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Royal Dutch Shell A : Shell Goes on a Deep-Water Drilling Diet

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03/20/2017 | 04:51 pm


By Lynn Cook in Houston, Sarah Kent in London and Paul Kiernan in Rio de Janeiro | Photographs by William Widmer for The Wall Street Journal



MARS OIL PLATFORM -- Royal Dutch Shell PLC is trying to reinvent its business with a concept that sounds oxymoronic: budget deep-water drilling.



Here on a hulking steel behemoth 130 miles southeast of New Orleans, more than 170 roughnecks and engineers are working to quickly wring more oil out of a massive old field -- and keep it profitable even if oil sinks to $15 a barrel.



Shell, the world's second-largest publicly traded energy company, is making a high-stakes bet that it can take highly efficient technology and processes perfected onshore and deploy it in deep-sea production.



It hopes to squeeze more oil out of existing undersea wells, like those that ring the platform, which weighs 82 million pounds and floats in 3,000 feet of water over the Mars oil field in the Gulf of Mexico. It also wants to make new deep-water projects cheaper and faster, especially in Brazil, where it acquired a bevy of offshore prospects as part of its $50 billion purchase of BG Group PLC last year.



It is a strategy born of necessity. Big oil companies have traditionally needed prices of $70 a barrel or more just to break even on new deep-water projects, which take years to begin paying off.



But with onshore shale oil flooding the market, Shell executives aren't sure when crude, currently around $50 a barrel, will fetch more again. And with electric cars and other technologies threatening to eat into demand, they believe the world's thirst for oil may peak as soon as the end of next decade.



So while Shell's top executives stop short of saying the megadrill era is gone forever, they aren't comfortable spending $10 billion to $20 billion on moonshot projects. Shell is going lean, focusing on smaller-scale projects that produce "first oil" faster.



The company's longstanding objective of increasing production and replenishing reserves, costs be damned, has taken a back seat to delivering returns to shareholders on every single barrel pumped. That means deep-water projects have to be able to compete on price with opportunities Shell has in shale and in onshore basins around the world.



Chief Executive Ben Van Beurden predicts the company can end the decade with double-digit returns as it upends its deep-water drilling model, so long as oil prices rebound to $60. Shell estimates it is now drilling new deep water wells around 30% faster than it used to, and has cut drilling costs 50%.



"If the world needs deep-water oil, which it does, it's going to obviously economically make sense to develop the lowest-development-cost oil first," Mr. Van Beurden said in an interview.



To do this, Shell is shaking up its corporate culture, appointing "chief irritants" to each division, individuals whose only role is to challenge old ways of doing business. In weekly team meetings, managers have to justify how they are running their units. The result: simpler deep-water operations. In the Gulf division that has meant some 200 changes, such as dialing down the amount of equipment Shell will take out to a deep-water rig, now down 40% compared to a couple of years ago.



The company is also adopting techniques from smaller upstart firms and onshore fracking operations for its deep-water projects, such as drilling horizontal water-injection wells to help maximize oil recovery in fields once thought to be played out.



It is also cutting costs. In the Gulf and Brazil, Shell slashed 25% of its workforce and cut the number of support ships ferrying equipment, food and other supplies to platforms to 16 from 61. If equipment breaks, replacement can now take two weeks to arrive, a far cry from the days when offshore managers thought nothing of overnighting parts on a fast boat, or even the occasional $10,000 helicopter trip, to keep a rig running. The marine logistics measures will save an estimated $300 million a year.



"This is not a cut-and-cope exercise," said Kevin McMahon, operations manager for Mars. "This is our new reality."



When Shell initially discovered Mars in 1989, it was the largest find in the U.S. since oil was struck in Alaska's Prudhoe Bay in the 1960s.



It took Shell seven years of engineering work before it pumped its first oil from the site, and more than $1 billion -- several times more than NASA spent on its Pathfinder probe to the actual Red Planet. Shell brought in BP PLC as a minority investor to help defray costs. Mars eventually became a big cash cow.



But Mars's production, which peaked at more than 225,000 barrels a day in 2002, fell to around 60,000 barrels a day. Now the company's goal is to capitalize on its extensive infrastructure in the area and squeeze more barrels out of the field, using new know-how and technology. The Mars platform has recently rebounded to pump 75,000 barrels a day.



