This week of extreme oil price volatility might not seem like an auspicious time for
The 160,000-ton behemoth floats in 7,000 feet of water, 280 miles south of New Orleans. Its wells pierce the Jack and St. Malo reservoirs 26,500 feet below sea level. In time, after more wells are drilled, the platform is expected to produce as much as 94,000 barrels per day of oil and 21 million cubic feet of natural gas.
It's good that Chevron brought this project online before the end of the year, as promised. Yet the recent slide in oil prices dramatically shifts its path to profitability. At $100 a barrel (where oil was in June) Chevron and partners would need to produce roughly 100 million barrels to generate enough cash (after operating expenses) to pay back their capital investment. At today's $68 per barrel they'll need more like 150 million barrels to breakeven. So, assuming average production of about 30 million barrels of oil (and equivalent gas) per year, the recent oil price plunge will delay the payback period on Jack/St. Malo by at least 18 months.
Is that a big deal? Not so much, it turns out. Chevron didn't sanction this project with $100 oil in mind. Over its three decade lifespan, Jack/St. Malo is expected to pump more than 500 million barrels. Once paid off, it will continue to be a tremendous cash cow for Chevron and partners
But what about new deepwater discoveries being made today? How's the current deepwater economics look when stacked up against all those onshore shale fields like the Permian and Bakken? Are these ultra-deepwater developments relatively better or worse bets in today's lower oil price environment?
Jack/St. Malo platform. Photo by Justin Higgs, courtesy Chevron.
I put those questions to Imran Khan, a research analyst with oil consultancy WoodMackenzie. He says that the average breakeven oil price needed for new deepwater Gulf of Mexico developments in early stages of construction is between $65 and $75 per barrel. That "breakeven" implies a long-term annualized 10% return on capital.
As for completed projects like Jack/St. Malo, where so many billions have already been sunk, Khan says the breakeven price needed to justify incremental investment from here on out is as low as $35 per barrel. Indeed, he says that some of the world's most economic oil projects today involve new deepwater fields discovered nearby existing offshore infrastructure. These so-called "tie-backs" can generate that 10% breakeven even at oil prices as low as $30 per barrel. Now that's some cheap oil.
The Great American Oil Boom of recent years was brought to you by the drilling of thousands of ~$10 million wells into shale formations, with each well coming on line at about 1,000 bpd before declining by half in the first 12 months.
A decade ago, before fracking became a household word, oil companies would have thought you were crazy to spend so much on such a lackluster well. But that was before oil prices got high enough to trigger the shale boom, and before
Today, those shale plays are looking less attractive, but the deepwater is still there, ready to be explored, and still featuring surprisingly good economics. Sure, each deepwater well can cost as much as $250 million, but they will produce 10,000 bpd for years, instead of petering out quickly like a shale oil well.
Indeed, it looks like the deepwater Gulf of Mexico is ready for a resurgence. Call it Back To The Future.
For my new Forbes Magazine story of one pipsqueak company's big bet on the deepwater, check out:
Venari Resources: Oil's Offshore Oddball
