Could deep water drilling in the Red Sea play a key role in the provision of oil and gas to the Middle East?
You would be forgiven for thinking that the Middle East would have little trouble meeting its energy demands in the coming years, with over 56% of the world’s proven oil reserves being located in the region.
However, regional and global demand is spiralling out of control and Middle Eastern countries have posted some extremely ambitious production targets. Kuwait has announced plans to double its oil production to four million barrels per day (mbpd) by 2020.
Similarly, Iran will increase its production levels to 5.7 mbpd and Iraq to a staggering nine mbpd by 2020. It is the same story with gas production, with the Middle East set to raise its gas processing capacity from 25 trillion cubic feet per day to (tcf/d) to 40 tcf/d in the next 20 years.
According to Stewart Williams, principal analyst at Wood Mackenzie, this rising demand has prompted the regions key oil and gas players to look to deep water exploration in order to sate the regions appetite for oil and gas.
“Previously there have been very few deep water wells drilled in the Middle East. This is because the huge success onshore and in the regions shallow water sites. These were relatively low cost and meant that there was never any need to go into deeper waters,” explains Stewart.
“The push into deeper waters is being driven by the need to replace reserves in a region that is now becoming increaingly mature in a hydrocarbon sense, coupled with consistant, rapidly growing
domestic oil and gas consumption rates”.
Excluding Iran and the Levant, the Middle East’s deep water acreage is located in the waters surrounding Saudi Arabia, Yemen and Oman.
Many analysts now say that the answer to meeting the Middle East’s growing energy demands may lie with the untapped Red Sea reserves, off the Saudi Arabian coast.
Some limited exploration has already taken place in the Red Sea region, and Shamlee Epari, research consultant at analyst firm Contax Partners, says the fact that there are potentially huge reserves of natural gas in the region.
“Saudi Aramco has taken a lead by being the first to use a deep water rig in the Red Sea region, after a 15 month seismic study in 2009 revealed that significant reserves of natural gas seemed to be present,” she says.
Initial seismic studies in the Red Sea look promising, so attention will now turn to drilling test wells.
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“The challenge of the test wells is not the water depth in the Red Sea, it’s the hydrocarbon geology that’s important and that is not particularly well understood at the moment. Saudi Aramco has acquired a much better understanding of the subsurface through an extensive seismic programme but the only real way to find out its real potential is to drill it,” explains Williams.
Deep water drilling would represent a significant change of tack for the region. Of the 147 rigs listed as operating in the region by IHS’ weekly rig count report, only one is classified as a ‘deep water’ rig. Until this point, the Middle East’s drilling operations have been overwhelmingly located in shallow water sites.
Shifting its focus to deep water drilling will raise a number of new challenges to be overcome, not least of which will be the associated costs and tougher drilling conditions associated with a deep water site.
“Deep water rigs are usually bigger, more complex, are higher specification, require more personnel and have higher running costs than jack-up rigs. The fuel bill alone for a dynamically-positioned deepwater vessel over a large drilling programme can run into the tens of millions of dollars,” Williams points out.
With the average deep water rig costing around $600 million, deep water drilling operations require a huge amount of capital expenditure, something which has acted as a deterrent for Middle Eastern companies up to this point.
“While the past few years have seen a constant increase in day rates, with the expected high inflow of new build deep water rigs in the near future, lower day rates are anticipated and hence, oil companies such as Shell, ExxonMobil, Chevron and Total have postponed their deepwater exploration programmes to mid-2015.
This implies that reduced drilling activity will be seen through 2015, whereas 2016 and 2017 will see high drilling activity to make up for this postponement,” Epari says.
Instead of buying the rigs outright, operators often lease them for an agreed day rate. The day rate for an offshore rig is reported to be around $600,000 but cabn be as high as $1m per day for deepwater rigs. This rental model is only viable however, if the rig owners can secure a high enough number of rentals, usually known as the ‘utilisation rate’.
“Project owners are hesitant to invest in the deepwater industry and this gravely affects a drilling company’s ability to maintain a high utilisation rate,” says Epari.
There are currently 18 rigs engaged in offshore drilling in the Red Sea, 17 of which are concerned with shallow water operations. These rigs currently have a utilisation rate of around 66.7%, compared with a utilisation rate of 76.5% for the 132 rigs operating in the Arabian Gulf.
Over the next few years, offshore drilling in the Middle East area is expected to follow the same trajectory as drilling operations in the rest of the world. Analysts and industry experts agree that 2014-2015 will see a significant downturn in the number of drilling operations, with activity sharply increasing in 2016 and 2017.
Oilfield company National Oilwell Varco recently told Reuters that they expect a significant downturn in offshore drilling operations in 2014 and early 2015. Their sentiments were echoed by Diamond Offshore Drilling who said that the coming two years could be tough for offshore drillers.
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The global deepwater drilling industry is also still recovering from the aftermath of the Deep Water Horizon blowout.
“There are inherent risks in oil and gas drilling. Deepwater drilling adds further levels of complexity due to the more extreme operating conditions. The drilling industry has learned many lessons from the Deep Water Horizon tragedy. Any deep water rigs that will operate in the Middle East will be part of a fleet that operate globally and will have adopted new operating practices and procedures since Macondo,” says Williams.
The destruction that arose from the Deep Water Horizon blowout, coupled with the environmental and financial damage it caused, has led to a sharp decline in demand for offshore drilling rigs, as operators look to review their HSE operations.
As the region takes steps towards deepwater drilling operations in the Red Sea, health, safety and environmental (HSE) issues will be of the utmost importance. Oil and gas companies will need to tread lightly when drilling commences but Williams believes that regional governments will play a lead role in the drive towards HSE excellence.
“I’m certain that the governments of the Middle East will insist on the highest levels of safety before they sanction any drilling programmes,” says Williams.
The fallout from the Deep Water Horizon blowout has led drilling contractors such as Transocean,
Seadrill Ltd and Pacific drilling to place orders for new build, technologically advanced deep water rigs, which are able to deliver safer, more efficient performance.
In the next 18 months, it is expected that over 100 new, technologically advanced rigs will hit the market. This is expected to have a significant knock on effect on prices and influence the Middle East’s shift towards deepwater drilling in the Red Sea region.
