiny of How can technology help keep teams via the distribution and sharing operations by onshore experts and this from happening again? of data, information and knowledge many of the more developed centers Many companies and industry groups on a real-time basis. IO not only have the capability to intervene, take have undertaken major safety, spill reduces the need for personnel control, and importantly, be able to response and environmental cleanup offshore, but shortens decision time shut down operations should the initiatives in response to the GOM and improves decision making; situation arise. disaster. Recently a consortium of moreover, it facilitates a safer IOCs led by ExxonMobil announced operation. The concept of a dedicated drilling plans to develop a massive rapid center began about ten years ago with response containment system for use As illustrated in Figure 2, real-time the intention of creating a safer work in depths up to 10,000 feet of water. well data is fed from offshore environment offshore; indeed, some of Initial cost estimates peg this operations to onshore drilling centers the initial business cases were built on development at about US$1 billion. manned by experts from a variety of the reduction in the number of people technical disciplines. The information required offshore and for having fewer However, the overarching concern in collected by sensors on the platform helicopter trips to shuffle crews to and the industry is, first and foremost, and from within the well and from offshore platforms. Once the how to prevent such events from reservoir. The data, sent to land by foundational communications and happening in the first place. either satellite or over fiber optic collaboration technologies were

“Integrated Operations” (IO) holds significant promise in avoiding Figure 2: The Fundamentals of Integrated Operations offshore drilling accidents. These changes to the traditional ‘modus Real Time operandi’ of the industry are Decision-Making becoming a critical element of the oil and gas industry efforts to advance Onshore Maximize advantage of highly Drilling Center safer operations. Statoil, one of the mechanized rigs – reduce human leading global deep water operators, factor-related inefﬁciencies defines IO as “ collaboration across disciplines, companies, organizational and geographical boundaries, made Low Pressure Zone possible by real-time data and new Gas Inﬂux Sensors At Each Joint work processes, in order to reach safer and better decisions – faster. ” LWD & Look Ahead L WD IO is a broad category of industry Debris Build Up practices using real-time data in concert with collaborative and visualization technologies to improve Improved onshore / offshore communication and collaboration enabled through real time communication, data sharing and visualization technologies.

5 Energy, Utilities and Chemicals the way we see it

established, improvements focused on Recent advances hold further as pore pressure while drilling could adding additional functionality promise: provide an additional valuable including more and better well I Realistic simulations, using actual capability. However, the industry is planning, through fostering improved operational scenarios and real well facing challenges with developing collaboration among geologists, data, are being used to prepare the necessary sensors to focus either reservoir engineers, drillers and key crews for seamless and safer the sonic or electromagnetic signal service providers who had redeployment offshore; operators ahead of the bit. These technologies traditionally done their work in routinely have their offshore crews will, in time, be an additional isolation. This was quickly followed rotate through the onshore centers capability to the more usual Logging by the capability to do around-the- to conduct business process While Drilling (LWD) technologies clock monitoring of well data from rehearsals or to get them up to speed typically used by the industry in offshore to enhance safety, reduce with the actual state of offshore more technically challenging wells. human error and improve overall activities in advance of onboarding. Most of the technology required for performance. I “Virtual worlds” applications, similar shore based centers is commercially to those used in immersive and available on the market, but making it The primary focus is prevention. interactive online games, are being work within any specific organization Through flagging up deviations in used to conduct emergency response is a different matter. They require well drilling performance earlier in rehearsals. Crisis management significant changes in work flows, the process, center based experts are exercises are extremely difficult, if responsibilities and in some cases a able to alert the offshore rig crews to not impossible, to conduct in the shift in culture. As with the take remedial action to prevent it from real world. These innovative implementations of any new developing into a major incident. applications allow personnel to technology, the biggest challenge is to discover risks and learn to react manage the change in people, and to At critical times even small anomalies correctly and quickly in exceptional design the appropriate processes to may signify a trend which indicates situations and emergencies take full advantage of the innovation. the first stages of instability; if acted I “Look ahead” tools that lie upon quickly the chance that it immediately behind the drill bit to The deployment of IO solutions is develops into something more serious capture critical operational data such truly transforming how drilling is and is reduced significantly. will be conducted in the future. Such practices are becoming increasing prevalent around the globe and most Figure 3: Defining Integrated Operations visibly in Norway where the development and utilization of Integrated Operations is a broad category of transformation initiatives related to the integration purpose built drilling centers have of real time data, technology, and operational work processes. become a standard practice after OLF deﬁnition: Intelligent systems Virtual model of reservoirs, almost a decade of practice and “real time data onshore from offshore and components wells, production ﬁelds to enable new integrated work refinement. process & facilities processes ” As the facts about the Macondo blowout are not yet known, it is too Distributed control Co llaboration early to claim that the deployment of & surveillance systems tools advanced drilling centers may have prevented the incident from Fiber cable 4D and 4C Operators Vendors happening. What is clear is that these seismic (sea Integrated, onshore-based drilling centers will be getting a closer bottom or Down hole sensors operation centers conventional) and processing look as operators face continued equipement pressure to ensure the safety of offshore drilling.

Includes many improvement initiatives among major global producers – Smart Fields, i-Field, e-ﬁeld, Field of the Future, Digital Oil …

The Gulf of Mexico blowout – Impacts, opportunities and future challenges 6 www.capgemini.com/energy

About Capgemini and the ®

® Collaborative Business Experience

Capgemini, one of the global revenues of EUR 8.4 billion and world's foremost providers employs 95,000 people worldwide. of consulting, technology and outsourcing services, enables its clients to With EUR 1.13 billion revenue in 2009 transform and perform through and 12,000 dedicated consultants technologies. Capgemini provides its engaged in Energy, Utilities and clients with insights and capabilities that Chemicals projects across Europe, North boost their freedom to achieve superior America and Asia Pacific, Capgemini's results through a unique way of working, Energy, Utilities & Chemicals Global the Collaborative Business Experience TM . Sector serves the business consulting and The Group relies on its global delivery information technology needs of many of model called Rightshore ®, which aims to the world’s largest players of this get the right balance of the best talent industry. from multiple locations, working as one team to create and deliver the optimum More information about our services, solution for clients. Present in more than offices and research is available at 30 countries, Capgemini reported 2009 www.capgemini.com/energy

Pat Quinlan Global Lead, Oil & Gas Center of Excellence [email protected]