Onshore, the shale fields of Texas' Permian Basin are known for having multiple layers of oil-rich rock, likened to stacks of pancakes. Companies have discovered that they can tap several layers, raising the total amount of oil the acreage can yield.



Conventional wisdom held that deep-water geology was different. But Mr. McMahon said studies show the area around Mars also has many stacked layers of oil, and Shell is now using techniques pioneered on land to quickly drain them.



Shell is going back into old, deep wells and using them to drill out horizontally into shallower layers of oil-bearing rock. It is also using water to flood reservoirs once thought to be played out, hoping to flush more crude to the surface. Shell can also produce oil for $10 to $15 a barrel by reopening old wells and using water and chemicals to flush more fuel out of the ground, Mr. McMahon said. The company is retapping a dozen wells near Mars in the first half of 2017, with another dozen tentatively scheduled for the second half of the year.



But the effort carries risks. Hydrogen sulfide, a colorless gas that has been known to kill workers at drill sites, can build up inside old offshore wells that have been shut down and sealed off.



Tensions can mount between Shell's technical experts, armed with big ideas about how to squeeze more crude through the aging Mars platform, and the offshore supervisors on the massive steel erector set who actually have to oversee the projects. Every weekday at 3 p.m., the two sides meet via a video feed connecting Shell's New Orleans skyscraper with the platform.



During one recent meeting, Dale Toups, a chemical engineer at the skyscraper, was adamant about deploying sensitive monitoring equipment on a well whose geology suggested potential problems with hydrogen sulfide. Other engineers warned that testing could slow down work on nearby wells, delaying the other projects, and thus costing Shell money.



Howard Hill, the offshore installation manager of Mars, sided with Mr. Toups. Mr. McMahon, the ultimate say, chose caution: The monitoring system got deployed at the start of February.



BP's Deepwater Horizon rig disaster and oil spill, which killed 11 workers, released 3.2 million barrels of oil into the Gulf and has cost the company nearly $63 billion so far, occurred less than 100 miles from Mars. Expensive federal safety regulations are going into effect seven years after that deadly accident, calling for better real-time monitoring of equipment and more-frequent inspections, among other things.



Shell executives said they aren't worried about the additional costs because their internal safety protocols are already tougher than what the regulations require. Still, dangers abound in deep water, and Shell has had its share of missteps.



The company's recent foray into the Arctic waters off the coast of Alaska was marred when a drilling rig ran aground while traveling back to the Port of Seattle. The company pulled the plug on the project two years ago after the $7 billion endeavor resulted in a dry hole -- one of the most expensive in the history of oil exploration.



Last March, Shell narrowly avoided an environmental disaster off the east coast of Canada when intense waves made a supply ship list so far to one side that a piece of heavy machinery in tow snapped loose and plunged to the sea floor, landing a few yards from an underwater oil well head.



"We are a high-risk business," said Wael Sawan, Shell's vice president for deep water in Houston. "This is just the nature of deep water."



But Shell, like other major oil companies, has little choice but to adapt its methods.



Despite high crude prices over much of the past decade, big oil companies have struggled after plowing billions of dollars into megaprojects from Africa to Australia.



A survey of Shell, Exxon Mobil Corp. and Chevron Corp. found that their combined return on capital plunged from 21.5% in 2007 to almost nothing over the past decade, according to a Wall Street Journal analysis of data from S&P Global Market Intelligence. Exxon and Chevron say the formulas they use to calculate returns show higher results.



Shell's BG acquisition was the industry's largest since Exxon merged with Mobil in 1999. The deal propelled Shell ahead of Chevron Corp. to become the world's No. 2 energy company by market value and a huge producer of liquefied natural gas, increasingly used to generate electricity.



Most important for its growth prospects, it acquired a host of new deep-water targets in Brazil that it believes it can develop economically even when oil sells for $40 a barrel.



Brazil's offshore geology is so rich that experts rank it as one of the lowest-cost places to develop new oil finds. Shell plans to invest $10 billion in Brazil over the next five years, making it the largest foreign investor, according to Mr. Sawan.



But Brazil remains a politically challenging place to operate, with complex environmental licensing procedures and requirements that a lot of equipment and labor be made and hired locally.



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03-20-17 1151ET

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