Deepwater drilling thriving in Gulf after BP spill

ALAMINOS CANYON BLOCK 857, GULF OF MEXICO — Two hundred miles off the Texas coast, ribbons of pipe are reaching for oil and natural gas deeper below the ocean's surface than ever before.

These pipes, which run nearly 2 miles deep, are connected to a floating platform so remote that Shell named it Perdido, which means "lost" in Spanish. What attracted Shell to this location is a geologic formation, found throughout the Gulf of Mexico, that might contain enough oil to satisfy U.S. demand for two years.

Though Perdido is isolated, it isn't alone. Across the Gulf, companies are probing dozens of new deep-water fields, thanks to high oil prices and technological advances that make it possible to tap them.

The newfound oil won't do much to lower oil prices. But — along with increased production from onshore U.S. fields and slowing domestic demand for gasoline — it could help reduce U.S. oil imports by more than half during the next decade.

Eighteen months ago, such a flurry of Gulf activity seemed unlikely. The Obama administration halted drilling and stopped issuing new permits after the explosion of a BP well killed 11 workers and caused a massive oil spill.

But the moratorium was lifted, and the Obama administration issued the first new drilling permit in March. Now the Gulf is humming again, and oil executives say it's the world's best place to drill.

"In the short term and the medium term, it's clearly the Gulf of Mexico," said Matthais Bichsel, a Royal Dutch Shell PLC board member who is in charge of the company's new projects and technology.

By early 2012, there will be more rigs in the Gulf to drill in "deep water" — defined as 2,000 feet or deeper — than before the BP spill.

In November, Perdido began pumping oil from a field called Tobago; the well begins 9,627 feet below the Gulf's surface. No other well on Earth produces oil in deeper water, and that's about as deep as the Gulf gets. For drillers, that means the entire Gulf is now within reach.

"We are at the point where ... depth is not the primary issue anymore," said Marvin Odum, head of Royal Dutch Shell's drilling unit in the Americas. "I do not worry that there is something in the Gulf that we cannot develop ... if we can find it."

From a distance, Perdido looks like an Erector Set perched on an aluminum can. This can, or "spar," is a 500-foot-tall steel cylinder that sits mostly underwater, serving as a base for the equipment and living quarters above. It is stuffed with iron ore to lower its center of gravity, keeping it from bobbing in the water like a cork. The spar is tethered to the sea floor, 8,000 feet below, with ropes and chains.

The 160 workers on Perdido must board a helicopter in Galveston for the two-hour ride to the platform. They work 12-hour shifts for 14 days straight and then have two weeks off.

Oil and natural gas are pumped to Perdido from nearby wells drilled by an onboard rig and from faraway wells drilled by satellite rigs. Water and other impurities are then removed from the oil and gas, which is sent hundreds of miles through an undersea pipeline to terminals and refineries along the Gulf coast.

Perdido, which pumps 60,000 barrels of oil and natural gas a day, will eventually yield 100,000 barrels per day from 35 wells in a 30-mile radius, according to Shell. It will probably produce oil for decades — in all, as much as 360 million barrels of oil and 750 billion cubic feet of natural gas, according to energy research firm Wood Mackenzie.

As global oil demand climbs past 89 million barrels a day and traditional fields are depleted, the deep waters of the Gulf and off the coasts of South America, West Africa and Australia are playing an increasingly important role.

In 2000, 1.5 million barrels of oil per day were produced from deep-water fields around the globe, or 2 percent of global production. In 2011, that number grew to 5.5 million barrels, or 6 percent of global production. By 2020, deep-water oil will account for 9 percent, according to energy research firm IHS CERA.

By early 2012, there will be 40 deep-water rigs in the Gulf, up from 37 before the BP spill, said Cinnamon Odell of the market research firm ODS-Petrodata.

The Gulf produces an average of 1.5 million barrels of oil per day, according to Wood Mackenzie. That's 27 percent of U.S. output and 8 percent of U.S. demand.

Many of the Gulf's recent discoveries are in a geologic formation called the Lower Tertiary. Perdido — which is operated by Shell and owned jointly by Shell, Chevron and BP — is the first to produce oil from the formation. Analysts say it could hold 15 billion barrels of oil.

As the BP disaster made clear, drilling in deep water presents difficulties and dangers. Last month, a Chevron deep-water well off of Brazil ruptured and spilled 2,400 barrels of oil into the Atlantic after Chevron underestimated the pressure of the oil field it was tapping.

Perdido only recently reached its monthly production target after a year of operation because of difficulties getting oil and gas from the seabed to the platform.

New devices designed to separate oil and gas on the sea floor haven't performed as well as Shell hoped. It has taken months of adjustments made by underwater robots and other equipment on the platform to fix the problems.

Challenges like this have helped push the average cost of producing oil in the deep-water Gulf to $60 a barrel, according to IHS CERA, near the highest level ever. But with oil close to $100 a barrel, the expense is well worth it.

The Gulf is attractive for many reasons. Its oil fields are enormous; it is near the world's biggest consumer of oil; it's in a politically stable part of the world; and drillers can easily tap into a vast network of pipelines and refineries. Also, despite industry complaints, the cost of royalties, taxes and regulation in the U.S. are among the lowest in the world.

"Everybody wants to be there," said Mohammad Rahman, the lead Gulf analyst for Wood Mackenzie.