x Abu Dhabi, UAEMonday 22 January 2018

Easy oil is never far from the cutting edge

Feature Headlines focus on new fields in challenging environments such as the Gulf of Mexico and the South Atlantic, but discoveries are still being made onshore.

Fly out by helicopter 300 kilometres over the Gulf of Mexico. The water here is more than a kilometre deep, and hurricanes like 2005's Katrina sweep through every year. Now drill an exploration well costing some US$100 million (Dh367m), through sand and shifting layers of salt. The well, one of the deepest ever, goes further beneath the seabed than Mount Everest is tall. The temperature underground is 120°C, and pressures are extreme. That is BP's latest giant oil discovery, made last Wednesday: Tiber, the new frontier of oil exploration in US waters.

Tiber is reported to hold some 4 to 6 billion barrels of oil equivalent, of which a third or more might be recoverable. That makes it bigger than BP's nearby find from 2006, Kaskida, with 3 billion barrels, and adds very substantially to the company's existing reserves of 18 billion barrels. These are not the only finds in the Gulf of Mexico's "Lower Tertiary" province. Chevron, Shell, ConocoPhillips and other big oil players are also active there, with a string of colourfully named finds including Great White, Tiger and Trident. As yet, none of these fields has begun production, but the first Lower Tertiary oil, from developments by Shell and the Brazilian state oil giant Petrobras, is due next year.

Petrobras is also BP's partner in Tiber, holding 20 per cent, and has taken the lead in Brazil's "pre-salt" oil boom. These giant discoveries in the South Atlantic are every bit as challenging as those in the Gulf of Mexico: under deep water, far below the seabed and located beneath thick saltbeds that make drilling difficult. If companies are venturing into such extreme conditions, surely this means that the age of easy oil is over? Is this not evidence that new fields are going to be increasingly expensive and challenging, that it will be harder and harder to grow or even sustain global oil production, and that prices will rise inexorably?

But consider another news item from last week. Beneath the village of Susangerd in Iran, in flat plains about 40km from the Iraqi border, drilling uncovered a field almost twice the size of BP's find. Iraqi Kurdistan has seen several big discoveries recently, mostly by small companies braving the wrath of the Baghdad government. Exploration here is still at very early stages: some 40 blocks have been awarded, but only seven or so have yet seen any drilling. These fields are onshore, prolific and low-cost to develop. Yet their discovery received little attention from the media.

Easy oil is not only confined to new exploration. In June, Saudi Aramco brought onstream the Khurais oilfield, the largest ever single increment to global supply, and equal to half of the reserves in Kuwait. Unlike new deepwater fields, which will be developed as fast as possible, Khurais was discovered in 1957, emphasising how Saudi Arabia can afford to take its time in developing its vast hydrocarbon resources. In July, BP bid aggressively to guarantee itself some "easy" oil in addition to Tiber's difficult treasures. The company agreed to a deal with Iraq to boost output at the supergiant Rumaila field by almost 2 million barrels per day (bpd), more than 2 per cent of global production.

New oil seems to fall into two camps. OPEC still has abundant, cheap and straightforward fields, although they are not quite as easy as 20 or 30 years ago, and they lie either in politically problematic areas, such as Iraq, or in countries largely inaccessible for international oil companies, such as Saudi Arabia and Iran. Outside OPEC, the big oil companies have to work with progressively more challenging projects, at the limits of engineering capabilities.

This situation is nothing new. The petroleum business has worked like this for at least the past 30 years, since most OPEC oil was nationalised. The big oil companies reinvented themselves, developed new technologies, and went into tougher areas. Working in the rough offshore conditions of the North Sea, or chilly Alaska, in the 1970s was probably more gruelling than today's deepwater fields. In the 1990s, at a time of record low oil prices, the big oil companies took up political challenges in the former Soviet Union. They negotiated with shaky, newly established governments, manoeuvred through unclear and often corrupt legal systems, and built pipelines through earthquake zones - literally and politically. They took on new frontiers in exploring deepwater oilfields in West Africa and the US, requiring breakthroughs in technology that are the foundation of today's work in Brazil and the Gulf of Mexico. They were so successful that Angola was able to join OPEC. They developed new ways to produce from Canada's huge but costly oil sands. Now they are moving into the ice-bound waters of the Arctic.

In this sense, there has never been a time of "easy oil". We are looking back to an imagined golden age. The industry's capabilities advance in step with the demands it faces. Otherwise, we might fondly think that the 1960s was the "age of easy microchips". As BP has shown, what was impossible five years ago becomes feasible today. Five years in the future, it will be routine. On its own, even the whole Lower Tertiary will not make the US independent of "foreign oil", nor put a serious dent in OPEC's domination of world reserves. Tiber might yield some 300,000 bpd, very significant to BP, but modest in global terms. Without new projects, production from the Gulf of Mexico, a quarter of US oil output, would begin to decline from 2012 onwards. With new projects, continued growth is possible. These fields, along with Brazil's, will no doubt take many years to appraise and develop, and be very costly. Along the way, there will be budget overruns and delays that will lead sceptics to doubt their potential. BP's previous Gulf of Mexico giant, Thunder Horse, took a decade from discovery to first production.

But BP's success is a reminder that, especially at current prices, there are many possibilities for future oil supply. As a Chevron executive has said: "Let me know when we reach peak technology - then we can talk about peak oil." Technology marches on relentlessly, but the hurricanes of the Gulf of Mexico are nothing to the political tempests that stop Iran and Iraq realising their petroleum potential. One day, the "easy" and "difficult" oil are both going to arrive: that supply may cool off an overheated market, or cause an indigestible glut. The key discovery is perhaps not Tiber, but the ones you didn't read about last week.

Robin Mills is a Dubai-based energy economist, and author of The Myth of the Oil Crisis (Praeger, 2008). business@thenational.ae