If We Want Oil We're Going To Have To Use Deepwater Drilling


This post is adapted from GetRealList

The 2009 Offshore Technology Conference (OTC) in Houston sported the most massive exhibit hall I have ever seen, including huge trucks, enormous steel parts weighing many tons, drilling rigs, giant generators and pumps and other assorted gear that makes offshore drilling possible.

The oil and gas industry is constantly in pursuit of new technologies that will allow them to develop these remaining resources, like horizontal drilling and fracturing, advanced seismic modelling, remotely operated devices, and subsea systems.

Nowhere is the technology more advanced than in deepwater drilling and production, with modern hardware incorporating everything from giant versions of low-tech nuts and bolts to the ultimate in high-tech hardware and software.

Outlook Solid
With an uncertain outlook on oil and gas for the next few years, one might think that the purveyors of these high-ticket items would be suffering from falling orders, and to be sure they took their hits along with the rest of the equities market through the end of 2008. But all found their bottoms starting in 2009, and have staged an impressive rally in the last two months as they followed the broader market up:

The fact is that deepwater production is now the name of the game in oil and gas. If we want it, we’re going to have to go there to get it. Oil producers know this and are still pouring billions into its development annually, in the expectation that over the decades that it will take to develop these fields, their investments will pay off handsomely.

In a technical session at the OTC conference, Baker Hughes Inc. (NYSE: BHI) observed that the drop in oil demand in the last big downturn in 1983 was 24% off the peak, whereas demand has only declined 4% in 2009. “The easy oil has been found,” declared BHI CEO Chad Deaton, and when the economy rebounds the supply problem will be more intense than ever. He believes that $100 a barrel pricing is needed to ensure future supply, a point I have emphasised in this column (see “The Sleeping Threat of Low Oil Prices“).

Or, as Karen A. Harbert, the Executive Vice President and Managing Director of the Institute for 21st Century Energy (a department within the U.S. Chamber of Commerce) put it, “We’re going to be wishing for $4 gas if we don’t get our act together.”

The oil and gas industry faces numerous challenges in addition to prices that are too low. For one, a lack of qualified personnel plagues the business from end to end. A majority of the personnel are over 50, followed by a 10-year gap before reaching the next tier of 35-40 year olds who could take their places—the result of a sharp decline in petroleum geology students during the 80s and 90s. Technical, regulatory and political challenges, delivery scheduling issues, and cost control are major hurdles for the industry as well.

Taken together, the picture for offshore oil and gas development is clear: demand will remain high, and the prices for oil and gas will have to rise for the industry to meet it.

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